SUMMARY OF CASH FLOWS
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Q1 2004 Q1 2003
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Cash from operating activities 1,243 1,157
Capital expenditures (688 ) (594 )
Other investing activities 20 (40 )
Preferred dividends (22 ) (11 )
Dividends paid by subsidiaries to (42 ) (44 )
non-controlling interest
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Free cash flow from operations, before common 511 468
dividends
Common dividends (277 ) (257 )
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Free cash flow from operations, after common 234 211
dividends
Business acquisitions (81 ) (63 )
Business dispositions 16 -
Change in investments accounted for under the 6 7
cost and equity methods
Net issuance of equity instruments 4 158
Net issuance of debt instruments 406 1,313
Financing activities of subsidiaries with (36 ) 54
third parties
Cash provided by discontinued operations 288 4
Other (48 ) (2 )
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Net increase in cash and cash equivalents 789 1,682
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CASH FROM OPERATING ACTIVITIES
Cash from operating activities increased 7.4% or $86 million to
$1,243 million in Q1 2004, compared to Q1 2003. This was a result of:
º improved operating performance
º the positive effect of changes in working capital
partly offset by:
º tax refunds of $237 million received in Q1 2003 generated from the
utilization of capital losses.
CAPITAL EXPENDITURES
We have rigorous programs in place to manage capital spending
prudently. We continue to make investments to expand and update our
networks and to meet customer demand. Capital expenditures were
$688 million in the first quarter, or 14.6% of revenues, up from
$594 million, or 12.7% of revenues, for the same period last year.
This increase reflects higher spending earlier in the year to drive
DSL footprint expansion, productivity and the Telesat satellite
build.
Bell Canadas consolidated capital intensity ratio was 14.4% in
Q1 2004, compared to 13.1% in Q1 2003. Bell Canadas consolidated
capital expenditures accounted for over 80% of our consolidated
capital expenditures in Q1 2004 and 90% of our consolidated capital
expenditures in Q1 2003.
OTHER INVESTING ACTIVITIES
Cash from other investing activities of $20 million in 2004 included
$43 million of insurance proceeds that Telesat received for a
malfunction on the Anik F1 satellite.
COMMON DIVIDENDS
We paid a dividend of $0.30 per common share in Q1 2004. This was the
same as the dividend we paid in Q1 2003.
We realized a cash benefit of $18 million in Q1 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 eliminated any
further cash benefits related to issuing treasury shares. As a
result, total dividends paid on common shares increased 7.8% or
$20 million to $277 million in Q1 2004, compared to Q1 2003.
16 2004 Quarterly Report Bell Canada Enterprises
BUSINESS ACQUISITIONS
We invested $81 million in business acquisitions in Q1 2004.
This consisted mainly of:
º Bell Canada's purchase of a 100% interest in Accutel
Conferencing Systems Inc. (Canada) and certain branches of
Accutel Conferencing Systems (U.S.) (collectively, Accutel)
for $48 million. The acquisition of Accutel, a
teleconferencing service provider, will allow us to broaden
our strategy of combining voice and data to provide
solutions to SMB customers.
º Bell Canada's purchase of a 75.8% interest in Elix Inc.
(Elix) for $10 million. The acquisition of Elix, a company
well-known for contact center solutions, complements our
strategic objective of providing enterprise customers with
value-added services. It increases the scale of
Bell Canada's existing contact center professional services
team and provides access to an expanded customer base.
º BCE Emergis' purchase of a 100% interest in each of WARE
Solutions Corporation, Gestion InfoPharm Inc. and Tri-comp
Systems Ltd. for a total of $22 million.
We invested $63 million in business acquisitions in
Q1 2003. This consisted mainly of our proportionate share of
the cash paid for CGI's acquisition of Cognicase Inc.
EQUITY INSTRUMENTS
In Q1 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.
DEBT INSTRUMENTS
We issued $1.3 billion of debt in Q1 2004 and repaid
$939 million of existing debt. The excess cash raised of
$406 million, mainly at Bell Canada, along with existing cash
on hand of $714 million at the end of 2003, free cash flow of
$234 million generated in Q1 2004 and net cash proceeds of
$285 million on the sale of BCE Emergis' U.S. health
operations, contributed to the cash on hand of $1.5 billion at
March 31, 2004. This cash on hand is expected to be used
primarily to repay maturing debt during the remainder of 2004
and to finance the purchase of MTS's 40% interest in Bell West.
On April 30, 2004, Bell Canada repaid its Series M-15
Debentures for $500 million.
CASH RELATING TO DISCONTINUED OPERATIONS
Cash provided by discontinued operations was $288 million in
Q1 2004. This consisted mainly of net cash proceeds of
$285 million on the sale of BCE Emergis' U.S. health
operations.
CREDIT RATINGS
Our key credit ratings at May 4, 2004 remain unchanged from
those listed in the BCE 2003 MD&A.
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.
RECENT DEVELOPMENTS IN LEGAL PROCEEDINGS
This section provides a description of recent material
developments in certain of the legal proceedings involving BCE
described in the BCE 2003 AIF.
17 2004 Quarterly Report Bell Canada Enterprises
TELEGLOBE RELATED LAWSUITS
Kroll Restructuring Lawsuit
As indicated in the BCE 2003 AIF, Kroll Restructuring Ltd.
filed on February 26, 2003 a notice of action in the Ontario
Superior Court of Justice against five former directors of
Teleglobe Inc.(Teleglobe). On April 16, 2004, the defendants
filed their statement of defence.
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.
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
its consequences, the actual effect of any event on our
business could be materially different from what we currently
anticipate. In addition, this description of risks does not
include all possible risks, and there may be other risks that
we are currently not aware of.
Bell Canada is our most important subsidiary, which means
our financial performance depends in large part on how well
Bell Canada performs financially. The risks that could affect
Bell Canada and its subsidiaries are more likely to have a
significant impact on our financial condition, results of
operations and business than the risks that could affect other
BCE group companies.
RISKS THAT COULD AFFECT ALL BCE GROUP COMPANIES
STRATEGIES AND PLANS
We plan to achieve our business objectives through various
strategies and plans. For Bell Canada, Aliant and their
respective telecommunications subsidiaries (collectively, the
Bell Canada companies), the strategy is to lead change in the
industry and set the standard for IP-based communications while
continuing to deliver on our goals of innovation, simplicity
and service, and efficiency. The key elements of the strategies
and plans of the Bell Canada companies include:
º evolving from multiple service-specific networks to a single
IP-based network
º providing new services to meet customers' needs by
introducing innovative technologies, including Voice over
Internet Protocol (VoIP), very high speed digital subscriber
line (VDSL) and Internet Protocol television (IPTV) and
providing professional services to customers in associated
areas such as network management, security and engineering
º maintaining and improving customer satisfaction by
simplifying all areas of our customers' experience,
including call centres, billing and points of sale
º increasing the number of customers who buy multiple products
by focusing our marketing and sales efforts by customer
segment. This includes offering bundled services to
consumers and service packages to businesses.
º lowering costs by improving efficiency in all areas of
product and service delivery, including installation,
activation and call centres.
Our strategic direction involves significant changes in
processes, in how we approach our markets, and in products and
services. These changes will require a shift in employee
skills.
18 2004 Quarterly Report Bell Canada Enterprises
The strategies and plans outlined above will require
capital expenditures for their implementation. The timing and
quantity of the returns from these investments are uncertain.
At this time, we cannot determine the effect that moving to a
single IP-based network could have on our results of
operations.
If we are unable to achieve our business objectives, our
financial performance, including our growth prospects, could be
hurt. This could have a material and negative effect on our
results of operations.
ECONOMIC AND MARKET CONDITIONS
Our business is affected by general economic conditions,
consumer confidence and spending, and the demand for, and the
prices of, our products and services. When there is a decline
in economic growth, and in retail and commercial activity,
there tends to be a lower demand for our products and services.
During these periods, customers may delay buying our products
and services, or reduce or discontinue using them.
The slower pace of growth and the uncertainty in the
global economy have reduced demand for some of our products and
services, which has negatively affected our financial
performance and may continue to negatively affect it in the
future.
Weak economic conditions may negatively affect our
profitability and cash flows from operations. They could also
negatively affect the financial condition and credit risk of
our customers, which could increase uncertainty about our
ability to collect receivables and potentially increase our bad
debt expenses.
INCREASING COMPETITION
We face intense competition from traditional competitors, as
well as from new entrants to the markets we operate in. We
compete not only with other telecommunications, media,
television, satellite, information technology and e-commerce
service providers, but also with other businesses and
industries. These include cable, software and Internet
companies, a variety of companies that offer network services,
such as providers of business information systems and system
integrators, and other companies that deal with, or have access
to, customers through various communications networks.
