Today / Fibre to the home / Rural Internet / Customer service / Wireless networks / Crave / Collaboration solutions / Smart Cities / IoT / Streaming video / Whole Home Wi-Fi / Fibe TV / Basketball / Inclusion / Virtual networks / Advertising reach / Mobile roaming / Hockey / Alt TV / Football / Connected cars / R&D / Local programming / Managed services / Streaming radio / Mental health / Manitoba / Prepaid wireless / Enterprise security / Business efficiency / Public safety / Self serve / News, sports & entertainment / The Source / Montréal transit / Branch connectivity / Order tracking / Content production / Soccer / Broadband speeds / Unified communications / Data centres / Cloud computing / Smart Homes / Canada / Dividends / just got better. BCE Inc. 2018 Annual Report / Our goal To be recognized by customers as Canada’s leading communications company. Our 6 strategic imperatives Invest in broadband networks and services Leverage wireline momentum Improve customer service Accelerate wireless Expand media leadership Achieve a competitive cost structure BCE Inc. 2018 Annual Report Table of contents Table of contents Our strategy 3 / Financial and operational highlights 4 / Letters to shareholders 6 / Strategic imperatives 10 / Innovation highlights 21 / Community investment 22 / Bell archives 24 / Management’s discussion and analysis (MD&A) 28 / Reports on internal controls 114 / Consolidated financial statements 116 / Notes to consolidated financial statements 122 / 2 Our strategy BCE Inc. 2018 Annual Report Executing our broadband strategy in the highly competitive Canadian communications industry, the Bell team delivered strong gains in wireless, Internet, TV and streaming customers, driving increases in revenue, adjusted EBITDA and free cash flow in line with our guidance targets. Bell’s strong operational and financial performance has supported consistent and steady dividend growth, with 15 increases to the BCE common share dividend and a total shareholder return of 261% over the past 10 years. 2018 Financial Performance Revenue growth Adjusted EBITDA (1) growth Capital intensity Adjusted EPS (1) Free cash flow (1) growth Driving growth in shareholder value ACTUAL 3.1% 2.7% 16.9% $3.51 4.4% TARGET 2% – 4% 2% – 4% ~ 17% $3.45 – $3.55 3% – 7% 261% 5.0% 117% 10-YEAR TOTAL SHAREHOLDER RETURN (2) (3) INCREASE IN DIVIDEND PER COMMON SHARE FOR 2019 INCREASE IN DIVIDEND PER COMMON SHARE SINCE THE END OF 2008 (1) Adjusted EBITDA, adjusted EPS and free cash flow are non-GAAP financial measures and do not have any standardized meaning under International Financial Reporting Standards. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. For a full description of these measures, including dividend payout ratio, see section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) on pp. 109 to 112 of the MD&A. (2) Assumes the reinvestment of dividends. (3) Total return since the end of 2008, the year Bell implemented its transformational strategy. 3 BCE Inc. 2018 Annual Report Financial and operational highlights Today just got better The fastest Internet. Lucky Mobile. Crave. Gigabit wireless. Alt TV. Enterprise cloud solutions. Wireless Home Internet. Connected Cars, Smart Homes and Smart Cities. These are just some of the Bell service innovations that make today better for our consumer, business and government customers across the country. Bell has the scale necessary to deliver the world’s best communications technologies throughout the country, a key factor enabling Canadians and our business community to participate fully in an increasingly global marketplace. In fact, Bell invests more in new network infrastructure and Canadian communications R&D than any other company. Our focus on bringing Canadians the best in broadband supports our country’s technological leadership on a global scale, while giving Bell the competitive edge to succeed in Canada’s dynamic communications industry. BCE subscribers (millions)* Wireless High-speed Internet Television Total growth services Local residential telephone services Total subscribers (1) 2018 9.61 3.93 2.85 16.40 2.99 19.39 2017 9.17 3.79 2.83 15.79 3.23 19.02 CHANGE +4.8% +3.8% +0.7% +3.9% (7.5%) +1.9% (1) Excludes business telephone services. * Rounding in numbers may affect total figures presented. 4 Financial and operational highlights BCE Inc. 2018 Annual Report Broadband leadership delivers results Outstanding gains in wireless, steady growth in broadband Internet and TV, and stable performance in a fast-changing media marketplace underpinned strong BCE financial results in 2018, supporting our strategy to lead in broadband investment and innovation while delivering steady dividend growth for our shareholders. BCE operating revenues ($ millions) Bell Wireless Bell Wireline Bell Media 2018 2017 CHANGE $8,422 $7,926 $12,662 $12,400 $3,121 $3,104 6.3% 2.1% 0.5% Inter-segment eliminations ($ 737) ($ 673) (9.5%) Total BCE operating revenues $23,468 $22,757 3.1% 2018 2017 +2.7% $9,535 2018 $9,282 2017 (2.5%) $2,973 2018 $3,050 2017 BCE adjusted EBITDA ($ millions) BCE net earnings ($ millions) BCE adjusted net earnings ($ millions) 2018 2017 +0.4% $7,384 2018 $7,358 2017 +4.4% $3,567 2018 $3,418 2017 Cash flows from operating activities ($ millions) Free cash flow ($ millions) BCE capital expenditures ($ millions) +3.0% $3,151 $3,058 (1.6%) $3,971 $4,034 For more information, please refer to section 7 of the MD&A – Selected annual and quarterly information, page 84. 5 BCE Inc. 2018 Annual Report Message from the Chair of the Board BCE well positioned to continue leading Canada’s broadband innovation As has been the case since Bell’s founding in 1880, BCE remains at the forefront of Canadian communications, deploying the most extensive fibre and mobile broadband infrastructure, driving research and development in communications services, and managing the voice and data connections that Canadian consumers, businesses and government rely on around the clock. In an industry marked by rapid technological advances and rising competition, BCE is well prepared to meet the challenges and opportunities ahead. We are leveraging our scale, strategic focus and expert team to lead Canada’s broadband transformation and deliver value for our shareholders, customers and communities now and into the future. Setting the pace in Canadian communications BCE is committed to operating with the highest standards of corporate governance, shareholder accountability and ethical business conduct. This dedication to corporate responsibility is also reflected in BCE’s investments in every region of the country with advanced communications services, our focus on environmental sustainability and support for people and communities nationwide with the Bell Let’s Talk mental health initiative. We are dedicated to offering a diverse and inclusive national workplace that fully reflects our communities throughout Canada. The Bell team’s 2018 performance makes clear that we have successfully embraced the broadband future across every business segment. With strong results in broadband wireless, Internet and TV growth services, Bell built on its position as Canada’s #1 Internet provider, largest television and media company, and the communications provider of choice for Canadian business and government. BCE invested approximately $4 billion in capital in network, service and media innovation in 2018, delivering the communications services that consumers and businesses depend on and the critical network infrastructure that drives Canada’s social and economic success. Our capital investment program is among the most significant in any Canadian business sector, well ahead of our competitors and the most capital-efficient in the industry. Strong financial position underpins shareholder value BCE’s healthy balance sheet, strong $1.8-billion liquidity position and stable investment grade credit profile ensure we have the financial flexibility to execute our business plan and our capital markets objectives. In February 2019, BCE announced a 5% increase to the common share dividend to $3.17, effective with the Q1 2019 payment on April 15. This is the 15th such increase since the end of 2008, representing total dividend growth of 117% over this period. It also marks the 11th consecutive year that BCE will deliver 5% or better dividend growth while maintaining our dividend payout ratio within the target policy range of 65% to 75% of free cash flow. In addition, BCE undertook a $175 million repurchase of common shares in 2018 through a Normal Course Issuer Bid (NCIB) program. Annualized dividend per share ($) 117% 1.97 2.07 2.17 2.27 2.33 1.46 1.54 1.62 1.74 1.83 Q4 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q2 11 Q1 12 Q3 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 Q1 18 Q1 19 6 3.17 3.02 2.76 2.87 2.60 2.47 Our total shareholder return since the end of 2008 has been 261%, better than most of our North American peers and more than double the return of the S&P/TSX Composite Index. BCE reduced the cost of debt in 2018 as Bell Canada raised $1.5 billion in gross proceeds from the issuance of 7-year and 10-year medium-term note (MTN) debentures, as well as US$1.15 billion in gross proceeds from the issuance of 30-year notes in the first public debt financing by Bell Canada in the US market in more than 20 years. Together, these offerings lowered our after-tax cost of publicly issued debt securities to 3.1%. Message from the Chair of the Board BCE Inc. 2018 Annual Report Workplace leader Bell is consistently recognized as a leading Canadian corporate citizen and one of the country’s top employers. We also reinforced the strong solvency position of our Defined Benefit (DB) pension plans with a voluntary $240 million contribution, significantly reducing the amount of our future obligations and better aligning the status of subsidiary BCE DB plans with Bell Canada’s fully funded program. We expect normal-course cash pension funding to remain stable and foresee no requirement for additional voluntary pension cash funding in 2019. A top Canadian workplace The Bell team has been an integral part of Canada’s growth and success for almost 140 years. Today, more than 52,000 BCE employees in every province and territory are ensuring Canadians are connected, informed and entertained wherever they may be. We are proud to be considered a workplace of choice, one that is committed to enhancing diversity and inclusion, providing opportunities for young leaders and taking the initiative in workplace mental health. In 2018, Bell was recognized as one of Canada’s Top 100 Employers, one of Canada’s Best 50 Corporate Citizens, a Best Diversity Employer and a Top Employer for Young People. Honoured to serve as your Chair, I am grateful to my fellow BCE board members for their tremendous wisdom and integrity, and for their dedication to the success of your company. On their behalf, I thank our President and CEO George Cope for his clear strategic vision and commitment to ensuring Bell remains at the forefront of Canadian communications now and into the future. Your support of the company as a shareholder is critical to our ability to invest, innovate and compete, driving Canada’s technological leadership and contributing to our country’s ongoing growth and prosperity. On behalf of your board and the national Bell team, I thank you for your confidence in BCE and the Bell group of companies. Gordon M. Nixon Chair of the Board BCE Inc. 7 BCE Inc. 2018 Annual Report Message from the President & CEO Leading innovation, outstanding execution drive marketplace performance On behalf of the Bell team, I am pleased to report on a year of strong progress by your company in a dynamic and highly competitive communications sector. In 2018, our rapidly expanding broadband fibre and wireless networks, coupled with the best communications services and content in Canada, enabled growth across Bell’s wireless, wireline and media operations. Our goal and strategy Bell’s goal is to be recognized by customers as Canada’s leading communications company, and we execute 6 Strategic Imperatives every day to achieve it. We are focused on delivering the best broadband connections and the latest wireless, TV, Internet and content innovations to customers, operating with the highest levels of efficiency and providing a better customer experience in a fast-changing marketplace. The Bell broadband strategy delivered strong growth in customer additions and solid financial performance in 2018, including increases in BCE’s revenue, adjusted EBITDA and the free cash flow that enables both our strategic broadband investments and our shareholder value objectives. We achieved all 2018 financial guidance targets including for revenue, adjusted EBITDA and free cash flow growth, capital intensity, adjusted EPS, annualized common dividend per share and our dividend payout policy. Bell also closed the year with our 53rd consecutive quarter of year-over-year adjusted EBITDA growth, which has supported steady increases in the BCE common dividend since 2008, including the latest 5% increase announced for 2019. The Bell fibre advantage Bell’s historic project to rebuild Canada’s core communications infrastructure with direct fibre connections was approximately 50% complete by the end of 2018, reaching 4.6 million homes and business locations across 7 provinces. This includes the launch of the Toronto fibre network throughout Canada’s largest city in 2018, ongoing expansion in Greater Montréal, and the start of the next major phase of our rollout, in Southern Ontario’s populous 905 region. A network built for the future, Bell fibre supports continued increases in data speeds to meet growing consumer demand and fully enables high-capacity business and government applications such as the Internet of Things, connected homes and cars, and Smart City platforms. Our leading fibre density also offers significant advantages in wireless network connectivity, reducing backhaul costs and positioning Bell to efficiently roll out upcoming Fifth Generation (5G) mobile networks. 8 Message from the President & CEO BCE Inc. 2018 Annual Report Bell was ranked as the fastest Internet provider in Canada in 2018, and was first to offer consumers data access speeds of 1.5 Gigabits per second. In wireless, Bell was also first to launch Gigabit-speed mobile service, and extended the latest wireless technology, LTE Advanced, to 91% of the population. Bell takes broadband further than any Canadian communications company. In Manitoba, Bell MTS continued to execute its infrastructure investment plan, in many cases bringing broadband to communities previously unserved by any provider. BCE’s Northwestel significantly extended broadband service in Canada’s territories, and Bell was awarded Alberta’s SuperNet contract to ensure communities throughout the province are connected with broadband Internet access. We also steadily increased the number of smaller towns and rural locations connected with Bell’s broadband Wireless Home Internet service. CTV remained Canada’s most-watched network for the 17th consecutive year while English and French language specialty channels, including top sports networks TSN and RDS, significantly increased viewers in key demographics. Canada’s leader in both pay TV and streaming services, Bell Media launched the all-new Crave platform combining HBO Canada, Showtime, TMN and other premium programming, growing the service to 2.3 million subscribers by the end of the year, and debuted the popular TSN Direct and RDS Direct streaming services. Executing its objective to create the best content for both Canadian and international audiences, Bell Media assumed a majority interest in Pinewood Toronto Studios and partnered to acquire the Just for Laughs comedy brand. Canada’s broadband growth leader Bell Let’s Talk Bell welcomed approximately 700,000 net new wireless, Internet and IPTV (Fibe TV and Alt TV) customers in 2018, the most new broadband customers in the industry and a 32% increase over the year before. We efficiently managed the ongoing declines in legacy businesses such as landline phone and the maturing satellite TV segment, and by the end of 2018 provided more than 22 million consumer and business customer connections throughout Canada. Bell’s advantage in network performance and exclusive services supported a stronger growth trajectory in both business and residential wireline services. The fastest access speeds and innovations such as Whole Home Wi-Fi and app-based live television service Alt TV helped enhance our position as Canada’s largest Internet provider, with net Internet subscriber additions up 22.7% year over year. Part of the evolving Fibe TV universe, Alt TV also contributed significantly to Bell’s positive TV subscriber growth in an era of new viewing options, cord cutting and cable decline. The speed, quality, reliability and coverage of the Bell LTE mobile network supported leading wireless customer additions, lower monthly customer churn and, with continued data usage growth on Canada’s best national mobile network, the industry’s highest blended average billing per user. We welcomed approximately 480,000 net new postpaid and prepaid wireless customers in 2018, the most in the industry and 44% more than in 2017. Key to this exceptional performance was the growing popularity of our low-cost Lucky Mobile brand, which expanded to all 10 provinces in 2018 and quickly made Bell the growth leader in the competitive prepaid wireless marketplace. #1 in Canadian media Increasing competition from global media heavyweights and new viewing options for consumers continued to impact the Canadian media sector in 2018. Bell Media met the challenge with unparalleled programming leadership and ongoing innovation in direct-to-consumer platforms. Bell Let’s Talk continues to grow the mental health conversation while funding care, research and community programs throughout Canada. Bell Let’s Talk Day has become an annual focus for anti-stigma and mental health action in workplaces, schools, media and government as Canadians everywhere come together to address the challenge of mental illness. Messages of support for the cause across social media and other communications platforms since our first Bell Let’s Talk Day in 2011 have now topped 1 billion, including growing support from high-profile influencers here in Canada and around the globe, while Bell’s funding commitment for mental health programs now exceeds $100 million. We can all be proud that the made-in-Canada Bell Let’s Talk initiative has captured the attention of the world, reflecting a universal desire for progress in mental health. Thank you On behalf of the national team, I thank our shareholders for enabling Bell to lead the way in delivering the broadband communications that are at the heart of our ever more connected society and economy. We are proud and honoured to build on the renowned Bell Canada name, and will continue to pursue our goal, for Bell to be recognized by customers as Canada’s leading communications company, every day. George A. Cope President and Chief Executive Officer BCE Inc. and Bell Canada 9 BCE Inc. 2018 Annual Report Strategic imperatives Invest in broadband networks and services Bell delivers better broadband to consumers and businesses in more cities, towns and smaller communities than ever, building advanced networks that deliver unmatched speeds and infinite innovation possibilities. As Bell continues to lead the deployment of next-generation broadband networks and services, Canadians are taking full advantage of the advanced capabilities these fibre and wireless connections provide, from streaming content to accessing Internet of Things (IoT) services and new cloud solutions. More connected devices are being added throughout homes and businesses each day, and the need for fast and reliable connectivity continues to accelerate. As Canada’s broadband provider of choice, Bell is addressing the opportunity by investing more in advanced networks and services than any other company, with $3.97 billion in capital expenditures in 2018. Improving coverage and quality Bell’s historic fibre optic network build was approximately 50% complete by the end of 2018, increasing our number of all-fibre connections to approximately 4.6 million homes and businesses in Atlantic Canada, Québec, Ontario and Manitoba. As we surpassed 1 million locations with direct fibre in the City of Toronto – and continued our large-scale fibre deployment in Montréal – we launched a new initiative to connect 1.3 million households and businesses in the surrounding Greater Toronto Area (GTA). As part of the $1 billion Bell MTS investment plan for Manitoba begun in 2017, we expanded our all-fibre broadband network in Brandon, Niverville, Oakbank, Steinbach, Winkler and within Winnipeg, supporting the ranking of Bell MTS in PCMag’s top 10 fastest ISPs in Canada for the first time. Bell also brought the fastest wireless technology to more Canadians with the expansion of LTE Advanced (LTE-A) network availability to 91% of the national population (overall LTE coverage surpassed 99% in 2017). More than 90% of Manitobans now have access to LTE-A as part of the Bell MTS investment plan, and we extended our wireless network reach into previously unserved areas, including the communities of Stuartburn, Woodridge and Zhoda in southeastern Manitoba. The speed of our broadband connections also continued to outpace our competitors. In 2018, Bell became the first wireless carrier in Canada to achieve 1 Gigabit per second (Gbps) mobile speeds, and the first Internet service provider to offer access speeds of 1.5 Gbps. Bell has invested significantly to connect the vast majority of our cell towers to high-speed fibre backhaul which, together with the ongoing deployment of mobile small cell technology, is greatly enhancing the reliability of our wireless networks while advancing our preparations for 5G. At the same time, our work to maximize the efficient deployment of our wireless spectrum holdings through the use of carrier aggregation and 4x4 multiple input multiple output (MIMO) technology is driving ongoing increases in LTE-A speeds and capacity. Bell brought consumers the fastest Internet in Canada with access speeds of 1.5 Gigabits per second on our all-fibre network. 