Canadian Telecommunications

Overview

BCE's Canadian Telecommunications group includes the following subsidiaries and proportionately accounted for entities: Bell Canada, MPACT Immedia Corporation (which was renamed BCE Emergis Inc. on January 21, 1999), the domestic operations of Bell ActiMedia, BCE Mobile, Telesat Canada (Telesat), Bell Satellite Services Inc. (Bell Satellite Services), CGI Group Inc. (CGI), NewTel Enterprises Limited, Northern Telephone Limited, Northwestel Inc., Télébec ltée, and TMI Communications and Company Limited Partnership as well as the following associated companies: Bruncor Inc., Maritime Telegraph and Telephone Company, Limited, and Teleglobe Inc. (Teleglobe). These entities provide a full range of domestic and international telecommunications services to Canadian customers as well as information technology services.

Earnings

The contribution of the Canadian Telecommunications group to BCE's net earnings before extraordinary item increased by $227 million (25%) in 1998. Bell Canada's contribution to the Canadian Telecom group of $799 million was $53 million lower compared with 1997. Excluding special net charges of $354 million in 1998, mainly related to restructuring and other charges of $392 million, Bell Canada's contribution to the Canadian Telecom group increased by $301 million (35%) compared with 1997. Bell Canada's increased earnings contribution was primarily related to lower depreciation and amortization coupled with marginal revenue growth and a small decrease in operating expenses. BCE Mobile's 1998 contribution was $46 million lower compared with 1997, mainly as a result of the anticipated start-up costs related to personal communications services (PCS). Other Canadian Telecom contributed $347 million in 1998, an increase of $326 million compared with 1997. The increase results mainly from a $315 million gain on reduction of BCE's ownership in Teleglobe following the acquisition of Excel Communications Inc. (Excel) by Teleglobe.

Canadian Telecommunications Revenues

Bell Canada local and access services
Local and access services revenues, which are earned principally by connecting business and residence customers to Bell Canada's network and providing them with local area service, increased $396 million in 1998 due to:

• the impact of the $2.57 monthly residential local service rate increase which became effective January 1, 1998;

• network access services growth;

• increased payments made by users of private line digital services to access the local network; and,

• increased revenues from long distance competitors accessing the local network;

partially offset by:

• the impact of a local business rate decrease which became effective May 1, 1998.

Bell Canada long distance and network services
Long distance and network services revenues, which are earned by carrying long distance traffic and by providing network services such as private line and business data services, decreased $313 million for 1998 compared with 1997. Long distance revenues for 1998 decreased due to lower average prices which were partially offset by higher volumes. The lower average prices were primarily due to increased penetration of discount calling plans. Price reductions and concentrated marketing efforts led to an increase in long distance services volumes, as measured in conversation minutes, of 516 million (5.2%) for 1998, compared with 1997. During 1998, Bell Canada's share of the long distance market increased by 1.2% to an estimated market share of 64.3% as at December 31, 1998, compared with an estimated market share of 63.1% as at December 31, 1997. The gain in market share, the first since the introduction of competition in the long distance market, reflected the success of Bell Canada's First Rate long distance discount calling plan. The decrease in long distance services revenues was partially offset by an increase in network services revenues for 1998, compared with 1997, due mainly to growth in digital data services and in digital frame-relay services.

On December 16, 1998, Bell Canada gave notice to the Stentor Operating Companies of the termination, effective December 31, 1999, of the connecting agreement which defines the rules of connection and payment between the Stentor Operating Companies, and the governance agreement concerning Stentor Canadian Network Management. New agreements are under negotiation which are intended to reflect the more competitive and less-regulated environment in Canada's telecommunications industry, as well as the fact that Bell Canada will be originating and terminating traffic and exchanging strategic plans with alliance partners on its own behalf in the future. Bell Canada does not expect the financial impact from the foregoing to be material.

Other Bell Canada revenues
The main revenue streams in this category include revenues from the rental, sales and maintenance of terminal equipment, directory advertising, Internet access, network management services and revenues related to public telephones. Revenues in this category were essentially flat in 1998 compared with 1997 as increased revenues related to terminal equipment sales and Internet access were offset by the impact of the disposition of Bell Sygma's Telecom Solutions and International divisions to CGI, effective July 1, 1998.

Bell Canada revenues
During 1999, Bell Canada will seek growth in local and access services revenues driven by growth in network access services as well as in optional services, partially offset by an increase in local service competition and lower average local rates due to the continuing impact of the price cap regime. Bell Canada expects continued pressures from intense competition related to long distance revenues. In addition, Bell Canada will seek revenue growth in data network services and through the provision of emerging services such as broadband, and other Internet services as well as from the launch of Bell Canada's new Internet Protocol (IP)/broadband company, in the first quarter of 1999. The Canadian and United States operations of this company were named BCE Nexxia Inc., carrying on business under the name Bell Nexxia, and BCE Nexxia Corporation, respectively (collectively BCE Nexxia). Bell Canada will continue to pursue new sources of revenues through emerging technologies and will explore ways of integrating its business.