Many of our competitors have substantial financial,
marketing, personnel and technological resources. Other
competitors have recently emerged, or may emerge in the future,
from restructurings with reduced debt and a stronger financial
position. This means that they could have more financial
flexibility to price their products and services at competitive
rates. Recently, Manitoba Telecom Services Inc., an established
telecommunications provider, announced a proposed merger with
Allstream Inc. potentially leading to more consolidation in the
industry.
Competition could affect our pricing strategies and reduce
our revenues and profitability. It could also affect our
ability to retain existing customers and attract new ones.
Competition puts us under constant pressure to keep our prices
competitive. It forces us to continue to reduce costs, manage
expenses and increase productivity. This means that we need to
be able to anticipate and respond quickly to the constant
changes in our businesses and markets.
We already have several domestic and foreign competitors,
but the number of foreign competitors with a presence in Canada
and large resources could increase in the future. In 2003, the
Canadian government started a review of the foreign ownership
restrictions that apply to telecommunications carriers and to
broadcasting distribution undertakings (BDUs). Removing or
easing the limits on foreign ownership could result in foreign
companies entering the Canadian market by making acquisitions
or investments. This could result in greater access to capital
for our competitors or the arrival of new competitors with
global scale, which would increase competitive pressure.
Because the government's review has not been completed, it is
impossible to predict the outcome or to assess how any
resulting change in foreign ownership restrictions may affect
us.
19 2004 Quarterly Report Bell Canada Enterprises
Competition from foreign competitors could increase
through the provision of advanced applications and related
services delivered over IP, limiting the Bell Canada companies
to the provision of IP access services only.
Wireline and Long Distance
We experience significant competition in long distance from
dial-around providers, pre-paid card providers and others, and
from traditional competitors, such as inter-exchange carriers
and resellers. Contracts for long distance services to large
business customers are very competitive. Our pricing strategy
is to offer prices that reflect the quality of our service and
the volume and the characteristics of the traffic. Customers
may choose to switch to competitors that offer very low prices
to acquire market share and have little regard for the quality
of service or impact on their earnings.
We also face increasing cross-platform competition as
customers substitute new technologies for traditional services.
For example, our wireline business competes with wireless and
Internet services, including chat services, instant messaging
and e-mail. We expect to face competitive pressure from cable
companies as they implement voice services over their networks
and from other emerging competitors, including municipal
electrical utilities and other VoIP providers. We expect these
kinds of competition to intensify as growth in Internet and
wireless services continues and new technologies are developed.
Cross-platform competition will be increasingly intense as
technologies, such as VoIP, improve and gain market acceptance.
We have announced plans to launch our own VoIP initiative, but
there is no assurance that it will attract a sustainable
customer base. VoIP services are anticipated to take business
away from our other products and services. If significant
competition for VoIP develops, it could reduce our existing
market share in local and long distance services, and could
have a material and negative effect on our future revenues and
profitability.
VoIP technology does not require service providers to own
or rent physical networks, which increases access to this
market by other competitors. If competition from these service
providers further develops, it could have a material and
negative effect on our future revenues and profitability.
Technology substitution, and VoIP in particular, has
reduced barriers to entry that existed in the industry. This
has allowed competitors with limited access to financial,
marketing, personnel and technological resources to rapidly
launch new products and services and to gain market share. This
trend is expected to accelerate in the future, which could
materially and negatively affect our financial performance.
Internet Access
Cable companies and independent Internet service providers
(ISPs) have increased competition in the broadband and Internet
access services business. Competition has led to pricing for
Internet access in Canada that is among the lowest in the
world.
Furthermore, service providers funded by regional
electrical utilities may continue to develop and market
services that compete directly with Bell Canada's Internet
access and broadband services. Developments in the field of
fixed wireless broadband services may also result in increased
competition in certain geographic service regions. This could
materially and negatively affect the financial performance of
our Internet access services business.
Wireless
The Canadian wireless telecommunications industry is also
highly competitive. We compete directly with other wireless
service providers that have aggressive product and service
introductions, pricing and marketing, and with wireline service
providers. We expect competition to intensify as new
technologies, products and services are developed.
20 2004 Quarterly Report Bell Canada Enterprises
Video
Bell ExpressVu competes directly with another direct-to-home
(DTH) satellite television provider and with cable companies
across Canada. These cable companies have recently upgraded
their networks, operational systems and services, which could
improve their competitiveness. This could materially and
negatively affect the financial performance of Bell ExpressVu.
IMPROVING PRODUCTIVITY AND CONTAINING CAPITAL INTENSITY
We continue to implement several productivity improvements
while containing our capital intensity. There could be a
material and negative effect on our profitability if we do not
continue to successfully implement these productivity
improvements and manage capital intensity while maintaining the
quality of our service. For example, we must reduce the price
of certain services offered by the Bell Canada companies, that
are subject to regulatory price caps, each year between 2002
and 2006. In addition, to remain competitive in some business
data services that are not regulated, we have reduced our
prices and may have to continue doing so in the future. The
profits of the Bell Canada companies will decline if they
cannot lower their expenses at the same rate. There could also
be a material and negative effect on our profitability if
market factors or other regulatory actions result in lower
revenues and we cannot reduce our expenses at the same rate.
Many productivity improvements require capital
expenditures to implement systems that automate or assist in
our operations. There is no assurance that these investments
will be effective in delivering the planned productivity
improvements.
ANTICIPATING TECHNOLOGICAL CHANGE
We operate in markets that are experiencing constant
technological change, evolving industry standards, changing
client needs, frequent new product and service introductions,
and short product life cycles.
Our success will depend in large part on how well we can
anticipate and respond to changes in industry standards and
client needs, and how quickly and efficiently we can introduce
new products, services and technologies, and upgrade existing
ones.
We may face additional financial risks as we develop new
products, services and technologies, and update our networks to
stay competitive. Newer technologies, for example, may quickly
become obsolete or may need more capital than expected.
Development could be delayed for reasons beyond our control.
Substantial investments usually need to be made before new
technologies prove to be commercially viable.
The Bell Canada companies are in the process of moving
their core circuit-based infrastructure to IP technology. This
should allow them to:
º offer integrated voice, data and video services
º offer a range of valuable network enabled business solutions
to large business customers
º increase capital efficiency
º increase operating efficiency, including our efficiency in
introducing and supporting services.
As part of this move, the Bell Canada companies also plan
to discontinue certain services that are based on circuit-based
infrastructure. This is a necessary component of increasing
capital and operating efficiencies. In some cases, this could
be delayed or prevented by customers or regulatory actions. If
the Bell Canada companies cannot discontinue these services as
planned, they will not be able to achieve improvements as
expected.
There is no assurance that we will be successful in
developing, implementing and marketing new technologies,
products, services or enhancements in a reasonable time, or
that they will have a market. There is also no assurance that
efficiencies will increase as expected. New products or
services that use new or evolving technologies could make our
existing ones unmarketable or cause their prices to fall.
21 2004 Quarterly Report Bell Canada Enterprises
LIQUIDITY
Our ability to generate cash and to maintain capacity to meet
our financial obligations and provide for planned growth
depends on our cash requirements and on our sources of
liquidity.
Our cash requirements may be affected by the risks
associated with our contingencies, off-balance sheet
arrangements and derivative instruments.
In general, we finance our capital needs in four ways:
º from cash generated by our operations or investments
º by borrowing from commercial banks
º through debt and equity offerings in the capital markets
º by selling or otherwise disposing of assets.
Financing through equity offerings would dilute the
holdings of existing equity investors. An increased level of
debt financing could lower our credit ratings, increase our
borrowing costs and give us less flexibility to take advantage
of business opportunities.
Our ability to raise financing depends on our ability to
access the capital markets and the syndicated commercial loan
market. The cost of funding depends largely on market
conditions, and the outlook for our business and our credit
ratings at the time capital is raised. If our credit ratings
are downgraded, our cost of funding could significantly
increase. In addition, participants in the capital and
syndicated commercial loan markets have internal policies
limiting their ability to invest in, or extend credit to, any
single borrower or group of borrowers or to a particular
industry.
BCE Inc. and certain of its subsidiaries have entered into
renewable credit facilities with various financial
institutions. They include facilities serving as back-up
facilities for issuing commercial paper. There is no assurance
that these facilities will be renewed at favourable terms.
We need significant amounts of cash to implement our
business plan. This includes cash for capital expenditures to
provide our services, dividend payments and payment of our
contractual obligations, including repayment of and refinancing
our outstanding debt.
Our plan in 2004 is to generate enough cash from our
operating activities to pay for capital expenditures and
dividends. We expect to repay contractual obligations maturing
in 2004 from cash on hand, from cash generated from our
operations or by issuing debt. If actual results are different
from our business plan or if the assumptions in our business
plan change, we may have to raise more funds than expected from
issuing debt or equity.
If we cannot raise the capital we need upon acceptable
terms, we may have to:
º limit our ongoing capital expenditures
º limit our investment in new businesses
º try to raise additional capital by selling or otherwise
disposing of assets.
Any of these possibilities could have a material and
negative effect on our cash flow from operations and growth
prospects in the long term.
