Management’s Discussion and Analysis

This management’s discussion and analysis of financial condition and results of operations (MD&A) comments on BCE’s operations, performance and financial condition for the years ended December 31, 2004 and 2003.

About Forward-Looking Statements

Securities laws encourage companies to disclose forward-looking information so that investors can get a better understanding of the company’s future prospects and make informed investment decisions.
     BCE’s 2004 annual report, including this MD&A, contains forward-looking statements about BCE’s objectives, strategies, financial condition, results of operations, cash flows and businesses. These statements are forward-looking because they are based on our current expectations, estimates and assumptions about the markets we operate in, the Canadian economic environment and our ability to attract and retain customers and to manage network assets and operating costs. It is important to know that:

• forward-looking statements in BCE’s 2004 annual report, including this MD&A, describe our expectations at March 2, 2005
• our actual results could be materially different from what we expect if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statement will materialize and, accordingly, you are cautioned not to place undue reliance on these forward-looking statements.
• forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made may have on our business. For example, they do not include the effect of dispositions, sales of assets, monetizations, mergers, acquisitions, other business combinations or transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made. The financial impact of such transactions and non-recurring and other special items can be complex and necessarily depends on the facts particular to each of them. Accordingly, the expected impact cannot be meaningfully described in the abstract or presented in the same manner as known risks affecting our business.
• we disclaim any intention and assume no obligation to update any forward-looking statement even if new information becomes available as a result of future events or for any other reason.

Risks that could cause our actual results to materially differ from our current expectations are discussed throughout this MD&A and, in particular, in Risks that Could Affect Our Business.

Non-GAAP Financial Measures

EBITDA

The term EBITDA does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). It is therefore unlikely to be comparable to similar measures presented by other companies. EBITDA is presented on a consistent basis from period to period.
     We use EBITDA, among other measures, to assess the operating performance of our ongoing businesses without the effects of amortization expense, net benefit plans cost, and restructuring and other items. We exclude amortization expense and net benefit plans cost because they largely depend on the accounting methods and assumptions a company uses, as well as non-operating factors, such as the historical cost of capital assets and the fund performance of a company’s pension plans. We exclude restructuring and other items because they are transitional in nature.
     EBITDA allows us to compare our operating performance on a consistent basis. We believe that certain investors and analysts use EBITDA to measure a company’s ability to service debt and to meet other payment obligations, or as a common valuation measurement in the telecommunications industry.
     The most comparable Canadian GAAP financial measure is operating income. The tables on the next page are reconciliations of EBITDA to operating income on a consolidated basis for BCE and Bell Canada.

EBITDA
We define EBITDA (earnings before interest, taxes, depreciation and amortization) as operating revenues less operating expenses, which means it represents operating income before amortization expense, net benefit plans cost, and restructuring and other items.

Operating Income Before Restructuring and Other Items

The term operating income before restructuring and other items does not have any standardized meaning prescribed by Canadian GAAP. It is therefore unlikely to be comparable to similar measures presented by other companies.
     We use operating income before restructuring and other items, among other measures, to assess the operating performance of our ongoing businesses without the effects of restructuring and other items. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. The exclusion of these items does not imply they are necessarily non-recurring.
     The most comparable Canadian GAAP financial measure is operating income. The table below is a reconciliation of operating income to operating income before restructuring and other items on a consolidated basis.

Operating income before restructuring and other items 

Net Earnings Before Restructuring and Other Items and Net Gains on Investments

The term net earnings before restructuring and other items and net gains on investments does not have any standardized meaning prescribed by Canadian GAAP. It is therefore unlikely to be comparable to similar measures presented by other companies.
     We use net earnings before restructuring and other items and net gains on investments, among other measures, to assess the operating performance of our ongoing business without the effects of after-tax restructuring and other items and net gains on investments. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. The exclusion of these items does not imply they are necessarily non-recurring.
     The most comparable Canadian GAAP financial measure is net earnings applicable to common shares. The table below is a reconciliation of net earnings applicable to common shares to net earnings before restructuring and other items and net gains on investments on a consolidated basis and per common share.

Free Cash Flow
We define free cash flow as cash from operating activities after capital expenditures, total dividends and other investing activities.

Free Cash Flow

The term free cash flow does not have any standardized meaning prescribed by Canadian GAAP. It is therefore unlikely to be comparable to similar measures presented by other companies. Free cash flow is presented on a consistent basis from period to period.
     We consider free cash flow to be an important indicator of the financial strength and performance of our business because it shows how much cash is available to repay debt and to reinvest in our company. We believe that certain investors and analysts use free cash flow when valuing a business and its underlying assets.
     The most comparable Canadian GAAP financial measure is cash from operating activities. The table below is a reconciliation of free cash flow to cash from operating activities on a consolidated basis.

Free cash flow before restructuring and other items 

About Our Business

BCE is Canada’s largest communications company. Our primary focus is Bell Canada, which is Canada’s leading provider of wireline and wireless communications services, Internet access, data services and video services to residential and business customers, and represents the largest component of our business. We report Bell Canada’s results of operations in four segments. Each reflects a distinct customer group: Consumer, Business, Aliant and Other Bell Canada. All of our other activities are reported in the Other BCE segment. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. We discuss our consolidated operating results in this MD&A, as well as the operating results of each segment. See Note 2 to the consolidated financial statements for information about our segments. We also discuss our results by product line to give further insight into these results.
     The chart below shows the operating revenues that each segment contributed to total operating revenues for the year ended December 31, 2004. Some of these revenues vary slightly by season. For example, Business segment revenues tend to be higher in the fourth quarter because of higher levels of voice and data equipment sales. Revenues for the Other BCE segment tend to be highest in the fourth quarter and lowest in the third quarter because of seasonal patterns in advertising spending in the fall and summer respectively. Our operating income can also vary slightly by season. For example, Consumer segment operating income tends to be lower in the fourth quarter due to the higher acquisition costs related to higher subscriber gains in the holiday season.

Consumer Segment

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 Québec. Wireless services are also offered in Western Canada and video services are provided nationwide.
     Local telephone and long distance services are sold under the Bell brand, wireless services through Bell Mobility, Internet access under the Sympatico brand and video services through Bell ExpressVu.

Business Segment

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 large enterprise (Enterprise) customers in Ontario and Québec, as well as business customers in Western Canada.
     In 2004, Bell Canada acquired several small specialized service companies, allowing us to quickly enhance our value-added services (VAS) product suite for both SMB and Enterprise customers.
     In the third quarter, we enhanced our competitive position in Western Canada by acquiring 100% ownership of Bell West Inc. (Bell West), our competitive local exchange carrier (CLEC) in Alberta and British Columbia, by completing the purchase of Manitoba Telecom Services Inc.’s (MTS) interest in Bell West.
     In the fourth quarter of 2004, we further enhanced our competitive position in Western Canada by completing the acquisition of the Canadian operations of 360networks Corporation (360networks) as well as certain U.S. network assets. This acquisition increases our customer base and gives us an extensive fibre network across major cities in Western Canada.

Aliant Segment

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).
     At December 31, 2004, Bell Canada owned 53% of Aliant. The remaining 47% was publicly held.

Other Bell Canada Segment

The Other Bell Canada segment includes Bell Canada’s Wholesale business and the financial results of Télébec Limited Partnership (Télébec), NorthernTel Limited Partnership (NorthernTel) and Northwestel Inc. (Northwestel). Our Wholesale business provides local telephone, long distance, wireless, data and other services to competitors who resell these services. Télébec, NorthernTel and Northwestel provide telecommunications services to less populated areas of Québec, Ontario and Canada’s northern territories.
     Following the purchase of 360networks, Bell Canada sold 360networks’ retail customer operations in Central and Eastern Canada to Call-Net Enterprises Inc. (Call-Net). As part of the sale, Bell Canada will provide to Call-Net, for a share of the revenues, network facilities and other operations and support services.
     At December 31, 2004, Bell Canada owned 100% of Northwestel and 63% of Télébec and NorthernTel. The Bell Nordiq Income Fund owned the remaining 37%.

Other BCE Segment

The Other BCE segment includes the financial results of our media, satellite and information technology (IT) businesses as well as the costs incurred by our corporate office. This segment includes Bell Globemedia Inc. (Bell Globemedia), Telesat Canada (Telesat) and CGI Group Inc. (CGI).
     Bell Globemedia provides information and entertainment services to Canadian customers and access to distinctive Canadian content. It includes CTV Inc. (CTV), Canada’s leading private broadcaster, and The Globe and Mail, Canada’s leading national newspaper. BCE Inc. owns 68.5% of Bell Globemedia. The Woodbridge Company Limited and affiliates own the remaining 31.5%.
     Telesat is a pioneer in satellite communications and systems management and is an experienced consultant in establishing, operating and upgrading satellite systems worldwide. BCE Inc. owns 100% of Telesat.
     CGI is one of Canada’s largest IT services companies. It provides a full range of IT services and business solutions including outsourcing, systems development and integration and consulting. CGI is publicly traded. BCE Inc. owns 29% of CGI.

Bell Canada Products and Services

Bell Canada is our primary focus and the largest component of our business. It has six major lines of business:

• local and access services
• long distance services
• wireless services
• data services
• video services
• terminal sales and other.

Local and Access Services

Bell Canada operates an extensive local access network that provides local telephone services to business and residential customers. The 12.9 million local telephone lines, or network access services (NAS), we provide for our customers are key in establishing customer relationships and are the foundation for the other products and services we offer.
     Local telephone service is the main source of local and access revenues. Other sources of local and access revenues include:

• value-added services, such as call display, call waiting and voicemail
• services provided to competitors accessing our local network
• connections to and from our local telephone service customers for competing long distance companies
• subsidies from the National Contribution Fund to support local service in high-cost areas.

Rates for local telephone and value-added services in our incumbent territories are regulated by the Canadian Radio-television and Telecommunications Commission (CRTC).
     The local telephone services market became more competitive in 2004 when several companies launched voice over Internet protocol (VoIP) services. In 2004, we launched our own VoIP service for Enterprise customers and are currently conducting trials of a version for residential customers. Several major cable companies recently entered, or announced their intention to enter, the local telephone services market in 2005 with VoIP offerings of their own.

Long Distance Services

We supply long distance voice services to business and residential customers. We also receive settlement payments from other carriers for completing their customers’ long distance calls in our territory.
     Prices for long distance services have been declining since this market was opened to competition. In 2004, the long distance services market became more competitive with the emergence of non-traditional suppliers (i.e., prepaid card, dial-around and VoIP providers).

Wireless Services

We offer a full range of wireless communications services to business and residential customers, including cellular, personal communications services (PCS) and paging. PCS customers can get wireless access to the Internet through our Mobile Browser service or send text messages. We also provide value-added services, such as call display and voicemail, and roaming services with other wireless service providers. Customers can choose to pay for their cellular and PCS services through a monthly rate plan (postpaid) or in advance (prepaid). At the end of 2004, we had more than 5.3 million cellular, PCS and paging customers.
     The wireless division of each of our incumbent telephone companies provides wireless communications in its home territory, except for Bell Mobility Inc. (Bell Mobility), which provides these services in its home territory, as well as Alberta and British Columbia.
     Our wireless network provides voice services and data services at typical transmission speeds of approximately 120 Kbps. At the end of 2004, our wireless network covered:

• 95% of the population in Ontario and Québec, which is equivalent to our analogue coverage in this region
• 88% of the population in Atlantic Canada
• Calgary, Edmonton and Vancouver in Western Canada.

In December 2004, we announced we were in trials for Canada’s first Evolution, Data Optimized (EVDO) network, which will provide wireless broadband speeds up to six times faster than data speeds available today. We expect to deploy EVDO in major urban centres across Canada in 2005 and 2006.
     We also announced a joint venture with the Virgin Group to offer wireless services to the key youth market under the dynamic Virgin brand.

Data Services

High-speed Internet access service provided through digital subscriber line (DSL) technology for residential and SMB customers is a growth area for Bell Canada. At the end of 2004, we had over 1.8 million high-speed Internet customers.
     We expanded our DSL footprint in Ontario and Québec to 83% of homes and business lines passed at the end of 2004, compared to 80% at the end of 2003. This was partly due to the deployment of new high-speed remotes that began in April 2004. In Atlantic Canada, DSL was available to 72% of homes and 79% of businesses at the end of 2004, compared to 65% and 75%, respectively, at the end of 2003.
     During 2004, we upgraded our Sympatico DSL services by increasing our High Speed Edition to up to 3 Mbps from 1.5 Mbps and our Ultra service from 3 Mbps to up to 4 Mbps.
     We offer a full range of data services to business customers, including Internet access, Internet protocol (IP) based services, VAS and equipment sales. While we still offer legacy data services such as frame relay and asynchronous transfer mode (ATM), we began the process of discontinuing legacy data services by announcing in 2004 that we would not sell several of these services to customers who do not use them currently.

Video Services

We are Canada’s largest digital television provider, broadcasting nationally more than 400 video and CD-quality audio channels, including up to 25 high definition channels and unique interactive television services. At the end of 2004, we provided video services to more than 1.5 million customers. We currently distribute our video services to customers in one of two ways:

• direct-to-home (DTH) satellite: we have been offering DTH video services nationally since 1997. We use three satellites, Nimiq 1, Nimiq 2, and Nimiq 3. We added Nimiq 3 in 2004 to improve signal strength and reliability while increasing capacity.
• very high bit rate DSL (VDSL): in 2003, we began expanding our reach to the Toronto multiple-dwelling unit (MDU) market through the use of VDSL. The MDU market represents approximately 40% of all households in Toronto. In 2004, we increased our penetration of the Toronto MDU market and also began deploying VDSL in the MDU markets in Montréal and Ottawa.

In the future, we plan to provide an IPTV service (video over Internet protocol) terrestrially to urban households in the Québec City to Windsor corridor. In 2004, we received CRTC approval of our broadcast licence application to deliver video services terrestrially to single family units (SFUs). We plan to conduct trials of our IPTV service in 2005.
     Signal piracy is a major issue facing the Canadian broadcasting industry. In order to combat DTH signal piracy, in 2004 we began the deployment of a new conditional access system. All new customers are now supplied with the new system, and the replacement of old smart cards is expected to be completed in the second half of 2005. During the transition to the new system, we are continuing our electronic countermeasure program, which transmits electronic signals that disable set top boxes that use illegal cards to steal programming.

Terminal Sales and Other

This category includes revenues from a number of other sources, including:

• renting, selling and maintaining business terminal equipment
• wireless handset and video set top box sales
• network installation for third parties
• IT services provided by Aliant.

Discontinued Operations

In the past two years, we have disposed of or approved formal plans for disposing of a number of our businesses. These include:

• Aliant’s emerging business segment. Its assets were sold in 2003.
• Aliant’s remote communications segment, which consisted mainly of Aliant’s investment in Stratos Global Corporation (Stratos). Stratos was sold in December 2003.
• Emergis Inc.’s (Emergis) US Health operations, which were sold in March 2004
• Emergis, which was sold in May  2004.

All of these business dispositions were treated as discontinued operations.
     In treating business dispositions as discontinued operations, we restated the financial results of all previous years to exclude the results of these businesses. They are presented separately in the consolidated financial statements and are discussed separately in this MD&A.

