BCE's consolidated operating cash flow decreased by $1,635 million to $4,020 million compared with 1997, primarily as a result of lower operating profit resulting from the change in accounting for Nortel Networks.
As discussed in theManagement's Discussion and Analysis section, due to the Bay Networks transaction, BCE's ownership in Nortel Networks has been diluted from approximately 51% to 41%. As a result of the decrease in ownership, effective September 1, 1998, on a prospective basis, BCE has changed its accounting for Nortel Networks from full consolidation to equity accounting. Accordingly, BCE's consolidated statement of changes in financial position no longer reflects the cash flows related to Nortel Networks on a line-by-line basis effective September 1, 1998.
A discussion of changes in cash flows of Canadian Telecommunications, Nortel Networks, International Telecommunications and BCE Inc. follows.
Canadian Telecommunications
Bell Canada
The principal components of Bell Canada's cash flows are shown in table 7.
Operating cash flow was essentially flat for 1998 compared with 1997. Free cash flow of $923 million in 1998 represented an increase of $485 million over 1997 due primarily to the net proceeds of $753 million related to the sale of certain real estate properties in the first quarter of 1998 and the termination of the business transformation program, partially offset by increased working capital requirements and other items and increased net capital expenditures.
Net capital expenditures increased by $279 million for 1998 compared with 1997 due principally to the information systems and information technology modernization program. Net capital expenditures for 1999 are expected to remain relatively flat compared with 1998 as increases related to Internet technologies (broadband) are expected to be offset by reduced net capital expenditures related to voice technologies (narrowband) and by reduced expenditures related to information systems and information technology.
During 1998, Bell Canada repaid some $862 million of debt comprised of $544 million of long-term debt which matured, $127 million of long-term debt which was redeemed prior to maturity, and $191 million of notes payable and bank advances. Bell Canada's cash requirements during 1998, including the financing of capital expenditures and early redemptions, were primarily met by internally generated funds. Approximately $640 million of Bell Canada's long-term debt and other long-term liabilities will mature during 1999. Bell Canada's cash requirements during 1999, including the financing of capital expenditures and investments, are expected to be met by internally generated funds and by the issuance of debt.
On December 31, 1998, outstanding commercial paper totalled $105 million in Canadian funds. The commercial paper program is supported by lines of credit, extended by several banks, totalling $750 million.
Nortel Networks
The following discussion of Nortel Networks' cash flows is based on the full twelve months of 1998.
Cash flow from operations of $2,447 million in 1998 represented an increase of $1,274 million from 1997. Nortel Networks continues to focus on working capital as a key component of cash management.
Capital expenditures of $955 million in 1998 represented an increase of $153 million from 1997. Nortel Networks expects its consolidated capital expenditures for 1999 to be substantially above 1998 levels.
Proceeds from the sales of businesses were $1,136 million in 1998, an increase of $594 million from 1997. The increase was primarily due to the sale of Nortel Networks' Advanced Power Systems business to Astec (BSR) plc, the proceeds from the Entrust initial public and secondary offerings and the sale of Nortel Networks' holdings in ICL plc.
On April 17, 1998, Nortel Networks amended its five-year and 364-day syndicated credit agreements which permit borrowings in an aggregate amount not to exceed US $1.5 billion, of which US $1.0 billion relates to the five-year agreements and US $500 million relates to the 364-day agreements, to, among other things, extend the agreements for an additional one year and 364 days, respectively. The entire amount of these committed facilities remains available. Nortel Networks expects to meet its cash requirements from operations and conventional sources of external financing.