RELIANCE ON MAJOR CUSTOMERS
An important amount of revenue earned by BCE group companies,
including Bell Canada, comes from a small number of major
customers. If they lose contracts with such major customers and
cannot replace them, it could have a material and negative
effect on their results.
22 2004 Quarterly Report Bell Canada Enterprises
MAKING ACQUISITIONS
Our growth strategy includes making strategic acquisitions and
entering into joint ventures. There is no assurance that we
will find suitable companies to acquire or to partner with or
that we will have the financial resources needed to complete
any acquisition or to enter into any joint venture. There could
also be difficulties in integrating the operations of acquired
companies with our existing operations or in operating joint
ventures.
LITIGATION, REGULATORY MATTERS AND CHANGES IN LAWS
Pending or future litigation, regulatory initiatives or
regulatory proceedings could have a material and negative
effect on our businesses, operating results and financial
condition. Changes in laws or regulations or in how they are
interpreted, and the adoption of new laws or regulations,
including changes in, or the adoption of, new tax laws that
result in higher tax rates or new taxes, could also materially
and negatively affect us. Any claim by a third party, with or
without merit, that a significant part of our business
infringes on its intellectual property could also materially
and negatively affect us.
Please see the BCE 2003 AIF for a detailed description of:
º the principal legal proceedings involving BCE
º certain regulatory initiatives and proceedings concerning
the Bell Canada companies.
Please see Recent Developments in Legal Proceedings in
this MD&A for a description of recent material developments,
since the BCE 2003 AIF, in the principal legal proceedings
involving us.
In addition, please refer to the discussion under Risks
that could affect certain BCE group companies - Bell Canada
companies - Changes to wireline regulations for a description
of certain regulatory initiatives and proceedings that could
affect the Bell Canada companies.
FUNDING AND CONTROL OF SUBSIDIARIES
BCE Inc. is currently funding, directly or indirectly, and may
continue to fund, the operating losses of some of its
subsidiaries in the future, but it is under no obligation to
continue doing so. If BCE Inc. decides to stop funding any of
its subsidiaries and that subsidiary does not have other
sources of funding, this would have a material and negative
effect on the subsidiary's results of operations and financial
condition and on the value of its securities.
In addition, BCE Inc. does not have to remain the majority
holder of, or maintain its current level or nature of ownership
in, any subsidiary, unless it has agreed otherwise. The
announcement of a decision by BCE Inc. to change the nature of
its investment in a subsidiary, to dispose of some or all of
its interest in a subsidiary, or any other similar decision
could have a material and negative effect on the subsidiary's
results of operations and financial condition and on the value
of its securities.
If BCE Inc. stops funding a subsidiary, changes the nature
of its investment or disposes of all or part of its interest in
a subsidiary, stakeholders or creditors of the subsidiary might
decide to take legal action against BCE Inc. For example,
certain members of the lending syndicate of Teleglobe, a former
subsidiary of BCE Inc., and other creditors of Teleglobe have
launched lawsuits against BCE Inc. following its decision to
stop funding Teleglobe. You will find a description of these
lawsuits in the BCE 2003 AIF under Legal proceedings we are
involved in as updated in this MD&A under Recent Developments
in Legal Proceedings. While we believe that these kinds of
claims have no legal foundation, they could negatively affect
the market price of BCE Inc.'s securities. BCE Inc. could have
to devote considerable management time and resources in
responding to any such claim.
PENSION FUND CONTRIBUTIONS
Most of our pension plans had pension fund surpluses as of our
most recent actuarial valuations. As a result, we have not had
to make regular contributions to the pension funds in the past
few years.
23 2004 Quarterly Report Bell Canada Enterprises
The decline in the capital markets in 2001 and 2002,
combined with historically low interest rates, has
significantly reduced the pension fund surpluses and negatively
affected our net earnings.
Our pension plan assets had higher returns than expected
in 2003. There is no assurance that high returns will continue.
If returns on pension plan assets decline again in the future,
the surpluses could also continue to decline. If this happens,
we might have to start making contributions to the pension
funds. This could also have a material and negative effect on
our results of operations.
RETAINING EMPLOYEES
Our success depends in large part on our ability to attract and
retain key employees. The loss of key people, if it happens,
could materially hurt our businesses and operating results.
RENEGOTIATING LABOUR AGREEMENTS
Approximately 45% of our employees are represented by unions
and are covered by collective agreements. The following
material collective agreements have expired:
º the collective agreement between Bell Canada and the
Communications, Energy and Paperworkers Union of Canada
(CEP), representing approximately 7,000 craft and services
employees.
º the collective agreements between Aliant Telecom and its
employees, representing approximately 4,200 employees. Most
of these employees, represented by the Council of Atlantic
Telecommunications Unions began a strike on April 23, 2004,
the duration of which cannot be predicted.
º the collective agreements relating to employees of certain
divisions and subsidiaries of CTV Inc (CTV), representing
approximately 550 employees
º the collective agreement between Connexim, Limited
Partnership and its employees, representing approximately
100 craft and services employees.
The following material collective agreements will expire
in 2004:
º the collective agreements between Entourage Technology
Solutions Inc. and the CEP, representing approximately 2,000
technicians in Qubec and Ontario, will expire on September
30, 2004
º the collective agreements between certain divisions and
subsidiaries of CTV and their employees, representing
approximately 500 employees, will expire on or before
December 31, 2004.
Renegotiating collective agreements could result in higher
labour costs and work disruptions, including work stoppages or
work slowdowns. Difficulties in renegotiations or other labour
unrest could significantly hurt our businesses, operating
results and financial condition.
EVENTS AFFECTING OUR NETWORKS
Network failures could materially hurt our business, including
our customer relationships and operating results. Our
operations depend on how well we protect our networks, our
equipment, our applications and the information stored in our
data centres against damage from fire, natural disaster, power
loss, hacking, computer viruses, disabling devices, acts of war
or terrorism, and other events. Any of these events could cause
our operations to be shut down indefinitely.
Our network is connected with the networks of other
telecommunications carriers, and we rely on them to deliver
some of our services. Any of the events mentioned in the
previous paragraph, as well as strikes or other work
disruptions, bankruptcies, technical difficulties or other
events affecting the networks of these other carriers, could
also hurt our business, including our customer relationships
and operating results.
24 2004 Quarterly Report Bell Canada Enterprises
RISKS THAT COULD AFFECT BCE INC.
HOLDING COMPANY STRUCTURE
BCE Inc. is a holding company. That means it does not carry on
any significant operations and has no major sources of income
or assets of its own, other than the interests it has in its
subsidiaries, joint ventures and significantly influenced
companies. BCE Inc.s cash flow and its ability to service its
debt and to pay dividends on its shares all depend on dividends
or other distributions it receives from its subsidiaries, joint
ventures and significantly influenced companies and, in
particular, from Bell Canada. BCE Inc.s subsidiaries, joint
ventures and significantly influenced companies are separate
legal entities. They do not have to pay dividends or make any
other distributions to BCE Inc.
STOCK MARKET VOLATILITY
The stock markets have experienced significant volatility over
the last few years, which has affected the market price and
trading volumes of the shares of many telecommunications
companies, in particular. Differences between BCE Inc.s actual
or anticipated financial results and the published expectations
of financial analysts may also contribute to volatility in
BCE Inc.s common shares. A major decline in the capital markets
in general, or an adjustment in the market price or trading
volumes of BCE Inc.s common shares or other securities, may
materially and negatively impact our ability to raise capital,
issue debt, retain employees or make future strategic
acquisitions or joint ventures.
RISKS THAT COULD AFFECT CERTAIN BCE GROUP COMPANIES
BELL CANADA COMPANIES
Changes to Wireline Regulations
Decisions of regulatory agencies
The business of the Bell Canada companies is affected by
decisions made by various regulatory agencies, including the
CRTC. Many of these decisions balance requests from competitors
for access to facilities, such as the telecommunications
networks, switching and transmission facilities, and other
network infrastructure of incumbent telephone companies, with
the rights of the incumbent telephone companies to compete
reasonably freely.
Second Price Cap decision
In May 2002, the CRTC issued decisions relating to new price
cap rules that will govern incumbent telephone companies for a
four-year period starting in June 2002. These decisions:
º set a 3.5% productivity factor on many capped services,
which may require the Bell Canada companies to reduce prices
on these services
º extended price cap regulation to more services
º reduced the prices that incumbent telephone companies can
charge competitors for services
º set procedures for enforcing standards of service quality
º effectively froze rates for residential services.
The CRTC also established a deferral account and, on
March 24, 2004, initiated a public proceeding inviting
proposals on the disposition of the amounts accumulated in the
accounts of the incumbent telephone companies during the first
two years of the price cap period. There is a risk that the
account could be used in a way that could have a negative
financial effect on the Bell Canada companies.