10 Broadband coverage everywhere As Bell quickly extends its fibre links in urban centres, we’re also delivering broadband speeds to smaller towns and rural locations with our innovative Wireless Home Internet fixed-wireless service. Based on 5G-capable Wireless to the Premises (WTTP) technology in the 3.5 GHz spectrum band, the service is now available in 28 towns in Ontario and Québec and is expected to reach a total of 1.2 million households, up from the 800,000 originally planned prior to the federal government’s Accelerated Investment Incentive. Homes and businesses in Iqaluit and other Nunavut communities now have access to a new satellite-based high-speed Internet service, the result of a joint broadband initiative by Bell, Northwestel, Telesat, the federal Connect to Innovate program and the Nunavut government. Bell Mobility also brought 4G wireless service to 11 Nunavut communities in 2018, and will complete the rollout to all 25 communities in the territory in 2019. Bell continues to work with network partners and with federal, provincial and territorial governments on providing broadband in other remote areas, winning a number of bids for additional Connect to Innovate projects in Newfoundland and Labrador, Nova Scotia, northern Ontario and the Northwest Territories in 2018. In Manitoba, Bell MTS is extending broadband to 8 communities – 6 of them First Nations – in partnership with both the federal and provincial governments, while another federal-provincial partnership will connect 13 communities in Québec’s Outaouais region. Communities in all the northern territories will benefit from a new 777 km fibre network being built by Bell subsidiary Northwestel between Dawson City, Yukon and Inuvik, Northwest Territories with funding support from Connect to Innovate and the Yukon government. The high quality and reliability of Bell’s broadband networks were showcased to the world during the G7 Summit in Québec’s Charlevoix region. With communications enhancements required to support officials, security and international media, the federal government turned to Bell for a program to expand fibre and wireless networks in less than a year, including installing 13 cell towers and extensive fibre connections that will be a lasting benefit to communities in the region. Strategic imperatives BCE Inc. 2018 Annual Report Bell is deploying advanced broadband network access to communities large and small throughout Canada’s vast geography. In 2018, we began a challenging network build to deliver broadband Internet and wireless services to all 25 communities across the territory of Nunavut in partnership with BCE’s Northwestel. In Manitoba, Bell MTS is rolling out the latest Internet, TV and wireless services to urban centres, rural communities and remote locations alike with Bell fibre and LTE Advanced mobile coverage. Pond Inlet Qikiqtaaluk Region Nunavut 11 BCE Inc. 2018 Annual Report Strategic imperatives Accelerate wireless Canada’s best mobile network welcomed the most new net wireless customers of any provider in 2018, while our ongoing focus on expanding our wireless reach, speed and quality led to another year of industry firsts from Canada’s mobile innovation leader. With our superior network, the leading line-up of the top smartphones and unparalleled retail distribution reach, Bell gained the largest share of new postpaid and prepaid customers in the Canadian industry in 2018, with 479,811 net additions in the year bringing our total wireless customer base to more than 9.6 million. The high speed, quality and other advantages of Bell LTE attracted customers who want a better network that lets them do more with their mobile devices. With increasing data usage and higher customer satisfaction, Bell’s superior mobile network ensured the industry’s highest monthly blended ABPU (average billing per user) and continued reductions in customer churn throughout the year, even in the face of heightened competition and larger data plans that pressured overall industry revenue. With its low-cost plans for budget- conscious mobile customers now available in all 10 provinces, Lucky Mobile became the prepaid wireless growth leader in 2018. 12 Strategic imperatives BCE Inc. 2018 Annual Report Bell’s high-capacity wireless networks support a wide range of Smart City and public safety projects. Lucky Mobile Bell has re-energized the prepaid wireless business with Lucky Mobile, the low-cost wireless service that expanded to all 10 provinces in 2018. It was Bell’s first year of positive prepaid subscriber growth in a decade as the Lucky Mobile brand broke through to gain the most net new customers in the Canadian prepaid segment. 1 We introduced 38 new devices in 2018, including Samsung’s Galaxy Note series, LG’s G7, as well as Google’s Pixel 3 and Pixel 3 XL and Apple’s most advanced iPhone XS, iPhone XS Max and iPhone XR, and the Apple Watch Series 4. Bell was the only carrier in Canada and just one of 11 worldwide at Apple’s launch to offer Dual SIM capability that provides customers with the convenience of having 2 phone numbers on a single device. Bell maintains the largest retail distribution network of any wireless provider in the country with Bell, Virgin Mobile and Lucky Mobile stores and kiosks, Canada’s largest tech retailer The Source, and Glentel’s extensive number of Wirelesswave, Tbooth wireless and Wireless etc. locations. Mobile service innovation In addition to supporting Bell’s major Smart City platform projects, our wireless segment is delivering smart IoT technologies as we build the framework for a 5G future of connected cities, cars, homes and businesses. We partnered with Echologics to deliver an IoT Smart City solution for the City of Medicine Hat in Alberta to wirelessly monitor the city’s water pipeline network to help reduce water loss. We teamed with Icicle Technologies to provide food manufacturers across the country with a remote tracking and monitoring solution to enhance food safety. Superior Propane implemented a national fuel tank monitoring solution from Bell for its business and residential customers. Using thousands of IoT sensors from Bell IoT partner Otodata, the solution provides Superior Propane with a centralized view of its tank operations across the country. A new partnership with BeWhere and Trak-iT introduced Fleet Freedom, Canada’s first integrated fleet management and asset tracking solution, delivered exclusively over Bell’s LTE-M network. Bell was also the first to enable built-in Wi-Fi hotspots in Ford and Lincoln vehicles with Bell’s Connected Car Built ln service, providing on-the-go connectivity for up to 10 devices at a time and enabling data sharing across customer smartphone plans. Public safety communications Bell Mobility was awarded a contract by the Government of Manitoba to replace the province’s aging public safety communications service with a new digital 2-way mobile radio system for first responders. To be built over the next 3 years, the system will be owned and operated by Bell. We are completing an upgrade of the public safety radio service in Québec City with deployment planned in 2019. Customer data usage on Canada’s best national mobile network continues to grow. 13 BCE Inc. 2018 Annual Report Strategic imperatives Leverage wireline momentum Bell’s next-generation all-fibre network is delivering leading broadband Internet, TV and Smart Home services to Canadian consumers and bold new solutions for businesses, including leading innovations in the fast-growing Internet of Things (IoT) sector. Bell Smart Home Bell has quickly staked a leadership position in the connected home marketplace with the launch of the Bell Smart Home brand. Executed through strategic acquisitions, including AlarmForce Industries, and leveraging our scale in residential services, retail distribution, installation and customer service, Bell’s entry into the smart home market provides a range of monitoring, security and automation services to customers in the Atlantic region, Québec, Ontario and Manitoba. Bell Smart Home customers can remotely manage all their security and connected home services with an easy-to-use app. Bell expanded its connected home business in 2018 with the acquisition of AlarmForce Industries. Bell took broadband leadership to the next level in 2018 by expanding our all-fibre network to 4.6 million homes and commercial locations across 7 provinces. Our advanced fibre network enabled Bell to build on our position as Canada’s #1 provider of both TV and Internet services in 2018. Consumers are demanding increasing Internet speeds and capacity, and Bell delivered by attaining the highest overall Internet speed index ever recorded in Canada by PCMag, scoring 30% better than our nearest competitor in the Fastest ISPs of 2018: Canada report. Bell Residential and Small Business took its lead in Internet speed further in August, launching 1.5 Gigabit Internet service, the fastest available to the home in Canada. We’re also bringing smart and fast Wi-Fi to every room in the home with Whole Home Wi-Fi, the first to adapt to household usage patterns and to ensure all devices achieve the fastest speeds possible – and it can all be managed remotely with the new Bell Wi-Fi mobile app. Bell’s advanced Internet service is also a driver of growth for Alt TV, Canada’s first app-based live TV streaming service that requires no traditional set-top box and is available across Amazon, Apple and Google viewing platforms. Alt TV is another example of Bell Fibe TV innovation, which has enabled continued Bell television subscriber growth in an era of new technology choices and increasing global competition for viewers. Offering the most TV channels and on-demand content on any screen, the Fibe TV app introduced Download & Go to enable customers to download their recordings to their mobile devices to watch on the go, even without an Internet connection. Bell MTS significantly expanded the availability of Fibe TV in Manitoba, and became the first TV provider in the province to offer live 4K TV programming. 14 Strategic imperatives BCE Inc. 2018 Annual Report Bell Business Markets is the communications provider of choice for Canadian business and government. We offer superior broadband connectivity, the latest enterprise data and security products, Canada’s largest network of data hosting centres, and the widest range of business services solutions. Business communications leader Accelerating performance by Bell Business Markets reflects both a strengthening economy and the growth of Bell’s superior broadband technology, enterprise data products and range of business services solutions. With the country’s largest network of 28 state-of-the-art data centres, Bell remains the leader in offering Canadian businesses the most advanced hosting and cloud computing facilities to support their operations. Business innovations include the launch of Bell’s Virtual Network Services platform, the first of its kind, offering enterprise customers a catalogue of on-demand network functions that reside securely in Bell’s private cloud. Bell was awarded a multi-year contract to operate Alberta’s SuperNet, a government-led initiative providing broadband connectivity to schools, hospitals, libraries and Internet service providers in communities throughout the province. With our acquisition of Calgary-based Axia NetMedia, Bell now connects 429 rural and urban Alberta centres to SuperNet. Bell’s network leadership has also been key to implementing the Smart City platform, which combines innovative IoT technology from Bell and partners with broadband fibre and mobile connectivity to improve municipal operational efficiency and enhance city services. Bell is a partner in Smart City initiatives with the Ontario cities Kingston, Markham, Orillia and St. Catharines; Medicine Hat, Alberta; Whitehorse, Yukon; and St. John’s, Newfoundland and Labrador. To support the growing number of businesses and governments employing IoT technology, Bell introduced Canada’s first managed security service to help protect their applications from evolving cyber threats. Television innovations like Alt TV enable Bell’s continued leadership in an evolving marketplace. 15 BCE Inc. 2018 Annual Report Strategic imperatives Expand media leadership Bell Media is meeting the changing needs of audiences by delivering new and innovative content and increasing digital viewing platforms and direct-to-consumer offerings. Bell Media continues to expand its leadership in TV, radio, digital media and out-of-home advertising by providing industry-first solutions for viewers and advertisers. Growing international competition and fast-evolving technologies have impacted how media is consumed and monetized. In a dynamic marketplace, Bell Media has the scale, the brands and the creative talent and resources to build on its position as Canada’s leading broadcasting and content creation company. Canada’s favourite TV CTV marked its 17th consecutive year as Canada’s most-watched network – the most consistent #1 performance of any network in North America – airing the country’s top fall shows, including #1 comedy The Big Bang Theory, #1 drama The Good Doctor and #1 new series The Conners. Among Canadian specialty channels, Star Trek: Discovery on Space was the #1 most-watched series while The Handmaid’s Tale on Bravo ranked #3. Discovery continues to distinguish itself with 3 of the top 6 Canadian series on specialty TV. Bell Media maintained its leadership position in Québec, with RDS, Super Écran, Canal D and Canal Vie ranking as 4 of the top 10 French specialty and pay channels among key viewer demographics. TSN finished 2018 as the most-watched specialty channel of any kind in Canada, powered by the FIFA World Cup, which reached 23.6 million Canadians on TSN and CTV; regional Canadiens, Jets, Leafs and Senators hockey; Raptors basketball; and NFL football. RDS also maintained its position as Canada’s top French-language sports network, with Montreal Canadiens hockey the channel’s most-watched programming, NFL football up 10% and FIFA World Cup reaching 3.7 million viewers. 16 Strategic imperatives BCE Inc. 2018 Annual Report Content creation partnerships Bell Media continued its focus on increasing access to premier content through strategic international partnerships, including Starz and BNN Bloomberg, which saw the rebranding of existing channels (TMN Encore and BNN) and increased digital presence. Bell Media also announced new partnerships with Sony Pictures Television to deliver movie content to new digital on-demand services, a long-term agreement for new and library content from VICE, and a partnership with Spotify that makes Bell Media’s original podcasts available on every major audio platform in the country. Bell Media joined forces with Groupe CH, ICM Partners and Howie Mandel to acquire comedy powerhouse Just For Laughs, and acquired a majority stake in Pinewood Toronto Studios, the largest purpose-built production studio in Canada. In-house and independent production arm Bell Media Studios greenlit 35 English-language projects with independent producers across the country and 97 original projects with Québec producers. Bell Media and partners received 203 Canadian Screen Awards nominations in 2018 including for homegrown hits and international success stories Letterkenny, Cardinal and Wynonna Earp. Smart data Bell Media smart data initiatives went to market this year with the launch of a new proprietary Strategic Audience Management tool (SAM). The data enhanced TV tool combines the powerful reach of linear television with the precision of digital targeting. This ongoing work in smart data by Bell Media’s sales and digital teams is generating incremental revenue and providing the foundation for future product builds. 17 Premier digital destination Bell Media launched the all-new Crave streaming service, providing current HBO programming to all Canadians with access to the Internet for the first time ever. Combining HBO Canada, TMN, Showtime, Starz and other premium content into a single service, Crave offers more Emmy® Award-winning TV programming than any other service in Canada. Now available from all major Canadian TV providers, Crave expanded to 2.3 million subscribers by the end of 2018. Bell Media’s digital universe grew further with the launch of new direct-to-consumer streaming offerings in sports, movies and short-form video. TSN Direct and RDS Direct allow subscribers to access TSN and RDS feeds exclusively through digital platforms. CTV Throwback and CTV Movies are free ad-supported, on-demand channels available on CTV.ca and the CTV app that deliver thousands of hours of entertainment. SnackableTV, Bell Media’s short-form video content hub, provides premium snack-sized pieces of content while offering a new environment for advertisers to connect with consumers. Bell Media remains Canada’s top radio broadcaster. In addition to 16.6 million local listeners tuning into Bell Media radio stations every week, more Canadians are accessing radio via Bell’s enhanced iHeartRadio Canada app, featuring more than 1,000 live radio stations and 10,000 podcasts. Astral, Bell Media’s out-of-home advertising division, strengthened its position with new programmatic partnerships, including alliances with Campsite and Vistar Media. These agreements make Astral’s 240 digital, large format and street furniture faces across Canada accessible through programmatic platforms, allowing digital marketers to take advantage of the power of out-of-home media. Bell Media is the Canadian leader across conventional, specialty, pay and streaming TV with high-profile properties like CTV, TSN, Bravo and the all-new Crave. BCE Inc. 2018 Annual Report Strategic imperatives Improve customer service At Bell, service innovation is what we do: building the best broadband network technology in Canada, offering exclusive services and the best in digital content, and working continuously to improve the customer service experience every day. The MyBell app was named the Best Telecommunications Mobile Application of the Year by the Web Marketing Association, which said the app “empowers Bell customers to manage their telecom bills and services on the go in a simple and intuitive mobile interface.” In 2018, we enhanced the MyBell app to enable customers to manage even more elements of their Internet and TV services, including updating channels and programming packages, ordering pay per view and on demand content or upgrading their receiver. In 2018, Virgin Mobile Canada ranked highest in overall customer care satisfaction in the J.D. Power Canada Wireless Customer Care Study. Cited for its outstanding service, including store, phone and online support options, Virgin took the top honours for the second consecutive year. For business customers, the Bell Business Portal’s self-serve centre was updated with a customizable dashboard that makes service orders and appointments, move requests and billing inquiries faster and more convenient than ever. Field services enhancements We also upgraded our Manage Your Appointment service, which enables customers to access real-time scheduling information about our Field Services technicians. Now customers can reschedule appointments online, communicate helpful information such as building entry codes and parking instructions directly to technicians, and provide instant feedback on their service experience. With these technological improvements and the hiring of almost 2,000 new field technicians to support the ongoing expansion of our all-fibre footprint, we accelerated residential installation appointments and improved our on-time performance. We offered appointments 33% earlier than in 2017, and technicians were on time for 97% of appointments, delivering an overall customer satisfaction rating of 94%. Bell techs also reduced the time for new fibre installations by 9% and the number of fibre repair visits by 6%. Bell’s leading investments in networks, services and content and in our service operations are focused on making it faster and easier for our customers to access Bell service. In 2018, our work to leverage new technology and tools for our call centre, online and field service teams, sharpen internal processes, and integrate strategic acquisitions into our service channels has supported leading subscriber growth, reduced customer churn and increased overall customer satisfaction. Self-serve innovation Bell continues to lead the development of self-serve technology that makes it more convenient for our customers to manage their accounts, including bill payment, service selection and monitoring of mobile and Internet data usage. The success of MyBell self-serve options have decreased customer operations costs by greatly reducing the volume of calls to our service centres, freeing up our representatives to spend more time managing complex requests. In 2018, customers visited our self-serve sites using the MyBell mobile app and MyBell.ca online tool 104 million times and conducted 13.4 million transactions. Mobile visits increased by 22%, while customer calls to our contact centres decreased by almost 3%. 18 Strategic imperatives BCE Inc. 2018 Annual Report With new enhancements to the Manage Your Appointment service, customers can reschedule appointments online, provide information directly to technicians and tell us about their service experience right away. 19 Supporting improved industry standards Bell actively took part in the CRTC’s 2018 hearings into telecommunications retail sales practices, which focused on ensuring best practices in customer sales across the Canadian industry. Bell proposed several new industry service standards, and we are pleased that the CRTC’s report endorsed some of these recommendations as best practices. Bell will continue to work constructively with the regulator and the broader Canadian industry to ensure our sector leads the way in delivering exceptional customer service. Virgin Mobile Canada was #1 in overall customer care satisfaction in the J.D. Power Canada Wireless Customer Care Study for the second consecutive year. BCE Inc. 2018 Annual Report Strategic imperatives Achieve a competitive cost structure Bell strives to operate as cost efficiently as possible in the dynamic and capital-intensive Canadian communications industry, managing legacy lines of business as we focus on broadband growth opportunities to deliver consistent financial performance in a highly competitive marketplace. A focus on achieving a competitive cost structure is fundamental to every decision Bell makes. Strategic cost management is central to delivering on our broadband investment and innovation strategy, maximizing value for our customers and continuing to return value to shareholders. Team members across every business segment are focused on innovative approaches to increase productivity and cost efficiency in our delivery of network and service innovations to consumers and business customers. These include the continued integration of strategic acquisitions, efficiencies in wireless connectivity and business solutions from the ongoing rollout of our all-fibre network, and new self-serve options that are reducing customer service costs. Cost discipline supported increases in adjusted EBITDA and relatively stable margin performance, despite customer retention and acquisition spending pressures in an increasingly competitive marketplace for wireless and wireline, and higher costs in our media segment for premium TV programming. Cost discipline is a key factor in our wireline segment’s ability to maintain a North American industry leading margin as we effectively manage revenue declines in our wireline voice and other legacy services. Enhancements to customer self-serve options available through the MyBell mobile app and online at MyBell.ca continue to decrease costs by significantly reducing the volume of service calls to our contact centres. Customers visited our self-serve channels 104 million times and completed 13.4 million transactions in 2018. Bell is highly effective at integrating strategic acquisitions into our national operations, enabling significant cost savings in network, customer service, marketing and corporate services. In 2018, BCE reduced management positions by approximately 700, which will deliver annualized cash savings of approximately $75 million, reflecting the operational synergies realized from our MTS, AlarmForce Industries, Axia NetMedia and other acquisitions. A focus on environmental responsibility is also delivering significant savings. Bell has reduced electricity consumption in our national operations by more than 30,000 Megawatt hours, and reduced fuel consumption across our service fleet by more than 500,000 litres through the use of telematics systems and eco-driving practices such as limiting idling. Bell Canada raised $1.5 billion in gross proceeds by issuing 7-year and 10-year medium-term note (MTN) debentures, and US$1.15 billion in gross proceeds from 30-year notes, lowering our after-tax cost of outstanding publicly issued debt securities to 3.1% and increasing the average term to maturity to approximately 11 years. BCE also made a $240 million voluntary pension plan contribution that further reinforced the solvency position of BCE’s defined benefit (DB) pension plans and reduced the amount of our future pension obligations. Named Best Telecommunications Mobile Application at the 2018 MobileWebAwards, the MyBell app enables customers to easily manage their Bell services. 