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Note 24 Financial and capital management

Note 24 Financial and capital management

Financial management

Management’s objectives are to protect BCE and its subsidiaries on a consolidated basis against material economic exposures and variability of results from various financial risks that include credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk.

DERIVATIVES

We use derivative instruments to manage our exposure to foreign currency risk, interest rate risk and changes in the price of BCE common shares under our share-based payment plans.

The following derivative instruments were outstanding during 2016 and/or 2015:

  • foreign currency forward contracts and options that manage the foreign currency risk of certain purchase commitments
  • cross currency basis swaps that hedge foreign currency risk on a portion of our long-term debt and debt due within one year
  • interest rate swaps that hedge interest rate risk on a portion of our long-term debt
  • interest rate locks on future debt issuances and dividend rate resets on preferred shares
  • forward contracts on BCE common shares that mitigate the cash flow exposure related to share-based payment plans

FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Certain fair value estimates are affected by assumptions we make about the amount and timing of future cash flows and discount rates, all of which reflect varying degrees of risk. Income taxes and other expenses that would be incurred on disposition of financial instruments are not reflected in the fair values. As a result, the fair values are not the net amounts that would be realized if these instruments were settled.

The carrying values of our cash and cash equivalents, trade and other receivables, dividends payable, trade payables and accruals, compensation payable, severance and other costs payable, interest payable, notes payable and loans secured by trade receivables approximate fair value as they are short-term.

The following table provides the fair value details of financial instruments measured at amortized cost in the statements of financial position.

 

CLASSIFICATION

FAIR VALUE METHODOLOGY

NOTE

  

DECEMBER 31, 2016 DECEMBER 31, 2015
CARRYING
VALUE

 

FAIR
VALUE

 

CARRYING
VALUE

 

FAIR
VALUE

 

CRTC tangible benefits obligation

Trade payables and other liabilities and non-current liabilities

Present value of estimated future cash flows discounted using observable market interest rates

18, 23

 

166

 

169

 

227

 

234

 

CRTC deferral account obligation

Trade payables and other liabilities and non-current liabilities

Present value of estimated future cash flows discounted using observable market interest rates

18, 23

 

136

 

145

 

154

 

163

 

Debentures, finance leases
and other debt

Debt due within one year and long-term debt

Quoted market price of debt or present value of future cash flows discounted using observable market interest rates

19, 20

 

17,879

 

20,093

 

17,688

 

19,764

 

The following table provides the fair value details of financial instruments measured at fair value in the statements of financial position.

           

FAIR VALUE AT DECEMBER 31

  CLASSIFICATION NOTE  

CARRYING VALUE OF
ASSET (LIABILITY) AT
DECEMBER 31

  QUOTED PRICES IN
ACTIVE MARKETS FOR
IDENTICAL ASSETS
(LEVEL 1)
  OBSERVABLE MARKET
DATA
(LEVEL 2)(1)
  NON-OBSERVABLE
MARKET INPUTS
(LEVEL 3)(2)
 
2016                      

AFS publicly-traded and privately-held investments

Other non-current assets 16   103   1     102  

Derivative financial instruments

Other current assets, trade payables and other liabilities, other non-current assets and liabilities     166     166    

MLSE financial liability(3)

Trade payables and other liabilities 18   (135 )     (135 )

Other

Other non-current assets and liabilities     35     88   (53 )
2015                      

AFS publicly-traded and privately-held investments

Other non-current assets 16   128   16     112  

Derivative financial instruments

Other current assets, trade payables and other liabilities, other non-current assets and liabilities     256     256    

MLSE financial liability(3)

Other non-current liabilities 23   (135 )     (135 )

Other

Other non-current assets and liabilities     30     56   (26 )

 

CREDIT RISK

We are exposed to credit risk from operating activities and certain financing activities, the maximum exposure of which is represented by the carrying amounts reported in the statements of financial position.

We are exposed to credit risk if counterparties to our trade receivables and derivative instruments are unable to meet their obligations. The concentration of credit risk from our customers is minimized because we have a large and diverse customer base. There was minimal credit risk relating to derivative instruments at December 31, 2016 and 2015. We deal with institutions that have investment-grade credit ratings, and as such we expect that they will be able to meet their obligations. We regularly monitor our credit risk and credit exposure.

The following table provides the change in allowance for doubtful accounts for trade receivables.

  2016   2015  

Balance, January 1

(64 ) (69 )

Additions

(102 ) (86 )

Use

106   91  

Balance, December 31

(60 ) (64 )

In many instances, trade receivables are written off directly to bad debt expense if the account has not been collected after a predetermined period of time.

The following table provides further details on trade receivables not impaired.

AT DECEMBER 31 2016   2015  

Trade receivables not past due

2,187   2,205  

Trade receivables past due and not impaired

       

Under 60 days

286   289  

60 to 120 days

359   339  

Over 120 days

75   72  

Trade receivables, net of allowance for doubtful accounts

2,907   2,905  

LIQUIDITY RISK

Our cash and cash equivalents, cash flows from operations and possible capital markets financing are expected to be sufficient to fund our operations and fulfill our obligations as they become due. Should our cash requirements exceed the above sources of cash, we would expect to cover such a shortfall by drawing on existing committed bank facilities and new ones, to the extent available.