The competitive environment requires Nortel Networks and many of its principal competitors to provide significant amounts of medium-term and long-term customer financing in connection with the sale of products and services. While Nortel Networks has generally been able to place its customer financings with third-party lenders, Nortel Networks anticipates that, due to the amount of financing it expects to provide and the higher risks typically associated with such financings (particularly when provided to start-up operations or to customers in developing countries), the amount of such financings required to be supported directly by Nortel Networks for at least the initial portion of their term is expected to increase significantly in the future. As at December 31, 1998, Nortel Networks had entered into certain financing agreements for the future provision of up to approximately US $754 million of customer financing and had outstanding offers or commitments in connection with awarded supply contracts, subject to fulfillment of certain conditions, to provide up to approximately US $1.46 billion of additional customer financings (not all of these offers or commitments are expected to be drawn upon). Nortel Networks expects to continue to arrange for third-party lenders to assume customer financing obligations agreed to by Nortel Networks and to fund other customer financings directly supported by Nortel Networks from working capital and conventional sources of external financing in the normal course. In light of recent economic uncertainty and reduced demand for financings in capital and bank markets, Nortel Networks may be required to continue to hold certain customer financing obligations for longer periods prior to placement with third-party lenders.
As a result of the maturity of Nortel Networks' internal customer financing processes and Nortel Networks' increased experience in the area of medium-term and long-term customer financing, effective April 1, 1997, Nortel Networks began to maintain an allowance to absorb credit-related losses in its portfolio of on-balance sheet and off-balance sheet financing assets and liabilities (Financing Portfolio). The Financing Portfolio is primarily medium-term and long-term customer-financed receivables and guarantees. The allowance is part of the provision for uncollectibles. The allowance is reviewed quarterly for adequacy of impairment coverage and, in management's opinion, the allowance is considered adequate to absorb credit-related losses in the Financing Portfolio. Prior to January 1, 1997, Nortel Networks reflected customer financing risk related to PCS contracts as a reduction in revenues. All customer financing risk is now reflected through SG&A.
Nortel Networks has entered into supply contracts with customers for products and services, which in some cases involve new technologies currently being developed or which have not yet been commercially deployed by Nortel Networks or require Nortel Networks to build and operate networks on a turnkey basis. These supply contracts may contain delivery and installation timetables and performance criteria which, if not met, could result in the payment of substantial penalties or liquidated damages by Nortel Networks, the termination of the related supply contract, and/or reduction of shared revenues under a turnkey arrangement.
International Telecommunications
Bell Canada International
BCI had cash and cash equivalents of $98 million at December 31, 1998. During 1998, net investing activities amounted to $913 million, mainly relating to BCI's acquisition of a 68.4% interest in OCCEL for $445 million, its acquisition of an 18.2% equity interest in Hansol for $179 million and $297 million in capital expenditures primarily at COMCEL, OCCEL, Hansol and Americel.
On December 10, 1998, subsidiaries of American International Group Inc. paid $116 million for an indirect 3.45% (fully diluted) equity interest in COMCEL and OCCEL. On December 23, 1998, BCI transferred its interest in OCCEL to COMCEL. The aggregate sale price was $551 million, consisting of $244 million in cash and $307 million in warrants to purchase shares of COMCEL. In addition, on December 23, 1998, COMCEL also arranged a new US $300 million credit facility expiring in 2002 and exchanged its outstanding bonds with final maturity in 2003 for new bonds maturing in 2005.
On December 14, 1998, Americel was the first B-band cellular operator to be granted a long-term loan of R $190 million ($240 million) from the Brazilian National Economic Development Bank. These funds will allow Americel to decrease its interest cost without being exposed to foreign exchange risk.
In December 1998, BCI entered into credit agreements for up to $500 million of senior unsecured indebtedness. The credit agreements expire in December 1999. In addition, in February 1999, BCI issued $400 million of Debentures ($150 million to Nortel Networks) due 2002. Funds available under the credit agreements and the proceeds from the Debentures have been or will be primarily used to fund BCI's existing operations and development projects, to provide working capital and for general corporate purposes, including the expenses incurred in seeking and evaluating new business opportunities.
Between existing operations and development projects, BCI expects to have approximately $500 million of capital expenditures, investments and acquisitions in 1999. BCI's 1999 financing requirements are expected to be met through available cash balances, proceeds from the issuance of the Debentures, funds available under the credit agreements and new debt or equity.
In early 1999, two new BCI operations will be launched: Axtel S.A. de C.V. (formerly known as Telefonia Inalambrica del Norte S.A. de C.V.), which will provide fixed wireless local service in Mexico and Telet S.A., BCI's second Brazilian cellular operation.