20 2018 innovation highlights BCE Inc. 2018 Annual Report Innovation highlights Bell was first in Canada to achieve Gigabit mobile speeds on our LTE Advanced wireless network, and the first Internet provider to offer 1.5 Gbps access speeds on broadband fibre. 1 Gbps LTE-A Our all-fibre connections reached 4.6 million homes and businesses across 7 provinces while also laying the groundwork for fast and efficient 5G wireless network deployment. Bell was the only Canadian wireless provider among 11 worldwide to support new Dual SIM technology – 2 phone numbers on a single device – when Apple announced the next generation of iPhones. The Virtual Network Services platform is a Canadian first that provides business customers with a managed service for network functions residing securely in Bell’s private cloud. We delivered the highest consumer Internet overall speed index ever recorded in Canada in PCMag’s 2018 speed rankings, outpacing our nearest competitor by 30%. Furthering our leadership in connected car technology, Bell was the first Canadian wireless provider to launch built-in Wi-Fi hotspots in Ford and Lincoln vehicles. We reduced fuel consumption across the national Bell service fleet by more than 500,000 litres annually through the use of telematics systems and eco-driving practices. Bell Media expanded its content creation leadership and audience reach by partnering to acquire the legendary Just For Laughs comedy brand and Pinewood Toronto Studios, the largest purpose-built film and TV production facility in Canada. 21 BCE Inc. 2018 Annual Report Community investment Canada leads the world’s biggest conversation about mental health Bell Let’s Talk Day surpasses one billion total messages of support. The Bell Let’s Talk initiative has helped to transform how Canadians, and increasingly people around the world, think about mental health. Our latest Bell Let’s Talk Day saw messages of support surpass a total of 1 billion since the first event in 2011, while Bell’s funding commitment for mental health programs now exceeds $100 million over 10 years. Since 2010, Bell Let’s Talk has led the conversation about the impact of mental illness and the stigma that surrounds it while funding Canadian programs focused on our 4 mental health action pillars: anti-stigma, care and access, new research and workplace leadership. Each year on Bell Let’s Talk Day, we invite Canadians and people worldwide to focus fully on mental health, fight the stigma that holds back those who struggle with mental illness, heighten awareness of the need for action, and drive Bell’s funding for mental health programs that make a difference all year round. Bell’s investment in mental health is built on an initial $50-million, 5-year donation to launch Bell Let’s Talk in September 2010, plus funding based on engagement across communications platforms on Bell Let’s Talk Day every year since February 2011. Bell donates 5 cents for each of the millions of eligible calls, texts and social media interactions supporting mental health made each Bell Let’s Talk Day – and because it’s all about enabling the conversation, Bell donates at no cost to participants beyond what they would normally pay their service provider for phone or online access. Mental health milestones Bell Let’s Talk Day 2019 on January 30 achieved some major new milestones. First, we broke previous records with a total of 145,442,699 messages of support – social media interactions on Twitter, Facebook, Instagram and Snapchat, text messages, and mobile and long distance calls by Bell customers – resulting in a Bell donation to mental health of $7,272,134.95 for 2019. That brings the total number of interactions in our global mental health conversation to an incredible 1,013,915,275 since the first Bell Let’s Talk Day in 2011 – and, including our $50-million anchor donation, Bell’s total mental health funding to $100,695,763.75. Friends of Bell Let’s Talk The Bell Let’s Talk Day awareness campaign features the Friends of Bell Let’s Talk, Canadians from around the country who share their stories of living with mental illness, as well as an outstanding group of leaders from the worlds of sports and entertainment who serve as our spokespeople and community ambassadors. On Bell Let’s Talk Day 2019, these mental health champions hosted events, visited students and young people, and performed concerts, inspiring Canadians to speak out and take action in support of mental health. Communities around Canada demonstrated their engagement by raising Bell Let’s Talk flags at city halls, military bases and hockey games. The Bell Let’s Talk national campus campaign also grew to over 200 universities and colleges across Canada and almost 400 events and varsity games encouraging mental health conversations. Chris Johnson Queena Lau By sharing personal stories of living with mental illness, the Friends of Bell Let’s Talk offer a message of hope and recovery. They’re part of the growing Bell Let’s Talk team that invites all Canadians to join in the mental health conversation. Manon Charbonneau David K. Henry 22 Community investment BCE Inc. 2018 Annual Report New voices to grow the conversation Bell Let’s Talk all year round This year’s campaign really broke out on social media with the appearance of a group of major new influencers in our Bell Let’s Talk Day video. Alessia Cara, Anderson Cooper, Ellen DeGeneres, Lisa LaFlamme and Seth Rogen appeared along with Bell Let’s Talk team members Mike Babcock, Manon Charbonneau, Denni Clement, David K. Henry, Chris Johnson, Queena Lau, Howie Mandel and Souad Saidj in the English- language version. Adib Alkhalidey, Luc Bellemare, Sophie Cadieux, Guy Carbonneau, Véronique Cloutier, Gilbert Delorme, Jonathan Drouin, François Gagnon, Julien Lacroix, Marie-Mai, Herby Moreau and Alexandre Taillefer appeared in the French-language video with Étienne Boulay, Marie-Soleil Dion, Patricia Lemoine, Michel Mpambara and Stefie Shock from the Bell Let’s Talk team. #BellLetsTalk – the most used Canadian hashtag of all time – was once again the #1 trend on Twitter both in Canada and worldwide, driven by the engagement of prominent Canadian and international leaders, like Prime Minister Justin Trudeau and Governor General Julie Payette, as well as the Royal Family with a tweet of support for Bell Let’s Talk from Will and Kate, the Duke and Duchess of Cambridge, and Harry and Meghan, the Duke and Duchess of Sussex. Bell Let’s Talk supports a wide range of mental health programs each year, working with a total of more than 900 partner organizations across the country since the initiative began. In 2018, the Bell Let’s Talk Community Fund, which provides grants of up to $25,000 for grassroots mental health initiatives that increase access to care, doubled to $2 million annually and supported 120 organizations in every region. In the lead-up to this Bell Let’s Talk Day, we made new donations to several programs across the country. We joined with the Manitoba Government in a $1 million donation expanding mental health services for young people through the Strongest Families Institute, a Bell Let’s Talk partner that originated in the Atlantic provinces. Université du Québec à Montréal will use a $500,000 donation from Bell Let’s Talk to support suicide prevention research, while 3 Montréal organizations working to address the mental health challenges confronting homeless people will share $300,000. Another $300,000 donation to Ottawa’s Children’s Hospital of Eastern Ontario will reduce wait times for mental health care for young people. And Bell Let’s Talk’s dedicated fund for Indigenous mental health in Manitoba partnered with the City of Winnipeg to support Bear Clan Patrol with $200,000 for its mental health outreach to vulnerable people. To learn more, please visit Bell.ca/LetsTalk. 23 BCE Inc. 2018 Annual Report Bell archives 1918: Honouring the Bell employees who served our nation at war and at home When war broke out in 1914, Bell’s Board of Directors committed to keep the positions of all permanent Bell employees who joined Canada’s armed forces open for them. When the war ended in 1918, Bell began to welcome back the 750 team members who returned home from World War I. In 2018, as the world marked the 100th anniversary of the armistice that ended World War I at 11 am on November 11, Bell honoured the memory of our 109 employees (from Bell Canada, MTS, MT&T and NBTel) who never returned from the battlefields of Europe. The names of 16 of these Bell employees are among the more than 11,000 names of Canadian soldiers with no known graves inscribed on Canada’s Vimy Memorial, built on the famous ridge in France where nearly 3,600 Canadians fell in 1917 – including 7 of our Bell colleagues. In their memory, Bell was proud to support the new Vimy Ridge Education Centre, opened on the Centennial of the battle. A continuing legacy Ultimately, more than 3,500 Bell team members would enlist in the armed forces during World War I and World War II. By 1946, 40% of Bell team members were veterans, including many women who had broken new ground in the military. And during both wars, the entire Bell team was engaged in providing crucial communications services to the war effort on the home front as well. Today, Bell continues to enhance our workforce with the valuable skills and experience of military veterans, reservists and their spouses, providing meaningful career opportunities and easing the transition from military to civilian life. Since we joined the federal government’s Hire a Veteran program in 2013, almost 350 Canadian service men and women have signed on to the Bell team. Bell also supports the continued service of military members in the reserves with time off for military operations and training, holding their jobs for them just as we did in 1918. Mental health support Recognizing the lasting impact military operations can have on service members, veterans and their families, Bell Let’s Talk has been supporting mental health programs for them since the launch of the initiative in 2010. In 2012, we joined with the True Patriot Love Foundation to launch the Bell True Patriot Love Fund. By 2020, the fund will have provided $2 million in grants including 18 new grants announced in 2018 to support mental health programs in military communities across the country through almost 90 organizations. The Canadian Armed Forces (CAF) were an early Bell Let’s Talk partner, encouraging service members to take part in Bell Let’s Talk Day activities at bases across the country and talk openly about mental health. Each year, the CAF holds a panel discussion on mental health at a different location, which is webcast to service members no matter where they are. On Bell Let’s Talk Day 2019, Bell Let’s Talk flags flew at military establishments across the country. In recognition of Bell’s contributions to Canada’s military community, in 2018 the True Patriot Love Foundation presented Bell Let’s Talk with the annual Patriot Award. We’re proud to have 3 Canadian Armed Forces veterans on the Bell Let’s Talk team. Bruno Guévremont, Kelly Scanlan and Jonathan Thériault all served in Afghanistan and now share their stories of how they’ve struggled with and recovered from mental health issues. 24 Bell archives BCE Inc. 2018 Annual Report Bell employees from Montréal serving with the Royal Canadian Corps of Signals in England before heading to the front in 1916. Bell employees in Hamilton with their float in a World War I Victory Bond drive. BELL 1916 ANNUAL REPORT February 22, 1917 To the 31st of December, 657 of our employees had enlisted for Overseas Service, or 30% of our male employees of military age. Of this number, 348 have families or relatives dependent upon them. The Company continues to pay one-half of the salaries of enlisted employees to their dependents when they are not otherwise provided for. BELL 1918 ANNUAL REPORT February 27, 1919 Eight hundred and thirty-three of our employees enlisted for Military Service abroad, and 584 were still so serving at the close of the year. 79 have laid down their lives, 4 are missing or prisoners and 166 have been discharged from Military Services. The Company promised re-employment to all permanent employees in the service prior to the outbreak of war who enlisted, and this promise has been and will continue to be met. 25 BCE Inc. 2018 Annual Report Today just got better. 26 Table of contents Management’s discussion and analysis 1 Overview Introduction 1.1 1.2 About BCE 1.3 Key corporate developments 1.4 Capital markets strategy 1.5 Corporate governance and risk management 2 Strategic imperatives Invest in broadband networks and services 2.1 2.2 Accelerate wireless 2.3 2.4 2.5 2.6 Achieve a competitive cost structure Leverage wireline momentum Expand media leadership Improve customer service 3 Performance targets, outlook, assumptions and risks 3.1 BCE 2018 performance vs. guidance targets 3.2 Business outlook and assumptions 3.3 Principal business risks 4 Consolidated financial analysis Introduction 4.1 4.2 Customer connections 4.3 Operating revenues 4.4 Operating costs 4.5 Net earnings 4.6 Adjusted EBITDA 4.7 Severance, acquisition and other costs 4.8 Depreciation and amortization 4.9 Finance costs 4.10 Other expense 4.11 4.12 Net earnings attributable to common shareholders and EPS 4.13 Capital expenditures 4.14 Cash flows Income taxes 5 Business segment analysis 5.1 Bell Wireless 5.2 Bell Wireline 5.3 Bell Media 6 Financial and capital management 6.1 Net debt 6.2 Outstanding share data 6.3 Cash flows 6.4 6.5 6.6 Credit ratings Liquidity 6.7 Post-employment benefit plans Financial risk management 7 Selected annual and quarterly information 7.1 Annual financial information 7.2 Quarterly financial information 8 Regulatory environment 9 Business risks 28 29 29 31 34 35 38 41 41 42 43 44 45 45 46 46 46 47 50 50 51 52 52 53 53 54 54 55 55 56 56 57 57 58 58 63 70 75 75 75 76 78 78 80 81 83 83 85 88 93 10 Financial measures, accounting policies and controls 10.1 Our accounting policies 10.2 Non-GAAP financial measures and key performance indicators (KPIs) 10.3 Effectiveness of internal controls 100 100 109 112 BCE Inc. 2018 Annual Report Reports on internal controls 114 Management’s report on internal control over financial reporting 114 115 Report of independent registered public accounting firm Consolidated financial statements Management’s responsibility for financial reporting Report of independent registered public accounting firm Consolidated income statements Consolidated statements of comprehensive income Consolidated statements of financial position Consolidated statements of changes in equity Consolidated statements of cash flows Inventory Notes to consolidated financial statements Corporate information Significant accounting policies Business acquisitions and dispositions Segmented information Operating costs Severance, acquisition and other costs Interest expense Other expense Income taxes Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9 Note 10 Earnings per share Note 11 Trade and other receivables Note 12 Note 13 Contract assets and liabilities Note 14 Contract costs Note 15 Property, plant and equipment Note 16 Note 17 Note 18 Other non-current assets Note 19 Goodwill Note 20 Trade payables and other liabilities Note 21 Debt due within one year Note 22 Long-term debt Note 23 Provisions Note 24 Post-employment benefit plans Note 25 Other non-current liabilities Note 26 Financial and capital management Note 27 Share capital Note 28 Share-based payments Note 29 Additional cash flow information Note 30 Remaining performance obligations Note 31 Commitments and contingencies Note 32 Related party transactions Note 33 Significant partly-owned subsidiaries Note 34 Adoption of IFRS 15 Intangible assets Investments in associates and joint ventures Board of directors Executives Investor information 116 116 117 118 118 119 120 121 122 122 122 132 135 137 137 138 138 139 140 141 141 141 141 142 143 144 145 145 146 146 148 149 150 154 154 158 159 162 163 163 164 165 166 170 171 172 s t n e t n o c f o e b a T l 27 BCE Inc. 2018 Annual Report Management’s discussion and analysis In this management’s discussion and analysis (MD&A), we, us, our, BCE and the company mean, as the context may require, either BCE Inc. or, collectively, BCE Inc., Bell Canada, their subsidiaries, joint arrangements and associates. Bell means, as the context may require, either Bell Canada or, collectively, Bell Canada, its subsidiaries, joint arrangements and associates. MTS means, as the context may require, until March 17, 2017, either Manitoba Telecom Services Inc. or, collectively, Manitoba Telecom Services Inc. and its subsidiaries; and Bell MTS means, from March 17, 2017, the combined operations of MTS and Bell Canada in Manitoba. All amounts in this MD&A are in millions of Canadian dollars, except where noted. Please refer to section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) on pages 109 to 112 for a list of defined non-GAAP financial measures and key performance indicators. Please refer to BCE’s audited consolidated financial statements for the year ended December 31, 2018 when reading this MD&A. Effective January 1, 2018, we applied International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers, as described in section 10.1, Our accounting policies, retrospectively to each period in 2017 previously reported. We have also reclassified some amounts from previous periods to make them consistent with the presentation for the current period. In preparing this MD&A, we have taken into account information available to us up to March 7, 2019, the date of this MD&A, unless otherwise stated. You will find additional information relating to BCE, including BCE’s audited consolidated financial statements for the year ended December 31, 2018, BCE’s annual information form for the year ended December 31, 2018, dated March 7, 2019 (BCE 2018 AIF) and recent financial reports, on BCE’s website at BCE.ca, on SEDAR at sedar.com and on EDGAR at sec.gov. This MD&A comments on our business operations, performance, financial position and other matters for the two years ended December 31, 2018 and 2017. CAUTION REGARDING FORWARD-LOOKING STATEMENTS BCE’s 2018 annual report, including this MD&A and, in particular, but without limitation, section 1.4, Capital markets strategy, section 2, Strategic imperatives, section 3.2, Business outlook and assumptions, section 5, Business segment analysis and section 6.7, Liquidity of this MD&A, contains forward-looking statements. These forward-looking statements include, without limitation, statements relating to our projected financial performance for 2019, BCE’s dividend growth objective, common share dividend payout policy and 2019 annualized common share dividend, BCE’s financial policy targets and our intended progress towards meeting those targets, the sources of liquidity we expect to use to meet our anticipated 2019 cash requirements, our expected 2019 post-employment benefit plans funding, our network deployment and capital investment plans, BCE’s business outlook, objectives, plans and strategic priorities, and other statements that do not refer to historical facts. A statement we make is forward-looking when it uses what we know and expect today to make a statement about the future. Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, project, strategy, target and other similar expressions or future or conditional verbs such as aim, anticipate, believe, could, expect, intend, may, plan, seek, should, strive and will. All such forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities laws and of the United States (U.S.) Private Securities Litigation Reform Act of 1995. Unless otherwise indicated by us, forward-looking statements in BCE’s 2018 annual report, including in this MD&A, describe our expectations as at March 7, 2019 and, accordingly, are subject to change after that date. Except as may be required by applicable securities laws, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements, by their very nature, are subject to inherent risks and uncertainties and are based on several assumptions, both general and specific, which give rise to the possibility that actual results or events could differ materially from our expectations expressed in, or implied by, such forward-looking statements and that our business outlook, objectives, plans and strategic priorities may not be achieved. These statements are not guarantees of future performance or events, and we caution you against relying on any of these forward-looking statements. Forward-looking statements are presented in BCE’s 2018 annual report, including in this MD&A, for the purpose of assisting investors and others in understanding our objectives, strategic priorities and business outlook as well as our anticipated operating environment. Readers are cautioned, however, that such information may not be appropriate for other purposes. We have made certain economic, market and operational assumptions in preparing the forward-looking statements contained in BCE’s 2018 annual report and, in particular, but without limitation, the forward-looking statements contained in the previously mentioned sections of this MD&A. These assumptions include, without limitation, the assumptions described in the various sections of this MD&A entitled Business outlook and assumptions, which sections are incorporated by reference in this cautionary statement. We believe that our assumptions were reasonable at March 7, 2019. If our assumptions turn out to be inaccurate, our actual results could be materially different from what we expect. Important risk factors including, without limitation, competitive, regulatory, security, technological, operational, economic, financial and other risks that could cause actual results or events to differ materially from those expressed in, or implied by, the previously-mentioned forward-looking statements and other forward-looking statements contained in BCE’s 2018 annual report, and in particular in this MD&A, include, but are not limited to, the risks described or referred to in section 9, Business risks, which section is incorporated by reference in this cautionary statement. We caution readers that the risks described in the previously mentioned section and in other sections of this MD&A are not the only ones that could affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. Except as otherwise indicated by us, forward-looking statements do not reflect the potential impact of any special items or of any dispositions, monetizations, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after March 7, 2019. The financial impact of these transactions and special items can be complex and depends on facts particular to each of them. We therefore cannot describe the expected impact in a meaningful way, or in the same way we present known risks affecting our business. A & D M 28 1 Overview Effective January 1, 2018, we applied IFRS 15, Revenue from Contracts with Customers, as described in section 10.1, Our accounting policies, retrospectively to each period in 2017 previously reported. We have also reclassified some amounts from previous periods to make them consistent with the presentation for the current period. BCE Inc. 2018 Annual Report 1.1 Introduction AT A GLANCE BCE is Canada’s largest communications company, providing residential, business and wholesale customers with a wide range of solutions for all their communications needs. BCE’s shares are publicly traded on the Toronto Stock Exchange and on the New York Stock Exchange (TSX, NYSE: BCE). Our results are reported in three segments: Bell Wireless, Bell Wireline and Bell Media. Bell Wireless provides wireless voice and data communications products and services to our residential, small and medium-sized business and large enterprise customers across Canada. Bell Wireline provides data, including Internet access and Internet protocol television (IPTV), local telephone, long distance, as well as other communications services and products to our residential, small and medium-sized business and large enterprise customers, primarily in Ontario, Québec, the Atlantic provinces and Manitoba, while satellite television (TV) service and connectivity to business customers are available nationally across Canada. In addition, this segment includes our wholesale business, which buys and sells local telephone, long distance, data and other services from or to resellers and other carriers. Bell Media provides conventional TV, specialty TV, pay TV, streaming services, digital media services, radio broadcasting services and out-of-home (OOH) advertising services to customers nationally across Canada. BCE is Canada’s largest communications company BCE’s business segments At December 31, 2018 BCE Bell Wireless Bell Wireline Bell Media We also hold investments in a number of other assets, including: • a 28% indirect equity interest in Maple Leaf Sports & Entertainment Ltd. (MLSE) • a 50% indirect equity interest in Glentel Inc. (Glentel) • an 18.4% indirect equity interest in entities that operate the Montreal Canadiens Hockey Club, evenko and the Bell Centre in Montréal, Québec, as well as Place Bell in Laval, Québec 29 MD&AOverview1 BCE Inc. 2018 Annual Report BCE CONSOLIDATED RESULTS BCE 2018 Operating revenues $23,468 million +3.1% vs. 2017 BCE 2018 Net earnings $2,973 million (2.5%) vs. 2017 BCE 2018 Adjusted EBITDA (1) $9,535 million +2.7% vs. 2017 BCE 2018 Net earnings attributable to common shareholders BCE 2018 Adjusted net earnings (1) $2,785 million (2.8%) vs. 2017 $3,151 million +3.0% vs. 2017 BCE 2018 Cash flows from operating activities $7,384 million +0.4% vs. 2017 BCE 2018 Free cash flow (1) $3,567 million +4.4% vs. 2017 BCE CUSTOMER CONNECTIONS Wireless (2) (3) Total +4.8% 9.6 million subscribers at the end of 2018 OUR GOAL High-speed Internet (2) (4) TV (4) Residential network access services (NAS) lines (4) (5) +3.8% 3.9 million subscribers at the end of 2018 +0.7% 2.9 million subscribers at the end of 2018 (7.5%) 3.0 million subscribers at the end of 2018 Our goal is to be recognized by customers as Canada’s leading communications company. Our primary business objectives are to grow our subscribers profitably and to maximize revenues, operating profit, free cash flow and return on invested capital by further enhancing our position as the foremost provider in Canada of comprehensive communications services to residential, business and wholesale customers and as Canada’s premier content creation company. We seek to take advantage of opportunities to leverage our networks, infrastructure, sales channels, and brand and marketing resources across our various lines of business to create value for both our customers and other stakeholders. Our strategy is centred on our disciplined focus and execution of six strategic imperatives. The six strategic imperatives that underlie BCE’s business plan are: 1 Invest in broadband networks and services 4 Expand media leadership 2 Accelerate wireless 3 Leverage wireline momentum 5 Improve customer service 6 Achieve a competitive cost structure (1) Adjusted EBITDA, adjusted net earnings and free cash flow are non-GAAP financial measures and do not have any standardized meaning under International Financial Reporting Standards (IFRS). Therefore, they are unlikely to be comparable to similar measures presented by other issuers. See section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) – Adjusted EBITDA and adjusted EBITDA margin, Adjusted net earnings and adjusted EPS and Free cash flow and dividend payout ratio in this MD&A for more details, including reconciliations to the most comparable IFRS financial measure. (2) At the beginning of Q1 2018, we adjusted our postpaid wireless subscriber base to remove 16,116 subscribers with a corresponding increase to our high-speed Internet subscribers to reflect the transfer of fixed wireless Internet subscribers. (3) At the beginning of Q4 2018, we adjusted our postpaid wireless subscriber base to remove 20,000 subscribers that we divested to Xplornet Communications Inc. (Xplornet) as a result of BCE’s acquisition of MTS. (4) At the beginning of Q1 2018, our high-speed Internet subscriber base was increased by 19,835, our IPTV by 14,599 and our residential NAS by 23,441, mainly as a result of a small acquisition made in Q1 2018. (5) As of January 1, 2018, business NAS was removed from our NAS subscriber base due to its declining relevance as a KPI given migrations from voice to Internet protocol (IP) result in NAS losses without a corresponding decline in revenues. Previously reported periods were retroactively adjusted. 30 MD&AOverview1 1.2 About BCE We report the results of our operations in three segments: Bell Wireless, Bell Wireline and Bell Media. We describe our product lines by segment below, to provide further insight into our operations. BCE Inc. 2018 Annual Report OUR PRODUCTS AND SERVICES Bell Wireless SEGMENT DESCRIPTION • Provides integrated digital wireless voice and data communications products and services to residential and business customers across Canada • Includes the results of operations of Bell Mobility Inc. (Bell Mobility) and wireless-related product sales from our wholly-owned subsidiary, national consumer electronics retailer, The Source (Bell) Electronics Inc. (The Source) OUR BRANDS INCLUDE OUR NETWORKS AND REACH OUR PRODUCTS AND SERVICES We hold wireless spectrum licences, with holdings across various spectrum bands and regions across Canada, totalling more than 4.8 billion megahertz population (MHz-Pop), corresponding to an average of approximately 137 MHz of spectrum per Canadian. • Voice and data plans: available on either postpaid or prepaid options, providing fast Internet access for video, social networking, messaging and mobile applications, as well as a host of call features • Specialized plans: for tablets, mobile Internet, smartwatches and Connected Car • Extensive selection of devices: leading 4G LTE and LTE-A smartphones and tablets, mobile Internet hubs and sticks, mobile Wi-Fi devices and connected things (smartwatches, Bell Connected Car, trackers, smart home, lifestyle products and virtual reality) • Mobile content: over 40 live and on-demand channels on smartphones and tablets • Travel: roaming services with other wireless service providers in more than 230 outbound destinations worldwide with LTE roaming in 178 outbound destinations, Roam Better feature and Travel Passes • Mobile business solutions: push-to-talk, field service management, worker safety and mobility management • Internet of Things (IoT) solutions: asset management, smart buildings, smart cities, fleet management and other IoT services The vast majority of our cell towers are connected with fibre, the latest network infrastructure technology, for a more reliable connection. Our Fourth Generation (4G) Long-term Evolution (LTE) and LTE Advanced (LTE-A) nationwide wireless broadband networks are compatible with global standards and deliver high-quality and reliable voice and high- speed data services to virtually all of the Canadian population. • LTE coverage of 99% of the Canadian population coast to coast, with LTE-A covering approximately 91% of the Canadian population at December 31, 2018 • Expansion of our LTE and LTE-A services is supported by continued repurposing of wireless spectrum to increase capacity and coverage • In-building coverage improvements deliver a stronger LTE signal • LTE-A provides peak theoretical mobile data access download speeds that exceed 1 (1) Gigabit per second (Gbps) (expected average speeds of 25 to 220 Megabits per second (Mbps)), while LTE offers speeds up to 150 Mbps (typical speeds of 18 to 40 Mbps) (2) • Reverts to the High-speed packet access plus (HSPA+) network outside LTE coverage areas, with speeds up to 42 Mbps (typical speeds of 7 to 14 Mbps) • International voice and data roaming capabilities in more than 230 outbound destinations, including LTE roaming in 178 outbound destinations. We manage 17,000 wireless fidelity (Wi-Fi) access points at enterprise customer locations. We have more than 2,360 retail points of distribution across Canada, including approximately 1,360 Bell-branded stores and The Source locations, Glentel-operated stores (WIRELESSWAVE, Tbooth wireless and WIRELESS etc.) as well as other third-party dealer and retail locations. (1) Peak theoretical download speeds that exceed 1 Gbps are currently offered in Kingston and Toronto, with more to come. (2) Network speeds vary with location, signal and customer device. Compatible device required. 31 MD&AOverview1 OUR BRANDS INCLUDE BCE Inc. 2018 Annual Report Bell Wireline SEGMENT DESCRIPTION • Provides data, including Internet access and IPTV, voice, comprising local telephone and long distance, as well as other communications services and products to residential, small and medium-sized business and large enterprise customers, primarily in Ontario, Québec, the Atlantic provinces and Manitoba, while satellite TV service and connectivity to business customers are available nationally across Canada. We also offer competitive local exchange carrier (CLEC) services in Alberta and British Columbia. • Includes the results of our wholesale business, which buys and sells local telephone, long distance, data and other services from or to resellers and other carriers, and the wireline operations of Northwestel Inc. (Northwestel), which provides telecommunications services in Canada’s Northern Territories • Includes wireline-related product sales from The Source OUR NETWORKS AND REACH OUR PRODUCTS AND SERVICES • Extensive local access network in Ontario, Québec, the Atlantic provinces and Manitoba, as well as in Canada’s Northern Territories • Broadband fibre network, consisting of fibre-to-the-node (FTTN) and fibre-to-the-premise (FTTP) locations, covering 9.5 million homes and businesses in Ontario, Québec, the Atlantic provinces and Manitoba. Our FTTP direct fibre footprint encompassed approximately 4.6 million homes and commercial locations at the end of 2018, representing the largest FTTP footprint in Canada. • Largest IP multi-protocol label switching footprint of any Canadian provider, enabling us to offer business customers a virtual private network (VPN) service for IP traffic and to optimize bandwidth for real-time voice and TV • Largest data centre footprint in Canada with 28 locations in eight provinces, enabling us to offer data centre co-location and hosted services to business customers across Canada • Approximately 1,360 Bell-branded stores and The Source locations across Canada RESIDENTIAL • TV: IPTV services (Fibe TV and Alt TV) and satellite TV service. Bell Fibe TV provides extensive content options with Full high-definition (HD) and 4K Resolution (4K) Whole Home personal video recorder (PVR), 4K Ultra HD programming, on-demand content and innovative features including wireless receivers, the Fibe TV app, Restart and access to Crave, Netflix and YouTube. Alt TV app-based live TV streaming service offers up to 500 live and on-demand channels on laptops, smartphones, tablets, Apple TV, Amazon Fire TV and other devices with no traditional TV set-top box (STB) required. • Internet: high-speed Internet access through fibre optic broadband technology or digital subscriber line (DSL) with a wide range of options, including Whole Home Wi-Fi, unlimited usage, security services and mobile Internet. Our Internet service, marketed as Fibe Internet, offers download speeds up to 1.5 Gbps with FTTP or 100 Mbps with FTTN. We also offer Internet service under the Virgin Mobile brand offering download speeds up to 100 Mbps. • Home Phone: local telephone service, long distance and advanced calling features • Smart Home: home security, monitoring and automation services from Bell Smart Home in Ontario, Québec and Atlantic Canada and from AAA Security, a Bell MTS company, in Manitoba • Bundles: multi-product bundles of TV, Internet and home phone services with monthly discounts BUSINESS • Internet and private networks: business Internet, Ethernet, IP VPN, Wavelength, global network solutions, virtual network services, managed Wi-Fi • Communications: IP telephony, local and long distance, audio, video and web conferencing and webcasting, contact centre solutions • Cloud and data centre: cloud computing, cloud services, backup and disaster recovery, co-location hosting, virtual data centre • Other: security, managed services, professional services 32 MD&AOverview1 BCE Inc. 2018 Annual Report OUR BRANDS INCLUDE Bell Media SEGMENT DESCRIPTION • Canada’s leading content creation company with premier assets in video, radio, OOH advertising and digital media • Revenues are derived primarily from advertising and subscriber fees • Conventional TV, radio, OOH and digital media revenues are derived from advertising • Specialty TV revenue is generated from subscription fees and advertising • Pay TV revenue is derived from subscription fees OUR ASSETS AND REACH VIDEO • 30 conventional TV stations, including CTV, Canada’s #1 TV network for 17 consecutive years • 33 specialty and Pay TV channels, including TSN, Canada’s most- watched specialty TV channel and RDS, the top French-language sports network • Three direct-to-consumer streaming services, including Crave, the • SHOWTIME: long-term content licensing and trademark agreement for past, present and future SHOWTIME-owned programming • STARZ: long-term agreement with Lionsgate bringing U.S. premium pay TV service STARZ to Canada • iHeartRadio: exclusive partnership for digital and streaming music services in Canada OTHER ASSETS • Majority stake in Pinewood Toronto Studios, the largest purpose-built exclusive home of HBO in Canada production studio in Canada RADIO • 109 licensed radio stations in 58 markets across Canada OOH ADVERTISING • Network of more than 31,000 advertising faces in British Columbia, • Partnership in Just for Laughs, the live comedy event and TV producer • Equity interest in Dome Productions Partnership, one of North America’s leading providers of sports and other event production and broadcast facilities Alberta, Ontario, Québec and Nova Scotia DIGITAL MEDIA • More than 200 websites and more than 30 apps BROADCAST RIGHTS • Sports: long-term media rights to key sports properties and official Canadian broadcaster of the Super Bowl, Grey Cup and International Ice Hockey Federation (IIHF) World Junior Championship. Live sports coverage also includes the Toronto Maple Leafs, Montreal Canadiens, Winnipeg Jets and Ottawa Senators, Canadian Football League (CFL), National Football League (NFL), National Basketball Association (NBA), Major League Soccer (MLS), Fédération Internationale de Football Association (FIFA) World Cup events, Curling’s Season of Champions, Major League Baseball (MLB), Golf’s Majors, Monster Energy NASCAR Cup Series, Formula One, Grand Slam Tennis, Ultimate Fighting Championship (UFC), National Collegiate Athletic Association (NCAA) March Madness and more. • HBO: long-term agreement to deliver all current-season, past-season and library HBO programming in Canada exclusively on our linear, on-demand and over-the-top (OTT) platforms OUR PRODUCTS AND SERVICES • Varied and extensive array of TV programming to broadcast distributors across Canada • Advertising on our TV, radio, OOH, and digital media properties to both local and national advertisers across a wide range of industry sectors • Crave subscription on-demand TV streaming service offering a large collection of premium content in one place, including HBO, SHOWTIME and STARZ programming, on STBs, mobile devices, Apple TV, other streaming devices and online. Crave is offered through a number of Canadian TV providers and is available directly to all Canadian Internet subscribers as an OTT service. • TSN Direct and RDS Direct streaming services offering live and on-demand TSN and RDS content directly to consumers through a monthly subscription on computers, tablets, mobile devices, Apple TV and other streaming devices • Mobile TV service with live and on-demand access to content from our conventional TV networks, CTV and CTV Two, BNN Bloomberg, TSN, RDS and other brands in news, sports and entertainment, is offered on commercial terms to all Canadian wireless providers 33 MD&AOverview1 BCE Inc. 2018 Annual Report Other BCE investments BCE also holds investments in a number of other assets, including: • a 28% indirect equity interest in MLSE, a sports and entertainment company that owns several sports teams, including the Toronto Maple Leafs, the Toronto Raptors, Toronto FC and the Toronto Argonauts, as well as real estate and entertainment assets in Toronto • a 50% indirect equity interest in Glentel, a Canadian-based dual-carrier, multi-brand mobile products distributor • an 18.4% indirect equity interest in entities that operate the Montreal Canadiens Hockey Club, evenko (a promoter and producer of cultural and sports events) and the Bell Centre in Montréal as well as Place Bell in Laval, Québec OUR PEOPLE EMPLOYEES At the end of 2018, our team comprised 52,790 employees, an increase of 1,111 employees compared to the end of 2017, due primarily to call centre hiring and acquisitions, partly offset by natural attrition, retirements and workforce reductions. Approximately 44% of total BCE employees were represented by labour unions at December 31, 2018. BCE 2017 employees BCE 2018 employees 13% 13% 51,679 74% 13% Bell Wireless 74% Bell Wireline 13% Bell Media 12% 12% 52,790 76% 12% Bell Wireless 76% Bell Wireline 12% Bell Media BELL CODE OF BUSINESS CONDUCT The ethical business conduct of our people is core to the integrity with which we operate our business. The Bell Code of Business Conduct sets out specific expectations and accountabilities, providing employees with practical guidelines to conduct business in an ethical manner. Our commitment to the Code of Business Conduct is renewed by employees each year in an ongoing effort to ensure that all employees are aware of, and adhere to, Bell’s standards of conduct. 1.3 Key corporate developments MIRKO BIBIC APPOINTED AS CHIEF OPERATING OFFICER On October 4, 2018, BCE appointed Mirko Bibic as Chief Operating Officer (COO) for BCE and Bell Canada. As COO, Mr. Bibic is leveraging his deep knowledge of Bell’s business and his experience in executing major corporate initiatives to lead the company’s largest customer-facing business units. Mr. Bibic also continues to lead legal and regulatory strategy for the BCE group of companies. Mr. Bibic has been a key driver in the success of Bell’s broadband investment and innovation strategy as Executive Vice President of Corporate Development. This includes his oversight of strategic mergers and acquisitions transactions such as the acquisitions of Astral Media Inc. and MTS, Bell’s participation in multiple wireless spectrum auctions, and a wide range of other investment and partnership initiatives. ACQUISITION OF AXIA NETMEDIA On August 31, 2018, BCE completed its acquisition of Axia NetMedia Corporation (Axia), the Calgary-based operator of SuperNet, the Alberta broadband network connecting thousands of provincial and municipal offices, Indigenous communities, schools, libraries, healthcare institutions, businesses and Internet service providers throughout the province. In addition to the multi-year contract to supply all SuperNet services, which was awarded to Bell on July 3, 2018, Bell now owns and operates Axia network assets connecting a total of 402 rural Alberta communities, along with the 27 urban areas already connected to SuperNet by Bell. The acquisition also creates new opportunities to provide advanced solutions in security, data centres and unified communications to Alberta-based and national enterprise customers and Internet service providers in the province. 