Our Strategic Priorities

The telecommunications industry continues to evolve rapidly as the industry moves from multiple service-specific networks to IP-based integrated communications networks where text, video, sound and voice all travel on a single network. While IP-based communications is creating a new competitive landscape with reduced barriers to entry, it also unleashes new growth opportunities and the ability to achieve significant cost savings.
     In 2004, we embarked on our strategy to deliver unrivalled integrated communications to customers across Canada with the overall objective of taking a leadership position in setting the standard in IP for the industry and for our customers. Leveraging the opportunities created by IP-based communications should allow us to deliver on the guiding principles of our strategy of customer simplification, innovation and efficiency. This strategy is founded on three priorities:

1. Deliver an enhanced customer experience with the objective of enabling a significantly lower cost structure at Bell Canada.

A year ago we announced a far-reaching, company-wide program called Galileo (Galileo) designed to simplify and enhance the customer experience. In the Consumer segment, Galileo aims to unify the customer experience across all product lines, and eliminate the costs of complexity associated with multiple systems and processes. In the Business segment, Galileo aims to deliver to customers a streamlined service offer based on IP, thereby eliminating the costs of multiple data networks and related processes.
     In 2004, we made significant progress on our Galileo initiatives in both our Consumer and Business segments.

In our Consumer segment:

• we gained 369,000 subscriptions to the Bell bundle (a combination of wireless, Internet and video services in one offer), bringing our total sales to 431,000 since it was launched in September of 2003. Over the year, 48% of new bundle activations, 49% of fourth quarter activations and 51% of December activations included the sale of at least one new service.
• the $5 Long Distance Bundle that we introduced in June 2004 was extremely successful, gaining approximately 229,000 customers by year end
• we completed a major overhaul of Bell ExpressVu’s service offerings to stimulate growth and invigorate the business. This included repackaging programs and simpler pricing.
• we completed the migration of all Bell Mobility postpaid customer accounts to a new billing platform that will enable us to consolidate all of a customer’s services onto a single bill
• we also made significant advancements in improving the customer experience in our corporate stores.

In our Business segment:

• we made significant progress on our key objective of having 100% of our core traffic moved to a pervasive national IP multi-protocol label switching (IP MPLS) network by the end of 2006. At the end of 2004, 61% of the traffic on our core network was IP-based.
• we also began the process to discontinue several legacy data services by announcing in 2004 that we would not sell these services to customers who do not use them currently. This list of legacy services includes Frame Relay, ATM, Megastream, Bell Electronic Business Network, some business long distance services from the VNet portfolio (virtual corporate network services for large companies) and some packet services from the Datapac portfolio.

In 2005, we will continue to work on both of these areas.

In Consumer, we will continue to deliver on our strategy to win the broadband home. In particular, we:

• aim to significantly increase the number of customers on the Bell bundle
• will launch a redesigned Bell.ca site with the objective of increasing online sales
• will rollout a new, simpler bill for our customers.

In Business, we will:

• continue the process of discontinuing legacy data services by expanding the list of services that will no longer be sold to customers who do not currently use them and by beginning to stop selling these services to existing customers
• continue to actively encourage customers to adopt new IP-based services as well as to migrate from legacy services to new IP-based services
• increase the adoption of self-serve and web-based interfaces by Enterprise customers
• eliminate network elements and standardize core operating processes.

By the end of 2006, through our Galileo initiatives, we are targeting to remove between $1 billion and $1.5 billion in annual costs from our current cost structure.

2. Deliver abundant bandwidth to enable all the services of the future with the reliability and security that customers require.

Over the next four years, we plan to make a significant investment to expand the reach and amount of bandwidth available to customers. We are aiming to be able to deliver by 2008 up to 26 Mbps to 85% of urban households in the Québec City to Windsor corridor, or approximately 4.3 million households. Four million of these households will be SFUs that will be served using a fibre-to-the-node (FTTN) architecture capable of delivering IPTV service. The remaining 300,000 households will be MDUs served using VDSL.
     In 2004, we began our FTTN rollout by deploying new high-density remotes in 376 neighbourhoods. Although not yet capable of providing video services, these remotes did enable the expansion of our high-speed Internet access footprint in Ontario and Québec to 83% of homes and business lines passed, compared to 80% at the end of 2003. We also made solid progress in the deployment of VDSL to MDUs. By the end of the year, we had signed access agreements with 335 buildings.
     In 2005, we plan to continue our FTTN rollout and conduct trials of our IPTV service. By year end, we expect to have deployed new high-density remotes to 2,500 neighbourhoods, representing a footprint of approximately 1.1 million households. We plan to also continue our VDSL expansion into the MDU markets of Toronto, Montréal and Ottawa.
     We were also the first in Canada to announce plans to deploy the third generation (3G) of wireless mobile communications. Through our investment in EVDO, we will offer wireless broadband speeds of up to 2.4 Mbps, six times faster than the speeds that exist today. We intend to deploy EVDO in major urban centres across Canada in 2005 and 2006.

3. Create the next-generation services to drive future growth.

We continue to leverage our network capabilities, customer base and market knowledge to deliver innovative next-generation services. We plan to develop applications together with our wide array of partners, integrate them into useful services and bring these services to market using our strong brand, customer reach and channels.
     In 2004, our Consumer segment provided next-generation services with:

• the launch of Sympatico-MSN.ca, a single portal combining the best features and Internet tools of MSN Canada Co. with the broadband content and innovative services of Sympatico.ca
• the introduction of MSN Premium
• the launch of Sympatico Home Networking (an integrated wireless high-speed modem and router solution)
• the launch of leading-edge wireless location-based services
• the launch of wireless phone-to-phone video messaging service.

For Enterprise customers, we launched our Managed IP Telephony service. By year end, Bell Canada had sold more than 145,000 IP-enabled lines on customer premises equipment (CPE). We also enhanced our portfolio of value-added services through the acquisitions of:

• Infostream Technologies Inc. (Infostream), a systems and storage technology firm, addressing customer needs for secure and reliable information storage and redundant backup capabilities
• approximately 76% of Elix Inc. (Elix), a provider of call routing and management systems, IT applications integration, and design and implementation of electronic voice-driven response systems
• the security business of Emergis.

As part of our strategy to become the technology advisor of choice to SMB customers, we:

• launched Productivity Pak (a self-serve bundle of tools that enables SMB customers to more easily access and share information) and ProConnect (a fully-managed service enabling the sharing of information easily, securely and affordably across the most extensive private IP-based network in Canada)
• acquired IT solutions provider Charon Systems Inc. (Charon) and, by February 21, 2005, an 89% interest in IT solutions provider Nexxlink Technologies Inc. (Nexxlink)
• on December 14, 2004, announced an initiative with Microsoft Canada Co. whereby Bell Canada will combine telecommunications services and Microsoft software-based solutions to bring SMB customers reliable, secure, productivity-enhancing services at affordable prices.

In 2005, we plan to introduce Internet telephony service for consumers. In the Enterprise unit, we are targeting to increase the proportion of our customers in the Enterprise market purchasing value-added solutions. In the SMB market, we intend to reinvent the way information technology and telecom are integrated with the objective of increasing the number of SMB customers that view Bell Canada as their virtual Chief Information Officer (VCIO).
     We will exploit the IP capability to achieve interoperability between wireless and wireline platforms. For instance, in 2005 we are targeting to bring to market an integrated single-voice mailbox for both cellular and land lines to allow customer access to voicemail messages through a single voicemail system.

The Year at a Glance
This section reviews the key measures we use to assess our performance and how our results in 2004 compare to our results in 2003.

The Year at a Glance

The results for 2004 demonstrate steady progress on our strategic objectives. We set a solid foundation for future growth, simplification of our customers’ experience and the transformation of our cost structure. Overall, our 2004 revenue growth performance exceeded the rate of growth achieved last year. The decrease in operating income was driven mainly by the restructuring and other items mainly related to the employee departure programs announced by Bell Canada and Aliant. Before restructuring and other items, operating income grew compared to last year, despite the negative impact of Aliant’s labour disruption. This growth reflected better operating performance at Bell Canada.
     In the Consumer segment, we achieved solid revenue and operating income growth, while maintaining strong levels of customer acquisitions and loyalty. Bundle subscriptions, a key part of our strategy to win the broadband home, significantly exceeded our expectations for the year.
     In the Business segment, we grew our base of IP-based services and VAS within our SMB and Enterprise markets and expanded our presence in Western Canada. Overall, Business revenues grew modestly, despite increased competitive pressures, significant impacts from our exit from the low-margin cabling business, the completion of the Hydro-Québec outsourcing contract and lower revenues from Bell West’s contract with the Government of Alberta for the construction of the SuperNet. The improved momentum in our IP-connectivity and VAS business, combined with strong cost containment, led to operating income growth.
     In the Aliant segment, a new collective labour agreement was signed on September 16, 2004. The labour disruption, which started on April 23, 2004 and ended on September 20, 2004, negatively impacted revenues and operating income.
     In the Other Bell Canada segment, market challenges persisted throughout the year for our Wholesale business. While full year revenues declined, this was in part due to our decision in the fourth quarter of 2003 to exit certain low-margin contracts and promotional offers for international switched minutes. In the last three quarters of the year, the rate of decline stabilized.
     In the Other BCE segment, Bell Globemedia delivered strong revenue and operating performance compared to last year, largely driven by higher television advertising revenue. Higher advertising revenue resulted from CTV’s programming line-up which included the majority of the top 20 programs in each season. The improvement in revenue, combined with cost savings, contributed to significantly higher operating performance compared to 2003. Telesat’s revenues improved in 2004 as an increase in telecommunications revenue more than offset declines in consulting fees. CGI’s revenues also increased due to its acquisition of American Management Systems Incorporated (AMS) in May 2004.

Customer Connections

The total number of customer connections increased 4.2% or 1.1 million to 26.6 million at December 31, 2004, compared to December 31, 2003.

Wireless

Our total cellular and PCS subscriber base grew 11.6% or 513,000 in 2004 to reach 4,925,000 at December 31, 2004. This reflects a similar level of net additions as in 2003. We also improved blended and postpaid churn by 0.1 and 0.2 percentage points, respectively, over 2003.

High-Speed Internet

Our DSL high-speed Internet business added 350,000 customers in 2004, increasing our DSL customer base by 24% to reach 1,808,000 at December 31, 2004. The additions achieved in 2004 were slightly lower than the 358,000 subscribers added in 2003. We also more than doubled our subscriptions to Sympatico value-added solutions over December 31, 2003, to reach an end of period count of 624,000.

Video

We gained momentum in our video business in 2004, ending the year with over 1.5 million subscribers, growing by 8.4% over 2003. During the year, we had 116,000 net activations, an increase of 40% over 2003. Bell ExpressVu achieved its target in the deployment of VDSL to MDUs, signing access agreements for 335 buildings by year end.

NAS

Our NAS levels declined 1.1% or 146,000 in 2004, similar to the rate of decline in 2003, reflecting the substitution of wireline with wireless services and a reduction in the number of second lines as a result of growth in high-speed Internet access.

Operating Revenues

Operating revenues increased 2.4% or $456 million to $19,193 million in 2004, compared to 2003. This reflects a rate of growth which exceeded our 2003 performance. Bell Canada contributed most of the increase despite the trailing effects of the implementation of a new wireless billing system and a prolonged labour disruption at Aliant.
     Bell Canada’s revenue growth reflects improved performance in the Consumer segment stemming from stronger wireless, Internet access and video services, along with higher IP-connectivity and VAS revenues in the Business segment.
     Revenue growth was enhanced further by higher revenues at CGI, resulting from the AMS acquisition, and at Bell Globemedia, resulting from higher television advertising revenues due to strong ratings performance.

Operating Income/EBITDA
EBITDA margin is EBITDA divided by operating revenues.

Operating Income/EBITDA

Operating income for the year declined $1,145 million to $2,976 million in 2004, compared to 2003. This was mainly a result of restructuring and other items of $1,224 million recorded in 2004. The cost of the employee departure programs announced at Bell Canada in June of this year, encompassing a total of 5,052 employees, and at Aliant, announced in the fourth quarter this year encompassing a total of 693 employees, amounted to $1,063 million. In addition, the labour disruption at Aliant had an estimated negative impact of $68 million on operating income.
     Operating income before restructuring and other items increased 1.6% or $65 million to $4,200 million in 2004, compared to 2003, despite the estimated negative impact of $68 million of the Aliant labour disruption. This increase reflects EBITDA growth, partially offset by higher net benefit plans cost.
     EBITDA grew 2.1% or $154 million to $7,564 million in 2004, compared to 2003, driven mainly by improvements at Bell Canada and the Other BCE segment. Growth was 3.0% excluding the estimated negative impact of $71 million from the Aliant labour disruption. EBITDA growth at Bell Canada was driven by continued improvement in wireless, Internet access and video services.
     EBITDA erosion in our legacy services was offset by a continued focus on productivity, as well as EBITDA contributions from IP connectivity, VAS and VCIO revenue gains in our Business segment.
     The Other BCE  segment also contributed to the overall EBITDA growth. Bell Globemedia’s EBITDA improvement reflects a higher level of television advertising revenue and benefits from cost savings. CGI’s EBITDA improvement reflects the benefit of the AMS acquisition.
     Our EBITDA margin for the year was 39.4%, down 0.1 percentage points from 2003, reflecting a lower EBITDA margin at CGI and higher corporate expenses, which more than offset margin improvement at Bell Canada. Bell Canada’s EBITDA margin of 42.4% reflected a 0.3 percentage point improvement over last year. Wireless EBITDA grew significantly, driving a 5.2 percentage point margin improvement despite the adverse impacts of the implementation of a new billing system. We achieved EBITDA margin improvement by better managing acquisition costs per gross activation, particularly in the wireless business, and by placing a greater emphasis on more profitable contracts within the Enterprise and Wholesale markets. The negative impact of the Aliant employee strike and the cost of the billing system implementation partly offset the improvement at Bell Canada.

Net Earnings
ROE (return on common shareholders’ equity) is calculated as net earnings applicable to common shares as a percentage of average common shareholders’ equity.

Net Earnings/Earnings per Share (EPS)

Net earnings applicable to common shares for 2004 were $1,523 million, or $1.65 per common share. This compared to net earnings of $1,744 million, or $1.90 per common share in 2003. ROE was 12.5% in 2004, compared to 15.1% last year. Included in 2004 net earnings were net losses of $349 million after taxes and non-controlling interest, or $0.37 per common share, consisting primarily of:

• restructuring and other items of $772 million or $0.83 per share, mainly relating to the employee departure programs announced at Bell Canada ($647 million) and Aliant ($24 million), partly offset by:
• net gains of $423 million from the sales of our investment in MTS, our remaining interest in YPG General Partner Inc. (YPG) and our interest in Emergis, and the gain on the purchase of 360networks, which reflected the excess of the fair value of the net assets acquired over the purchase price.

This compared to net losses of $5 million included in 2003 net earnings due mainly to the loss on sale of Emergis’ US Health operations, which was partly offset by a gain on sale of an interest in YPG.
     Excluding the impact of these items, net earnings grew 7.0% to $1,872 million, or $2.02 per share, in 2004, an increase of $123 million, or $0.12 per share, yielding an ROE of 15.2%, which is similar to last year. This increase reflected the improvement in operating income and lower interest expense.

Capital Expenditures
Capital intensity is capital expenditures divided by operating revenues. It is a key financial measure that we use to assess our performance and that of our business units.

Capital Expenditures

Capital expenditures increased 6.2% or $197 million to $3,364 million in 2004, compared to 2003. Capital spending as a percentage of revenues was 17.5% in 2004, compared to 16.9% in 2003. Capital intensity at Bell Canada also increased from 17.4% to 18.0%. Capital spending at Bell Canada in 2004 reflected a mix of higher investment in the growth areas of the business and reduced expenditures in legacy areas.
     Our key strategic investments this year included the migration to one national IP MPLS network, our VDSL deployment strategy, our DSL footprint expansion facilitated through the deployment of new high-density remotes, and productivity enhancement initiatives. Higher spending related to satellite builds at Telesat also contributed to the increase.