BCE Mobile revenues
Revenues at BCE Mobile increased in 1998 reflecting growth in wireless voice services revenues which increased mainly due to a 17% increase in the average number of subscribers, partially offset by an 8% decrease in average revenue per subscriber. The increase in wireless voice services revenues was partially offset by lower revenues from equipment sales mainly due to changes by BCE Mobile in its dealer compensation plan related to hardware pricing.

At December 31, 1998, there were 1,475,000 wireless voice customers, reflecting net additions of 254,000 or a 21% increase over last year.

The number of paging customers grew by 14% to 542,000 (from 475,000 a year earlier). Revenue per average pager subscriber decreased 14% mainly due to the effect of competitive pricing in the marketplace.

Other Canadian Telecom revenues
The increase of $548 million in revenues compared with 1997 was mainly due to the acquisitions of CGI on July 1, 1998, (CGI was accounted for as an investment at cost in 1997 and up to June 1998) and of Telesat in May 1998 (Telesat was accounted for as an investment at equity in 1997 and up to April 1998).

Canadian Telecommunications Operating Expenses

Bell Canada depreciation and amortization
The depreciation and amortization expense decrease of $384 million in 1998 compared with 1997 was primarily due to the write-down of capital assets and write-off of regulatory assets as at December 31, 1997, reflecting the impact of the transition from rate-of-return regulation, combined with the sale of real estate properties. The impact of these factors was partially offset by a reduction of capital asset lives compared with 1997 lives reflecting technological and market changes.

Bell Canada operating expenses
Operating expenses (excluding depreciation and amortization and restructuring and other charges) were essentially flat for 1998 compared with 1997 as the impact of workforce reduction and process improvement programs implemented in prior periods and lower long distance settlement payments were offset by costs associated with the January 1998 ice storm, increased rental charges related to the sale of real estate properties, and volume increases.

At December 31, 1998, the total number of employees at Bell Canada was 38,049, down 1,279 or 3.3% from December 31, 1997, mainly as a result of the sale of Bell Sygma's Telecom Solutions and International divisions to CGI. Total salaries and wages (including capitalized amounts and excluding payments made under workforce reduction programs) were $2,038 million, down $185 million from 1997. The 8.3% decrease in salary and wages is higher than the 3.3% decrease in the total number of employees due primarily to workforce reductions which occurred in 1997, partially offset by increased overtime related to the January 1998 ice storm.

During 1998, Bell Canada and its clerical and associated employees, represented by the Canadian Telephone Employees' Association, reached a new collective agreement. The new agreement will expire May 31, 2002. Bell Canada and its Operator Services employees and Craft and Services employees, represented by the Communications, Energy and Paperworkers' Union (CEP), started negotiations on October 15, 1998. The collective agreements expired on November 24, 1998 and November 30, 1998, respectively. On January 11, 1999, Bell Canada tabled a comprehensive offer of settlement in resolution of all outstanding issues with the Craft and Services employees. On the same day, Bell Canada also informed the Operator Services employees of plans to partner with Excell Global Services Inc., an international operator services provider, to create a new company to provide operator services to Bell Canada and other companies. On January 14, 1999, Bell Canada and the CEP both requested the appointment of a federal government conciliator to facilitate contract negotiations. The conciliation process began on February 1, 1999. On February 4, 1999, Bell Canada and the CEP, after both agreeing that they had reached an impasse in conciliation, requested that the conciliators file their report with the federal Minister of Labour (Minister). On February 19, 1999, the Minister informed Bell Canada and the CEP of her decision not to extend the conciliation process in contract negotiations for the renewal of the Craft and Operator Services collective agreements. However, the Minister appointed two mediators to assist the parties in reaching an agreement. The right to strike or lock-out will be acquired on February 27, 1999.

Bell Canada restructuring and other charges
During the second quarter of 1998, Bell Canada recorded pre-tax charges in the aggregate of $608 million representing restructuring and other charges of $102 million and $506 million, respectively. The restructuring charges related to plans for rationalization of real estate and the integration of business units. Included in the charges are costs relating to lease terminations and associated costs and employee severance. Other charges include a provision for the costs of implementing local service competition and providing local number portability, to the extent such costs are estimated not to be recoverable. Also included are costs relating to the write-down of certain assets and other provisions.

During 1999, Bell Canada anticipates increased expenses related to revenue growth principally from emerging services, including BCE Nexxia. These costs are expected to be offset by the impact of workforce reduction programs and process improvement projects implemented in prior periods and benefits to be derived from Bell Canada's information systems and information technology modernization program. Bell Canada will continue to explore ways of improving its cost structure in 1999 in order to continue to be more competitive.

BCE Mobile operating expenses
Operating expenses at BCE Mobile were $1,236 million, $146 million higher compared with 1997 due to increases in wireless voice selling expenses and depreciation and amortization. The increase in wireless voice selling expenses was due to a 45% increase in wireless gross activations in 1998 compared with 1997, offset by a 7% decrease in costs of acquisition. The increase in depreciation and amortization expense mainly reflected the impact of a higher level of capital assets in 1998.

Other Canadian Telecom operating expenses
The increase of $585 million in operating expenses compared with 1997 was mainly due to the start-up costs at Bell Satellite Services and the acquisitions of CGI and Telesat.

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