34 MD&AOverview1 BELL LET’S TALK DAY PASSES 1 BILLION TOTAL MESSAGES, $100 MILLION IN BELL MENTAL HEALTH FUNDING Bell Let’s Talk Day on January 30, 2019, set new records with 145,442,699 text messages, mobile calls and long distance calls by our customers and social media messages of support for mental health, taking total interactions since the first Bell Let’s Talk Day in 2011 to 1,013,915,275. Canadians everywhere, including leaders like Prime Minister Justin Trudeau, and people worldwide, including influencers like Anderson Cooper and Ellen DeGeneres, helped spread the mental health message across social media. With a donation of 5 cents for each interaction, Bell’s funding commitment grew by $7,272,134.95 to a total of $100,695,763.75 since 2010 for anti-stigma and mental health care, research and workplace initiatives throughout Canada. BCE Inc. 2018 Annual Report RECOGNITION OF BELL’S ENVIRONMENTAL LEADERSHIP Bell was named one of Canada’s Greenest Employers by Canada’s Top 100 Employers program for the second consecutive year in 2018. The award recognizes Bell’s focus on minimizing our environmental impact, our leadership in implementing an ISO 14001 certified Environmental Management System and the success of our ongoing initiatives to reduce waste and save energy. The following are some highlights from 2017: • At Bell offices across Canada, we reduced electricity consumption by over 30,000 Megawatt hours (MWh), enough to power 3,000 homes for a year • We reduced fuel consumption by more than 500,000 litres by using telematics systems in 85% of Bell vehicles and following eco-driving practices such as limiting idling • We diverted 64% of our waste, including 100 tonnes of computer equipment, from landfills through reuse and recycling programs • We recovered 200,536 phones through the Bell Blue Box program, which donates proceeds to mental health organizations across Canada as part of Bell Let’s Talk BELL NAMED ONE OF CANADA’S BEST DIVERSITY EMPLOYERS For the second year in a row, Bell was named one of Canada’s Best Diversity Employers in Mediacorp’s 2018 report on workplace diversity and inclusion. The award recognizes Bell’s commitment to providing an inclusive and accessible workplace that reflects Canada’s diversity and highlights our wide range of initiatives to support women, persons with disabilities, Aboriginal people, visible minorities and other groups. 1.4 Capital markets strategy We seek to deliver sustainable shareholder returns through consistent dividend growth. This objective is underpinned by continued growth in free cash flow and a strong balance sheet, supporting a healthy level of ongoing capital investment on advanced broadband networks and services that are essential to driving the long-term growth of our business. DIVIDEND GROWTH AND PAYOUT POLICY Dividend growth +117% Since Q4 2008 2019 dividend increase Dividend payout policy +5% to $3.17 per common share 65%-75% of free cash flow On February 7, 2019, we announced a 5%, or 15 cents, increase in the annualized dividend payable on BCE’s common shares for 2019 to $3.17 per share from $3.02 per share in 2018, starting with the quarterly dividend payable on April 15, 2019. This represents BCE’s 15th increase to its annual common share dividend since the fourth quarter of 2008, representing a total increase of 117%. This is BCE’s 11th consecutive year of 5% or better dividend growth. Our objective is to seek to achieve dividend growth while maintaining our dividend payout ratio (1) within the target policy range of 65% to 75% of free cash flow and balancing our strategic business priorities. BCE’s dividend payout policy, increases in the common share dividend and the declaration of dividends are subject to the discretion of the BCE board of directors (BCE Board or Board) and, consequently, there can be no guarantee that BCE’s dividend policy will be maintained, that the dividend on common shares will be increased or that dividends will be declared. We have a strong alignment of interest between shareholders and our management’s equity-based long-term incentive compensation plan. The vesting of performance share units depends on the realization of our dividend growth policy, while stock options reflect our objective to increase the share price for our shareholders. (1) Dividend payout ratio is a non-GAAP financial measure and does not have any standardized meaning under IFRS. Therefore, it is unlikely to be comparable to similar measures presented by other issuers. See section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) – Free cash flow and dividend payout ratio for more details. 35 MD&AOverview1 BCE Inc. 2018 Annual Report Best practices adopted by BCE for executive compensation USE OF LIQUIDITY • Stringent share ownership requirements • Emphasis on pay-at-risk for executive compensation • Double trigger change-in-control policy • Anti-hedging policy on share ownership and incentive compensation • Clawbacks for the President and Chief Executive Officer (CEO) and all Executive Vice-Presidents as well as all options holders • Caps on BCE supplemental executive retirement plans (SERPs) and annual bonus payouts, in addition to mid-term and long-term incentive grants • Vesting criteria fully aligned to shareholder interests Our dividend payout policy allows BCE to retain a high level of free cash flow after payment of dividends on common shares. Consistent with our capital markets objective to deliver sustainable shareholder returns through dividend growth, while maintaining appropriate levels of capital investment, investment-grade credit ratings and considerable overall financial flexibility, we deploy amounts of remaining free cash flow, after payment of dividends on common shares, in a balanced manner and on uses that include, but are not limited to: • Financing of strategic acquisitions and investments (including wireless spectrum purchases) that support the growth of our business • Debt reduction • Voluntary contributions to BCE’s defined benefit (DB) pension plans to improve the funded position of the plans and reduce the use of letters of credit for funding deficits • Share buybacks through normal course issuer bid (NCIB) programs In 2018, free cash flow, after payment of dividends on common shares, in the amount of $888 million, down from $906 million in 2017, was directed towards a $240 million voluntary pension plan contribution to better align the funded status of a number of BCE’s subsidiary DB plans with Bell Canada’s; the funding of various acquisitions, including AlarmForce Industries Inc. (AlarmForce) and Axia; and a $175 million repurchase of common shares through a NCIB program. TOTAL SHAREHOLDER RETURN PERFORMANCE Five-year total shareholder return (1) +50.2% 2014–2018 One-year total shareholder return (1) (5.6%) 2018 FIVE-YEAR CUMULATIVE TOTAL VALUE OF A $100 INVESTMENT (2) DECEMBER 31, 2013 – DECEMBER 31, 2018 $200 $175 $150 $125 $100 $75 This graph compares the yearly change in the cumulative annual total shareholder return of BCE common shares against the cumulative annual total return of the S&P/TSX Composite Index (3), for the five-year period ending December 31, 2018, assuming an initial investment of $100 on December 31, 2013 and the quarterly reinvestment of all dividends. 2013 2014 2015 2016 2017 2018 BCE common shares S&P/TSX Composite Index (1) The change in BCE’s common share price for a specified period plus BCE common share dividends reinvested, divided by BCE’s common share price at the beginning of the period. (2) Based on BCE’s common share price on the Toronto Stock Exchange (TSX) and assumes the reinvestment of dividends. (3) As the headline index for the Canadian equity market, the S&P/TSX Composite Index is the primary gauge against which to measure total shareholder return for Canadian-based, TSX-listed companies. 36 MD&AOverview1 BCE Inc. 2018 Annual Report STRONG CAPITAL STRUCTURE BCE’s balance sheet is underpinned by a healthy liquidity position and an investment-grade credit profile, providing the company with a solid financial foundation and a high level of overall financial flexibility. BCE is well-positioned with an attractive long-term debt maturity profile and no requirements to repay publicly issued debt securities until the second quarter of 2020. We continue to monitor the capital markets for opportunities where we can further reduce our cost of debt and optimize our cost of capital. We seek to proactively manage financial risk in terms of currency exposure of our U.S. dollar-denominated purchases, as well as equity risk exposure under BCE’s long-term equity-based incentive plans and interest rate and foreign currency exposure under our various debt instruments. We also seek to maintain investment-grade credit ratings with stable outlooks. We monitor capital by utilizing a number of measures, including net debt leverage ratio (1), adjusted EBITDA to net interest expense ratio (1), and dividend payout ratio. ATTRACTIVE LONG-TERM PUBLIC DEBT MATURITY PROFILE (2) • Average term of Bell Canada’s publicly issued debt securities: approximately 11 years STRONG LIQUIDITY POSITION (2) • $844 million available under our $4.0 billion multi-year committed credit facilities • $500 million accounts receivable securitization available capacity • Average after-tax cost of publicly issued • $425 million cash and cash equivalents debt securities: 3.1% • No publicly issued debt securities maturing until Q2 2020 on hand INVESTMENT GRADE CREDIT PROFILE (2) (3) • Long-term debt credit rating of BBB (high) by DBRS Limited (DBRS), Baa 1 by Moody’s Investors Service, Inc. (Moody’s) and BBB+ by Standard & Poor’s Ratings Services (Canada) (S&P), all with stable outlooks As a result of financing a number of strategic acquisitions made since 2010, including CTV Inc., Astral Media Inc., MLSE, Bell Aliant Inc. (Bell Aliant), Q9 Networks (Q9) and MTS; voluntary pension plan funding contributions to reduce our pension solvency deficit; wireless spectrum purchases; as well as the incremental debt that was assumed as a result of the privatization of Bell Aliant and the acquisition of MTS, our net debt leverage ratio has increased above the limit of our internal target range. At December 31, 2018, we had exceeded the limit of our internal net debt leverage ratio target range of 1.75 to 2.25 times adjusted EBITDA by 0.47. Additionally, our net debt leverage ratio in 2019 will reflect a one-time unfavourable impact due to the adoption of IFRS 16, Leases, reflecting the addition of $2.1 billion to $2.3 billion of capital leases to net debt (1) on our balance sheet on January 1, 2019. As a result, we increased our net debt leverage ratio target range from 1.75 to 2.25 times adjusted EBITDA to 2.0 to 2.5 times adjusted EBITDA. The new target range remains aligned with our investment-grade credit rating profile and is consistent with the target net debt leverage ratios of our direct Canadian telecom peers. Neither the change in the net debt leverage ratio target range nor the higher net debt leverage resulting from the implementation of IFRS 16 accounting standards is expected to affect our credit ratings or outlooks. Our net debt leverage ratio is expected to improve over time and return within the net debt leverage ratio target range through growth in free cash flow and applying a portion of free cash flow, after payment of dividends on common shares, to the reduction of BCE’s indebtedness. BCE’s adjusted EBITDA to net interest expense ratio remains significantly above our internal target range of greater than 7.5 times adjusted EBITDA, providing good predictability in our debt service costs and protection from interest rate volatility for the foreseeable future. This ratio was unaffected by the adoption of IFRS 16. BCE CREDIT RATIOS INTERNAL TARGET DECEMBER 31, 2018 Net debt leverage ratio Adjusted EBITDA to net interest expense ratio 2.0–2.5 >7.5 2.72 9.00 Bell Canada successfully accessed the capital markets in March 2018, August 2018 and September 2018, raising a total of $1.5 billion in gross proceeds from the issuance of seven-year and 10-year medium-term note (MTN) debentures, and US $1.15 billion (C$1.493 billion) in gross proceeds from the issuance of 30-year notes. The U.S.-dollar financing represented the first public debt issuance by Bell Canada in the U.S. market in more than 20 years. Both the Canadian-dollar and U.S.-dollar issuances contributed to lowering our after-tax cost of outstanding publicly issued debt securities to 3.1% (4.3% on a pre-tax basis), and increased the average term to maturity to approximately 11 years. The net proceeds of the 2018 offerings were used to fund the early redemption of $2.1 billion of Bell Canada and MTS debt securities maturing in 2018 and 2019, to repay short-term debt and for general corporate purposes. On March 20, 2018, Bell Canada renewed its short form base shelf prospectus, enabling Bell Canada to offer up to $4 billion of debt securities from time to time until April 20, 2020. The debt securities will be fully and unconditionally guaranteed by BCE. Consistent with past practice, the short form base shelf prospectus was renewed to continue to provide Bell Canada with financial flexibility and efficient access to the Canadian and U.S. capital markets. As at December 31, 2018, Bell Canada had issued approximately $2.5 billion principal amount of debt securities calculated on a Canadian-dollar basis under its new short form base shelf prospectus. (1) Net debt, net debt leverage ratio and adjusted EBITDA to net interest expense ratio are non-GAAP financial measures and do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. See section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) – Net debt, Net debt leverage ratio and Adjusted EBITDA to net interest expense ratio in this MD&A for more details. (2) As at December 31, 2018 (3) These credit ratings are not recommendations to buy, sell or hold any of the securities referred to, and they may be revised or withdrawn at any time by the assigning rating organization. Each credit rating should be evaluated independently of any other credit rating. 37 MD&AOverview1 BCE Inc. 2018 Annual Report 1.5 Corporate governance and risk management CORPORATE GOVERNANCE PHILOSOPHY The BCE Board and management believe that strong corporate governance practices contribute to superior results in creating and maintaining shareholder value. That is why we continually seek to strengthen our leadership in corporate governance and ethical business conduct by adopting best practices, and providing full transparency and accountability to our shareholders. Key governance strengths and actions in support of our governance philosophy include: • Separation of the Board Chair and CEO roles • Director independence standards • Audit Committee, Management Resources and Compensation Committee (Compensation Committee) and Corporate Governance Committee (Governance Committee) of the Board composed of independent directors RISK GOVERNANCE FRAMEWORK BOARD OVERSIGHT BCE’s full Board is entrusted with the responsibility for identifying and overseeing the principal risks to which our business is exposed and seeking to ensure there are processes in place to effectively identify, monitor and manage them. These processes seek to mitigate rather than eliminate risk. A risk is the possibility that an event might happen in the future that could have a negative effect on our financial position, financial performance, cash flows, business or reputation. While the Board has overall responsibility for risk, the responsibility for certain elements of the risk oversight program is delegated to Board committees in order to ensure that they are treated with appropriate expertise, attention diligence, with reporting to the Board in the ordinary course. Board of Directors Audit Committee Compensation Committee Governance Committee Pension Committee • Annual director effectiveness and performance assessments • Ongoing reporting to Board committees regarding ethics programs and the oversight of corporate policies across BCE • Share ownership guidelines for directors and executives For more information, please refer to BCE’s most recent notice of annual general shareholder meeting and management proxy circular (the Proxy Circular) filed with the Canadian provincial securities regulatory authorities (available at sedar.com) and furnished to the U.S. Securities and Exchange Commission (available at sec.gov), and available on BCE’s website at BCE.ca. Risk information is reviewed by the Board or the relevant committee throughout the year, and business leaders present regular updates on the execution of business strategies, risks and mitigation activities. • The Audit Committee is responsible for overseeing financial reporting and disclosure as well as overseeing that appropriate risk management processes are in place across the organization. As part of its risk management activities, the Audit Committee reviews the organization’s risk reports and ensures that responsibility for each principal risk is formally assigned to a specific committee or the full Board, as appropriate. The Audit Committee also regularly considers risks relating to financial reporting, legal proceedings, the performance of critical infrastructure, information and physical security, journalistic independence, privacy and records management, business continuity and the environment. • The Compensation Committee oversees risks relating to compensation, succession planning, and health and safety practices • The Governance Committee assists the Board in developing and implementing BCE’s corporate governance guidelines and determining the composition of the Board and its committees. The Governance Committee also oversees matters such as the organization’s policies concerning business conduct, ethics and public disclosure of material information. • The Pension Fund Committee (Pension Committee) has oversight responsibility for risks associated with the company’s pension funds. 38 MD&AOverview1 RISK MANAGEMENT CULTURE There is a strong culture of risk management at BCE that is actively promoted by the Board and the company’s President and CEO at all levels within the organization. It has become a part of how the company operates on a day-to-day basis and is woven into its structure and operating principles, guiding the implementation of the organization’s strategic imperatives. The President and CEO, selected by the Board, has set his strategic focus through the establishment of six strategic imperatives and focuses risk management around the factors that could impact the achievement of those strategic imperatives. While the constant state of change in the economic environment and the industry creates challenges that need to be managed, clarity around strategic objectives, performance expectations, risk management and integrity in execution ensures discipline and balance in all aspects of our business. RISK MANAGEMENT FRAMEWORK While the Board is responsible for BCE’s risk oversight program, operational business units are central to the proactive identification and management of risk. They are supported by a range of corporate support functions that provide independent expertise to reinforce implementation of risk management approaches in collaboration with the operational business units. The Internal Audit function provides a further element of expertise and assurance, working to provide insight and support to the operational business units and corporate support functions, while also providing the Audit Committee with an independent perspective on the state of risk and control within the organization. Collectively, these elements can be thought of as a “three lines of defence” approach to risk management. Although the risk management framework described in this section 1.5 is aligned with industry best practices and is endorsed by the Institute of Internal Auditors, there can be no assurance that it will be sufficient to prevent the occurrence of events that could have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. Board and Committees Oversight Operational Business Units 1st line of defence RISK AND CONTROL ENVIRONMENT Internal Audit Function 3rd line of defence Corporate Support Functions 2nd line of defence BCE Inc. 2018 Annual Report FIRST LINE OF DEFENCE – OPERATIONAL BUSINESS UNITS The first line refers to management within our operational business segments (Bell Wireless, Bell Wireline and Bell Media), who are expected to understand their operations in great detail and the financial results that underpin them. There are regular reviews of operating performance involving the organization’s executive and senior management. The discipline and precision associated with this process, coupled with the alignment and focus around performance goals, create a high degree of accountability and transparency in support of our risk management practices. As risks emerge in the business environment, they are discussed in a number of regular forums to share details and explore their relevance across the organization. Executive and senior management are integral to these activities in driving the identification, assessment, mitigation and reporting of risks at all levels. Formal risk reporting occurs through strategic planning sessions, management presentations to the Board and formal enterprise risk reporting, which is shared with the Board and the Audit Committee during the year. Management is also responsible for maintaining effective internal controls and for executing risk and control procedures on a day-to-day basis. Each operational business unit develops its own operating controls and procedures that fit the needs of its unique environment. SECOND LINE OF DEFENCE – CORPORATE SUPPORT FUNCTIONS BCE is a very large enterprise, with 52,790 employees as at December 31, 2018, multiple business units and a diverse portfolio of risks that is constantly evolving based on internal and external factors. In a large organization, it is common to manage certain functions centrally for efficiency, scale and consistency. While the first line of defence is often central to identification and management of business risks, in many instances operational management works collaboratively with, and also relies on, the corporate functions that make up the second line of defence for support in these areas. These corporate functions include Finance, Corporate Security and Corporate Risk Management, as well as Legal and Regulatory, Corporate Responsibility, Human Resources, Real Estate and Procurement. Finance function: BCE’s Finance