Cash Flows
Net debt to capitalization ratio is a key measure we use to assess our financial condition. It shows how much net debt (debt due within one year and long-term debt, net of cash) we have in relation to our capitalization (total net debt, non-controlling interest and shareholders’ equity).

Cash Flows

Cash from operating activities decreased 7.5% or $449 million to $5,519 million in 2004, compared to 2003. The decline resulted mainly from cash tax refunds of $440 million received in 2003 that did not recur this year, higher cash payments related to the employee departure programs and higher working capital requirements, partly offset by the receipt of $75 million from the settlement of lawsuits against MTS and Allstream Inc. (Allstream).
     We generated free cash flow for the year totalling $898  million or $1,092 million before restructuring and other items. Compared to 2003, free cash flow was down $691 million, mainly reflecting the $449  million decline in cash from operating activities and higher capital expenditures of $197 million.
     Our net debt to total capitalization ratio improved to 42.8% at December 31, 2004, from 44.0% at December 31, 2003. The improvement reflects a reduction in net debt of $610 million, which was driven by $898 million of free cash flow, net cash proceeds of approximately $1 billion on our sales of MTS, YPG and Emergis, less $1.3 billion of business acquisitions, including Bell West and 360networks. This was complemented by an increase in shareholders’ equity, which reflects the excess of net earnings over dividends of approximately $400 million.

New Labour Agreements

During the year, Bell Canada reached a new four-year agreement with approximately 7,100 technicians represented by the Communications, Energy and Paperworkers Union of Canada (CEP). This agreement will expire in November 2007.
     Aliant reached an agreement with approximately 4,300 unionized employees represented by the Council of Atlantic Telecommunication Unions (CATU), ending a lengthy labour disruption. This agreement will expire in December 2007.

Rewarding Shareholders

On December 15, 2004, having achieved a solid capital structure and traction on our strategic initiatives, we announced, subject to being declared by the board of directors, a 10%, or $0.12 per share, increase in our annual dividend on BCE Inc. common shares.

Selected Annual and 
Quarterly Information
This section shows selected financial and operational data.

EBITDA to interest ratio is EBITDA divided by interest expense.

Operating margin is operating income divided by operating revenues.

Net debt to EBITDA is net debt divided by EBITDA.

Total debt to total assets is total long-term debt (including debt due within one year) divided by total assets.

Long-term debt to equity is long-term debt (including portion due within one year) divided by shareholders’ equity.

Cash flow per share is calculated by dividing cash from operating activities less capital expenditures by the average number of common shares outstanding.

Cash flow yield is cash from operating activities less capital expenditures, other investing activities, dividends on preferred shares and dividends paid by subsidiaries to non-controlling interest, divided by the number of common shares outstanding at the end of the year and multiplied by the share price at the end of the year.

Selected Annual and Quarterly Information

Annual Financial Information

The tables below show selected consolidated financial data for each year from 2000 to 2004. We discuss the factors that have caused our results to vary over the past two years throughout this MD&A.

Operations 

Operating revenues 

Operating expenses 

EBITDA 

Amortization expense 

Net benefit plans (cost) credit 

Restructuring and other items 

Operating income 

Other income 

Impairment charge 

Interest expense 

Pre-tax earnings from continuing operations 

Income taxes 

Non-controlling interest 

Earnings from continuing operations 

Discontinued operations 

Net earnings before extraordinary gain 

Extraordinary gain 

Net earnings 

Dividends on preferred shares 

Premium on redemption of preferred shares 

Net earnings applicable to common shares 

Included in net earnings: 

Net gains on investments 

Continuing operations 

Discontinued operations 

Restructuring and other items 

Impairment charge 

Goodwill amortization 

Other 

Net earnings per common share: 

Continuing operations – basic 

Continuing operations – diluted 

Net earnings – basic 

Net earnings – diluted 

Ratios 

EBITDA margin (%) 

EBITDA to interest ratio (times) 

Operating margin (%) 

ROE (%) 

Market capitalization is BCE Inc.’s share price at the end of the year multiplied by the number of common shares outstanding.

Book value per share is common shareholders’ equity divided by number of common shares outstanding.

Common dividend yield is dividends paid on common shares divided by BCE Inc.’s share price at the end of the year multiplied by the number of common shares outstanding.

Common dividend payout ratio is dividends paid on common shares divided by net earnings applicable to common shares.

Price to earnings ratio is BCE Inc.’s share price at the end of the year divided by earnings per share.

Price to book ratio is BCE Inc.’s share price divided by the book value per share.

Price to cash flow ratio is BCE Inc.’s share price at the end of the year divided by cash flow per share.

Balance Sheet 

Total assets 

Long-term debt (including current portion) 

Net debt 

Total capitalization 

Preferred shares 

Common shareholders’ equity 

Ratios 

Net debt to total capitalization (%) 

Net debt to EBITDA (times) 

Total debt to total assets (times) 

Long-term debt to equity (times) 

Cash Flows 

Cash flows from operating activities 

Cash flows from investing activities 

Capital expenditures 

Business acquisitions 

Business dispositions 

Other investing activities 

Cash flows from financing activities 

Net issuance (repayment) of equity instruments 

Net issuance (repayment) of debt instruments 

Financing activities of subsidiaries with third parties 

Cash dividends paid on common shares 

Cash dividends paid on preferred shares 

Cash dividends paid by subsidiaries to non-controlling interest 

Cash provided by (used in) discontinued operations 

Ratios 

Free cash flow 

Capital intensity (%) 

Cash flow per share (dollars) 

Cash flow yield (%) 

Share Information 

Average number of common shares (millions) 

Common shares outstanding at end of year (millions) 

Market capitalization 

Dividends declared per common share (dollars) 

Book value per share (dollars) 

Total dividends declared on common shares 

Total dividends declared on preferred shares 

Market price per common share (dollars) 

High 

Low 

Close 

Ratios 

Common dividend yield (%) 

Common dividend payout ratio (%) 

Price to earnings ratio (times) 

Price to book ratio (times) 

Price to cash flow ratio (times) 

Other Data 

Number of employees (thousands) – unaudited 

Digital equivalent access lines are derived by converting low capacity data lines (DS-3 and lower) to the equivalent number of voice-grade access lines.

ARPU (average revenue per unit) and ARPS (average revenue per subscriber) represent a measurement of the average revenue generated by each unit or subscriber, expressed as a rate per month for the year.

Churn is the rate at which existing subscribers cancel their services. Churn is calculated as the number of subscribers disconnected divided by the average subscriber base.

Costs of acquisition (COA) are also referred to as subscriber acquisition costs. This measure is expressed per gross activation. It includes costs associated with acquiring a customer such as hardware subsidies, marketing and distribution costs.

Annual Operational Information

The table below shows selected data on our operations from 2002 to 2004.

Wireline 

Local network access services (thousands) 

Long distance conversation minutes (millions) 

Long distance average revenue per minute (cents) 

Data 

Digital equivalent access lines (thousands) 

High-speed Internet net activations (thousands) 

High-speed Internet subscribers (thousands) 

Dial-up Internet subscribers (thousands) 

Wireless 

Cellular and PCS net activations (thousands) 

Cellular and PCS subscribers (thousands) 

Average revenue per unit ($/month) 

Churn (%) (average per month) 

Cost of acquisition ($/subscriber) 

Paging subscribers (thousands) 

Video 

Video net activations (thousands) 

Video subscribers (thousands) 

Average revenue per subscriber ($/month) 

Churn (%) (average per month) 

Cost of acquisition ($/subscriber) 

Quarterly Financial Information

The table below shows selected consolidated financial data by quarter for 2004 and 2003. This quarterly information is unaudited but has been prepared on the same basis as the annual consolidated financial statements. The factors that have caused our results to vary over the past eight quarters are discussed throughout this MD&A.

Operating revenues 

EBITDA 

Amortization expense 

(3,108

)

)

)

)

)

)

)

)

)

)

Net benefit plans cost 

(63

(175

Restructuring and other items 

)

)

Operating income 

Earnings from continuing operations 

Discontinued operations 

Extraordinary gain 

Net earnings 

Net earnings applicable to common shares 

1,523

Net gains on investments
Continuing operations 

Discontinued operations 

Restructuring and other items 

(62

(725

Net earnings per common share 

Continuing operations – basic 

Continuing operations – diluted 

Net earnings – basic 

Net earnings – diluted 

Average number of common shares outstanding (millions) 

Financial Results Analysis
This section provides detailed information and analysis about our performance over the past two years. It focuses on our consolidated operating results and provides financial information for each of our operating segments.

Financial Results Analysis

Consolidated Analysis

Pre-tax earnings from continuing operations 

Earnings from continuing operations 

Net earnings before extraordinary gain 

Net earnings applicable to common shares 

N/M: Not meaningful

Operating Revenues

Operating revenues grew 2.4% or $456 million to $19,193 million in 2004, compared to 2003, a rate of growth which exceeded our 2003 performance.
     Bell Canada contributed most of the increase despite the trailing effects of the implementation of a new wireless billing system and a prolonged labour disruption at Aliant. Bell Canada’s revenue growth was a result of improved performance in the Consumer segment stemming from stronger wireless, Internet access and video services revenues, along with higher IP-connectivity and VAS revenues in the Business segment.
     Revenue growth was enhanced further by higher revenues at CGI, resulting from the AMS acquisition, and at Bell Globemedia, resulting from higher television advertising revenues due to strong ratings performance.
     Looking ahead for 2005, we expect to achieve overall revenue growth as expected increases from our growth services, including wireless, Internet and IP-based connectivity, video services and value-added services are expected to more than offset anticipated continued declines in our legacy wireline business. Beyond 2005, we expect growth services will become a greater component of our future revenue base.
     In 2005, the anticipated revenue increases from our growth services are expected to be driven by solid increases in the number of subscribers and targeted increases in average revenue per subscriber across these services.
     In local and access and long distance revenues, we expect the trends experienced over the past years to continue and the rate of decline of these services to increase somewhat as cable companies begin expected launches of VoIP offerings. We also expect continued legacy revenue declines from the Enterprise and Wholesale businesses due to continued competitive pricing pressures and the migration to IP.
     See Segmented Analysis for a discussion of operating revenues on a segmented basis, and Product Line Analysis for a discussion of operating revenues on a product line basis.

Operating Income

Operating income declined 28% or $1,145 million to $2,976 million in 2004, compared to 2003. This was mainly because of an increase in restructuring and other items and a higher net benefit plans cost. Excluding the impact of the restructuring and other items, operating income increased 1.6% or $65 million to $4,200 million in 2004. This increase stemmed from operating income growth in our Consumer and Business segments, as well as improvements in Bell Globemedia and Telesat in the Other BCE segment, driven by the underlying growth in these sectors.
     See Segmented Analysis for a discussion of operating income on a segmented basis.

EBITDA

Our EBITDA grew 2.1% or $154 million to $7,564 million in 2004, compared to 2003. This represented a growth rate of 3.0%, excluding the estimated negative impact of $71 million from the Aliant labour disruption, from improvements at Bell Canada and the Other BCE segment.
     EBITDA growth at Bell Canada was driven by continued improvement in wireless, Internet access and video services. EBITDA erosion in our legacy services was offset by a continued focus on productivity as well as EBITDA contributions from IP-based connectivity service, and VAS and VCIO revenue gains in our Business segment.
     The other BCE  segment also contributed to the overall EBITDA growth. Bell Globemedia’s EBITDA improvement reflects a higher level of television advertising revenue and benefits from cost savings. CGI reflects the benefit of the AMS acquisition.
     Our EBITDA margin for the year was 39.4%, down 0.1 percentage points from 2003, reflecting a lower EBITDA margin at CGI and higher corporate expenses, which more than offset the margin improvement at Bell Canada.
     Bell Canada’s EBITDA margin of 42.4% in 2004 reflected a 0.3 percentage point improvement over last year. Wireless EBITDA margin reflected a 5.2 percentage point improvement despite the adverse impacts of the implementation of the new billing system.
     We achieved EBITDA margin improvement by better management of COA per gross activation, particularly in the wireless business, and by placing a greater emphasis on more profitable contracts within the Enterprise and Wholesale markets. The negative impact of the Aliant employee strike and the cost of the billing system migration partly offset the improvement at Bell Canada.
     Wireless COA of $411 per gross activation in 2004 improved by $15 compared to 2003, driven primarily from more targeted and cost-effective campaigns. COA for video services of $571 per gross activation increased $39 due to more customers taking a second receiver as a result of our 2TV bundle and aggressive retail pricing by competitors.
     In 2005, we are targeting stable EBITDA margins, as cost savings expected to be achieved through the benefits of our Galileo initiatives, combined with anticipated revenue increases from our growth services, are expected to mitigate declines in our legacy business.
     We are targeting to achieve significant cost savings from our Galileo initiatives. We expect close to half of these savings will be derived from the Consumer segment, driven by the impact of this year’s employee reduction programs, the migration to a single bill, higher sales through our Bell.ca website, efficiencies in call centre operations, and our efforts to provide simpler provisioning and product offers. The rest of the cost savings are expected to be achieved in the Business segment as we eliminate network elements and standardize core operating processes, as well as from labour savings driven by this year’s workforce reductions.

Amortization Expense
The amount of our amortization expense in any year is affected by:
• how much we invested in new capital assets in previous years
• how many assets we retired during the year
• changes in accounting rules and estimates.

Each year, we review our estimate of the useful life of our capital assets.

Net Benefit Plans Cost
The amount of the net benefit plans cost in a year mainly depends on:
• the return on pension plan assets expected to be generated during the year – the lower the return, the higher the cost
• the present value of future pension benefit payments to employees – the lower the present value, the lower the cost
• actuarial gain (loss) – the difference between the actual funded status of our pension plans and the amount calculated using our accounting assumptions. We amortize this into earnings over time.

Restructuring and Other Items
This category includes various income and expenses that are not directly related to the operating revenues generated during the year. Examples are costs related to streamlining initiatives, asset write-downs and other types of income or charges.

Amortization Expense

Amortization expense increased 0.3% or $8 million to $3,108 million in 2004, compared to 2003. This was a result of an increase in our capital asset base from capital spending that continues to be higher than asset retirements. This was partly offset by an increase from three to four years in the useful life of Bell Canada’s internal use software.

Net Benefit Plans Cost

The net benefit plans cost increased by 46% or $81 million to $256 million in 2004, compared to 2003. The increase resulted mainly from a higher accrued benefit obligation based on our most recent actuarial valuation. This was partly offset by the positive fund performance in 2003, which resulted in an actuarial gain and increased the fair value of plan assets.
     In the next two years, net benefit plans cost is expected to increase, mainly as a result of poor fund performance experienced in 2001 and 2002. This will continue to negatively impact the accounting value of the plan assets used to determine the net benefit plans cost. In 2006, however, we expect this negative impact will have a smaller effect. Beyond 2006, net benefit plans cost is expected to stabilize.

Restructuring and Other Items

We recorded $1,224 million in restructuring and other items in 2004, consisting of:

• $985 million in the third quarter relating to an employee departure program at Bell Canada, where 5,052 employees chose to leave the company. By the end of the year 4,900 employees had left the company. We expect this to result in annual savings of approximately $390 million.
• a $110 million provision recorded in the second quarter for potential cost overruns on a contract with the Government of Alberta, which was increased by $18 million in the fourth quarter
• $67 million in the fourth quarter relating to an employee departure program at Aliant under which 693 employees decided to leave the company. Of these employees, about 400 had left the company by January 1, 2005. We expect annual savings of approximately $48 million as a result of these departures.
• other charges totalling $119 million. These consisted of future lease costs for facilities that were no longer needed, asset write-downs and other provisions.