The following table is a maturity analysis for recognized financial liabilities at December 31, 2016 for each of the next five years and thereafter.

AT DECEMBER 31, 2016 NOTE   2017   2018   2019   2020   2021   THERE-
AFTER
  TOTAL  

Long-term debt

20   880   1,753   1,326   1,411   2,235   8,037   15,642  

Notes payable

19   2,649             2,649  

Minimum future lease payments under finance leases

13   568   514   328   265   253   1,050   2,978  

Loan secured by trade receivables

19   931             931  

Interest payable on long-term debt, notes payable and loan secured by trade receivables

    720   638   568   520   477   4,875   7,798  

MLSE financial liability

18   135             135  
Total     5,883   2,905   2,222   2,196   2,965   13,962   30,133  

We are also exposed to liquidity risk for financial liabilities due within one year as shown in the statements of financial position.

MARKET RISK

CURRENCY EXPOSURES

We use forward contracts, options and cross currency basis swaps to manage foreign currency risk related to anticipated transactions and certain foreign currency debt.

A 10% depreciation (appreciation) in the value of the Canadian dollar relative to the U.S. dollar would result in a gain (loss) of $30 million recognized in net earnings at December 31, 2016 and a gain (loss) of $84 million recognized in other comprehensive (loss) income at December 31, 2016, with all other variables held constant.

The following table provides further details on our outstanding foreign currency forward contracts, options and cross currency basis swaps as at December 31, 2016.

  

TYPE OF HEDGE

BUY

CURRENCY

  AMOUNT TO

RECEIVE

  SELL CURRENCY   AMOUNT TO

PAY

  MATURITY   HEDGED ITEM

 

Cash flow USD   1,949   CAD   2,591   2017   Commercial paper  
Cash flow USD   357   CAD   474   2017   Credit facility  
Cash flow USD   447   CAD   585   2017   Purchase commitments  
Cash flow USD   422   CAD   551   2018   Purchase commitments  
Economic USD   359   CAD   486   2017   Purchase commitments  
INTEREST RATE EXPOSURES

We use interest rate swaps to manage the mix of fixed and floating interest rates of our debt. We also use interest rate locks to hedge the interest rates on future debt issuances and to economically hedge dividend rate resets on preferred shares.

In 2016, we settled interest rate locks which hedged long-term debt and dividend rate resets on preferred shares with a notional amount of $500 million and $350 million respectively. In 2016, we redeemed, prior to maturity, long-term debt maturing on February 15, 2017 and settled the interest rate swap used to hedge the interest rate exposure on the redeemed debt, having a notional amount of $700 million. In 2016, we recognized a loss of $15 million (2015 – $18 million) on an interest rate swap used as a fair value hedge of long-term debt and an offsetting gain of $16 million (2015 – $18 million) on the corresponding long-term debt in Other income (expense) in the income statements.

A 1% increase (decrease) in interest rates would result in a decrease of $25  million (increase of $20  million) in net earnings at December 31, 2016.

EQUITY PRICE EXPOSURES

We use equity forward contracts on BCE’s common shares to economically hedge the cash flow exposure related to the settlement of share-based payment plans. See Note 26, Share-based payments for details on our share-based payment arrangements. The fair value of our equity forward contracts at December 31, 2016 was $111 million (2015 – $86 million).

A 5% increase (decrease) in the market price of BCE’s common shares at December 31, 2016 would result in a gain (loss) of $36 million recognized in net earnings for 2016, all other variables held constant.

 

 

Capital management

We have various capital policies, procedures and processes which are utilized to achieve our objectives for capital management. These include optimizing our cost of capital and maximizing shareholder return while balancing the interests of our stakeholders.

Our definition of capital includes equity attributable to BCE shareholders, debt, and cash and cash equivalents.

The key ratios that we use to monitor and manage our capital structure are a net debt leverage ratio(1) and an adjusted EBITDA to net interest expense ratio(2). Our net debt leverage ratio target range is 1.75 to 2.25 times adjusted EBITDA and our adjusted EBITDA to net interest expense ratio target is greater than 7.5 times. We monitor our capital structure and make adjustments, including to our dividend policy, as required. At December 31, 2016, we had exceeded the limit of our internal net debt leverage ratio target range by 0.32. This excess over the limit of our internal ratio target range does not create risk to our investment-grade credit rating.

These ratios do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. We use, and believe that certain investors and analysts use, our net debt leverage ratio and adjusted EBITDA to net interest expense ratio as measures of financial leverage and health of the company.

The following table provides a summary of our key ratios.

AT DECEMBER 31 2016   2015  
Net debt leverage ratio 2.57   2.53  
Adjusted EBITDA to net interest expense ratio 9.31   8.76  

 

On February 1, 2017, the board of directors of BCE approved an increase of 5.1% in the annual dividend on BCE’s common shares, from $2.73 to $2.87 per common share. In addition, the board of directors of BCE declared a quarterly dividend of $0.7175 per common share, payable on April 15, 2017 to shareholders of record at March 15, 2017.

On February 3, 2016, the board of directors of BCE approved an increase of 5.0% in the annual dividend on BCE’s common shares, from $2.60 to $2.73 per common share.

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