In January 1999, BCI's consortium won the regional operating license to provide fixed telephone and value added services in the Northeast region of Brazil, which is home to almost 90 million people. The consortium, of which BCI owns 34.4%, plans to invest more than $1.5 billion in building its state-of-the-art network. BCI and its partners have agreed to jointly contribute US $300 million in equity capital over a three-year period, of which up to US $103 million would be provided by BCI.
In January 1999, KG Telecom, a PCS operator in the northern region of Taiwan, acquired an 82% interest in Tuntex Telecommunications Co. Ltd., a PCS operator in the central and southern regions of Taiwan for approximately $410 million. BCI has an option to increase its equity interest in KG Telecom from its existing 10% interest to 20%.
Other International Telecom
On May 25, 1998, a wholly-owned subsidiary of BCE Inc. announced it had agreed to sell to Comcast 6.4 million Class A common shares of Jones Intercable and a 49% interest in another subsidiary of BCE Inc. which owns another 6.4 million Class A common shares of Jones Intercable. The 12.8 million class A common shares represent an approximate 30% equity interest and 15% voting interest in Jones Intercable. Comcast also has agreed to purchase a 49% interest in another subsidiary of BCE Inc. which owns a control option to acquire the approximate 2.9 million shares of common stock of Jones Intercable currently owned by Mr. Glenn R. Jones. As part of the transaction, Comcast would purchase the remaining 51% of the above-mentioned subsidiaries when the control option is exercised. On August 12, 1998, Comcast, BCE Inc.'s wholly-owned subsidiary and Mr. Glenn R. Jones agreed to structure the transaction in such a way that would allow for the acceleration of the exercise of the control option which is expected to occur in 1999.
BCE Inc.
Dividend income, net of corporate expenses and debt financing charges, amounted to $877 million for 1998 compared with $861 million for the same period last year. Dividends to shareholders totaled $961 million for 1998 compared with $939 million for 1997.
On February 18, 1998, BCE Inc. issued $150 million of Notes under its shelf prospectus filed in November 1997. In addition, BCE Inc. refinanced £125 million Series 9 Notes on January 30, 1998, and $300 million Series 10 Notes on May 1, 1998, with commercial paper.
The sale of CWC in June 1998 generated net proceeds of $2,289 million which were mainly used by BCE Inc. to repay commercial paper and for investments.
Investments during 1998 totaled $1,624 million including:
the acquisition of 4,832,200 shares of BCE Mobile for $170 million in March 1998, concurrent with BCE Mobile's sale of 2,567,800 shares at $35.25 per share on a bought deal basis, which maintained BCE's ownership interest of 65.3%;
the acquisition of 1,500,000 shares of Nortel Networks for $107 million in the first quarter of 1998;
the acquisition of common shares of Telesat Canada for $158 million in May 1998, which increased BCE's ownership interest from 58.7% to 100%;
the acquisition of 11,971,700 common shares of Excel for $424 million and the acquisition of 7,701,500 shares of Teleglobe for $312 million, which brought BCE's ownership of Teleglobe to approximately 20%;
a total investment of $124 million in Bell Satellite Services, including $16 million to acquire the 10% interest not previously owned by BCE; and,
the acquisition of 12,000,000 (post split) outstanding Class A Subordinate Shares of CGI in January 1998 for $138 million, and the acquisition of 1,500,000 Class B Multiple Voting Shares resulting from the exercise, in part, of a put option by the three largest shareholders of CGI for a total of $54 million.
In December 1997, BCE Inc. initiated a normal course issuer bid, which expired on December 1, 1998, to repurchase up to 10,000,000 common shares. In 1998, 656,400 common shares were purchased and cancelled for $32 million. The repurchase of shares lessened the effect of dilution that occurred as 4,837,613 common shares were issued for $250 million in 1998 through BCE Inc.'s shareholder dividend reinvestment and stock purchase plan, employee savings plan and stock option plan and as a result of the acquisition of 1,500,000 CGI Class B Multiple Voting Shares.
At December 31, 1998, BCE Inc. had committed credit facilities totaling $1.275 billion available as back-up for its commercial paper program and general corporate purposes. The entire amount of these facilities remains available for use by BCE Inc.