These charges were partly offset by income of $75 million recorded in the second quarter relating to an agreement reached between BCE Inc. and MTS to settle lawsuits. The terms of the settlement included:

• the unwinding of various commercial agreements
• the removal of contractual competitive restrictions effective June 30, 2004
• the orderly disposition of our interest in MTS, which was done in September 2004
• a premium payment to us by MTS if there is a change in control of MTS before 2006 and if there is an appreciation in MTS’ share price from the time of our divestiture to the time of any takeover transaction.

We recorded $14 million in restructuring and other items in 2003, which included a charge of $15 million relating to a restructuring at Aliant’s subsidiary, Xwave Solutions Inc. (xwave).
     In 2003, Bell Canada recorded charges of $65 million relating to various asset write-downs and other provisions. These charges were offset by a credit of $66 million relating to the reversal of restructuring charges recorded in 2002, which were no longer necessary because fewer employees were terminated than expected due to an increase in the number of employees being transferred to other positions within Bell Canada.
     See Note 4 to the consolidated financial statements for more information on the restructuring and other items.

Net Earnings/Earnings per Share (EPS)

EPS of $1.65 in 2004 was negatively impacted by net losses resulting from the after-tax restructuring and other items of $0.83 per share relating mainly to the employee departure programs at Bell Canada and Aliant. These were partly offset by:

• net gains of $0.39 per share relating mainly to the sales of our 15.96% interest in MTS, our remaining 3.24% interest in YPG, and our 63.9% interest in Emergis.
• an extraordinary gain of $0.07 per share relating to the acquisition of the Canadian operations of 360networks.

Similar items in 2003 had no net impact on the reported EPS of $1.90.
     Excluding the impact of these items, EPS was $2.02 in 2004, up 6.3% or $0.12 from 2003. The increase was a result of the improvement in EBITDA and lower interest expense. These were partly offset by a higher net benefit plans cost.

 

Operating revenues 

Consumer 

Business 

Aliant 

Other Bell Canada 

Inter-segment eliminations 

Bell Canada 

Other BCE 

Inter-segment eliminations 

Total operating revenues 

Operating income 

Consumer 

Business 

Aliant 

Other Bell Canada 

Bell Canada 

Other BCE 

Total operating income 

Consumer

Consumer segment revenues grew 4.2% or $299 million to $7,502 million in 2004, compared to 2003. The increase was the result of continued strength in our wireless, Internet access and video businesses from strong gains in the number of subscribers to these services. This was partly offset by steady rates of decline in local and access and long distance revenues.

Wireless

Consumer wireless revenues grew 15.2% in 2004, compared to 2003. The increase was achieved through strong subscriber growth, particularly as a result of the sales programs initiated during the first four months of the year. Although revenue performance was solid, we believe that our call centre’s focus on handling billing inquiries following the implementation of our new billing platform somewhat diminished our ability to sell more services to our customers and delayed the implementation of planned price increases.

Video

Video revenues grew 12.0% in 2004, compared to 2003. This was driven by the growth in our subscriber base and average revenue per unit (ARPU). Our total video customer base reached 1,503,000 at December 31, 2004, an increase of 8.4% compared to last year.
     Video net activations of 116,000 in 2004 were significantly higher than the 83,000 achieved in 2003. This growth was stimulated by the continued success of the Bell bundle and the major overhaul of the Bell ExpressVu service to stimulate growth and invigorate the business, which included program repackaging and simpler pricing principles. Initiatives focused on churn containment, which in the fourth quarter resulted in the lowest churn level since 2001, also contributed to the growth. One of these initiatives is Bell ExpressVu’s move to provide services to new DTH customers strictly on a contract basis. As of August 1, 2004, all new DTH customers must opt for a one or two-year contract. Churn for the year was 1.0% per month, a 0.1 percentage point improvement compared to 2003.
     ARPU per month of $49 for video services reflects a $3 increase in 2004, compared to 2003. The increase in ARPU for the year was positively impacted by the $2 to $3 rate increase for specific programming packages introduced on February 1, 2003, the introduction of the $2.99 system access charge for all customers effective April 28, 2003 and more customers paying for a second receiver.
     In 2005, growth in video revenues is expected to continue, driven by ongoing growth in our subscriber base and increases in ARPU, resulting in part from our $3 programming price increase effective March 1, 2005 for customers who are not on contracts and are not taking the new program packages introduced in September 2004. Our increased rollout of VDSL will help contribute to subscriber growth as our penetration in MDUs increases.

Data

Consumer data revenues grew 21% in 2004, compared to 2003. This was driven by growth of 22% in our high-speed Internet subscriber base and a 49% increase in revenues from our Sympatico-MSN.ca web portal.
     Bell Sympatico value-added services such as MSN Premium, Security Services and Home Networking added 337,000 subscriptions in 2004. Our MSN Premium subscriptions in the fourth quarter of 2004 increased 118% over the previous quarter.

Wireline

Local and access revenues declined slightly in 2004, compared to 2003, mainly due to lower NAS and related SmartTouch feature revenues, partly offset by higher revenues from wireline insurance and maintenance plans.
     Long distance revenues declined in 2004, compared to 2003, mainly as a result of volume declines in domestic, overseas and US minutes, reflecting competition from non-traditional long distance providers, partially offset by strong sales of prepaid cards. The reduction in higher priced overseas minutes and the impact of the $5 Long Distance Bundle also led to a lower average wireline revenue per minute in 2004.

Consumer operating income increased 5.0% or $100 million to $2,119 million in 2004, compared to 2003. The improvement related mainly to the increase in revenues, lower COA in wireless, and productivity savings. These were partly offset by increased operating expenses related to salaries, cost of goods sold and higher net benefit plans cost.
     In addition, higher costs were driven by an increase in the number of contact centre agents to support the increased customer handling time associated with the Bell bundle and increased call volumes resulting from the implementation of the new billing platform at Bell Mobility.
     For 2005, we expect the Consumer segment to continue to grow its revenue, driven by the strength of our wireless, Internet access and video businesses. However, erosion is expected to continue in our local and access and in long distance services, driven by increasing competition as cable companies enter the market with VoIP telephony services.

Business

Business segment revenues grew slightly by $24 million to $5,851 million in 2004, compared to 2003.
     The increase was the result of revenue growth in the SMB business, which was largely offset by revenue declines in our Enterprise and Bell West businesses. On November 19, 2004, we completed the acquisition of the Canadian operations of 360networks. The Business segment includes the financial results of the retail portion of this acquisition from that date.
     From a product line perspective, increases in wireless and terminal sales and other revenues were partly offset by declines in local and access, long distance and data revenues.

Business segment operating income grew 14.7% or $115 million to $896 million in 2004, compared to 2003. This demonstrates that our strategy of driving the shift to IP along with improved profitability achieved through ongoing productivity has traction and is delivering.
     In 2005, we expect Business segment revenues will grow, driven by organic growth in IP-based connectivity service and VAS revenues, as well as the full-year impact of the business acquisitions made in 2004. However, declines from our legacy services and from the completion of the SuperNet contract with the Government of Alberta in 2004 will partly offset this expected growth in revenues.

Enterprise

Enterprise revenues declined in 2004, compared to 2003, as a result of lower local and access, long distance and data revenues. These declines were partly offset by increases in wireless and terminal sales and other revenues.
     The decline in data revenues relates mainly to the completion of the Hydro-Québec outsourcing contract in the fourth quarter of 2003. Despite this decline, our IP-based connectivity and VAS revenues continued to grow significantly. IP-based connectivity and VAS service revenues grew from 22% of enterprise data revenues in 2003 to 43% in 2004. By December 31, 2004, more than 65% of our Enterprise customers used some element of our VAS portfolio.
     In December, 2004, we announced the signing of a seven-year, $140 million exclusive outsourcing agreement with Manulife Financial for the provisioning and management of its IP-based voice and data services. The outsourcing arrangement will lever our VAS capabilities by having BCE Connexim, Bell Canada’s outsourcing and professional services unit, provide an end-to-end solution that reduces and simplifies Manulife Financial’s transition to IP. Our out-sourcing capabilities play a key role in our strategy of securing the connectivity business of our Enterprise customers and preventing possible disintermediation by systems integrators. We also had a number of other significant contract wins during the year, including Fédération des Caisses Desjardins du Québec, La Senza Inc., Government of Québec, Hydro One Networks Inc., Department of Foreign Affairs and International Trade of the Government of Canada, and Enterprise Rent-a-Car.
     Significant growth in Enterprise operating income was the result of our focus on more profitable contracts and productivity savings, which led to reductions in cost of goods sold. This was partly offset by the completion of the Hydro-Québec contract in 2003 and higher operating expenses related to businesses acquired during the year (Infostream and Elix).

SMB

SMB revenues increased in 2004, compared to 2003, as a result of higher data, wireless and terminal sales and other revenues. These gains were partly offset by revenue declines in local and access and long distance revenues.
     Business acquisitions in 2004, such as Accutel Conferencing Systems Inc. (Accutel) and Charon, contributed to the revenue growth, as did our continued growth in DSL high-speed Internet access services and VAS services. At December 31, 2004, we had 83,000 VAS subscriptions.
     The decline in long distance revenues resulted from competitive pricing pressures and lower usage in our payphone business. Local and access revenues were also lower in our payphone business.
     SMB operating income growth was driven by revenue growth and productivity savings, partly offset by higher operating expenses of businesses acquired during the year.

Bell West

Bell West continued to grow its customer base leading to increases in local and access and long distance revenues in 2004, compared to 2003. In 2001, we were awarded a contract by the Government of Alberta to build a next-generation network (SuperNet) to bring high-speed Internet and broadband capabilities to rural communities in Alberta. Mechanical construction of the network was completed in December 2004. The decline in data revenues in 2004 reflects a decrease of approximately $43 million as this contract was nearing completion.
     The improvement in operating income performance at Bell West was driven by the increase in local and access and long distance revenues and lower operating costs related to the contract with the Government of Alberta, partly offset by higher salary costs due to the growing workforce.

Aliant

Aliant segment revenues declined 1.3% or $26 million to $2,033 million in 2004, compared to 2003. The labour disruption that started on April 23, 2004 and ended on September 20, 2004 negatively impacted revenues by an estimated $40 million. This represents fewer new customers, reduced product sales, additional promotional activities and reduced levels of fieldwork activity during the labour disruption. Strong growth in wireless and Internet services was more than offset by declines in other areas due to the labour disruption, the ongoing impact of competition, and the regulatory restrictions, including those on bundling, customer win-back activities, and rates charged for price-regulated services.
     Aliant’s wireless revenue grew 15.4% in 2004. This was driven by:

• an increase of 9.6% in Aliant’s wireless customer base, including a 26% increase in digital customers, reflecting a positive response to the extensive dealer-supported network, attractive pricing offers and the expansion of digital cellular service into new areas
• an increase of $3 in ARPU, reflecting the impact of a higher percentage of customers subscribing to digital service, higher usage and increased customer adoption of features.

Intense long distance competition, the difficulty in maintaining win-back efforts during the labour disruption and substitution of long distance calling with Internet and wireless options by customers resulted in long distance revenue declines in 2004, compared to last year. Consumer minute volumes were down due to customer losses to competition and the capping of minutes on certain long distance plans in late 2003. Business long distance pricing declines continued to reflect the impact of competitive pressures, as did long distance volume declines, in addition to a reduction of contact centre activity.
     Data revenues declined slightly in 2004 as higher Internet revenues were more than offset by other data revenue declines from the scale-back of marketing and sales efforts during the labour disruption and the continued rationalization of circuit networks by customers. The continued increase in Internet revenues stemmed from the increased popularity of enhanced services and year-over-year subscriber growth of 6%, reflecting 21% growth in Aliant’s high-speed Internet customer base. The higher subscriber base resulted from the expansion of high-speed Internet service into new areas, attractive introductory offers, an emphasis on bundling with other products and services as well as dealer and online sales channel initiatives.
     Terminal sales and other revenues declined in 2004 as a result of slower product sales during the labour disruption and the divestiture of non-core operations in the second and third quarters, which resulted in a reduction in IT service revenue.

Aliant’s operating income declined 35% or $147 million to $268 million in 2004, compared to 2003. This was largely due to:

• the labour disruption, which had an estimated negative impact of $68 million in 2004. Incremental costs were incurred during the labour disruption to enable operations to continue with relatively few interruptions, ensure the safety of employees, perform property repairs, provide training and equipment to employees and maintain basic customer service.
• a restructuring charge of $67 million relating to an employee departure program. See Restructuring and Other Items for more details.

The remaining decrease of $12 million is a result of higher operating expenses from:

• growth in wireless and Internet services
• an increase in net benefit plans cost
• normal wage and annual salary adjustments
• higher amortization expense resulting from a higher proportion of capital spending in recent years on broadband and wireless assets, which have shorter depreciable lives.

These increases were partly offset by lower operating costs stemming from the xwave restructuring in 2003 and the sale of non-core operations in the second and third quarters.
     With the labour disruption and its impact on 2004 behind us, for 2005 we expect revenue growth in Aliant’s wireless and Internet services to offset continued erosion in local and access and long distance. We also anticipate operating income growth in 2005 driven by revenue growth and productivity improvements, as well as the absence of the restructuring charge and costs associated with the labour disruption. These positive impacts are expected to be partially offset by increased costs associated with Aliant’s growth services and higher net benefit plans cost.

Other Bell Canada

The Other Bell Canada segment revenues declined 3.8% or $76 million to $1,939 million in 2004, compared to 2003. This was due to:

• a decline in our Wholesale business stemming from lower long distance and data revenues from price competition and customers migrating services to their own network facilities
• our decision last year to exit certain contracts and promotional offers for international switched minutes that had low margins.

The Other Bell Canada segment had an operating loss of $588 million in 2004, a $1,209 million decrease when compared to operating income of $621 million in 2003.
     This was mainly due to the charge for restructuring and other items of $1,147 million in 2004, mostly for the voluntary employee departure program at Bell Canada. See Restructuring and Other Items for more details.
     Excluding restructuring and other items, operating income decreased 9.7%, or $60 million, in 2004. The decrease relates to costs associated with increased volumes of cross-border carrier exchange traffic and the repricing of long distance and data services in our Wholesale business.

Other BCE

% CHANGE

The Other BCE segment revenues grew 10.2% or $264 million to $2,861 million in 2004, compared to 2003. This growth was driven by revenue growth at Bell Globemedia, Telesat and CGI.

The Other BCE segment operating income declined 1.4% or $4 million to $281 million in 2004, compared to 2003. This decline was due to higher corporate expenses, which more than offset higher operating income at Bell Globemedia, Telesat and CGI. The increase in corporate expenses is a result of higher net benefit plans cost and an increased level of corporate activities.

Bell Globemedia

Bell Globemedia’s revenues grew 4.2% or $57 million to $1,420 million in 2004, compared to 2003. This was the result of:

• advertising revenue growth of 6.4%, reflecting the strength of CTV’s schedule, which included the majority of the top 20 programs in each season, and higher advertising line rates at The Globe and Mail
• subscriber revenue growth of 2.4%, reflecting specialty channel subscription growth, and online subscription growth and cover price increases at The Globe and Mail.