The balance in Bell Canadas and Aliant Telecoms deferral
accounts at March 31, 2004 was estimated to be approximately
$189 million. Clearing of these accounts is expected to begin
in 2005.
25 2004 Quarterly Report Bell Canada Enterprises
On December 2, 2003, Bell Canada filed an application with
the CRTC asking for approval to use some of the funds in its
deferral account to expand its broadband services to certain
areas. The CRTC has indicated that this application will be
considered as part of the public proceeding in 2004.
In addition, other follow-up issues to the Price Cap
decision are expected to be resolved in 2004. The outcome of
these issues could result in an additional negative effect on
the results of the Bell Canada companies.
Decision on incumbent affiliates
On December 12, 2002, the CRTC released its decision on
incumbent affiliates, which requires Bell Canada and its
carrier affiliates to receive CRTC approval on contracts that
bundle tariffed and non-tariffed products and services. This
means that:
º all existing contracts that bundle tariffed and non-tariffed
products and services must be filed with the CRTC for
approval
º all new contracts that bundle tariffed and non-tariffed
products and services must receive CRTC approval before they
are carried out
º carrier affiliates must meet the same approval requirements
as Bell Canada on products and services they offer in
Bell Canada's operating territory.
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. The customer's
name will be kept confidential, but the pricing and service
arrangements it has with the Bell Canada companies will be
available on the public record.
These decisions increase Bell Canada's and its carrier
affiliates' regulatory burden at both the wholesale and retail
levels. They could also cause some of their large customers to
choose another preferred supplier, which could have a material
and negative effect on their results of operations. These
decisions are currently under appeal.
Allstream and Call-Net application concerning customer-specific
arrangements
On January 23, 2004, Allstream Corp. (Allstream) and Call-Net
Enterprises Inc. (Call-Net) filed a joint application asking
the CRTC to order Bell Canada to stop providing service under
any carrier services agreement (CSAs) that are currently filed
with the CRTC and are not yet approved.
Allstream and Call-Net have proposed that Bell Canada
should only provide services to these customers under its
general tariff. Allstream and Call-Net have also proposed that
the CRTC suspend its approval of any new CSAs until
Bell Canada's appeal of the decision on incumbent affiliates is
heard.
Bell Canada provided its comments opposing all aspects of
this application. If the CRTC grants it, Bell Canada will be
required to cancel contracts with many of its enterprise
customers and, in some cases, to reprice services. Suspending
approval of any new CSAs could have a material and negative
effect on Bell Canada's ability to offer new services to the
large business customer market on competitive terms and
conditions.
Public notice on changes to minimum prices
On October 23, 2003, the CRTC issued a public notice asking for
comments on its preliminary view that revised rules may be
needed for setting minimum prices for the regulated services of
the Bell Canada companies and for how incumbent telephone
companies price their services, service bundles and customer
contracts. It issued an amended public notice on December
8, 2003.
26 2004 Quarterly Report Bell Canada Enterprises
The CRTC is also seeking comments on proposed pricing
restrictions on volume or term contracts for retail tariffed
services. It is too early to determine if the proposals will be
implemented as proposed. If they are, the Bell Canada companies
will be required to increase the minimum prices they charge for
regulated services. This would limit their ability to compete.
Bell Canada provided its comments to the CRTC on January
30, 2004.
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. This would allow consistent rules to
be developed that recognize and support the growing competition
between these converging sectors. Bell Canada also requested
that this proceeding address any rules that might be needed to
govern VoIP services provided by cable companies and others.
On April 7, 2004, the CRTC invited comments on its
preliminary views, as well as on any other relevant matters,
and participation in a public consultation relating to the
regulatory framework for VoIP. The CRTC stated its preliminary
views that VoIP services that utilize telephone numbers that
conform to the North American Numbering Plan (NANP) and allow
subscribers to call or receive calls from any telephone with
access to the Public Switched Telephone Network (PSTN) are
functionally the same as switched telecommunications services.
The CRTC stated that as a preliminary conclusion, when
incumbent telephone companies provide VoIP services in their
incumbent territories, they would be required to adhere to
their existing tariffs or to file proposed tariffs where
required, in conformity with applicable regulatory rules. The
CRTC also provided its preliminary views with regard to the
provision of 9-1-1 services, message relay service and privacy
safeguards by local VoIP service providers.
These proceedings could determine the rules for
competition with other service providers and could affect the
ability of the Bell Canada companies to compete in the future.
Licences and Changes to Wireless Regulation
Companies must have a spectrum licence to operate cellular, PCS
and other radio-telecommunications systems in Canada. The
Minister of Industry awards spectrum licences, through a
variety of methods, at his or her discretion under the
Radiocommunication Act.
As a result of a recent Industry Canada decision, Bell
Mobility's and Aliant Telecom / MT&T Mobility Inc.'s cellular
and PCS licences, which would have expired on March 31, 2006,
will now expire in 2011. The PCS licences that were awarded in
the 2001 PCS auction will expire on November 29, 2011. As a
result, these Bell Canada companies' cellular and PCS licences
are now classified as spectrum licences with a 10-year licence
term. While we expect that they will be renewed at term, there
is no assurance that this will happen. Industry Canada can
revoke a company's licence at any time if the company does not
comply with the licence's conditions. While we believe that we
comply with the conditions of our licences, there is no
assurance that Industry Canada will agree, which could have a
material and negative effect on the Bell Canada companies.
In December 2003, Industry Canada issued its decision on
changing the terms and the method of calculating the fees of
cellular and PCS licences. The new fees are based on the amount
of spectrum a carrier holds in a given geographic area. Fees
were previously based on the degree of deployment or the number
of radio sites in operation. The changes came into effect on
April 1, 2004 and will be implemented over seven years. They
are not expected to have a material impact on the amount of
fees paid by the Bell Canada companies.
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. If the consultation process results in more
municipal
27 2004 Quarterly Report Bell Canada Enterprises
involvement 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. The final report is
expected in June 2004.
Increased Accidents From Using Cellphones
Some studies suggest that using handheld cellphones while
driving may result in more accidents. It is possible that this
could lead to new regulations or legislation banning the use of
handheld cellphones while driving, as it has in Newfoundland
and Labrador and in several U.S. states. If this happens,
cellphone use in vehicles could decline, which could negatively
affect the business of the Bell Canada companies.
Health Concerns About Radio Frequency Emissions
It has been suggested that some radio frequency emissions from
cellphones may be linked to medical conditions, such as cancer.
In addition, some interest groups have requested investigations
into claims that digital transmissions from handsets used with
digital wireless technologies pose health concerns and cause
interference with hearing aids and other medical devices. This
could lead to additional government regulation, which could
have a material and negative effect on the business of the
Bell Canada companies. In addition, actual or perceived health
risks of wireless communications devices could result in fewer
new network subscribers, lower network usage per subscriber,
higher churn rates, product liability lawsuits or less outside
financing available to the wireless communications industry.
Any of these would have a negative effect on the business of
the Bell Canada companies.
BELL EXPRESSVU
Bell ExpressVu currently uses two satellites, Nimiq 1 and Nimiq
2, for its video services. Telesat operates these satellites.
Satellites are subject to significant risks. Any loss, failure,
manufacturing defects, damage or destruction of these
satellites, or of Bell ExpressVu's terrestrial broadcasting
infrastructure, could have a material and negative effect on
Bell ExpressVu's results of operations and financial condition.
Please see Risks that could affect certain BCE group companies
- Telesat for more information on the risks concerning
Telesat's satellites.
Bell ExpressVu is subject to programming and carriage
requirements under its CRTC licence. Changes to the regulations
that govern broadcasting or to its licence could negatively
affect Bell ExpressVu's competitive position or the cost of
providing its services. Bell ExpressVu's application for the
renewal of its existing DTH satellite television distribution
undertaking licence was approved by the CRTC on March 31, 2004
upon essentially the same terms and conditions until
August 31, 2010.
Bell ExpressVu continues to face competition from
unregulated U.S. DTH satellite television services that are
illegally sold in Canada. In response, it has started, or is
participating in, several legal actions that are challenging
the sale of U.S. DTH satellite television equipment in Canada.
While Bell ExpressVu has been successful in increasing its
share of the satellite television market despite this
competition, there is no assurance that it will continue to do
so.
Bell ExpressVu faces a loss of revenue resulting from the
theft of its services. It is taking numerous actions to reduce
these losses, including legal action, investigations,
implementing electronic counter-measures targeted at illegal
devices, leading information campaigns and developing new
technology. Implementing these measures, however, could
increase Bell ExpressVu's capital and operating expenses,
reduce subscriber growth and increase churn.