function plays a pivotal role in seeking to identify, assess and manage risks through a number of activities, which include financial performance management, external reporting, pension management, capital management, and oversight and execution practices related to the U.S. Sarbanes-Oxley Act of 2002 and equivalent Canadian securities legislation, including the establishment and maintenance of appropriate internal control over financial reporting. BCE has also established and maintains disclosure controls and procedures to seek to ensure that the information it publicly discloses, including its business risks, is accurately recorded, processed, summarized and reported on a timely basis. For more details concerning BCE’s internal control over financial reporting and disclosure controls and procedures, refer to the Proxy Circular and section 10.3, Effectiveness of internal controls of this MD&A. 39 MD&AOverview1 BCE Inc. 2018 Annual Report Corporate Security function: This function is responsible for all aspects of security, which requires a deep understanding of the business, the risk environment and the external stakeholder environment. Based on this understanding, Corporate Security sets the standards of performance required across the organization through security policy definitions and monitors the organization’s performance against these policies. In high and emerging risk areas such as information security, Corporate Security leverages its experience and competence and, through collaboration with the operational business units, develops strategies intended to seek to mitigate the organization’s risks. For instance, we have implemented security awareness training and policies and procedures that seek to mitigate information security threats. We further rely on security assessments to identify risks, projects and implementation controls with the objective of ensuring that systems are deployed with the appropriate level of control based on risk and technical capabilities, including access management, vulnerability management, security monitoring and testing, to help identify and respond to attempts to gain unauthorized access to our information systems and networks. We evaluate and seek to adapt our security policies and procedures designed to protect our information and assets in light of the continuously evolving nature and sophistication of information security threats. However, given the complexity and scale of our business, network infrastructure, technology and IT supporting systems, there can be no assurance that the security policies and procedures that we implement will prevent the occurrence of all potential information security breaches. In addition, there can be no assurance that any insurance we may have will cover the costs, damages, liabilities or losses that could result from the occurrence of any information security breach. Corporate Risk Management function: This function works across the company to gather information and report on the organization’s assessment of its principal risks and the related exposures. Annually, senior management participate in a risk survey that provides an important reference point in the overall risk assessment process. In addition to the activities described above, the second line of defence is also critical in building and operating the oversight mechanisms that bring focus to relevant areas of risk and reinforce the bridges between the first and second lines of defence, thereby seeking to ensure that there is a clear understanding of emerging risks, their relevance to the organization and the proposed mitigation plans. To further coordinate efforts between the first and second lines of defence, BCE has established a Health and Safety, Security, Environment and Compliance Oversight Committee. A significant number of BCE’s most senior leaders are members of this committee, the purpose of which is to oversee BCE’s strategic security (including information security), compliance, and environmental, health and safety risks and opportunities. This cross-functional committee seeks to ensure that relevant risks are adequately recognized and mitigation activities are well integrated and aligned across the organization and are supported with sufficient resources. THIRD LINE OF DEFENCE – INTERNAL AUDIT FUNCTION Internal Audit is a part of the overall management information and control system and has the responsibility to act as an independent appraisal function. Its purpose is to provide the Audit Committee and management with objective evaluations of the company’s risk and control environment, to support management in fulfilling BCE’s strategic imperatives and to maintain an audit presence throughout BCE and its subsidiaries. 40 MD&AOverview1 BCE Inc. 2018 Annual Report 2 Strategic imperatives Our success is built on the BCE team’s dedicated execution of the six strategic imperatives that support our goal to be recognized by customers as Canada’s leading communications company. 2.1 Invest in broadband networks and services We invest in wireline and wireless broadband platforms to deliver the most advanced wireless, TV, Internet and other IP-based services available, to support continued subscriber and data growth across all our residential product lines as well as the needs of our business market customers. 2018 PROGRESS • Expanded our LTE-A wireless network to reach 91% of the Canadian population with data speeds up to 260 Mbps (expected average download speeds of 18 to 74 Mbps). In addition, our Quad-band LTE-A footprint covered more than 24% of the population with speeds up to 750 Mbps (expected average download speeds of 25 to 220 Mbps in select areas). • Became the first wireless provider in Canada to achieve Gigabit LTE speeds in testing and deployed these advanced speeds in Toronto and Kingston. To boost LTE-A speeds to the Gigabit level, Bell employed a combination of carrier aggregation, 256 QAM (quadrature amplitude modulation) and 4×4 Multiple Input Multiple Output (MIMO) technologies to increase spectrum efficiency and multiply capacity. • Continued to expand our FTTP direct fibre footprint, reaching approximately 4.6 million homes and businesses in seven provinces. Approximately 50 percent of our long-term broadband fibre program was completed at the end of 2018. FTTP delivers broadband access speeds of up to 1.5 Gbps currently, with faster speeds expected in the future as equipment evolves to support these higher speeds. • Launched an all-fibre broadband network in the city of Toronto, enabling fast Internet speeds, advanced TV and business connectivity to more than 1 million homes and business locations. Bell began the Toronto project in 2015, working closely with the city of Toronto and Toronto Hydro and employing innovative installation techniques and new heavy equipment to roll out the network as efficiently and quickly as possible. • Began the buildout of all-fibre connections to an additional 1.3 million homes and businesses throughout the populous and fast-growing Greater Toronto Area (GTA)/905 region surrounding Toronto. Bell commenced projects in a number of communities including the City of Oshawa, the Municipality of Clarington, the City of Orillia and the Chatham-Kent region. • Launched wireless-to-the-premise (WTTP) to 28 rural communities in Ontario and Québec following successful trials in the 3.5 Gigahertz (GHz) spectrum band utilizing Fifth Generation (5G)-oriented MIMO and 8T8R technology. WTTP is fixed wireless technology that will take full advantage of 5G to deliver high-speed Internet service to residents in smaller and underserved communities. Bell’s WTTP solution is expected to deliver broadband speeds 5 to 10 times faster than average speeds currently available in these areas. In addition, Bell accelerated its fixed wireless WTTP buildout plan from 800,000 to 1.2 million rural households following the introduction of the federal government’s Accelerated Investment Incentive program. 2019 FOCUS • Expand LTE-A network footprint to approximately 94% of the Canadian population • Deploy Quad-band LTE-A to approximately 60% of the Canadian population enabling theoretical speeds up to 750 Mbps (expected average speeds of 25 to 220 Mbps) • Increase LTE-A peak theoretical speeds to 950 Mbps with 4×4 MIMO technology in select urban areas covering approximately 40% of the Canadian population • Continue with preparations for 5G through market trials in various markets, continue to deploy mobile small cells and equip more cell sites with high-speed fibre backhaul • Expand combined FTTP direct fibre and fixed wireless WTTP broadband footprint to over 5.3 million homes and commercial locations • Increase FTTP footprint by approximately 500,000 homes and businesses to 5.1 million locations, with focus on the Montréal and the GTA/905 geographic areas • Accelerate buildout of fixed wireless WTTP network to approximately 200,000 additional households in 138 rural communities 41 MD&AStrategic imperatives2 BCE Inc. 2018 Annual Report 2.2 Accelerate wireless Our objective is to grow our Bell Wireless business profitably by focusing on postpaid subscriber acquisition and retention, increasing our share of the prepaid market, maximizing average billing per user (ABPU) by targeting premium smartphone subscribers in all geographic markets we operate in, leveraging our wireless networks, and maintaining device and mobile content leadership to drive greater wireless data penetration and usage. 2018 PROGRESS • Acquired 43% of total postpaid and prepaid net activations among the three national wireless carriers • Increased the number of postpaid subscribers on our LTE network to 91% of our total postpaid subscribers, up from 88% at the end of 2017 • Grew prepaid market share with 32,129 net activations, achieving our first year of growth in prepaid net activations since 2009, driven by strong demand for our low-cost Lucky Mobile service • Maintained the highest reported blended ABPU in the Canadian wireless industry • Expanded our smartphone and tablet lineup with 38 new devices, including Apple’s iPhone XS, XS Max, XR and Apple Watch Series 4, the Samsung Galaxy S9 and S9+, the Samsung Galaxy Note 9, Google’s Pixel 3 and Pixel 3 XL and the LG G7, adding to our extensive selection of 4G LTE and LTE-A devices • First Canadian wireless service provider to enable built-in Wi-Fi hotspots in supported Ford and Lincoln vehicles with Bell’s Connected Car – Built In service. Ideal for mobile workers, commuters and long family trips, Connected Car enables passengers to browse, stream and share on Bell’s broadband LTE wireless network when they are on the road or up to 50 feet from the vehicle when it is parked. • Expanded the availability of Lucky Mobile, our low-cost prepaid wireless service, to all 10 provinces with launches in Manitoba, Saskatchewan, Québec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador • Expanded lineup of IoT applications, which enable the interconnection of a range of devices and applications that send and receive data • Partnered with the City of Kingston and the City of Orillia to employ Bell’s Smart City platform to provide a series of connected IoT applications to improve municipal operating efficiencies • Launched a managed IoT security service that offers businesses, Smart Cities and other organizations employing IoT solutions with an advanced layer of comprehensive security services to detect and respond to evolving cyber threats • Partnered with Echologics, an industry leader in leak detection technology, to implement a water management solution for Medicine Hat, Alberta • Concluded a multi-year agreement with Superior Propane to deliver a comprehensive fuel tank monitoring solution for its business and residential customers on Bell’s national LTE mobile network 2019 FOCUS • Profitably grow our wireless postpaid subscriber base, while maintaining market share momentum of incumbent postpaid subscriber activations • Improve blended ABPU • Offer the latest handsets and devices in a timely manner to enable customers to benefit from ongoing technological improvements by manufacturers and from faster data speeds to optimize the use of our services • Continue to increase the number of postpaid smartphone subscribers using our 4G LTE and LTE-A networks • Leverage Lucky Mobile to grow prepaid subscriber market share, while providing Canadians with affordable wireless service options • Expand voice and video over LTE (VoLTE) technology coverage areas and broaden rollout to more supported devices • Accelerate new revenue streams by continuing to drive the commercialization of IoT services and applications • In February 2019, we partnered with the City of Markham for the launch of the Smart City Accelerator Research Program. The program will deploy Bell’s Smart City platform, an advanced solution of interconnected IoT applications, to improve the efficiency of municipal operations and enhance City services for residents. 42 MD&AStrategic imperatives2 2.3 Leverage wireline momentum We focus on leveraging our fibre-based TV and Internet services to develop attractive residential offers that drive higher multi- product bundle sales and improve customer satisfaction and retention. These broadband services contribute to the ongoing shift of our operating mix away from legacy wireline voice services. In our business markets, we remain focused on expanding our broadband network and strengthening our delivery of integrated solutions to Canadian businesses, while continuing to manage the transformation of our business from legacy network services to a fully-integrated data hosting, cloud computing and managed services provider. BCE Inc. 2018 Annual Report 2018 PROGRESS • Built on our position as the leading Internet service provider (ISP) in Canada with a high-speed Internet subscriber base of 3,933,931, up 3.8% over 2017, including 1.2 million FTTP customers • Maintained our position as Canada’s largest TV provider with 2,853,081 subscribers, and increased our total number of IPTV subscribers by 8.1% to 1,675,706 • Increased Fibe Internet access speeds to 1.5 Gbps, the fastest speed to the home available in Canada. Unlimited Gigabit Fibe 1.5 service was rolled out in Ontario, Québec and the Atlantic provinces. This enhanced Internet service offers total download speeds of up to 1.5 Gbps and uploads of up to 940 Mbps. • Took the top spot in PCMag’s “The Fastest ISPs of 2018: Canada”, delivering the highest overall Internet speed index ever recorded in Canada to date by the magazine and scoring more than 30% higher than our nearest competitor. Our operations in the Atlantic provinces marketed under the Bell Aliant brand took second place in the speed tests while Manitoba’s Bell MTS moved into the top 10 for the first time. • Launched an exclusive Whole Home Wi-Fi service that combines Wi-Fi access points with the cloud-based networking intelligence of Bell’s Home Hub 3000 and Home Hub 2000 modems to learn how households use the Internet and ensure all devices receive the strongest signal and fastest speeds possible • Continued to lead TV innovation in Canada with ongoing enhancements to our IPTV service • Launched Download & Go feature, enabling Fibe TV customers in Ontario, Québec and Atlantic Canada to download their PVR recordings with the Fibe TV app to watch on iOS and Android mobile devices even without an Internet connection • Expanded access to Alt TV with Amazon Fire TV Stick and a variety of Android TV devices including Sony, NVIDIA, Xiaomi and other Google certified products • Concluded a multi-year agreement with Ericsson to leverage its next generation, cloud-based MediaFirst platform to enable an even more personalized and converged multiscreen TV experience for Fibe TV and Alt TV customers • Offered access to Amazon Web Services as part of our leading lineup of cloud solutions for Canadian businesses. Bell Cloud Connect provides flexible cloud computing and storage solutions from Bell and partners like Microsoft, IBM, and now Amazon over Bell’s broadband networks, offering better reliability, faster speeds and enhanced security with private end-to-end connections. • Launched Virtual Network Services (VNS) platform, offering enterprise business customers a catalogue of on-demand network functions that reside securely in Bell’s private cloud. The first of its kind in Canada, Bell VNS responds to customers’ on-demand needs by transforming and centralizing hardware-based networks in virtualized, software- driven networks. • Bell was named a Canadian leader in security services by global IT and telecom advisory firm International Data Corporation (IDC) in its 2018 Canadian Security Services Vendor Assessment Report for the third consecutive year. IDC’s review of Canada’s major security service providers highlighted Bell’s exceptionally broad range of professional services including cloud security, advanced threat detection and proactive mitigation, backed by our highly qualified team and world-class networks. 2019 FOCUS • Further grow our residential IPTV and Internet subscriber bases as well as FTTP and WTTP customer penetration • Drive higher residential ARPU from the flow-through of price changes and increased penetration of multi-product households • Continue to enhance our TV services with more advanced ways to enjoy Fibe TV and Alt TV • Make the Fibe TV app available on more devices, including Chromecast • Update our satellite receiver lineup to include Whole Home PVR and access to Netflix and YouTube • Maintain product superiority through new service offerings and product innovation to provide the best Wi-Fi coverage and better customer experience in the home • Extend the availability of the Bell Wi-Fi app to all Bell Internet and TV subscribers • Reduce total wireline residential NAS net losses • Invest in direct fibre expansion and new solutions in key portfolios such as Internet and private networks, data centre and cloud services, unified communications, security services and IoT to improve the business client experience and increase overall business customer spending on telecommunications products and services • Increase share of wallet of large enterprise customers through greater focus on business service solutions and connectivity growth • Increase the number of net new customer relationships in both large and mid-sized businesses and reduce small business customer losses 43 MD&AStrategic imperatives2 BCE Inc. 2018 Annual Report 2.4 Expand media leadership We strive to deliver leading sports, news, entertainment and business content across all screens and platforms to grow audiences. We are also creating our own world class content, ensuring that Canadian attitudes, opinions, values and artistic creativity are reflected in our programming and in our coverage of events in Canada and around the world, and to introduce new services in support of new revenue streams. 2018 PROGRESS • Maintained CTV’s #1 ranking as the most-watched TV network in Canada for the 17th year in a row, and continued to lead with 10 of the top 20 programs nationally in all key demographics • Entered into a long-term agreement with VICE Media (VICE) making Bell Media the exclusive Canadian broadcaster of new original programming from VICE’s U.S. linear network, VICELAND, along with hundreds of hours of library VICE programming • TSN was Canada’s most-watched specialty TV channel and RDS remained the top French-language sports network • Launched TSN Direct and RDS Direct, making TSN and RDS content available direct to consumers through a monthly subscription. Available for a monthly fee with no contract, TSN Direct and RDS Direct allow digital subscribers to access TSN and RDS’ programming through their computer, tablet, mobile device, Apple TV, Samsung SmartTV and Xbox One. • TSN and RDS extended their broadcast partnership with UFC, the world’s premier mixed martial arts organization, including extensive broadcast and digital rights across TSN, RDS and Bell Media platforms • Launched the all-new Crave streaming service, combining TMN, HBO Canada, SHOWTIME and other premium content into a single service and making current HBO programming available directly to all Canadians with access to the Internet for the first time ever. Crave grew to 2.3 million subscribers at the end of 2018. • Concluded a long-term agreement with Lionsgate to bring premium U.S. pay TV platform STARZ to Canada and distribute the first pay window of Lionsgate’s future theatrical releases in the territory • Secured exclusive long-term deals with most major movie studios, including 20th Century Fox and Fox Searchlight Films, Entertainment One, Sony Pictures Entertainment, Universal Pictures and Focus Features, MGM Studios Inc. and Warner Bros. International Television Distribution, to bring the biggest Hollywood hit movies and film franchises across a variety of platforms including linear, on-demand and digital • Launched CTV Movies and CTV Throwback, two new ad-supported video-on-demand (VOD) services featuring thousands of hours of content, marking the first step in the evolution of the CTV Super Hub as Canada’s premiere destination for entertainment on digital platforms • Acquired a majority stake in Pinewood Toronto Studios, in partnership with Comweb Studio Holdings Inc., Castlepoint Studio Partners 2 Limited and the City of Toronto, and broke ground on its multi-stage expansion, which will increase total new production space to 200,000 square feet (18,580 square metres) of sound stages and support space. With this expansion, Pinewood Toronto Studios will become the largest purpose-built production studio in Canada and will be better able to support its growing roster of domestic and international film and TV clients. • Partnered with Bloomberg Media to create and launch BNN Bloomberg, Canada’s leading multi-platform business news brand. BNN Bloomberg provides audiences and advertisers with a broad suite of products across digital, TV and radio, targeting Canada’s business decision makers. • Launched Snackable TV, a mobile-first, short-form video app delivering premium and shareable entertainment targeted at viewers looking to consume snack-size pieces of content, featuring exclusive content from HBO, Comedy Central, Etalk and more • Bell Media’s OOH advertising division, Astral, entered into new part- nerships with Campsite, a Montréal-based leader in programmatic OOH advertising, and Vistar Media, a U.S.-based leader in programmatic technology for digital OOH advertising. These agreements make Astral’s 240 digital large format and street furniture faces across Canada accessible through programmatic platforms. 