This increase was partly offset by a decline in production and other revenues of 13.8% or $13 million in 2004 as a result of the sale of a 50% interest in Dome Productions Inc. in January 2004.
     Bell Globemedia’s operating income grew 44% or $73 million to $240 million in 2004, compared to 2003, as a result of the increase in revenues, which was complemented by cost savings.

Telesat

Telesat’s revenues grew 4.9% or $17 million to $362 million in 2004, compared to 2003. This increase was the result of higher telecommunications revenues, which more than offset lower consulting fees.
     On October 1, 2004, Telesat’s Anik F2 satellite began commercial service and became the world’s first satellite to commercialize the Ka frequency band, enabling two-way, high-speed Internet access services to consumers and businesses in Canada and the United States.
     Telesat’s operating income grew 13.7% or $17 million to $141 million in 2004, compared to 2003. This increase was the direct result of the increase in revenues.

CGI

Our share of CGI’s revenues grew 22% or $181 million to $1,019 million in 2004, compared to 2003. Our share of CGI’s operating income grew 3.3% or $3 million to $94 million in 2004, compared to 2003. In each case, the increase was driven mainly by CGI’s acquisition of AMS in May 2004.

Product Line Analysis

In addition to discussing our financial results by business segment, we believe that a separate discussion of Bell Canada’s consolidated revenues by product line provides further insight into management’s view of our financial results. The table below shows Bell Canada’s consolidated revenues by product line.

Local and Access

Local and access revenues declined 0.5% or $29 million to $5,572 million in 2004, compared to 2003.

This decline was a result of:

• lower NAS
• lower SmartTouch feature revenues, mainly linked to NAS losses.

The decline was partly offset by gains from wireline insurance and maintenance plans.
     NAS in service declined 1.1% or 146,000 in 2004, compared to 2003. This was a result of:

• continued growth in high-speed Internet access, which reduces the need for second telephone lines
• losses resulting from competition
• customers substituting wireline with wireless telephone service.

In 2005, we expect continued erosion of our NAS in service due to these trends, as well as the launches of VoIP telephony by cable providers.

Long Distance

Long distance revenues declined 8.5% or $217 million to $2,327 million in 2004, compared to 2003. This decline stemmed from:

• lower volumes of conversation minutes, lower domestic rates and the pricing impact of increased subscriptions to the $5 Long Distance Bundle in our Consumer market
• lower volume and lower prices resulting from competitive pressures in our Business market.

Overall, the volume of conversation minutes declined 5.6% in 2004. This was accompanied by a 5.6%, or $0.007, decrease in average revenue per minute (ARPM) to $0.117.
     We are anticipating continued pressure on long distance revenues in 2005, as well as increased take rates to our $5 Long Distance Bundle and competition from cable companies that are offering VoIP residential telephone service in 2005.

Wireless

In 2004, our wireless business continued to demonstrate strong growth.
     Wireless service revenues grew 14.5% or $357 million to $2,818 million in 2004, compared to 2003. This reflected subscriber growth of 11.6% and an increase in ARPU of $1 per month.
     Our total cellular and PCS subscriber base reached 4,925,000 at the end of 2004, reflecting solid net additions and our success in managing churn to very low levels. Including paging subscribers, our total wireless customer base totalled 5,352,000.
     We gained 513,000 new customers in 2004, matching the gains achieved in 2003. In 2004, 75% of gross activations came from postpaid rate plans, compared to 80% in 2003. The decrease was primarily due to the success of our prepaid offers, particularly in the last quarter. At December 31, 2004, 76% of our total cellular and PCS customer base were postpaid subscribers, unchanged from last year.
     Blended ARPU of $49 in 2004 was up from $48 in 2003. This was driven by an increase in revenues from:

• value-added services, such as Message Center and Call Display
• long distance and data services
• higher usage.

During the year, we accomplished a key operational initiative: to migrate our postpaid wireless customers to a new billing platform. The new platform will enable the consolidation of wireless into a single bill, which will provide simplified information to our customers, lower costs to Bell Canada, and enhance our ability to bundle our products and services.
     In 2004, revenue growth was impacted by our call centre’s focus on handling the high volume of billing inquiries after the migration to the new billing platform, diminishing our ability to sell more services to our customers and to implement planned price increases. Despite adding more than 600 call centre representatives, the high volume of calls meant customers experienced slower response times during the second half of the year.
     Our blended churn of 1.3% per month and postpaid churn of 1.1% per month reflect improvements of 0.1 and 0.2 percentage points over 2003. This was achieved despite the migration to the new billing platform and increased competitive pressures.
     We continue to see ongoing growth prospects in the wireless market for 2005, given that Canadian wireless penetration still lags behind levels achieved in other countries, such as the United States. We expect our wireless revenues will increase due to expected continued subscriber and ARPU growth. We anticipate that our recently announced price increases for some of our value-added services and increased usage of wireless data services such as text and picture messaging, as well as web browsing, will stimulate ARPU growth.

Data

Data revenues decreased 2.1% or $77 million to $3,640 million in 2004, compared to 2003, in spite of the growth in high-speed Internet services and revenues related to business acquisitions. This was because of:

• declines from competitive pricing and volume pressures, including wholesale customers migrating traffic onto their own networks
• lower revenues related to the completion of the mechanical construction of the Government of Alberta SuperNet
• our exit from the low-margin cabling business
• the completion of the Hydro-Québec outsourcing contract.

The number of high-speed Internet subscribers increased by 350,000 in 2004, resulting in 1,808,000 subscribers at December 31, 2004. The subscriber growth achieved this year was similar to that of last year, even as competition increased. At the end of 2004, we had a total of 743,000 dial-up customers compared to 869,000 last year.
     In 2005, we expect revenue erosion in our legacy data services as customers migrate to IP, offset by continued growth in high-speed Internet services, value-added solutions and acquisitions.

Video

See Segmented Analysis – Consumer for a discussion of revenues from our video services.

Terminal Sales and Other

Terminal sales and other revenues increased 3.1% or $48 million to $1,580 million in 2004, compared to 2003. This increase reflected:

• higher sales of wireless handsets, satellite dishes and receivers
• higher revenues related to business acquisitions.

Other Items

Other Income
Other income includes income that we receive from activities that are not part of our business operations, such as:
• net gains on investments, including gains or losses when we dispose of, write down or reduce our ownership in investments
• foreign currency gains (losses)
• interest income on cash and cash equivalents
• equity in net earnings (losses) from significantly influenced companies
• other miscellaneous income or expense.

Other Income

Other income increased 135% or $236 million to $411 million in 2004, compared to 2003. The increase was a result of higher net gains on investments and other miscellaneous income. These were partly offset by lower foreign currency gains and lower interest income.
     Net gains on investments of $319  million in 2004 included:

• a gain of $108 million from the sale of our remaining 3.24% interest in YPG in the third quarter, for net cash proceeds of $123 million
• a gain of $217 million from the sale of our 15.96% interest in MTS in the third quarter, for net cash proceeds of $584 million
• partly offset by net losses on other investments of $6 million.

Capital loss carryforwards fully sheltered the taxes on these gains.
     Net gains on investments of $76 million in 2003 included:

• a $120 million gain from the sale of a 3.66% interest in YPG in the fourth quarter, for net cash proceeds of $135 million
• a $44 million loss from the write-down of a number of our cost-accounted investments.

In April 2003, we entered into forward contracts to hedge US$200 million of long-term debt at Bell Canada that previously had not been hedged. This removed the foreign currency risk on the principal amount of that debt.
     Lower interest income in 2004 was a result of lower average cash balances.

Interest Expense

Interest expense declined 9% or $100 million to $1,005 million in 2004, compared to 2003. This was a result of a lower average debt level of approximately $1,370 million in 2004, mainly from the positive free cash flows achieved in the last two years. The average interest rate on our debt in 2004 and 2003 was 7.1%.

Income Taxes

Income taxes declined 37% or $409  million to $710 million in 2004, compared to 2003. The decline was mainly due to:

• lower pre-tax earnings
• no tax on the $325 million of gains on the sale of MTS and YPG due to the availability of capital loss carryforwards partly offset by $45 million of restructuring charges that were not tax-effected
• the reduction in the statutory income tax rate to 34.3% in 2004 from 35.4% in 2003.

As a result of these items, the effective tax rate was 29.8% in 2004, compared to 35.1% in 2003.

Non-Controlling Interest
The non-controlling interest in the statements of operations reflects the percentage of a subsidiary that we do not own multiplied by the amount of the subsidiary’s after-tax earnings.

Non-Controlling Interest

Non-controlling interest decreased 13.4% or $27 million to $174 million in 2004, compared to 2003. The decrease was a result of:

• a higher net loss at Bell West, mainly due to the loss on the Government of Alberta contract
• lower net earnings at Aliant because of the labour disruption and the restructuring charge.

The decrease was partly offset by higher net earnings at Bell Globemedia.

Discontinued Operations

The net gain from discontinued operations of $26 million in 2004 consisted of:

• a gain of $58 million on the sale of our 63.9% interest in Emergis in the second quarter
• our share of Emergis’ operating losses of $44 million.

The net loss from discontinued operations of $56 million in 2003 consisted of a loss of $160 million relating to Emergis’ sale of its US Health operations in the fourth quarter.
     The loss was partly offset by:

• net gains of $56 million on our share of Aliant’s sales of its emerging business and remote communication segments
• net gains of $39 million from the use of available capital loss carryforwards that were applied against taxes payable on Bell Canada’s sale of its 3.66% interest in YPG and Aliant’s sale of its investment in Stratos
• our share of operating gains from the discontinued businesses of $9 million.

Extraordinary Gain

We purchased the Canadian operations of 360networks in the fourth quarter of 2004 for $293 million in cash. The fair value of the net assets acquired exceeded the purchase price by approximately $227 million. For accounting purposes, the excess was eliminated by:

• reducing the amounts assigned to the acquired non-monetary assets (e.g., capital and intangible assets) to zero
• recognizing the balance of $69 million as an extraordinary gain.

Financial and Capital 
Management
This section tells you how we manage our cash and capital resources to carry out our strategy and deliver financial results. It provides an analysis of our financial condition, cash flows and liquidity on a consolidated basis.

Capital Structure
Our capital structure shows how much of our net assets are financed by debt and equity.

Financial and Capital Management

Capital Structure

AT DECEMBER 31 

Debt due within one year 

Long-term debt 

Less: cash and cash equivalents 

Total net debt 

Non-controlling interest 

Total shareholders’ equity 

Total capitalization 

Net debt to capitalization 

Outstanding share data (in millions) 

Common shares 

Stock options 

Net Debt to Capitalization Ratio

Our net debt to capitalization ratio was 42.8% at the end of 2004, an improvement from 44.0% at the end of 2003. This was a result of improvements in net debt and total shareholders’ equity, which was partly offset by lower non-controlling interest.
     Net debt improved by $610 million to $12,705 million in 2004. This was mainly from:

• $898 million of free cash flow in 2004
• approximately $1 billion of net cash proceeds from the disposition of our 15.96% interest in MTS ($584 million), our 63.9% interest in Emergis ($315 million) and our remaining 3.24% interest in YPG ($123 million).

These were partly offset by the $1.3 billion invested in business acquisitions in 2004.
     Non-controlling interest declined $489 million in 2004 due to Bell Canada’s purchase of MTS’ 40% interest in Bell West and the sale of our investment in Emergis.
     Total shareholders’ equity increased $459 million to $14,032 million in 2004. This was mainly due to the $413 million of net earnings remaining after the dividends we declared on common and preferred shares in 2004.

Outstanding Share Data

We had 925.9 million common shares outstanding at the end of 2004, an increase of 1.9 million over 2003. The increase was entirely from the exercise of stock options in 2004.
     The number of stock options outstanding at the end of 2004 was 28.5 million, an increase of 2.7 million over 2003. The weighted average exercise price of the stock options outstanding at December 31, 2004 was $32. Of the total outstanding stock options at December 31, 2004, 14.6 million were exercisable at a weighted average exercise price of $34. In 2004:

• 5.9 million stock options were granted
• 2 million of previously granted options were exercised
• 1.2 million of previously granted options expired or were forfeited.

Starting in 2004, most of the stock options granted contain specific performance targets that must be met before the option can be exercised.

Cash Flows

We generated free cash flow for the year totalling $898 million or $1,092 million before restructuring and other items. Compared to 2003, free cash flow was down $691 million, mainly reflecting the $449 million decline in cash from operating activities and higher capital expenditures of $197 million.
     We are targeting positive free cash flow generation in 2005, mainly from recurring sources. Beyond 2005, we anticipate generating higher sustainable free cash flow as we anticipate realizing the full benefit from our expected cost savings and reducing capital spending levels.

The table below is a summary of the flow of cash into and out of BCE in 2004 and 2003.

Cash from operating activities 

Capital expenditures 

Other investing activities 

Cash dividends paid on common shares 

Cash dividends paid on preferred shares 

Cash dividends paid by subsidiaries to non-controlling interest 

Free cash flow 

Business acquisitions 

Business dispositions 

Change in investments accounted for under the cost and equity methods 

Net issuance of equity instruments 

Net repayment of debt instruments 

Financing activities of subsidiaries with third parties 

Cash provided by discontinued operations 

Other financing activities 

Net increase (decrease) in cash and cash equivalents 

Cash from Operating Activities

Cash from operating activities decreased 7.5% or $449 million to $5,519 million in 2004, compared to  2003. This was mainly a result of less favourable changes in working capital that were mostly due to:

• one-time cash tax refunds of $440 million that were received in 2003
• an increase of $129 million in restructuring payments in 2004 relating to the employee departure program at Bell Canada.

These were partly offset by:

• improved operating performance in 2004 as a result of higher EBITDA and lower interest costs
• a $75 million settlement payment received from MTS in the third quarter of 2004.

Capital Expenditures

We continue to make investments to expand and update our networks and to meet customer demand for new services. Capital expenditures were $3,364 million in 2004, or 17.5% of revenues. This was 6.2% or $197 million higher than capital expenditures of $3,167 million, or 16.9% of revenues, in 2003. The increase reflects a mix of:

• higher spending in the growth areas of the business, such as the migration to one national IP-MPLS network, our VDSL deployment and DSL footprint expansion strategies, and productivity enhancement initiatives
• higher spending for construction of Telesat’s new satellites
• lower spending in the legacy areas.

Bell Canada’s capital expenditures accounted for 90% of our consolidated capital expenditures in 2004. Bell Canada’s consolidated capital intensity ratio increased to 18.0% in 2004, compared to 17.4% in 2003.
     In 2005, we are targeting a slightly higher capital intensity ratio at Bell Canada to support our continued investments in our key strategic priorities of enhancing the customer experience, reliable bandwidth and next-generation services. See Our Strategic Priorities.

Other Investing Activities

Cash from other investing activities totalled $124 million in 2004. This included $179 million of insurance proceeds that Telesat received for a progressive power failure on the Anik F1 satellite.
     Cash from other investing activities of $62 million in 2003 included:

• $83 million of proceeds from the settlement of dividend rate swaps. These swaps hedged dividend payments on some of BCE Inc.’s preferred shares.
• $68 million of insurance proceeds that Telesat and Bell ExpressVu received for a malfunction on the Nimiq 2 satellite.

Other items relate to changes in long-term notes receivable and payments by Bell Globemedia relating to CRTC benefits owing on previous business combinations.