28 2004 Quarterly Report Bell Canada Enterprises
BELL GLOBEMEDIA
Dependence on Advertising
A large part of Bell Globemedia's revenue from its television
and print businesses comes from advertising revenues. Bell
Globemedia's advertising revenues are affected by competitive
pressures, including its ability to attract and retain viewers
and readers. In addition, the amount spent by advertisers is
directly related to economic growth. An economic downturn tends
to make it more difficult for Bell Globemedia to maintain or
increase revenues. Advertisers have historically been sensitive
to general economic cycles and, as a result, Bell Globemedia's
business, financial condition and results of operations could
be materially and negatively affected by a downturn in the
economy. In addition, most of Bell Globemedia's advertising
contracts are short-term contracts that the advertiser can
cancel on short notice.
Increasing Fragmentation in Television Markets
Television advertising revenue largely depends on the number of
viewers and the attractiveness of programming in a given
market. The viewing market has become increasingly fragmented
over the past decade and this trend is expected to continue as
new services and technologies increase the choices available to
consumers. As a result, there is no assurance that Bell
Globemedia will be able to maintain or increase its advertising
revenues or its ability to reach or retain viewers with
attractive programming.
Revenues From Distributing Television Services
A significant portion of revenues from CTV's specialty
television operations comes from contractual arrangements with
distributors, primarily cable and DTH operators. Many of these
contracts have expired. In addition, competition has increased
in the specialty television market. As a result, there is no
assurance that contracts with distributors will be renewed on
equally favourable terms.
Increased Competition for Fewer Print Customers
Print advertising revenue largely depends on circulation and
readership. The existence of a competing national newspaper and
a commuter paper in Toronto has increased competition, while
the total circulation and readership of Canadian newspapers has
continued to decline. This has resulted in higher costs, more
competition in advertising rates and lower profit margins at
The Globe and Mail.
Broadcast Licences
Each of CTV's conventional and specialty services operates
under licences issued by the CRTC for a fixed term of up to
seven years. These licences are subject to the requirements of
the Broadcasting Act, the policies and decisions of the CRTC,
and the conditions of each licensing or renewal decision, all
of which may change. There is no assurance that any of CTV's
licences will be renewed. Any renewals, changes or amendments
may have a material and negative effect on Bell Globemedia.
TELESAT
Launch and In-Orbit Risks
There is a risk that the satellites that Telesat currently has
under construction, or satellites built in the future, may not
be successfully launched. Telesat normally buys insurance to
protect itself against this risk, but there is no assurance
that it will be able to get launch coverage for the full value
of any satellite proposed to be launched or at a favourable
rate.
Once Telesat's satellites are in orbit, there is a risk
that a failure could prevent them from completing their
commercial mission. Telesat has a number of measures in place
to protect itself against this risk. These include engineering
satellites with on-board redundancies by including spare
equipment on the satellite and buying in-orbit insurance.
However, there is no assurance that Telesat will be able to
renew its in-orbit insurance with enough coverage or at a
favourable rate.
29 2004 Quarterly Report Bell Canada Enterprises
Anik F1 and Anik F1R
In August 2001, the manufacturer of the Anik F1 satellite
advised Telesat of a gradual decline in power on the satellite.
After investigation, it indicated that power will continue to
decline at the rates observed to date. Telesat believes that
this will affect some of the satellite's core services in
mid-2005.
Telesat has insurance in place to cover the power loss on
Anik F1 and filed a claim with its insurers in December 2002.
In March 2004, it reached an agreement to settle this claim.
The agreement provides for an initial payment in 2004 of
U.S.$136.2 million to Telesat. It also provides for an
additional payment of U.S.$49.1 million in 2007 if the power on
Anik F1 degrades as predicted by the manufacturer. If it does
not, the payments (including the U.S.$136.2 million initial
payment) will be adjusted by applying a formula that is
included in the settlement documents. It is expected that all
of the initial payment will be received by the end of the
second quarter of 2004.
Telesat has a satellite under construction, Anik F1R,
which is expected to replace Anik F1 in time to ensure that
service to its customers will not be interrupted. There is no
assurance that Telesat will be able to get launch and in-orbit
coverage for the Anik F1R satellite, or that if it does get
coverage, that it will be for the full value of the satellite
or that it will be at a favourable rate.
Anik F2
Telesat has another satellite under construction, Anik F2. The
manufacturer has delayed delivery of this satellite and, more
recently, the launch service provider has indicated that there
is potential for a further launch delay. Telesat is currently
leasing a satellite to cover these delays. In addition, Telesat
is making arrangements for the use of another satellite to
cover potential further delays or a potential launch failure of
Anik F2. Delays beyond those currently anticipated could
require Telesat to refund prepayments to customers and result
in additional costs.
Telesat currently has commitments for insurance coverage
for approximately 70% of Anik F2's projected book value which
expire on August 31, 2004. Telesat is continuing its efforts to
obtain more insurance coverage. However, it is likely that
Telesat will launch Anik F2 without full value coverage. In the
event that Telesat is unable to obtain any additional coverage,
the net impact of a launch failure could result in a potential
after tax accounting loss estimated to be in the range of
$95 million to $100 million. In the event that the launch of
Anik F2 is delayed beyond August 31, 2004, there is no
assurance that Telesat will be able to get launch insurance
coverage for the Anik F2 satellite or that if it does get
coverage that it will equate to the existing commitments or be
at a favourable rate.
Nimiq 1 and Nimiq 2
Telesat carries in-orbit insurance on Nimiq 1 and Nimiq 2.
Nimiq 1 is insured for its book value. Telesat expects to renew
the in-orbit insurance for Nimiq 1 in 2004, but there is no
assurance that it will be able to obtain coverage or, if it
does, that it will be for the full value of the satellite or at
a favourable rate.
Following a partial failure and a successful insurance
claim on Nimiq 2 in 2003, Telesat arranged for in-orbit
insurance for approximately 50% of the residual value of Nimiq
2.
CGI
Long Sales Cycle for Major Outsourcing Contracts
The average sales cycle for large outsourcing contracts
typically ranges from 6 to 18 months, with some extending over
24 months. If current market conditions prevail or worsen, the
average sales cycle could become even longer, thus affecting
CGI's ability to meet its growth targets.
30 2004 Quarterly Report Bell Canada Enterprises
Foreign Currency Risks
CGI's increased international business volume could expose CGI
to greater foreign currency exchange risks, which could
adversely impact its operating results. CGI has a hedging
strategy in place to protect itself, to the extent possible,
against foreign currency exposure.
BCE EMERGIS
Adoption of e-Business
The success of BCE Emergis depends on widespread use of the
Internet and other electronic networks as a way to do business.
Because eBusiness and related activities, such as online
transactions, are relatively new and evolving, it is difficult
to predict the size of this market and its sustainable rate of
growth. Businesses and customers have not adopted eBusiness as
quickly as originally expected.
BCE Emergis must increase the number of transactions it
processes to build recurring revenue. This depends on how
quickly its customers and its distributors' customers adopt its
services. It also depends on BCE Emergis' ability to build an
effective sales force, stimulate sales from distributors and
influence their marketing plans. A significant decrease in the
number of transactions that BCE Emergis processes could have a
material and negative effect on its results.
Other Risks
BCE Emergis relies on strategic relationships to increase its
customer base. If these relationships fail, its business and
operating results could be materially and negatively affected.
In addition, if BCE Emergis is unable to protect the physical
and electronic security, and privacy, of applications, data
bases and transactions, its business and customer relationships
could be materially and negatively affected. Furthermore,
defects in software products, failures or mistakes in
processing electronic transactions, developments in
cryptography technology and failure to enforce its intellectual
property or prevent other parties from duplicating or designing
around it may materially and negatively affect BCE Emergis'
business and operating results.
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 2003 MD&A.
We have not had any changes in the accounting standards or
our accounting policies other than those described in the
BCE 2003 MD&A.