2019 FOCUS • Increase revenue generation from monetization of content rights and Bell Media properties across all platforms as well as from OOH and digital advertising platforms, while controlling TV programming and premium content cost escalation • Maintain strong audience levels and ratings across all TV and radio properties • Continue scaling Crave on-demand streaming service • Reinforce industry leadership in conventional TV, specialty TV, pay TV, streaming and sports services • On March 1, 2019, we rebranded Pay TV channel Encore as STARZ, featuring a slate of premium STARZ programming and a broad selection of Lionsgate hit films and TV series, facilitating its transformation into a world-class platform. STARZ also became available directly to all Canadians with access to the Internet as an add-on to Crave. • In January 2019, TSN and RDS announced Day Pass subscriptions to their TSN Direct and RDS Direct streaming services. The all-new, single-day subscription option is the first of its kind in Canada, providing full access to TSN and RDS channels for 24 hours with no contract. • Successfully renew agreements with broadcasting distribution undertakings (BDUs) • Develop in-house production and content creation for distribution and use across all screens and platforms • Expand live and on-demand content through TV Everywhere services • Build on our OOH leadership position in Canada • Leverage cross-platform and integrated sales and sponsorship • Grow revenues through unique partnerships and strategic content investments 44 MD&AStrategic imperatives2 BCE Inc. 2018 Annual Report 2.5 Improve customer service Our objective is to enhance customers’ overall experience by delivering call centre efficiency, meeting commitments for the installation and timely repair of services, increasing network quality, and implementing process improvements to simplify customer transactions and interactions with our front-line employees and self-serve tools. All of these will help differentiate us from our competitors and gain long-term customer loyalty. We intend to achieve this by making the investments we need to improve our front-line service capabilities, our networks, our products and our distribution channels to win and keep customers. 2018 PROGRESS • Virgin Mobile Canada (Virgin Mobile) was ranked highest in overall customer care satisfaction in the J.D. Power 2018 Canada Wireless Customer Care Study for the second consecutive year, cited for its strong performance in satisfaction with phone, in-store and online support as well as clarity of information on company websites, user forums and social media • Improved wireless postpaid churn by 0.03 pts, driven by our invest- • Reduced FTTP installation time by 9% • Reduced FTTP Residential Fibe TV repair truck rolls per customer by 6% • Offered residential installation appointments 33% earlier 2019 FOCUS • Further evolve our self-serve tools • Continue to invest in customer service initiatives to simplify complexity for all customers, including billing ments in network quality and customer retention • Further reduce the total volume of customer calls to our call centres • MyBell app was selected as the Best Telecommunications Mobile as well as the number of truck rolls Application of 2018 at the annual MobileWebAwards • Further improve customer satisfaction scores • Updated MyBell app with ability for customers to change their Internet package and manage almost every aspect of their TV service, including changing their channel selection or programming package, ordering Pay Per View and on-demand content, and upgrading their receiver • Redesigned MyBell.ca to a mobile-friendly format, making it easier for customers to find what they need and transact online. Mobile transactions increased by 22%. • Introduced ability for customers to reboot their modem remotely on Bell.ca, allowing customers to resolve over 40% of Internet connectivity issues • Enhanced the Manage Your Appointment web service with new self- serve features that enable customers to reschedule appointments online and provide technicians with handy information such as building entry codes and parking instructions • Achieve better consistency in customer experience • Continue to improve customer personalization • Reduce FTTP installation times and improve service quality • Deploy new diagnostic technology enabling enhanced troubleshooting and proactive service monitoring for our customers • Simplify the technician in-field experience through simplification and innovation of technician tools • Improve troubleshooting and diagnostic processes to manage increasing customer and device complexity 2.6 Achieve a competitive cost structure Cost containment is a core element of our financial performance. It remains a key factor in our objective to preserve steady margins as we continue to experience revenue declines in our legacy wireline voice and data services and further shift our product mix towards growth services. We aim to accomplish this through operating our business in the most cost-effective way possible to extract maximum operational efficiency and productivity gains. 2018 PROGRESS • Completed a net reduction in our management workforce of 4%, or approximately 700 positions, that is expected to deliver annualized cash savings of approximately $75 million. These changes reflect the further integration of Bell MTS, Bell Aliant and other acquisitions. • Realized productivity improvements and cost efficiencies resulting from the expansion of Bell’s all-fibre network footprint and service innovations enabled by new broadband technologies • Maintained relatively stable Bell Wireline and BCE consolidated adjusted EBITDA margins (1) 2019 FOCUS • Realize operating cost savings from: • workforce reductions completed in 2018 • lower contracted rates from our suppliers • reduction in traffic that is not on our wireline network • broader deployment of FTTP • consumer behaviour changes expected to be driven by product innovation and customer service improvements • the realization of further Bell MTS operating synergies • Lowered Bell Canada’s average after-tax cost of publicly issued debt • Optimize operating cost structure to align with revenue results securities to 3.1% (1) Adjusted EBITDA margin is a non-GAAP financial measure and does not have any standardized meaning under IFRS. Therefore, it is unlikely to be comparable to similar measures presented by other issuers. See section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) – Adjusted EBITDA and adjusted EBITDA margin in this MD&A for more details. 45 MD&AStrategic imperatives2 BCE Inc. 2018 Annual Report 3 Performance targets, outlook, assumptions and risks This section provides information pertaining to our performance against 2018 targets, our consolidated business outlook and operating assumptions for 2019 and our principal business risks. 3.1 BCE 2018 performance vs. guidance targets FINANCIAL GUIDANCE 2018 TARGET 2018 PERFORMANCE AND RESULTS ACHIEVED Revenue growth 2%–4% 3.1% Adjusted EBITDA growth 2%–4% 2.7% Capital intensity Approx. 17% 16.9% Adjusted net earnings per share (adjusted EPS) (1) $3.45–$3.55 $3.51 BCE revenues increased by 3.1% in 2018 compared to last year, driven by growth across all three of our segments and reflected both higher service and product revenues of 1.7% and 13.7%, respectively. This included the contribution from the acquisition of MTS in March 2017. BCE adjusted EBITDA grew by 2.7% in 2018 compared to last year, driven by growth in our Bell Wireless segment of 5.6% and our Bell Wireline segment of 1.7%, offset in part by a decline in our Bell Media segment of 3.2%. The increase was attributable to the growth in revenues, effective cost containment and the contribution from the acquisition of MTS, offset in part by higher cost of goods sold relating to greater wireless handset sales and higher product sales to enterprise customers, as well as increased content and programming costs at Bell Media. BCE capital investments totaled $3,971 million in 2018, down 1.6% from last year, with a corresponding capital intensity ratio of 16.9%, down from 17.7% in 2017. We continued to focus our strategic investments on the expansion of our FTTP footprint to more homes and businesses, the ongoing deployment of our LTE-A mobile network, spectrum carrier aggregation, the deployment of wireless small-cells to optimize mobile coverage, signal quality and data backhaul, along with the expansion of network capacity to support the growth in subscribers and data consumption and the initial rollout of fixed wireless broadband to rural locations in Ontario and Québec. Our capital expenditures also reflected the acquisition and integration of MTS. Net earnings attributable to common shareholders in 2018 decreased by $81 million, or $0.10 per common share, compared to 2017, due to higher other expense which included impairment charges of $200 million mainly relating to our Bell Media segment, higher depreciation and amortization expense and higher finance costs. This was partly offset by higher adjusted EBITDA, as growing revenues more than offset an increase in operating costs, lower income taxes and lower severance, acquisition and other costs. Excluding the impact of severance, acquisition and other costs, net mark-to-market (losses) gains on derivatives used to economically hedge equity settled share-based compensation plans, net losses on investments, early debt redemption costs and impairment charges, adjusted net earnings in 2018 was $3,151 million, or $3.51 per common share, compared to $3,058 million, or $3.42 per common share, in 2017. Free cash flow growth 3%–7% 4.4% Free cash flow increased $149 million in 2018 due mainly to higher cash flows from operating activities excluding voluntary DB pension plan contributions and acquisition and other costs paid, and lower capital expenditures. Annualized common dividend per share $3.02 $3.02 Annualized BCE common dividend per share for 2018 increased by 15 cents, or 5.2%, to $3.02 compared to $2.87 per share in 2017. Dividend payout ratio 65%–75% of free cash flow 75% Dividend payout ratio increased from 73% in 2017 to 75% in 2018. 3.2 Business outlook and assumptions OUTLOOK BCE’s 2019 outlook builds on the solid financial results achieved in 2018 that reflected higher wireless subscriber net additions and operating profitability; improved organic wireline financial performance; broadband Internet and TV market share growth enabled by an expanded direct fibre footprint offering more competitive Internet speeds and product innovation such as Alt TV; as well as the flow- through of operating cost savings realized from workforce reductions and other productivity improvements. Our projected financial performance for 2019 is underpinned by continued execution of our six strategic imperatives in a highly competitive and dynamic market. Wireless, Internet and TV subscriber base growth, together with pricing discipline and focused cost management, is projected to drive revenue and adjusted EBITDA growth. This is expected to contribute to higher free cash flow, providing a stable foundation for a higher BCE common share dividend for 2019, as well as continued significant capital investment in broadband fibre and wireless network infrastructure to support future growth. (1) Adjusted EPS is a non-GAAP financial measure and does not have any standardized meaning under IFRS. Therefore, it is unlikely to be comparable to similar measures presented by other issuers. See section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) – Adjusted net earnings and adjusted EPS in this MD&A for more details, including a reconciliation to the most comparable IFRS financial measure. 46 MD&APerformance targets, outlook, assumptions and risks3 BCE Inc. 2018 Annual Report The key 2019 operational priorities for BCE are to: • Maintain market share of incumbent wireless postpaid net additions • Grow wireless prepaid market share • Further expand our LTE-A mobile network coverage to approximately 94% of the Canadian population, while continuing with preparations for 5G through market trials in various markets, continuing to deploy mobile small cells and equipping more cell sites with high-speed fibre backhaul • Increase our FTTP footprint by approximately 500,000 homes and businesses to 5.1 million locations • Accelerate the buildout of our fixed wireless WTTP network to approximately 200,000 additional households in rural communities • Further grow our residential IPTV and Internet subscriber bases as well as FTTP and WTTP customer penetration • Drive higher wireline residential ARPU from the flow-through of price changes and increased penetration of multi-product households • Enhance Internet and TV product superiority through new service offerings and innovation to provide the best Wi-Fi coverage and better customer experience in the home • Invest in direct fibre expansion and new solutions in key portfolios such as Internet and private networks, data centre and cloud services, unified communications, security services and IoT to improve the business client experience and increase overall business customer spending on telecommunications products and services • Realize operating cost savings from workforce reductions completed in 2018, lower contracted rates from our suppliers, reduction in traffic that is not on our wireline network, broader deployment of FTTP, consumer behaviour changes driven by product innovation, customer service improvements, and the realization of further Bell MTS operating synergies • Increase revenue generation from monetization of content rights and Bell Media properties across all platforms as well as from OOH and digital advertising platforms, while controlling TV programming and premium content cost escalation • Continue scaling Bell Media’s Crave on-demand streaming service Our projected financial performance for 2019 enabled us to increase the annualized BCE common share dividend for 2019 by 15 cents, or 5.0%, to $3.17 per share. ASSUMPTIONS ASSUMPTIONS ABOUT THE CANADIAN ECONOMY MARKET ASSUMPTIONS • A slightly slower rate of economic growth, given the Bank of Canada’s most recent estimated growth in Canadian gross domestic product of 1.7% in 2019, down from 2.0% in 2018 • A consistently high level of wireline and wireless competition in consumer, business and wholesale markets • Higher, but slowing, wireless industry penetration and smartphone • Employment gains expected to continue in 2019, as the overall level adoption of business investment is expected to grow but remain variable • Interest rates expected to increase modestly in 2019 • Canadian dollar expected to remain at near current levels. Further movements may be impacted by the degree of strength of the U.S. dollar, interest rates and changes in commodity prices • A shrinking data and voice connectivity market as business customers migrate to lower-priced traditional telecommunications solutions or alternative OTT competitors • Advertising market expected to be impacted by audience declines and variable demand • Continued escalation of media content costs to secure TV programming • Ongoing linear TV subscriber erosion, due to growing cord-cutter and cord-never customer segments 3.3 Principal business risks Provided below is a summary description of certain of our principal business risks that could have a material adverse effect on all of our segments. Certain additional business segment-specific risks are reported in section 5, Business segment analysis. For a detailed description of the principal risks relating to our regulatory environment and a description of the other principal business risks that could have a material adverse effect on our financial position, financial performance, cash flows, business or reputation, refer to section 8, Regulatory environment and section 9, Business risks, respectively. COMPETITIVE ENVIRONMENT As the scope of our businesses increases and evolving technologies drive new services, delivery models and strategic partnerships, our competitive landscape intensifies and expands to include new and emerging competitors, certain of which were historically our partners or suppliers, as well as global-scale competitors including, in particular, OTT TV service providers, IoT hardware and software providers, voice over IP (VoIP) providers and other web-based and OTT players that are penetrating the telecommunications space with significant resources and a large customer base to amortize costs. Certain of these competitors are changing the competitive landscape by moving beyond being mere disruptors and newer entrants to the industry to establishing material positions. Greater customer adoption of data services, including mobile TV, international data roaming, mobile commerce and mobile banking, as well as other IoT applications in the areas of retail (e.g., home automation), business (e.g., remote monitoring), transportation (e.g., connected car and asset tracking) and urban city optimization 47 MD&APerformance targets, outlook, assumptions and risks3 BCE Inc. 2018 Annual Report (smart cities), is expected to accelerate growth opportunities as well as competition in these areas. If we are unable to develop and deploy retail, business and government IoT product solutions in advance of or concurrently with our competitors, our business and financial results could be adversely affected. Pricing and investment decisions of market participants are based on many factors, such as strategy, market position, technology evolution, customer confidence and economic climate, and collectively these factors could adversely affect our market share, service volumes and pricing strategies and, consequently, our financial results. Technology substitution, IP networks and recent regulatory decisions, in particular, continue to reduce barriers to entry in our industry. In addition, the effects of government policies regarding the set-aside of spectrum at favourable pricing for newer wireless entrants have begun to impact market dynamics. Together, these factors have changed industry economics and allowed competitors to launch new products and services and gain market share with far less investment in financial, marketing, human, technological and network resources than has historically been required. In particular, some competitors deliver their services over our networks, leveraging regulatory obligations applicable to us, therefore limiting the need to invest in building their own networks. Such lower required investment has enabled some competitors to be very disruptive in their pricing. Moreover, foreign OTT players such as Netflix are currently not subject to the same taxation and Canadian content investment obligations as those imposed on Canadian domestic digital suppliers, which provides them with a competitive advantage over us. We expect these trends to continue in the future and the increased competition we face as a result could negatively impact our business including, without limitation, in the following ways: • Competitors’ aggressive market offers, combined with heightened customer sensitivity around pricing, could result in pricing pressures, lower margins and increased costs of customer acquisition and retention, and our market share and sales volumes could decrease if we do not match competitors’ pricing levels or increase customer acquisition and retention spending • Higher Canadian wireless penetration could slow opportunities for new customer acquisition • Product substitutions could result in an acceleration of NAS erosion beyond our current expectations • The continued OTT-based substitution and market expansion of lower-cost VoIP and software-defined networking in a wide area network (SD WAN) solutions, which are attracting global competitors including traditional software players, are changing our approach to service offers and pricing and could have an adverse effect on our business • Spending rationalization by business customers could lead to higher declines in traditional connectivity value-added services sold and margin erosion, driven by technology substitution, economic factors and customers’ operational efficiencies • The pressure from simpler, lower cost, agile service models is driving in-sourcing trends, which could have an adverse impact on our managed services business • The fundamental separation of content and connectivity allows the expansion and market penetration of low-cost OTT TV providers and other alternative service providers, some of which may offer content as loss leaders to support their core business, which is changing our TV and media ecosystems and could lower our revenue streams, affecting our business negatively • Competition with global competitors such as Netflix and Amazon, in addition to traditional Canadian TV competitors, for programming content could drive significant increases in content acquisition costs as these competitors, along with other global-scale entities such as Google, gain a significant presence in local markets as a result of innovative and flexible global market strategies • The proliferation of content piracy could negatively impact subscriber growth and our ability to monetize products and services, while creating bandwidth pressure without corresponding revenue growth in the context of regulated wholesale high-speed Internet access rates • Regulatory decisions regarding wholesale access to our wireless and fibre networks could bring new competitors, including OTT players, or strengthen the market position of current competitors, which may negatively impact our retail subscriber base in favour of lower margin wholesale subscribers • Adverse economic conditions, such as economic downturns or recessions, adverse conditions in the financial markets or a declining level of retail and commercial activity, could have a negative impact on the demand for, and prices of, our wireline, wireless and media products and services, as well as drive an increase in bad debts as the creditworthiness of some customers declines For a further discussion of our competitive environment and competition risk, as well as a list of our main competitors, on a segmented basis, refer to Competitive landscape and industry trends and Principal business risks in section 5, Business segment analysis. REGULATORY ENVIRONMENT Although most of our retail services are not price-regulated, government agencies and departments such as the Canadian Radio-television and Telecommunications Commission (CRTC), Innovation, Science and Economic Development Canada (ISED), Canadian Heritage and the Competition Bureau continue to play significant roles in regulatory matters such as mandatory access to networks, spectrum auctions, consumer-related codes of conduct, approval of acquisitions, broadcast licensing and foreign ownership requirements. As with all regulated organizations, planned strategies are contingent upon regulatory decisions. Adverse decisions by regulatory agencies or increased regulation could have negative financial, operational, reputational or competitive consequences for our business. For a discussion of our regulatory environment and the principal risks related thereto, refer to section 8, Regulatory environment as well as the applicable segmented risk discussions under Competitive landscape and industry trends and Principal business risks in section 5, Business segment analysis. 