Cash Dividends Paid on Common Shares

We paid a dividend of $1.20 per common share in 2004, which is the same as the dividend we paid in 2003.
     We realized a cash benefit of $73 million in 2003 because we issued shares from treasury to fund BCE Inc.’s dividend reinvestment plan instead of buying shares on the open market. Effective the first quarter of 2004, we started buying all of the shares needed for the dividend reinvestment plan on the open market to avoid dilution. This removed the possibility of any further cash benefits through issuing shares from treasury.
     Total dividends paid on common shares increased 7.7% or $79 million to $1,108 million in 2004, compared to 2003.

Business Acquisitions

We invested $1,299 million in business acquisitions in 2004. This consisted of:

• Bell Canada’s acquisition of MTS’ 40% interest in Bell West in the third quarter for $646 million
• Bell Canada’s acquisition of the Canadian operations of 360networks in the fourth quarter for $293 million
• our 28.9% proportionate share of the cash paid for CGI’s acquisition of AMS in the second quarter for $171 million
• other business acquisitions at Bell Canada, Aliant and CGI, totalling $189 million.

We invested $115 million in business acquisitions in 2003. This consisted mainly of:

• our proportionate share of the cash paid for CGI’s acquisition of Cognicase Inc. in the first quarter
• Bell Canada’s purchase of an additional 30% interest in Connexim, Limited Partnership in the fourth quarter, which increased its total interest to 100%.

Business Dispositions

We did not have any significant business dispositions in 2004.
     We received $55 million for business dispositions in 2003. This related to Bell Canada’s sale of its 89.9% ownership interest in Certen Inc. in the third quarter. Bell Canada received $89 million in cash, which was reduced by $34 million Certen had in cash and cash equivalents at the time of sale.

Change in Investments Accounted for under the Cost and Equity Methods

In the third quarter of 2004, we sold our remaining 3.24% interest in YPG for net cash proceeds of $123 million and our 15.96% interest in MTS for net cash proceeds of $584 million.
     In the fourth quarter of 2003, we sold a 3.66% interest in YPG for net cash proceeds of $135 million and Bell Globemedia sold its 14.5% interest in Artisan Entertainment Inc. for net cash proceeds of $24 million.

Equity Instruments

We did not have any significant issues or redemptions of equity instruments in 2004.
     In the first quarter of 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 use a combination of short-term and long-term debt to finance our operations. Our short-term debt consists mostly of bank facilities and notes payable under commercial paper programs. We usually pay fixed rates of interest on our long-term debt and floating rates on our short-term debt.

Debt Instruments

We made $740 million in debt repayments (net of issues) in 2004:

• Bell Canada repaid $952 million in debentures
• Aliant repaid $100 million in medium-term notes
• BCE Inc. redeemed all of its outstanding Series P retractable preferred shares for $351 million.

Most of the issues were at Bell Canada, which issued $450 million in debentures, and Bell Globemedia, which issued $300 million of senior notes.
     We made $1.8 billion in debt repayments (net of issues) in 2003:

• Bell Canada repaid $1.4 billion in debentures
• Bell Canada Holdings Inc. repaid $314 million of equity-settled notes
• Bell Globemedia repaid $240 million of its credit facilities.

We also repaid $295 million of notes payable and bank advances. The issues were mainly at Bell Canada, which issued $600 million in debentures, and Bell Globemedia, which issued $300 million of senior notes.
     The combined debt of BCE Inc., Bell Canada and Aliant makes up 93% of our total debt portfolio. The average annual interest rate on our total debt was approximately 7.1% in 2004 and 2003.
     On February  11, 2005, Bell Canada issued $700 million in Series M-18 Medium Term Note Debentures having a maturity date of February 15, 2017 and a fixed interest rate of 5.00%. Following the issuance, Bell Canada swapped the fixed interest rate to a floating rate. The net proceeds from the issuance of the debentures will be used to repay maturing short-term debt and for general corporate purposes.

Cash Relating to Discontinued Operations

Cash from discontinued operations was $193 million in 2004. This consisted mainly of net cash proceeds of $315 million from the sale of our investment in Emergis, which were partly offset by the deconsolidation of Emergis’ cash on hand of $137 million at December 31, 2003.
     Cash from discontinued operations was $355 million in 2003. This consisted mainly of net cash proceeds of $320 million on Aliant’s sale of its 53.2% interest in Stratos.

Credit Ratings
The interest rates we pay are partly based on the quality of our credit ratings, which were all investment grade at March 2, 2005. Investment grade ratings usually mean that when we borrow money, we qualify for lower interest rates than companies that have ratings lower than investment grade.

Credit Ratings

The table below lists our key credit ratings at March 2, 2005.

(1) Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P)
(2) Dominion Bond Rating Services Limited (DBRS)
(3) Moody’s Investors Service,  Inc. (Moody’s)

Liquidity

Our plan is to generate enough cash from our operating activities to pay for capital expenditures and dividends. In other words, we are targeting to have positive free cash flow in the short term and in the long term.
     We expect to repay contractual obligations maturing in 2005 and in the long term from cash on hand, from cash generated from our operations or by issuing new debt. Contractual obligations include long-term debt.

Cash Requirements

In 2005, we will need cash mainly for capital expenditures, dividend payments, the payment of contractual obligations and other cash requirements.

Capital Expenditures

We spent $3.4 billion on capital expenditures in 2004, representing 17.5% of our revenues for the year. Our target is for Bell Canada’s capital expenditures to be in the range of 18% to 19% of its total revenues in 2005.

Dividends

In December 2004, the board of directors of BCE Inc. approved an increase of 10% or $0.12 per common share in the annual dividend on BCE Inc.’s common shares. As a result, starting with the quarterly dividend to be paid on April 15, 2005, subject to being declared by the board of directors, we expect to pay quarterly dividends on BCE Inc.’s common shares of approximately $305 million, based on the revised dividend policy. This assumes that there are no significant changes to the number of outstanding common shares. These quarterly dividends equal $0.33 per common share, based on approximately 925 million common shares outstanding at December 31, 2004.

Contractual Obligations

The table below is a summary of our contractual obligations at December 31, 2004 that are due in each of the next five years and after 2009.

Long-term debt (excluding capital leases) 

Notes payable and bank advances 

Capital leases 

Operating leases 

Commitments for capital expenditures 

Other purchase obligations 

Other long-term liabilities (including current portion) 

Total 

Long-term debt and notes payable and bank advances include $123 million drawn under our committed credit facilities. They do not include $414 million of letters of credit. The total amount available under these committed credit facilities and under our commercial paper programs, including the amount currently drawn, is $2,461 million.
     The imputed interest to be paid on capital leases is $106 million.
     Rental expense relating to operating leases was $406 million in 2004, $368 million in 2003 and $356 million in 2002.
     Our commitments for capital expenditures include investments to expand and update our networks and to meet customer demand. Other purchase obligations consist mainly of contractual obligations under service contracts.
     Other long-term liabilities included in the table relate to:

• Bell Canada’s future payments over the remaining life of its contract with Certen for the development of Bell Canada’s billing system. The total amount was $301 million at December 31, 2004.
• Bell Globemedia’s obligations relating to CRTC benefits owing on previous business combinations. These and other long-term liabilities were $130 million at December 31, 2004.

At December 31, 2004, we had other long-term liabilities that are not included in the table. They consisted of an accrued employee benefit liability, future income tax liabilities, deferred revenue and gains on assets and various other long-term liabilities.
     We did not include the accrued employee benefit liability and future income tax liabilities because we cannot accurately determine the timing and amount of cash needed for them. This is because:

• future contributions to the pension plans depend largely on the results of actuarial valuations that are performed periodically and on the investment performance of the pension fund assets
• future payments of income taxes depend on the amount of taxable earnings and on whether there are tax loss carryforwards available to reduce income tax liabilities.

We did not include deferred revenue and gains on assets because they do not represent future cash payments.

Other Cash Requirements

Our cash requirements may also be affected by the liquidity risks related to our contingencies, off-balance sheet arrangements and derivative instruments. We may not be able to quantify all of these risks.

Off-Balance Sheet Arrangements

Guarantees – As a regular part of our business, we enter into agreements that provide for indemnification and guarantees to counterparties in transactions involving business dispositions, sales of assets, sales of services, purchases and development of assets, securitization agreements and operating leases.
     We cannot reasonably estimate the maximum amount we might be required to pay counterparties because of the nature of almost all of these indemnifications. As a result, we cannot determine how they could affect our future liquidity, capital resources or credit risk profile. We have not made any significant payments under these indemnifications in the past. See Note 25 to the consolidated financial statements for more information.

Securitization of accounts receivable – Bell Canada and Aliant have agreements in place to provide us with a less expensive form of financing than debt financing.
     Under the agreements, Bell Canada and Aliant sold interests in pools of accounts receivable to securitization trusts for a total of $1,125 million.
     The total accounts receivable that were sold must meet minimum performance targets. These are based on specific delinquency, default and receivable turnover ratio calculations, as well as minimum credit ratings. If these accounts receivable go into default, the full purchase price will have to be returned to the buyers.
     These agreements are an important part of our capital structure and liquidity. If we did not have them, we would have had to finance approximately $1,125 million by issuing debt or equity. See Note 11 to the consolidated financial statements for more information.

Derivative Instruments

We use derivative instruments to manage our exposure to interest rate risk, foreign currency risk and changes in the price of BCE Inc. common shares. We do not use derivative instruments for speculative purposes. Since we do not trade actively in derivative instruments, we are not exposed to any significant liquidity risks relating to them.
     The carrying value of the outstanding derivative instruments was a net liability of $121 million at December 31, 2004. Their fair values amounted to a net liability of $167 million. See Note 20 to the consolidated financial statements for more information.

Litigation

We become involved in various claims and litigation as a part of our business. While we cannot predict the final outcome of claims and litigation that were pending at December 31, 2004, based on information currently available, management believes that these claims and litigation will not have a material and negative effect on our consolidated financial position or results of operation.
     You will find a more detailed description of the material claims and litigation pending at December 31, 2004 in the BCE 2004 AIF, and in Note 24 to the consolidated financial statements.

Commitment under the Deferral Account

The deferral account is a mechanism resulting from the CRTC’s second price cap decision of May 2002, which requires us to fund initiatives such as service improvements, reduced customer rates and/or customer rebates. We estimate our commitment under the deferral account to be approximately $202 million at December 31, 2004. We expect to clear most of this amount in 2005 by implementing various initiatives.

Provision for Contract Loss

In 2001, we entered into a contract with the Government of Alberta to build a next-generation network to bring high-speed Internet and broadband capabilities to rural communities in Alberta. Mechanical construction of the network was completed in December 2004. We identified cost overruns on the construction contract and recorded an additional provision of $128 million in 2004. Acceptance of the network by the Government of Alberta was initially due by January 24, 2005. Based on discussions with the Government of Alberta, Bell Canada has agreed to have the network completed and accepted by the Government of Alberta by the end of September 2005. There is a risk that we could incur higher than currently anticipated costs in completing the acceptance of the network by the Government of Alberta.

Sources of Liquidity

While we do not expect a cash shortfall in the foreseeable future, we expect to cover any shortfall through the financing facilities we currently have in place.
     These financing facilities, along with our strengthening balance sheet, give us flexibility in carrying out our plans for future growth. If necessary, we can supplement our liquidity sources by issuing additional debt or equity, or by selling non-core assets. We might do this to help finance business acquisitions or for contingencies.
     The table below is a summary of our outstanding lines of credit, bank facilities and commercial paper programs at December 31, 2004.

Commercial paper credit lines 

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 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 what its consequences may be, the actual effect of any event on our business could be materially different from what we currently anticipate. In addition, this description of risks does not include all possible risks, and there may be other risks of which we are currently not aware.

Risks that Could Affect Our Business

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.
     In 2004, we embarked on our strategy to deliver unrivalled integrated communications to customers across Canada, with an overall objective to take a leadership position in setting the standard in IP for the industry and for our customers. Leveraging the opportunities created by IP-based communications should allow us to deliver on the guiding principles of our strategy of customer simplification, innovation and efficiency. This strategy is founded on three priorities:

• deliver an enhanced customer experience with the objective of enabling a significantly lower cost structure at Bell Canada
• deliver abundant bandwidth to enable all the services of the future with the reliability and security that customers require
• create the next-generation services to drive future growth.

Our strategic direction involves significant changes in our processes, in how we approach our markets, and in how we develop and deliver products and services. This means we will need to be responsive in adapting to these changes. It also means that a shift in employee skills will be necessary.
     We will need to spend capital to implement our strategies and to carry out our plans. However, the actual amounts of capital required and the returns from these investments could differ materially from our current expectations.
     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 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.
     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.

Competition
Competition affects our pricing strategies and reduces 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.

Increasing Competition

We face intense competition from traditional competitors, as well as from new entrants to the markets in which we operate. We compete not only with other telecommunications, media, television, satellite and information technology 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, systems 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 may emerge from restructurings in the future 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.
     We already have several domestic and foreign competitors, but the number of well resourced foreign competitors with a presence in Canada could increase in the future. Over the past two years, the Government of Canada has reviewed 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. It is impossible to predict the outcome of the government’s review or to assess how any change in foreign ownership restrictions may affect us because the government has not completed its review of these matters.

Wireline and Long Distance

We experience significant competition in the provision of long distance service from dial-around providers, prepaid card providers, VoIP service providers and others, and from traditional competitors such as inter-exchange carriers and resellers. We also face increasing cross-platform competition as customers replace traditional services with new technologies. For example, our wireline business competes with VoIP, wireless and Internet services, including chat services, instant messaging and e-mail. We also expect to face competitive pressure from cable companies as they implement voice services over their networks and from other emerging competitors such as electrical utilities. These alternative technologies, products and services are now making significant inroads in our legacy services, which typically represent our higher margin business.
     Technology substitution, and VoIP in particular, has reduced barriers to entry in the industry. This has allowed competitors with far lower investments in financial, marketing, personnel and technological resources to rapidly launch new products and services and gain market share. This trend is expected to accelerate in the future, which could materially and negatively affect our financial performance.
     Contracts for long distance services to large business customers are very competitive. Customers may choose to switch to competitors that offer lower prices to gain market share and that are less concerned about the quality of service or impact on their earnings.
     These competitive factors suggest that our wireline accesses and long distance volumes will continue to decline in the future. Continued decline will lead to reduced economies of scale in those businesses and, in turn, lower margins. Our strategy is to mitigate these declines by building the business for newer growth services, but the margins on newer services will likely be less than the margins on legacy services. If the legacy services decline faster than the rate of growth of our newer services, our financial performance will be negatively and materially affected.

Internet Access

Cable companies and independent Internet service providers (ISPs) have increased competition in the broadband and Internet access services business. In particular, competition from cable companies has focused on increased bandwidth and discounted pricing on bundles. Competition has led to pricing for Internet access in Canada that is among the lowest in the world.
     In addition, service providers that are 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 wireless broadband services may also result in increased competition in certain geographic areas. 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 aggressively introduce, price and market their products and services, and with wireline service providers. We expect competition to intensify as new technologies, products and services are developed.

Video

Bell ExpressVu competes directly with another DTH satellite television provider and with cable companies across Canada. These cable companies have 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 will be a material and negative effect on our profitability if we do not continue to successfully implement these productivity improvements, reduce costs and manage capital intensity while maintaining the quality of our service. For example, each year between 2002 and 2004, we were required to reduce the price of certain services offered by the Bell Canada companies that are subject to regulatory price caps, and may be required to do so again in 2005. In addition, we have reduced our prices in some business data services that are not regulated in order to remain competitive, and we may have to continue doing so in the future. The profits of the Bell Canada companies will decline if they cannot reduce their expenses at the same rate. There would 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 introductions of new products and services, 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.