31 2004 Quarterly Report Bell Canada Enterprises
Consolidated Financial Statements
---------------------------------
Consolidated Statements of Operations
-------------------------------------------------------------------
For the three months ended March 31 (in 2004 2003
$ millions, except share amounts) (unaudited)
-------------------------------------------------------------------
Operating revenues 4,697 4,676
-------------------------------------------------------------------
Operating expenses (2,852 ) (2,903 )
Amortization expense (775 ) (762 )
Net benefit plans cost (Note 4) (63 ) (42 )
Restructuring and other charges (1 ) -
-------------------------------------------------------------------
Total operating expenses (3,691 ) (3,707 )
-------------------------------------------------------------------
Operating income 1,006 969
Other income 34 51
Interest expense (248 ) (278 )
-------------------------------------------------------------------
Earnings from continuing operations before
income taxes and non-controlling interest 792 742
Income taxes (269 ) (240 )
Non-controlling interest (44 ) (38 )
-------------------------------------------------------------------
Earnings from continuing operations 479 464
Discontinued operations 9 9
-------------------------------------------------------------------
Net earnings 488 473
Dividends on preferred shares (18 ) (15 )
Premium on redemption of preferred shares - (7 )
-------------------------------------------------------------------
Net earnings applicable to common shares 470 451
-------------------------------------------------------------------
Net earnings per common share - basic
Continuing operations 0.50 0.48
Discontinued operations 0.01 0.02
Net earnings 0.51 0.50
Net earnings per common share - diluted
Continuing operations 0.50 0.48
Discontinued operations 0.01 0.02
Net earnings 0.51 0.50
Dividends per common share 0.30 0.30
Average number of common shares outstanding - 924.1 917.1
basic (millions)
-------------------------------------------------------------------
Consolidated Statements of Deficit
-----------------------------------------------------------------------------------
For the three months ended March 31 (in $ millions) 2004 2003
(unaudited)
-----------------------------------------------------------------------------------
Balance at beginning of period, as previously reported (5,830 ) (6,435 )
Accounting policy change for asset retirement obligations (7 ) (7 )
(Note 1)
-----------------------------------------------------------------------------------
Balance at beginning of period, as restated (5,837 ) (6,442 )
Net earnings 488 473
Dividends - Preferred shares (18 ) (15 )
- Common shares (277 ) (275 )
-----------------------------------------------------------------------------------
(295 ) (290 )
Premium on redemption of preferred shares - (7 )
Other (1 ) 1
-----------------------------------------------------------------------------------
Balance at end of period (5,645 ) (6,265 )
-----------------------------------------------------------------------------------
|
32 2004 Quarterly Report Bell Canada Enterprises
Consolidated Balance Sheets
-------------------------------------------------------------------------------------------
March 31 December 31
(in $ millions) (unaudited) 2004 2003
-------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents (1) 1,511 714
Accounts receivable 2,283 2,077
Other current assets 882 745
Current assets of discontinued operations - 45
-------------------------------------------------------------------------------------------
Total current assets 4,676 3,581
Capital assets 20,932 21,195
Other long-term assets 3,559 3,550
Indefinite-life intangible assets 2,910 2,910
Goodwill 7,875 7,825
Non-current assets of discontinued operations 55 276
-------------------------------------------------------------------------------------------
Total assets 40,007 39,337
-------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 3,759 3,691
Debt due within one year 1,171 1,537
Current liabilities of discontinued - 27
operations
-------------------------------------------------------------------------------------------
Total current liabilities 4,930 5,255
Long-term debt 13,126 12,393
Other long-term liabilities 4,774 4,713
-------------------------------------------------------------------------------------------
Total liabilities 22,830 22,361
-------------------------------------------------------------------------------------------
Non-controlling interest 3,385 3,403
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred shares 1,670 1,670
-------------------------------------------------------------------------------------------
Common shareholders' equity
Common shares 16,753 16,749
Contributed surplus 1,045 1,037
Deficit (5,645 ) (5,837 )
Currency translation adjustment (31 ) (46 )
-------------------------------------------------------------------------------------------
Total common shareholders' equity 12,122 11,903
-------------------------------------------------------------------------------------------
Total shareholders' equity 13,792 13,573
-------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 40,007 39,337
-------------------------------------------------------------------------------------------
|
(1) Cash and cash equivalents of $1,511 million at March 31, 2004 included $66 million of
restricted cash. This amount represented a private placement by BCE Inc. in CGI Group Inc.
(CGI) of approximately 8.3 million subscription receipts which were automatically exchanged
for CGI Class A subordinate shares in May 4, 2004.
33 2004 Quarterly Report Bell Canada Enterprises
Consolidated Statements of Cash Flows
-------------------------------------------------------------------
For the three months ended March 31 (in 2004 2003
$ millions) (unaudited)
-------------------------------------------------------------------
Cash flows from operating activities
Earnings from continuing operations 479 464
Adjustments to reconcile earnings from
continuing operations to cash flows from
operating activities:
Amortization expense 775 762
Net benefit plans cost 63 42
Future income taxes 61 (20 )
Non-controlling interest 44 38
Contributions to employee pension plans (29 ) (6 )
Other employee future benefit plan (24 ) (21 )
payments
Other 40 44
Changes in non-cash working capital (166 ) (146 )
-------------------------------------------------------------------
1,243 1,157
-------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (688 ) (594 )
Business acquisitions (81 ) (63 )
Business dispositions 16 -
Decrease in investments accounted for under 6 7
the cost and equity methods
Other 20 (40 )
-------------------------------------------------------------------
(727 ) (690 )
-------------------------------------------------------------------
Cash flows from financing activities
Increase (decrease) in notes payable and bank 19 (113 )
advances
Issue of long-term debt 1,326 1,792
Repayment of long-term debt (939 ) (366 )
Issue of common shares 4 5
Issue of preferred shares - 510
Redemption of preferred shares - (357 )
Issue of equity securities by subsidiaries to 7 73
non-controlling interest
Redemption of equity securities by (43 ) (19 )
subsidiaries from non-controlling interest
Cash dividends paid on common and preferred (299 ) (268 )
shares
Cash dividends paid by subsidiaries to (42 ) (44 )
non-controlling interest
Other (48 ) (2 )
-------------------------------------------------------------------
(15 ) 1,211
-------------------------------------------------------------------
Cash provided by continuing operations 501 1,678
Cash provided by discontinued operations 288 4
-------------------------------------------------------------------
Net increase in cash and cash equivalents 789 1,682
Cash and cash equivalents at beginning of 722 306
period
-------------------------------------------------------------------
Cash and cash equivalents at end of period 1,511 1,988
-------------------------------------------------------------------
Consists of:
Cash and cash equivalents of continuing 1,511 1,941
operations
Cash and cash equivalents of discontinued - 47
operations
-------------------------------------------------------------------
Total 1,511 1,988
-------------------------------------------------------------------
|
34 2004 Quarterly Report Bell Canada Enterprises
----------------------------------- Notes to Consolidated Financial Statements
The interim consolidated financial NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
statements should be read in We have prepared the consolidated financial statements in
conjunction with the annual accordance with Canadian generally accepted accounting
consolidated financial statements principles (GAAP) using the same basis of presentation and
for the year ended December accounting policies as outlined in Note 1 to the annual
31, 2003, on pages 64 to 101 of consolidated financial statements for the year ended December
BCE Inc.'s 2003 annual report. 31, 2003, except as noted below.
Change in accounting policy
These notes are unaudited. Effective January 1, 2004, we retroactively adopted section
3110 of the CICA Handbook, Asset retirement obligations. As a
All amounts are in millions of result, we restated the comparative figures. The impact on our
Canadian dollars, except where consolidated statement of operations for the three months ended
noted. March 31, 2004 and prior periods was negligible. At December
31, 2003, this resulted in:
We, us, our and BCE mean BCE Inc., º an increase of $6 million in capital assets
its subsidiaries and joint º an increase of $17 million in other long-term liabilities
ventures. º a decrease of $4 million in future income tax liabilities
º an increase of $7 million in the deficit.
Comparative figures
We have reclassified some of the figures for the comparative
period in the consolidated financial statements to make them
consistent with the current period's presentation.
Stock-based compensation plans
Starting in 2004, we made a number of 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, where stock options are granted, into a new
mid-term plan under which restricted share units (RSUs) are
used. 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 will be adjusted for future changes in the market value
of BCE Inc. common shares until the vesting date. The
cumulative effect of the change will be recognized in the
period of the change. Subject to compliance with individual
share ownership requirements, vested RSUs will be paid in BCE
Inc. common shares purchased on the open market or in cash.
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
Qubec. 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 enterprise customers in Ontario and Qubec 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 Tlbec Limited
Partnership (Tlbec), Northern Telephone Limited Partnership
(Northern Telephone) and Northwestel Inc. (Northwestel). Our
wholesale unit provides local telephone, long distance, data
and other services to competitors who resell these services.
Tlbec, Northern Telephone and Northwestel provide
telecommunications services to less-populated areas in Qubec,
Ontario and Canada's northern territories.
The Other BCE segment includes the financial results of
our other media, satellite, information technology (IT) and
e-business activities as well as the costs incurred by our
corporate office. This segment includes Bell Globemedia Inc.
(Bell Globemedia), Telesat Canada (Telesat), CGI Group Inc.
(CGI) and BCE Emergis Inc. (BCE Emergis).
35 2004 Quarterly Report Bell Canada Enterprises
NOTE 2. SEGMENTED INFORMATION (continued)
For the three months ended March 31 2004 2003
Operating revenues
Consumer External 1,807 1,712
Inter-segment 18 17
1,825 1,729
Business External 1,360 1,360
Inter-segment 75 61
1,435 1,419
Aliant External 464 464
Inter-segment 40 37
504 501
Other Bell Canada External 438 520
Inter-segment 36 32
474 552
Inter-segment eliminations (132 ) (118 )
Bell Canada 4,106 4,083
Other BCE External 628 622
Inter-segment 99 100
727 722
Inter-segment eliminations (136 ) (129 )
Total operating revenues 4,697 4,676
Operating Income
Consumer 526 493
Business 241 190
Aliant 82 81
Other Bell Canada 111 162
Bell Canada 960 926
Other BCE 46 43
Total operating income 1,006 969
Other income 34 51
Interest expense (248 ) (278 )
Income taxes (269 ) (240 )
Non-controlling interest (44 ) (38 )
Earnings from continuing operations 479 464
36 2004 Quarterly Report Bell Canada Enterprises
NOTE 3. STOCK-BASED COMPENSATION PLANS
RSUs
During the first quarter of 2004, 1,833,276 RSUs were granted. We recorded
compensation expense of $4 million.
BCE Inc. stock options
The table below is a summary of the status of BCE Inc.s stock option programs.
Weighted
average
Number exercise
of shares price ($)
Outstanding, January 1, 2004 24,795,545 $32
Granted 5,394,776 $30
Exercised (217,491 ) $15
Expired/forfeited (307,413 ) $33
Outstanding, March 31, 2004 29,665,417 $32
Exercisable, March 31, 2004 13,849,767 $34
Teleglobe stock options
The table below is a summary of the status of Teleglobes stock option programs.
Weighted
Number of average
BCE Inc. exercise
shares price ($)
Outstanding, January 1, 2004 955,175 $21
Exercised (23,572 ) $16
Outstanding and exercisable, 931,603 $22
March 31, 2004
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.
For the three months ended March 31 2004 2003
Compensation cost (in $ millions) 8 8
Number of stock options granted 5,394,776 5,351,051
Weighted average fair value per option granted ($) 3 6
Assumptions
Dividend yield 4.0% 3.6%
Expected volatility 27% 30%
Risk-free interest rate 3.1% 4.1%
Expected life (years) 3.5 4.5
37 2004 Quarterly Report Bell Canada Enterprises
NOTE 4. EMPLOYEE BENEFIT PLANS
The table below shows the components of net benefit plans cost.
Pension benefits Other benefits
For the three months ended 2004 2003 2004 2003
March 31
Current service cost 60 56 8 8
Interest cost on accrued 201 188 26 26
benefit obligation
Expected return on plan (237 ) (235 ) (2 ) (2 )
assets
Amortization of past 2 2 - -
service costs
Amortization of net 8 6 - -
actuarial losses
Amortization of
transitional (asset) (11 ) (11 ) 7 7
obligation
Increase (decrease) in 1 (3 ) - -
valuation allowance
Net benefit plans cost 24 3 39 39
The table below shows the amounts we contributed to the pension benefit
plans and the payments made to beneficiaries under other employee future
benefit plans.
Pension benefits Other benefits
For the three months ended March 31 2004 2003 2004 2003
Aliant 19 3 1 1
Bell Canada 5 1 23 20
Bell Globemedia 3 1 - -
BCE Inc. 2 1 - -
Total 29 6 24 21
38 2004 Quarterly Report Bell Canada Enterprises
[[Image Removed]]
BCE Inc. This document has been filed by For further information
1000, rue de La BCE Inc. with Canadian concerning the Dividend
Gauchetire Ouest securities commissions and the Reinvestment and Stock
Bureau 3700 U.S. Securities and Exchange Purchase Plan (DRP),
Montral (Qubec) Commission. It can also be found direct deposit of
H3B 4Y7 on BCE Inc.'s Web site at dividend payments, the
www.bce.ca www.bce.ca or is available upon elimination of multiple
Communications request from: mailings or the receipt
e-mail:bcecomms@bce.ca Investor Relations of quarterly reports,
tel: 1 888 932-6666 e-mail:investor.relations@bce.ca please contact:
fax: (514) 870-4385 tel: 1 800 339-6353 Computershare Trust
fax: (514) 786-3970 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
for 1 888 453-0330
e-mail:
bce@computershare.com
[[Image Removed]] PRINTED IN CANADA
04-05 BCE-1E
[[Image Removed]]
For further information, contact
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
[[Image Removed]]
BCE Consolidated(1)
Consolidated Operational Data
Q1 Q1
($ millions, except per share amounts) 2004 2003 $ change % change
-----------------------------------------------------------------------------------------
Operating revenues 4,697 4,676 21 0.4%
Operating expenses (2,852 ) (2,903 ) 51 1.8%
-----------------------------------------------
EBITDA(2) 1,845 1,773 72 4.1%
EBITDA margin 39.3% 37.9% 1.4 pts.
Amortization expense (775 ) (762 ) (13 ) (1.7% )
Net benefit plans cost (63 ) (42 ) (21 ) (50.0% )
Restructuring and other charges (1 ) - (1 ) n.m.
-----------------------------------------------
Operating income 1,006 969 37 3.8%
Other income 34 51 (17 ) (33.3% )
Interest expense (248 ) (278 ) 30 10.8%
-----------------------------------------------
Earnings from continuing operations
before
income taxes and non-controlling 792 742 50 6.7%
interest
Income taxes (269 ) (240 ) (29 ) (12.1% )
Non-controlling interest (44 ) (38 ) (6) (15.8% )
-----------------------------------------------
Earnings from continuing operations 479 464 15 3.2%
Discontinued operations 9 9 - 0.0%
-----------------------------------------------
Net earnings 488 473 15 3.2%
Dividends on preferred shares (18 ) (15 ) (3 ) (20.0% )
Premium on redemption of preferred shares - (7 ) 7 n.m.
-----------------------------------------------
Net earnings applicable to common shares 470 451 19 4.2%
-----------------------------------------------------------------------------------------
Net earnings per common share - basic
Continuing operations $ 0.50 $ 0.48 $ 0.02 4.2%
Discontinued operations $ 0.01 $ 0.02 $ (0.01 ) (50.0% )
Net earnings $ 0.51 $ 0.50 $ 0.01 2.0%
Net earnings per common share - diluted
Continuing operations $ 0.50 $ 0.48 $ 0.02 4.2%
Discontinued operations $ 0.01 $ 0.02 $ (0.01 ) (50.0% )
Net earnings $ 0.51 $ 0.50 $ 0.01 2.0%
Dividends per common share $ 0.30 $ 0.30 $ - 0.0%
Average number of common shares 924.1 917.1
outstanding - basic (millions)
-----------------------------------------------------------------------------------------
|
The following items are included in net earnings:
Net gains on sale of investments and dilution gains
Continuing operations - -
Discontinued operations 6 -
Total 6 -
Impact on net earnings per share $ 0.01 $ -
n.m. : not meaningful
BCE Inc. Supplementary Financial Information - First Quarter 2004 Page 2
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BCE Consolidated(1)
Consolidated Operational Data - Historical Trend
Total
($ millions, except per share Q1 04 2003 Q4 03 Q3 03 Q2 03 Q1 03
amounts)
------------------------------------------- ----------- -------------------------------------------
Operating revenues 4,697 18,972 4,875 4,688 4,733 4,676
Operating expenses (2,852 ) (11,546 ) (3,021 ) (2,789 ) (2,833 ) (2,903 )
---------- ----------- -------------------------------------------
EBITDA(2) 1,845 7,426 1,854 1,899 1,900 1,773
EBITDA margin 39.3% 39.1% 38.0% 40.5% 40.1% 37.9%
Amortization expense (775 ) (3,147 ) (786 ) (813 ) (786 ) (762 )
Net benefit plans cost (63 ) (175 ) (46 ) (44 ) (43 ) (42 )
Restructuring and other charges (1 ) (52 ) (51 ) (1 ) - -
---------- ----------- -------------------------------------------
Operating income 1,006 4,052 971 1,041 1,071 969
Other income 34 213 136 19 7 51
Interest expense (248 ) (1,093 ) (263 ) (267 ) (285 ) (278 )
---------- ----------- -------------------------------------------
Earnings from continuing
operations before
income taxes and 792 3,172 844 793 793 742
non-controlling interest
Income taxes (269 ) (1,136 ) (340 ) (285) (271 ) (240 )
Non-controlling interest (44 ) (191 ) (46 ) (50 ) (57 ) (38 )
---------- ----------- -------------------------------------------
Earnings from continuing 479 1,845 458 458 465 464
operations
Discontinued operations 9 (30 ) (58 ) 6 13 9
---------- ----------- -------------------------------------------
Net earnings 488 1,815 400 464 478 473
Dividends on preferred shares (18 ) (64 ) (14 ) (18 ) (17 ) (15 )
Premium on redemption of - (7 ) - - - (7 )
preferred shares
---------- ----------- -------------------------------------------
Net earnings applicable to 470 1,744 386 446 461 451
common shares
------------------------------------------- ----------- -------------------------------------------
Net earnings per common share -
basic
Continuing operations $ 0.50 $ 1.93 $ 0.48 $ 0.48 $ 0.49 $ 0.48
Discontinued operations $ 0.01 $ (0.03 ) $ (0.07 ) $ 0.01 $ 0.01 $ 0.02
Net earnings $ 0.51 $ 1.90 $ 0.41 $ 0.49 $ 0.50 $ 0.50
Net earnings per common share -
diluted
Continuing operations $ 0.50 $ 1.92 $ 0.48 $ 0.47 $ 0.49 $ 0.48
Discontinued operations $ 0.01 $ (0.03 ) $ (0.07 ) $ 0.01 $ 0.01 $ 0.02
Net earnings $ 0.51 $ 1.89 $ 0.41 $ 0.48 $ 0.50 $ 0.50
Dividends per common share $ 0.30 $ 1.20 $ 0.30 $ 0.30 $ 0.30 $ 0.30
Average number of common shares 924.1 920.3 923.4 921.5 919.3 917.1
outstanding - basic (millions)
------------------------------------------- ----------- -------------------------------------------
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The following items are included
in net earnings:
Net gains on sale of
investments and dilution gains
Continuing operations - 84 84 - - -
Discontinued 6 (65 ) (73 ) 8 - -
operations
Restructuring and other - (24 ) (30 ) 6 - -
charges
Total 6 (5 ) (19 ) 14 - -
Impact on net earnings per share $ 0.01 $ - $ (0.01 ) $ 0.01 $ - $ -
BCE Inc. Supplementary Financial Information - First Quarter 2004 Page 3
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BCE Consolidated(1)
Segmented Data
Q1 Q1
($ millions, except where otherwise 2004 2003 $ change % change
indicated)
Revenues
Consumer 1,825 1,729 96 5.6%
Business 1,435 1,419 16 1.1%
Aliant 504 501 3 0.6%
Other Bell Canada 474 552 (78 ) (14.1% )
Inter-segment eliminations (132 ) (118 ) (14 ) (11.9% )
Total Bell Canada 4,106 4,083 23 0.6%
Other BCE
Bell Globemedia 342 335 7 2.1%
Advertising 249 235 14 6.0%
Subscriber 74 74 - 0.0%
Production and Sundry 19 26 (7 ) (26.9% )
Telesat 84 79 5 6.3%
CGI 220 219 1 0.5%
BCE Emergis 70 79 (9 ) (11.4% )
Other 11 10 1 10.0%
Total Other BCE 727 722 5 0.7%
Inter-segment eliminations (136 ) (129 ) (7 ) (5.4% )
Total revenues 4,697 4,676 21 0.4%
Operating income
Consumer 526 493 33 6.7%
Business 241 190 51 26.8%
Aliant 82 81 1 1.2%
Other Bell Canada 111 162 (51 ) (31.5% )
Total Bell Canada 960 926 34 3.7%
Other BCE
Bell Globemedia 40 19 21 n.m.