Liquidity
Our ability to generate cash and to maintain capacity to meet our financial obligations and provide for planned growth depends on our sources of liquidity.
     Our cash requirements may be affected by the risks associated with our contingencies, off-balance sheet arrangements, derivative instruments and assumptions built in our business plan.

Anticipating Technological Change

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. There is also a significant risk that current regulation could be expanded to apply to newer technologies. A regulatory change could delay our launch of new services and restrict our ability to market these services if, for example, new pricing rules or marketing or bundling restrictions were introduced or existing ones extended.
     The Bell Canada companies are in the process of moving their core circuit-based infrastructure to IP technology. As part of this move, the Bell Canada companies also plan to discontinue certain services that are based on circuit-based infrastructure. 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.

Liquidity

In general, we finance our capital needs in four ways:

• from cash generated by our operations or investments
• by borrowing from commercial banks
• through debt and equity offerings in the capital markets
• 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 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 some of its subsidiaries have entered into renewable credit facilities with various financial institutions. They include facilities serving as backup facilities for issuing commercial paper. There is no assurance that these facilities will be renewed on 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 our outstanding debt.
     Our plan in 2005 is to generate enough cash from our operating activities to pay for capital expenditures and dividends. We expect to pay contractual obligations maturing in 2005 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 by issuing debt or equity, borrowing from banks or selling or otherwise disposing of assets.
     If we cannot raise the capital we need upon acceptable terms, we may have to:

• limit our ongoing capital expenditures
• limit our investment in new businesses
• 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.

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

Please see the BCE 2004 AIF for a detailed description of:

• the principal legal proceedings involving BCE 
• certain regulatory initiatives and proceedings affecting the Bell Canada companies.

Please also see Risks that Could Affect Certain BCE  Group Companies – Bell Canada Companies – Changes to Wireline Regulation in this MD&A for a description of certain regulatory initiatives and proceedings that could affect the Bell Canada companies.

Funding and Control 
of Subsidiaries
BCE Inc. and Bell Canada are currently funding, directly or indirectly, and may in the future continue to fund, the operating losses of some of their subsidiaries, but they are under no obligation to continue doing so.

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.

Funding and Control of Subsidiaries

If BCE Inc. or Bell Canada 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. and Bell Canada do not have to remain the majority holder of, or maintain their current level or nature of ownership in, any subsidiary, unless they have agreed otherwise. The announcement of a decision by BCE Inc. or Bell Canada 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. or Bell Canada 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. or Bell Canada, respectively. 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. See Legal proceedings we are involved in in the BCE 2004 AIF for a description of these lawsuits. While we believe that these kinds of claims have no legal foundation, they could negatively affect the market price of BCE Inc.’s or Bell Canada’s securities. BCE Inc. and Bell Canada could also 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 valuation. As a result, we have not had to make regular contributions to the pension funds in the past few years.
     The decline in the capital markets in 2001 and 2002, combined with historically low interest rates and early retirement programs recently offered to employees, have significantly reduced the pension fund surpluses. This has negatively affected our net earnings.
     If returns on pension plan assets decline in the future or if interest rates decline further, the surpluses will also continue to decline. This could have a material and negative effect on our results of operations.
     We expect to contribute approximately $200 million to our defined benefit pension plans in 2005, subject to the completion of actuarial valuations. Following the completion of such actuarial valuations, we might have to make contributions to our defined benefit pension plans in 2005 in excess of the expected amount of approximately $200 million, which could have a negative effect on BCE Inc.’s liquidity.

Renegotiating Labour Agreements
Approximately 41% of our employees are represented by unions and are covered by collective agreements.

Renegotiating Labour Agreements

The following important collective agreements have expired:

• the collective agreements between CTV Television Inc. and its employees in Calgary and Edmonton, representing approximately 150 employees, which expired on September 30, 2004
• the collective agreement between CTV Television Inc. and its employees in Ottawa, representing approximately 65 employees, which expired on December 31, 2004.

Negotiations continue regarding the renewal of both collective agreements.
     The following important collective agreements expire on or before December 31, 2005:

• the collective agreement between the Canadian Telecommunications Employees’ Association (CTEA) and Bell Canada representing approximately 10,000 clerical and associated employees, which expires on May 31, 2005. Negotiations began in March 2005.
• certain collective agreements, representing approximately 170 CTV Television Inc. employees, which expire as follows:
  – Sault Ste. Marie on April 8, 2005
  – RDS Montréal on April 15, 2005
  – Cape Breton, New Brunswick, North Bay and Saskatoon on August 31, 2005
• the collective agreement representing approximately 395 employees at The Globe and Mail, which expires on July 1, 2005.

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. Bell Canada has established a program to implement a number of measures to help minimize disruptions and seek to ensure that customers continue to receive normal service during labour disruptions. There can be no assurance that a strike, if one occurs, would not disrupt service to Bell Canada’s customers. In addition, work disruptions at our service providers, including work slowdowns and work stoppages due to strikes, could significantly hurt our business, including our customer relationships and results of operations.

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, equipment, 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. Our operations also depend on the timely replacement and maintenance of our networks and equipment. Any of these events could cause our operations to be shut down indefinitely.
     Our networks are 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.

Software and System Upgrades

Many aspects of the BCE group companies’ businesses including, but not limited to, the provision of telecommunication services and customer billing, depend to a large extent on various IT systems and software, which must be improved and upgraded on a regular basis and replaced from time to time. The implementation of system and software upgrades and conversions is a very complex process, which may have several adverse consequences including billing errors and delays in customer service. Any of these events could significantly hurt our customer relationships and businesses and have a material and adverse effect on our results of operations.

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.

Stock Market Volatility
The stock markets have experienced significant volatility over the past few years, which has affected the market price and trading volumes of the shares of many telecommunications companies, in particular.

Holding Company Structure

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 are not required to pay dividends or make any other distributions to BCE Inc.

Stock Market Volatility

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 affect our ability to raise capital, issue debt, retain employees, make strategic acquisitions or enter into joint ventures.

Risks that Could Affect Certain BCE Group Companies

Bell Canada Companies

Contract with the Government of Alberta

In 2001, we entered into a contract with the Government of Alberta to build a next-generation network to bring high-speed Internet and broadband capabilities to rural communities in Alberta. Mechanical construction of the network was completed in December 2004. We identified cost overruns on the construction contract and recorded an additional provision of $128 million in 2004. Acceptance of the network by the Government of Alberta was initially due by January 24, 2005. Based on discussions with the Government of Alberta, Bell Canada has agreed to have the network completed and accepted by the Government of Alberta by the end of September 2005. There is a risk that we could incur higher than currently anticipated costs in completing the acceptance of the network by the Government of Alberta.

Decisions of Regulatory Agencies
The business of the Bell Canada companies is affected by decisions made by various regulatory agencies, including the CRTC. For example, many of the decisions of the CRTC try to 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. There is a risk that such decisions of the CRTC, and in particular the decisions dealing with prices at which we must provide such access, may adversely affect our business and results of operations.

Changes to Wireline Regulation

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:

• set a 3.5% productivity factor on many capped services, which may require the Bell Canada companies to reduce prices for these services
• extended price cap regulation to more services
• reduced the prices that incumbent telephone companies can charge competitors for services
• set procedures for enforcing standards of service quality
• 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.
     The total balance in Bell Canada’s and Aliant’s deferral accounts at December 31, 2004 was estimated to be approximately $202 million.
     On May 19, 2004, Bell Canada filed its proposal, as part of the public proceeding initiated by the CRTC on March 24, 2004, asking for approval to use some of the funds in its deferral account to implement the following initiatives:

• expand its broadband services to certain areas that are not economically viable to serve under its commercial broadband program
• reduce rates for some of its optional local services
• implement network upgrades required to support Bell Canada’s High Probability of Call Completion feature. This feature would give designated calls on the Bell Canada network a higher probability of completion under normal network loads and when the Public Switched Telephone Network (PSTN) is busy and experiencing call blocking conditions.

On January 28, 2005, Aliant filed its proposal for the disposition of any amounts in its deferral account. Its proposal included:

• funding of rate reductions in response to competitive pressures
• recovery of funds used to deploy telecommunications devices for the deaf for payphones pursuant to a CRTC directive
• funding E9-1-1 enhancements in Atlantic Canada
• recovery of costs and lost revenue resulting from a number of events that were beyond its control.

It is expected that this proceeding will close in the second half of 2005.
     If the CRTC does not approve these proposals, there is a risk that the funds in Bell Canada’s and Aliant’s deferral accounts could be used in a way that could have a negative financial effect on them.

Competitor Digital Network Service
The CRTC released Decision 2005-6 on February 3, 2005, regarding Competitor Digital Network (CDN) services. This decision determined the rates, terms and conditions for the provision of digital network services by Bell Canada and the other incumbent telephone companies to their competitors.

Competitor Digital Network Service

The CRTC’s decision concerning CDN services includes many changes that will affect both Bell Canada and Aliant as providers of CDN services in their respective operating territories and as buyers of those services elsewhere in Canada. The CRTC has determined that the scope of CDN services should be broadened from access elements only to also include intra-exchange facilities, inter-exchange facilities in certain metropolitan areas, channelization and co-location links (expanded CDN services). However, other than for the access and link components, the CRTC determined that these expanded CDN services should not be priced as essential facilities but will be priced to include “appropriate mark-ups” so as to encourage competitors to construct their own facilities.
     There are two important financial aspects to note in this decision. First, the reduced prices for the expanded CDN services are to be applied on a going-forward basis only, and Bell Canada will be compensated for the resulting revenue losses from the deferral account. Secondly, Bell Canada will also be compensated, through the deferral account, for both the retroactive and the future application of reduced rates for the CDN services currently tariffed. The incumbent telephone companies are required to file the estimated drawdown from the deferral account with the CRTC within 30 days of this decision.

Retail Quality of Service Indicators

As part of the second price cap decision, incumbent telephone companies are also subject to an interim penalty mechanism for retail quality of service. Under this mechanism, these companies could pay a penalty of up to 5% of their annual revenues from total local retail, business and residential services that are regulated. For Bell Canada, the potential penalty amount could be as much as approximately $262 million annually.
     The interim penalty mechanism covers 13 retail quality-of-service indicators. If a company does not meet the CRTC’s average annual standard for any of these indicators, the penalty could range from $5 million to $20 million for each indicator that is not met on an annual average basis. The amount of penalty payable would be based on how much the actual results for each indicator deviated from the CRTC standard.
     This mechanism is currently under review in the proceeding initiated by Public Notice 2003-3, Retail quality of service rate adjustment plan and related issues, and a decision has not yet been made. Based on actual results year-to-date, we do not expect Bell Canada to face any penalties for the penalty period of July 1, 2004 to June 30, 2005.

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:

• all existing contracts that bundle tariffed and non-tariffed products and services must be filed with the CRTC for approval
• all new contracts that bundle tariffed and non-tariffed products and services must receive CRTC approval before they are carried out
• 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.
     This decision increased the regulatory burden for Bell Canada and its carrier affiliates at both the wholesale and retail levels. It 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. Bell Canada’s appeal of this decision to the Federal Court of Canada was dismissed on September 14, 2004. As a result, Bell Canada has submitted tariffs for CRTC approval for those contracts with bundles that have not yet expired in order to provide more detailed descriptions of the bundled services.

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 customer-specific arrangements 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.
     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. This 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 incumbent telephone companies and for how they price their services, service bundles and customer contracts. The CRTC sought comments on proposed pricing restrictions on volume or term contracts for retail tariffed services. It issued an amended public notice on December 8, 2003. The record of this proceeding was completed with the filing of arguments on June 11, 2004 and reply arguments on June 25, 2004.
     If the CRTC determines the proposals are to be implemented as proposed, the Bell Canada companies will be required to increase the minimum prices they charge for regulated services. This would negatively limit their ability to compete.

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 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 on the regulation of VoIP services and invited interested parties to participate in a public consultation on the regulatory framework for VoIP. The CRTC’s preliminary view is that VoIP services using telephone numbers that conform to the North American Numbering Plan (NANP) and allow subscribers to make or receive calls from any telephone with access to the PSTN are functionally the same as switched telecommunications services. The CRTC’s preliminary conclusion is that when incumbent telephone companies provide VoIP services in their incumbent territories, they should be required to respect their existing tariffs or to file proposed tariffs where required, in order to conform with the regulatory rules that apply. The CRTC also provided preliminary views on 9-1-1 services, message relay service and privacy safeguards provided by local VoIP service providers. Bell Canada provided its comments to the CRTC on June 18, 2004. The CRTC held the public consultation on the regulatory framework for VoIP from September 21 to 23, 2004. Bell Canada filed reply comments on October 13, 2004.
     A decision is expected in the second quarter of 2005. There is a risk that the CRTC might decide to regulate VoIP services provided by the Bell Canada companies and other incumbent telephone companies but not the VoIP services provided by certain other competitors, cable companies in particular. These proceedings could determine the rules for competition with other service providers and limit the ability of Bell Canada companies to compete in the future.
     The CRTC has included a “Proceeding on Regulatory Symmetry” in its 2005–2006 Work Plan. If cable companies and the incumbent telephone companies are subject to different regulations for similar services, and specifically for similar bundles of services, the incumbent telephone companies would be at a competitive disadvantage which could have a material and negative effect on their revenues and profitability.

Licences for Broadcasting

On November 18, 2004, the CRTC issued Broadcasting Decision CRTC 2004-496, which approved Bell Canada’s applications for licences to operate terrestrial broadcasting distribution undertakings, using its wireline facilities, to serve large cities in Southern Ontario and Québec. Bell Canada will be licensed under the same terms and conditions that apply to major cable operators, without any delays or other conditions that would negatively affect its ability to compete with them. The licences will be issued once Bell Canada informs the CRTC that it is ready to commence operations and will expire on August 31, 2011. Bell Canada is required to have the terrestrial broadcasting distribution undertakings operational no later than November 18, 2006, unless an extension of time is approved by the CRTC.

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.

Licences and Changes to Wireless Regulation

As a result of an Industry Canada decision, the cellular and PCS licences of Bell Mobility and of Aliant Telecom Inc. and MT&T Mobility Inc. (two subsidiaries of Aliant), 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. Should there be a disagreement, this could have a material and negative effect on 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 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 from the National Antenna Tower Policy Review Committee was filed with Industry Canada in September 2004. Industry Canada is now reviewing the report and considering what next steps, if any, it will take, after which it may invite comments from interested parties, including the wireless carriers, on the report and its recommendations. It is not possible to predict at this time if or when any action might be taken on the findings of the report.

Revenue from Major Customers

A significant amount of revenue earned by Bell Canada’s Enterprise unit comes from a small number of major customers. If we lose contracts with these major customers and cannot replace them, it could have a material and negative effect on our financial results.

Voluntary Departure Programs

In 2004, we announced an early retirement program and early departure program for Bell Canada employees. We estimate annual savings of approximately $390 million relating to these programs because of lower salaries, bonuses and non-pension benefits. There is a risk that the amount we expect to save each year from these programs will be lower than expected if, for example, we incur outsourcing, replacement and other costs.

Competition Bureau’s Investigation Concerning System Access Fees

On December 9, 2004, Bell Canada was notified by the Competition Bureau that the Commissioner of Competition had initiated an inquiry under the misleading advertising provisions of the Competition Act concerning Bell Mobility’s description or representation of system access fees (SAFs) and was served with a court order, under section 11 of the Competition Act, compelling Bell Mobility to produce certain records and other information that would be relevant to the Competition Bureau’s investigation.
     SAFs are charged on a monthly basis to Bell Mobility cellular subscribers to assist Bell Mobility to recover certain costs associated with its mobile communications network. These costs include maintenance costs, the installation of new equipment, retrofitting of new technologies and fees for spectrum licences. These costs also include the recovery of the contribution tax charged by the CRTC to support telephone services in rural and remote areas of Canada.
     Bell Mobility may be subject to financial penalties by way of fines, administrative monetary penalties and/or demands for restitution of a portion of the SAFs charged to cellular subscribers if it is found to have contravened the misleading advertising provisions of the Competition Act.