Telesat 31 32 (1 ) (3.1% )
CGI 21 22 (1 ) (4.5% )
BCE Emergis (5 ) (12 ) 7 58.3%
Other (41 ) (18 ) (23 ) n.m.
Total Other BCE 46 43 3 7.0%
Total Operating income 1,006 969 37 3.8%
Capital expenditures(3)
Consumer 262 208 (54 ) (26.0% )
Business 197 193 (4 ) (2.1% )
Aliant 85 71 (14 ) (19.7% )
Other Bell Canada 46 62 16 25.8%
Total Bell Canada 590 534 (56 ) (10.5% )
Other BCE
Telesat 65 36 (29 ) (80.6% )
Other 33 24 (9 ) (37.5% )
Total capital expenditures 688 594 (94 ) (15.8%)
BCE Inc. Supplementary Financial Information - First Quarter 2004 Page
4
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BCE Consolidated(1)
Segmented Data - Historical Trend
Total
($ millions, except where Q1 04 2003 Q4 03 Q3 03 Q2 03 Q1 03
otherwise indicated)
Revenues
Consumer 1,825 7,203 1,868 1,838 1,768 1,729
Business 1,435 5,839 1,516 1,440 1,464 1,419
Aliant 504 2,059 527 514 517 501
Other Bell Canada 474 2,003 468 478 505 552
Inter-segment eliminations (132 ) (490 ) (133 ) (115 ) (124 ) (118 )
Total Bell Canada 4,106 16,614 4,246 4,155 4,130 4,083
Other BCE
Bell Globemedia 342 1,363 375 296 357 335
Advertising 249 978 283 201 259 235
Subscriber 74 291 69 73 75 74
Production and Sundry 19 94 23 22 23 26
Telesat 84 345 99 84 83 79
CGI 220 849 211 205 214 219
BCE Emergis 70 316 77 78 82 79
Other 11 51 15 13 13 10
Total Other BCE 727 2,924 777 676 749 722
Inter-segment eliminations (136 ) (566 ) (148 ) (143 ) (146 ) (129 )
Total revenues 4,697 18,972 4,875 4,688 4,733 4,676
Operating income
Consumer 526 1,985 471 552 469 493
Business 241 785 199 193 203 190
Aliant 82 415 108 104 122 81
Other Bell Canada 111 651 152 163 174 162
Total Bell Canada 960 3,836 930 1,012 968 926
Other BCE
Bell Globemedia 40 167 66 20 62 19
Telesat 31 124 33 28 31 32
CGI 21 91 22 23 24 22
BCE Emergis (5 ) (69 ) (42 ) (8 ) (7 ) (12 )
Other (41 ) (97 ) (38 ) (34 ) (7 ) (18 )
Total Other BCE 46 216 41 29 103 43
Total Operating Income 1,006 4,052 971 1,041 1,071 969
Capital expenditures(3)
Consumer 262 1,287 485 307 287 208
Business 197 936 286 228 229 193
Aliant 85 333 97 92 73 71
Other Bell Canada 46 336 123 81 70 62
Total Bell Canada 590 2,892 991 708 659 534
Other BCE
Telesat 65 159 43 64 16 36
Other 33 128 49 22 33 24
Total capital expenditures 688 3,179 1,083 794 708 594
BCE Inc. Supplementary Financial Information - First Quarter 2004 Page 5
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BCE Consolidated
Consolidated Balance Sheet Data
March 31 December 31
($ millions, except where otherwise indicated) 2004 2003
ASSETS
Current assets
Cash and cash equivalents 1,511 714
Accounts receivable 2,283 2,077
Other current assets 882 745
Current assets of discontinued operations - 45
Total current assets 4,676 3,581
Capital assets 20,932 21,195
Other long-term assets 3,559 3,550
Indefinite-life intangible assets 2,910 2,910
Goodwill 7,875 7,825
Non-current assets of discontinued operations 55 276
Total assets 40,007 39,337
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 3,759 3,691
Debt due within one year 1,171 1,537
Current liabilities of discontinued operations - 27
Total current liabilities 4,930 5,255
Long-term debt 13,126 12,393
Other long-term liabilities 4,774 4,713
Total liabilities 22,830 22,361
Non-controlling interest 3,385 3,403
SHAREHOLDERS' EQUITY
Preferred shares 1,670 1,670
Common shareholders' equity
Common shares 16,753 16,749
Contributed surplus 1,045 1,037
Deficit (5,645 ) (5,837 )
Currency translation adjustment (31 ) (46 )
Total common shareholders' equity 12,122 11,903
Total shareholders' equity 13,792 13,573
Total liabilities and shareholders' equity 40,007 39,337
Number of common shares outstanding 924.2 924.0
Key ratios
Net debt : Total Capitalization 42.7% 43.8%
Net debt : Trailing 12 month EBITDA 1.71 1.78
EBITDA : Interest (trailing 12 month) 7.05 6.79
BCE Inc. Supplementary Financial Information - First Quarter 2004 Page 6
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BCE Consolidated
Consolidated Cash Flow Data
Q1 Q1
($ millions, except where otherwise indicated) 2004 2003 $ change
------------------------------------------------------------------------ ----------
Cash flows from operating activities
Earnings from continuing operations 479 464 15
Adjustments to reconcile earnings from
continuing
operations to cash flows from
operating activities:
Amortization expense 775 762 13
Net benefit plans cost 63 42 21
Future income taxes 61 (20 ) 81
Non-controlling interest 44 38 6
Contributions to employee benefit (53 ) (27 ) (26 )
plans and other benefit plan payments
Other 40 44 (4 )
Change in non-cash working capital (166 ) (146 ) (20 )
---------- ---------- ----------
1,243 1,157 86
------------------------------------------------------------------------ ----------
Capital expenditures (688 ) (594 ) (94 )
Other investing items 20 (40 ) 60
Cash preferred dividends and cash
dividends paid by subsidiaries
to non-controlling interest (64 ) (55 ) (9 )
------------------------------------------------------------------------ ----------
Free Cash Flow from operations, before common 511 468 43
dividends(2)
Cash common dividends (277 ) (257 ) (20 )
---------- ---------- ----------
Free Cash Flow from operations, after common 234 211 23
dividends(2)
Business acquisitions (81 ) (63 ) (18 )
Business dispositions 16 - 16
Decrease in investments accounted for 6 7 (1 )
under the cost and equity methods
---------- ---------- ----------
Free Cash Flow after investments and 175 155 20
divestitures
---------- ---------- ----------
Other financing activities
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