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 would 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 certain medical conditions. 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 being 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 three satellites, Nimiq 1, Nimiq 2 and Nimiq 3, for its video services. Telesat operates or directs the operation of these satellites.

Bell ExpressVu

In order to restore the backup capacity for Bell ExpressVu, which was diminished by the partial failure of Nimiq 2, Telesat reached an agreement with DirecTV for an existing spare in-orbit satellite (Nimiq 3). Telesat received approval from Industry Canada to relocate this satellite to the orbital slots currently occupied by Nimiq 1 or Nimiq 2. In July 2004, the CRTC granted final approval to the agreement between Bell ExpressVu and Telesat to lease the full capacity of Nimiq 3.
     Satellites are subject to significant risks. Any loss, failure, manufacturing defects, damage or destruction of these satellites, of Bell ExpressVu’s terrestrial broadcasting infrastructure or of Telesat’s tracking, telemetry and control facilities that operate the satellites 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 relating to Telesat’s satellites.
     Bell ExpressVu is subject to programming and carriage requirements under CRTC regulations. Changes to the regulations that govern broadcasting could negatively affect Bell ExpressVu’s competitive position or the cost of providing its services. Bell ExpressVu’s DTH satellite television distribution undertaking licence was renewed in March 2004 and expires on 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 is participating in 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 countermeasures targeted at illegal devices, leading information campaigns and developing new technology. Bell ExpressVu introduced a smart card swap for its authorized digital receivers beginning in 2004, that is designed to block unauthorized reception of Bell ExpressVu signals. The smart card swap is being introduced in phases and is expected to be completed in the second half of 2005. As with any technology-based security system, it is not possible to eliminate with absolute certainty the possibility that security may be compromised at some point in the future.
     On October 28, 2004, the Court of Québec ruled in R. v. D’Argy and Theriault that the provisions in the Radiocommunication Act (Canada) making it a criminal offence to manufacture, offer for sale or sell any device used to decode an encrypted subscription signal relating to the unauthorized reception of satellite signals violate the freedom of expression rights enshrined in the Canadian Charter of Rights and Freedoms. The Canadian Department of Justice has launched an appeal of this decision to the Superior Court of Québec. It remains a criminal offence throughout Canada to manufacture, offer for sale or sell any device used to engage in the unauthorized reception of satellite signals. If this decision is ultimately upheld by the courts and Parliament does not enact new provisions criminalizing the unauthorized reception of satellite signals, Bell ExpressVu may face increasing loss of revenue from the unauthorized reception of satellite signals.

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 advertisers spend 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 who are mainly cable and DTH operators. 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 commuter papers in Toronto has increased competition, while the total circulation and readership of Canadian newspapers have 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 and CRTC Decisions

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. While these are expected to be renewed at the appropriate times, there can be no assurance that any or all of CTV’s licences will be renewed. Any renewals, changes or amendments to licences and any decisions by the CRTC from time to time that affect the industry as a whole or CTV in particular may have a material and negative effect on Bell Globemedia.

Telesat

Satellite Risks

There is a risk that the delivery of Telesat’s satellites under construction could be delayed as a result of delays in the construction of the satellites, delays in the construction of the launch vehicle, the failure of a launch vehicle that is similar to the model which Telesat intends to use to launch a satellite, or the unavailability of a reliable launch opportunity. A delay in delivery could have an adverse effect on Telesat’s ability to provide service and could result in additional costs. Telesat seeks to mitigate the impact of such a delay through various contractual measures including late delivery charges and by planning for contingency measures as required.
     There is a risk that Telesat’s satellites currently under construction, or satellites built in the future, may not be successfully launched and deployed. Once Telesat’s satellites are in orbit, there is a risk that a failure could prevent them from completing their commercial mission of providing uninterrupted service to customers. Telesat has a number of measures in place that seek to protect itself against continuity of service risk. These measures include engineering satellites with onboard redundancies, including spare equipment on the satellite, standard testing programs that provide high confidence of performance levels, or retaining and obtaining redundant capacity on either the same or another in-orbit satellite, and the purchase of insurance.
     Where insurance coverage is available on commercially reasonable terms and conditions, Telesat seeks to protect itself against some of the consequences of launch and in-orbit failures by purchasing satellite insurance. However, there is no assurance that Telesat will be able to obtain or renew launch and in-orbit insurance coverage for its satellites for the full satellite value, nor is there any assurance that coverage will be obtained at a favourable premium rate.
     Telesat currently maintains insurance on in-orbit satellites as follows:

• Nimiq 1 – insured until the second quarter of 2005 for approximately its book value;
• Anik F2 – insured until the third quarter of 2007 for approximately two thirds of its book value. In the event of a total failure of the Anik F2 satellite, the after-tax accounting loss is estimated at $110 million to $115 million.

In December 2004, Telesat ceased to insure its interest in the residual value of Nimiq 2 following the arrival in orbit of the leased satellite Nimiq 3 (formerly DirecTV3) a satellite that complements the capacity of Nimiq 1 and 2 and which, following operational changes, could be used to provide capacity and continuity of service in the event of a failure of either Nimiq 1 or Nimiq 2.
     In August 2001, the manufacturer of the Anik F1 satellite advised Telesat of a gradual decline in power on the satellite. Telesat believes some of the satellite’s core services will be affected by mid-to-late 2005. Anik F1R is expected to replace Anik F1 in time to ensure that service to Anik F1’s customers will not be interrupted. Telesat had insurance in place to cover the power loss on Anik F1 and filed a claim with its insurers in December 2002. In March 2004, Telesat and its insurers reached a final settlement agreement. The settlement calls for an initial payment to Telesat in 2004 of US$136.2 million, which has already been received, and an additional payment of US$49.1 million in 2007 if the power level on Anik F1 degrades as predicted by the manufacturer. In the event that the power level on Anik F1 is better than predicted, the amount of the payment(s) will be adjusted by applying a formula which is included in the settlement documentation and could result in either a pro-rated payment to Telesat of the additional US$49.1 million or a pro-rated repayment of up to a maximum of US$36.1 million to be made by Telesat to the insurers. Currently, power levels are continuing to degrade as predicted.
     In December 2004, Telesat received commitments for launch and in-orbit insurance coverage, covering the launch and first year of in-orbit life, for the approximate book value of Anik  F1R, subject to the completion of documentation.
     Telesat has signed a contract with EADS Astrium, SAS, a European satellite manufacturer, for construction of the Anik F3 satellite. Anik F3 is expected to be available for service in the second half of 2006. During 2005, subject to insurance availability and market conditions, Telesat will review and, if appropriate, commence the placement of launch and in-orbit insurance coverage for Anik F3. However, there is no assurance that Telesat will be able to obtain launch and in-orbit insurance coverage for the full value of Anik F3, nor is there any assurance that coverage will be obtained at a favourable premium rate.

Our Accounting Policies

Critical Accounting Estimates

Under Canadian GAAP, we are required to make estimates when we account for and report assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities in our financial statements. We are also required to continually evaluate the estimates that we use.
     We base our estimates on past experience and on other factors that we believe are reasonable under the circumstances. Because this involves varying degrees of judgment and uncertainty, the amounts currently reported in the financial statements could, in the future, prove to be inaccurate.
     We consider the estimates described in this section to be an important part of understanding our financial statements because they rely heavily on management’s judgment and are based on factors that are highly uncertain.
     Our senior management has discussed the development and selection of the critical accounting estimates described in this section with the audit committee of the board of directors. The audit committee has reviewed these critical accounting estimates.

Employee Benefit Plans

We perform a valuation at least every three years to determine the actuarial present value of the accrued pension and other retirement benefits. The valuation uses management’s assumptions for the discount rate, expected long-term rate of return on plan assets, rate of compensation increase, health-care cost trend and expected average remaining years of service of employees.
     While we believe that these assumptions are reasonable, differences in actual results or changes in assumptions could materially affect employee benefit obligations and future net benefit plans costs.
     We account for differences between actual and assumed results by recognizing differences in benefit obligations and plan performance over the working lives of the employees who benefit from the plans.
     The two most significant assumptions used to calculate the net employee benefit plans cost are the discount rate and the expected long-term rate of return on plan assets. Each of our operating segments is affected by these assumptions.

Discount Rate

We determine the appropriate discount rate at the end of every year. Our discount rate was 6.2% at December 31, 2004, a decrease from 6.5% at December 31, 2003. The table below shows the impact on the net benefit plans cost for 2005 and the accrued benefit asset at December 31, 2005 of a 0.5% increase and a 0.5% decrease in the discount rate.

Discount rate increased to 6.7%

Consumer 

Business 

Aliant 

Other Bell Canada 

Other BCE 

Discount rate decreased to 5.7%

Consumer 

Business 

Aliant 

Other Bell Canada 

Other BCE 

Although there is no immediate impact on our balance sheet, a lower discount rate results in a higher accrued benefit obligation and a lower pension surplus. This means that we may have to increase any cash contributions to the plan.

Expected Long-Term Rate of Return

The expected long-term rate of return is a weighted average rate of our forward-looking view of long-term returns on each of the major plan asset categories in our funds.
     We determine the appropriate expected long-term rate of return at the end of every year. We assumed an expected long-term rate of return on plan assets of 7.5% in 2004, which is the same as it was in 2003. The table below shows the impact on the net benefit plans cost for 2005 and the accrued benefit asset at December 31, 2005 of a 0.5% increase and a 0.5% decrease in the expected rate of return on plan assets.

Consumer 

Business 

Aliant 

Other Bell Canada 

Other BCE 

Consumer 

Business 

Aliant 

Other Bell Canada 

Other BCE 

Although there is no immediate impact on our balance sheet, poor fund performance results in a lower fair value of plan assets and a lower pension surplus. This means that we may have to increase any cash contributions to the plan.

Goodwill Impairment
We assess the value of goodwill of all reporting units within each of our operating segments every year and when events or changes in circumstances indicate that it might be impaired.

Contingencies
We become involved in various litigation and regulatory matters as a part of our business. Each of our operating segments may be affected. Pending litigation, regulatory initiatives or regulatory proceedings represent potential financial loss to our business.

Goodwill Impairment

We generally measure for impairment using a projected discounted cash flow method and confirm our assessment using other valuation methods. If the asset’s carrying value is more than its fair value, we record the difference as a reduction in the amount of goodwill on the balance sheet and an impairment charge in the statement of operations.
     We make a number of significant estimates when calculating fair value using a projected discounted cash flow method. These estimates include the assumed growth rates for future cash flows, the numbers of years used in the cash flow model, the discount rate and many others.
     We believe that all of our estimates are reasonable. They are consistent with our internal planning and reflect our best estimates, but they have inherent uncertainties that management may not be able to control.
     Any changes in each of the estimates used could have a material impact on the calculation of the fair value and resulting impairment charge. As a result, we are unable to reasonably quantify the changes in our overall financial performance if we had used different assumptions.
     We cannot predict whether an event that triggers impairment will occur, when it will occur or how it will affect the asset values we have reported.
     There were no impairment charges recorded in 2004 or 2003.

Contingencies

We accrue a potential loss if we believe the loss is probable and it can be reasonably estimated. We base our decision on information that is available at the time. We estimate the amount of the loss by consulting with the outside legal counsel that is handling our defence. This involves analyzing potential outcomes and assuming various litigation and settlement strategies.
     If the final resolution of a legal or regulatory matter results in a judgment against us or requires us to pay a large settlement, it could have a material and negative effect on our results of operations, cash flows and financial position in the period that the judgment or settlement occurs. Any accrual would be charged to operating income and included in Accounts payable and accrued liabilities or Other long-term liabilities. Any cash settlement would be included in cash from operating activities.
     None of our operating segments had any significant provisions relating to pending litigation, regulatory initiatives or regulatory proceedings at December 31, 2004. We have not made any significant changes to our estimates in the past two years.

Income Taxes

Management believes that it has adequately provided for income taxes based on all of the information that is currently available. The calculation of income taxes in many cases, however, requires significant judgment in interpreting tax rules and regulations, which are constantly changing. Each of our operating segments may be affected.
     Our tax filings are also subject to audits, which could materially change the amount of current and future income tax assets and liabilities. Any change would be recorded as a charge or a credit to income tax expense. Any cash payment or receipt would be included in cash from operating activities.
     There were no significant changes to the estimates we made in the past two years.

Recent Changes to Accounting Standards

Please see Note 1 to the consolidated financial statements for more information about the accounting policies we adopted in 2004. These are the result of new accounting standards for:

• impairment of long-lived assets
• asset retirement obligations
• hedging relationships.

Future Changes to Accounting Standards

Financial Instruments

The CICA issued revisions to section 3860 of the CICA Handbook, Financial Instruments – Disclosure and Presentation. The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equities.
     These revisions come into effect on January 1, 2005. Because we do not have any instruments with these characteristics, adopting this section on January 1, 2005 will not affect our consolidated financial statements.

Comprehensive Income

The CICA issued section 1530 of the CICA Handbook, Comprehensive Income. The section is effective for fiscal years beginning on or after October 1, 2006. It describes how to report and disclose comprehensive income and its components.
     Comprehensive income is the change in a company’s net assets that results from transactions, events and circumstances from sources other than the company’s shareholders. It includes items that would not normally be included in net earnings, such as:

• changes in the currency translation adjustment relating to self-sustaining foreign operations
• unrealized gains or losses on available-for-sale investments.

The CICA also made changes to section 3250 of the CICA Handbook, Surplus, and reissued it as section 3251, Equity. The section is also effective for fiscal years beginning on or after October 1, 2006. The changes in how to report and disclose equity and changes in equity are consistent with the new requirements of section 1530, Comprehensive Income.
     Adopting these sections on January 1, 2007 will require us to start reporting the following items in the consolidated financial statements:

• comprehensive income and its components
• accumulated other comprehensive income and its components.

Financial Instruments – Recognition and Measurement

The CICA issued section 3855 of the CICA Handbook, Financial Instruments – Recognition and Measurement. The section is effective for fiscal years beginning on or after October 1, 2006. It describes the standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives.
     This section requires that:

• all financial assets be measured at fair value, with some exceptions like loans and investments that are classified as held-to-maturity
• all financial liabilities be measured at fair value if they are derivatives or classified as held for trading purposes. Other financial liabilities are measured at their carrying value.
• all derivative financial instruments be measured at fair value, even when they are part of a hedging relationship.

We are currently evaluating the impact on our consolidated financial statements of adopting this section on January 1, 2007.

Hedges

The CICA recently issued section 3865 of the CICA Handbook, Hedges. The section is effective for fiscal years beginning on or after October 1, 2006, and describes when and how hedge accounting can be used.
     Hedging is an activity used by a company to change an exposure to one or more risks by creating an offset between:

• changes in the fair value of a hedged item and a hedging item
• changes in the cash flows attributable to a hedged item and a hedging item, or
• changes resulting from a risk exposure relating to a hedged item and a hedging item.

Hedge accounting makes sure that all gains, losses, revenues and expenses from the derivative and the item it hedges are recorded in the statement of operations in the same period.
     We are currently evaluating the impact on our consolidated financial statements of adopting this section on January 1, 2007.