48 MD&APerformance targets, outlook, assumptions and risks3 SECURITY MANAGEMENT Our operations, service performance, reputation and business continuity depend on how well we protect our physical and non-physical assets, including networks, information technology (IT) systems, offices, corporate stores and sensitive information, from events such as information security attacks, unauthorized access or entry, fire, natural disaster (including, without limitation, seismic and severe weather- related events such as ice, snow and wind storms, flooding, hurricanes, tornadoes and tsunamis), power loss, building cooling loss, acts of war or terrorism, sabotage, vandalism, actions of neighbours and other events. The protection and effective organization of our systems, applications and information repositories are central to the secure and continuous operation of our networks and business, as electronic and physical records of proprietary business and personal data, such as confidential customer and employee information, are all sensitive from a market and privacy perspective. Information security breaches can result from unintentional events or deliberate actions by hackers, organized criminals, state-sponsored organizations or other parties. Information security attacks have grown in complexity, magnitude and frequency in recent years and the potential for damage is increasing. Information security attacks may be perpetrated using a complex array of means including, without limitation, the use of stolen credentials, computer viruses and malicious software, phishing and other attacks on network and information systems. Information security attacks aim to achieve various malicious objectives including unauthorized access to, and theft of, confidential, proprietary or sensitive information, extortion and business disruptions. Information security policies and procedures must continuously adapt and evolve in order to seek to mitigate risk and, consequently, require constant monitoring to ensure effectiveness. We are also exposed to information security threats as a result of actions that may be taken by our customers, suppliers, outsourcers, business partners, employees or independent third parties, whether malicious or not, including as a result of the use of social media, cloud- based solutions and IT consumerization. Our use of third-party suppliers and outsourcers and reliance on business partners, which may also be subject to information security threats, also exposes us to risks as we have less immediate oversight over their IT domains. Furthermore, the proliferation of data services, including mobile TV, mobile commerce, mobile banking and IoT applications, as well as emerging technologies such as artificial intelligence and robotics, have significantly increased the number of access points to our network and systems, resulting in higher complexity that needs to be carefully monitored and managed to minimize security threats. Failure to implement an information security program that efficiently considers relationships and interactions with business partners, suppliers, customers, employees and other third parties across all methods of communication including social media and cloud-based solutions, as well as emerging technologies like robotics, artificial intelligence and machine-to-machine communication, could adversely affect our ability to successfully defend against information security attacks. BCE Inc. 2018 Annual Report If information security threats were to become successful attacks resulting in information security breaches, they could harm our brand, reputation and competitiveness, decrease customer and investor confidence and adversely affect our business, financial results, stock price and long-term shareholder value, given that they could lead to: • Network operating failures and business disruptions, which could negatively impact our ability to sell products and services to our customers and adversely affect their ability to maintain normal business operations and deliver critical services, and/or the ability of third-party suppliers to deliver critical services to us • Unauthorized access to proprietary or sensitive information about our business, which could result in diminished competitive advantages and loss of future business opportunities • Theft, loss, unauthorized disclosure, destruction or corruption of data and confidential information, including personal information about our customers or employees, that could result in financial loss, exposure to claims for damages by customers, employees and others, and difficulty in accessing materials to defend legal actions • Physical damage to network assets impacting service continuity • Litigation, fines and liability for failure to comply with privacy and information security laws • Fines and sanctions from credit card providers for failing to comply with payment card industry data security standards for protection of cardholder data • Regulatory investigations and increased audit and regulatory scrutiny that could divert resources from project delivery • Increased fraud as criminals leverage stolen information against us, our employees or our customers • Lost revenue resulting from the unauthorized use of proprietary information or the failure to retain or attract customers after an incident • Remediation costs such as liability for stolen information, equipment repairs and incentives to customers or business partners in an effort to maintain relationships after an incident • Increased information security protection costs, including the costs of deploying additional personnel and protection technologies, training employees and engaging third-party security experts • Higher insurance premiums We evaluate and seek to adapt our security policies and procedures designed to protect our information and assets in light of the continuously evolving nature and sophistication of information security threats. However, given in particular the complexity and scale of our business, network infrastructure, technology and IT supporting systems, there can be no assurance that the security policies and procedures that we implement will prevent the occurrence of all potential information security breaches. In addition, there can be no assurance that any insurance we may have will cover all or part of the costs, damages, liabilities or losses that could result from the occurrence of any information security breach. 49 MD&APerformance targets, outlook, assumptions and risks3 BCE Inc. 2018 Annual Report 4 Consolidated financial analysis This section provides detailed information and analysis about BCE’s performance in 2018 compared with 2017. It focuses on BCE’s consolidated operating results and provides financial information for our Bell Wireless, Bell Wireline and Bell Media business segments. For further discussion and analysis of our business segments, refer to section 5, Business segment analysis. 4.1 Introduction BCE CONSOLIDATED INCOME STATEMENTS 2018 2017 $ CHANGE % CHANGE Operating revenues Service Product Total operating revenues Operating costs Adjusted EBITDA Adjusted EBITDA margin Severance, acquisition and other costs Depreciation Amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Net earnings attributable to: Common shareholders Preferred shareholders Non-controlling interest Net earnings Adjusted net earnings Net earnings per common share (EPS) Adjusted EPS n.m.: not meaningful 20,441 3,027 23,468 (13,933) 9,535 40.6% (136) (3,145) (869) (1,000) (69) (348) (995) 2,973 2,785 144 44 2,973 3,151 3.10 3.51 BCE STATEMENTS OF CASH FLOWS – SELECTED INFORMATION Cash flows from operating activities Capital expenditures Free cash flow 2018 7,384 (3,971) 3,567 20,095 2,662 22,757 (13,475) 9,282 40.8% (190) (3,034) (810) (955) (72) (102) (1,069) 3,050 2,866 128 56 3,050 3,058 3.20 3.42 2017 7,358 (4,034) 3,418 346 365 711 (458) 253 54 (111) (59) (45) 3 (246) 74 (77) (81) 16 (12) (77) 93 (0.10) 0.09 1.7% 13.7% 3.1% (3.4%) 2.7% (0.2) pts 28.4% (3.7%) (7.3%) (4.7%) 4.2% n.m. 6.9% (2.5%) (2.8%) 12.5% (21.4%) (2.5%) 3.0% (3.1%) 2.6% $ CHANGE % CHANGE 26 63 149 0.4% 1.6% 4.4% BCE delivered revenue growth of 3.1% in 2018, compared to last year, reflecting higher service and product revenues of 1.7% and 13.7%, respectively, driven by growth across all three of our segments. The year-over-year increase in service revenues continued to be led by strong growth in our wireless, Internet, and IPTV subscribers, higher residential household ARPU, increased media advertising and subscriber revenues, improved business markets performance attributable to higher IP connectivity and business solutions services revenue, along with the contribution from the acquisition of MTS. This more than offset the continued erosion in our voice, satellite TV and legacy data revenues. The year-over-year increase in product revenues was driven by greater sales of premium wireless devices and higher equipment sales to large business customers. Net earnings in 2018 decreased 2.5% compared to 2017, mainly due to higher other expense which included impairment charges of $200 million mainly relating to our Bell Media segment, higher depreciation and amortization expense, and higher finance costs. This was partly offset by higher adjusted EBITDA, as growing revenues more than offset an increase in operating costs, lower income taxes and lower severance, acquisition and other costs. 50 MD&AConsolidated financial analysis4 BCE Inc. 2018 Annual Report Adjusted EBITDA grew by 2.7% in 2018, compared to last year, as a result of increases in our Bell Wireless and Bell Wireline segments, offset by a decline in our Bell Media segment. The year-over-year increase in adjusted EBITDA was driven by the flow-through of our revenue growth, ongoing disciplined cost containment and the contribution from our acquisition of MTS, offset in part by higher cost of goods sold relating to greater wireless handset sales and higher product sales to enterprise customers, along with escalating content and programming costs at Bell Media. In 2018, BCE’s cash flows from operating activities increased $26 million, compared to 2017, due mainly to higher adjusted EBITDA, partly offset by a higher voluntary DB pension plan contribution made in 2018. Free cash flow increased $149 million in 2018, compared to 2017, due mainly to higher cash flows from operating activities, excluding voluntary DB pension plan contributions, and acquisition and other costs paid, and lower capital expenditures. 4.2 Customer connections TOTAL BCE CONNECTIONS Wireless subscribers (1) (2) Postpaid (1) (2) Prepaid High-speed Internet subscribers (1) (3) TV (satellite and IPTV subscribers) (3) IPTV (3) Total growth services Wireline residential NAS lines (3) Total subscribers (4) 2018 2017 % CHANGE 9,610,482 9,166,787 8,830,216 8,418,650 780,266 748,137 3,933,931 3,790,141 2,853,081 2,832,300 1,675,706 1,550,317 16,397,494 15,789,228 2,990,188 3,231,308 19,387,682 19,020,536 4.8% 4.9% 4.3% 3.8% 0.7% 8.1% 3.9% (7.5%) 1.9% (1) At the beginning of Q1 2018, we adjusted our postpaid wireless subscriber base to remove 16,116 subscribers with a corresponding increase to our high-speed Internet subscribers to reflect the transfer of fixed wireless Internet subscribers. (2) At the beginning of Q4 2018, we adjusted our postpaid wireless subscriber base to remove 20,000 subscribers that we divested to Xplornet as a result of BCE’s acquisition of MTS. (3) At the beginning of Q1 2018, our high-speed Internet subscriber base was increased by 19,835, our IPTV by 14,599 and our residential NAS by 23,441, mainly as a result of a small acquisition made in Q1 2018. (4) As of January 1, 2018, business NAS was removed from our NAS subscriber base due to its declining relevance as a KPI given migrations from voice to IP result in NAS losses without a corresponding decline in revenues. Previously reported periods were retroactively adjusted. BCE NET ACTIVATIONS Wireless subscribers Postpaid Prepaid High-speed Internet subscribers TV (satellite and IPTV subscribers) IPTV Total growth services Wireline residential NAS lines Total subscribers 2018 479,811 447,682 32,129 107,839 6,182 110,790 593,832 333,084 416,779 (83,695) 87,860 (20,716) 107,712 400,228 2017 % CHANGE 44.1% 7.4% 138.4% 22.7% 129.8% 2.9% 48.4% (9.3%) (264,561) (242,094) 329,271 158,134 108.2% BCE added 593,832 net new customer connections to its growth services in 2018, representing a 48.4% increase over 2017. This consisted of: At the end of 2018, BCE customer connections totaled 19,387,682 and were comprised of the following: • 447,682 postpaid wireless customers, and 32,129 prepaid wireless customers • 107,839 high-speed Internet customers • 9,610,482 wireless subscribers, up 4.8% compared to 2017, including 8,830,216 postpaid subscribers, an increase of 4.9% over last year, and 780,266 prepaid subscribers, up 4.3% year over year • 110,790 IPTV customers and 104,608 satellite TV net customer losses • 3,933,931 high-speed Internet subscribers, 3.8% higher year over year Residential NAS net losses were 264,561 in 2018, an increase of 9.3% over 2017. Total BCE customer connections across all services increased by 1.9% in 2018 compared to last year, driven by increases in our growth services customer base, offset in part by the ongoing erosion in traditional residential NAS lines. • 2,853,081 total TV subscribers, up 0.7% compared to 2017, including 1,675,706 IPTV customers, up 8.1% year over year and 1,177,375 satellite subscribers, down 8.2% compared to last year • 2,990,188 residential NAS lines, a decline of 7.5% compared to 2017 51 MD&AConsolidated financial analysis4 BCE Inc. 2018 Annual Report 4.3 Operating revenues BCE Revenues (in $ millions) $22,757 $23,468 +3.1% 17 18 BCE Bell Wireless Bell Wireline Bell Media Inter-segment eliminations 2018 8,422 7,926 12,662 12,400 3,121 (737) 3,104 (673) 2017 $ CHANGE % CHANGE 496 262 17 (64) 711 6.3% 2.1% 0.5% (9.5%) 3.1% Total BCE operating revenues 23,468 22,757 Total operating revenues at BCE increased by 3.1% in 2018, compared to 2017, reflecting growth across all three of our segments, including the favourable impact from the acquisition of MTS. Total operating revenues were comprised of service revenues of $20,441 million and product revenues of $3,027 million in 2018, which grew by 1.7% and 13.7%, respectively, year over year. Wireless operating revenues increased by 6.3% in 2018, driven by service revenue growth of 3.5% and product revenue growth of 15.3%. Wireline operating revenues increased by 2.1% due to service revenue growth of 1.5%, from higher data and other service revenue, offset in part by a decline in voice revenue, and also reflected product revenue growth of 10.2%. Bell Media operating revenues increased by 0.5% in 2018 due to both higher subscriber and advertising revenues. 4.4 Operating costs BCE Operating costs (in $ millions) BCE Operating cost profile 2017 BCE Operating cost profile 2018 $13,475 in 2017 $13,933 in 2018 Bell Wireless Bell Wireline Bell Media Inter-segment eliminations Total BCE operating costs 15% 15% 33% 52% 32% 53% 52% Cost of revenues (1) 33% Labour (2) 15% Other (3) 53% Cost of revenues (1) 32% Labour (2) 15% Other (3) 2017 $ CHANGE % CHANGE 2018 (4,856) (7,386) (2,428) 737 (4,550) (7,210) (2,388) 673 (13,933) (13,475) (306) (176) (40) 64 (458) (6.7%) (2.4%) (1.7%) 9.5% (3.4%) (1) Cost of revenues includes costs of wireless devices and other equipment sold, network and content costs, and payments to other carriers. (2) Labour costs (net of capitalized costs) include wages, salaries and related taxes and benefits, post-employment benefit plans service cost, and other labour costs, including contractor and outsourcing costs. (3) Other operating costs include marketing, advertising and sales commission costs, bad debt expense, taxes other than income taxes, IT costs, professional service fees and rent. BCE Total BCE operating costs increased by 3.4% in 2018, compared to 2017, resulting from higher costs in wireless of 6.7%, wireline of 2.4%, and Bell Media of 1.7%. 52 MD&AConsolidated financial analysis4 4.5 Net earnings BCE Net earnings (in $ millions) $3,050 $2,973 (2.5%) 17 18 4.6 Adjusted EBITDA BCE Adjusted EBITDA (in $ millions) $9,282 $9,535 $3,376 $3,566 $5,190 $5,276 $716 $693 17 18 Bell Wireless Bell Wireline Bell Media Bell Wireless Bell Wireline Bell Media Total BCE adjusted EBITDA BCE BCE Inc. 2018 Annual Report In 2018, net earnings decreased by 2.5%, compared to 2017, mainly due to higher other expense which included impairment charges of $200 million mainly relating to our Bell Media segment, higher depreciation and amortization expense, and higher finance costs. This was partly offset by higher adjusted EBITDA, as growing revenues more than offset an increase in operating costs, lower income taxes and lower severance, acquisition and other costs. BCE Adjusted EBITDA (in $ millions) (% adjusted EBITDA margin) $9,282 in 2017 40.8% $9,535 in 2018 40.6% +2.7% 2018 3,566 5,276 693 9,535 2017 3,376 5,190 716 9,282 $ CHANGE % CHANGE 190 86 (23) 253 5.6% 1.7% (3.2%) 2.7% BCE’s adjusted EBITDA increased by 2.7% in 2018, compared to 2017, driven by growth in our Bell Wireless segment of 5.6% and our Bell Wireline segment of 1.7%, offset in part by a decline in our Bell Media segment of 3.2%. The increase in adjusted EBITDA was due to revenue growth, partly offset by higher operating expenses, and includes the benefit from the acquisition of MTS. This resulted in an adjusted EBITDA margin of 40.6% in 2018, compared to 40.8% experienced last year, attributable to greater low-margin product sales in our total revenue base. 53 MD&AConsolidated financial analysis4 BCE Inc. 2018 Annual Report 4.7 Severance, acquisition and other costs This category includes various income and expenses that are not related directly to the operating revenues generated during the year. BCE Severance, acquisition and other costs (in $ millions) $190 in 2017 $136 in 2018 2018 Severance, acquisition and other costs included: • Severance costs of $92 million for workforce reduction initiatives, which included a 4% reduction in management workforce across BCE • Acquisition and other costs of $44 million, which included transaction costs, such as legal and financial advisory fees, related to completed or potential acquisitions 2017 Severance, acquisition and other costs included: • Severance costs related to workforce reduction initiatives of $79 million • Acquisition and other costs of $111 million, which included transaction costs, such as legal and financial advisory fees, related to completed or potential acquisitions, severance and integration costs as well as a loss on transfer of spectrum licences to Xplornet related to the MTS acquisition 4.8 Depreciation and amortization The amount of our depreciation and amortization in any year is affected by: • How much we invested in new property, plant and equipment and intangible assets in previous years • How many assets we retired during the year • Estimates of the useful lives of assets BCE Depreciation (in $ millions) $3,034 $3,145 BCE Amortization (in $ millions) $810 $869 17 18 17 18 DEPRECIATION AMORTIZATION Depreciation in 2018 increased by $111 million, compared to 2017, mainly due to a higher asset base as we continued to invest in our broadband wireless networks as well as our IPTV service, and the acquisition of MTS. Amortization in 2018 increased by $59 million, compared to 2017, due mainly to a higher asset base and the acquisition of MTS. 54 MD&AConsolidated financial analysis4 4.9 Finance costs BCE Interest expense (in $ millions) $955 $1,000 BCE Interest on post-employment benefit obligations (in $ millions) $72 $69 17 18 17 18 BCE Inc. 2018 Annual Report INTEREST EXPENSE Interest expense in 2018 increased by $45 million, compared to 2017, mainly as a result of higher average debt levels, including the acquisition of MTS, and higher average interest rates on notes payable under commercial paper programs and loans securitized by trade receivables. INTEREST ON POST-EMPLOYMENT BENEFIT OBLIGATIONS Interest on our post-employment benefit obligations is based on market conditions that existed at the beginning of the year. On January 1, 2018, the discount rate was 3.6% compared to 4.0% on January 1, 2017. In 2018, interest expense decreased by $3 million, compared to last year, due to a lower discount rate, partly offset by a higher post- employment benefit obligation at the beginning of the year. The impacts of changes in market conditions during the year are recognized in other comprehensive income (loss) (OCI). 4.10 Other expense Other expense includes income and expense items, such as: • Impairment of assets • Net mark-to-market gains or losses on derivatives used to economically hedge equity settled share-based compensation plans • Equity income or losses from investments in associates and joint BCE Other expense (in $ millions) 17 18 ventures • Net gains or losses on investments, including gains or losses when we dispose of, write down or reduce our ownership in investments ($102) • Early debt redemption costs • Gains or losses on disposal and retirement of software, plant and equipment 2018 ($348) 2017 Other expense of $348 million included impairment charges of $200 million mainly related to our French TV channels and a brand within our Bell Media segment, and net mark-to-market losses on derivatives used to economically hedge equity settled share-based compensation plans of $80 million. Other expense also included losses from our equity investments of $35 million and losses on investments of $34 million, which included BCE’s obligations to repurchase at fair value the minority interest in one of BCE’s joint ventures and the minority interest in one of our subsidiaries, respectively. Other expense of $102 million included impairment charges of $82 million related to our music TV channels and two small market radio station cash-generating units (CGUs) within our Bell Media segment, losses on retirements and disposals of property, plant and equipment and intangible assets of $47 million, losses from our equity investments of $31 million which included BCE’s share of an obligation to repurchase at fair value the minority interest in one of BCE’s joint ventures, early debt redemption costs of $20 million, partly offset by net mark-to- market gains on derivatives used to economically hedge equity settled share-based compensation plans of $76 million. 55 MD&AConsolidated financial analysis4 BCE Inc. 2018 Annual Report 4.11 Income taxes BCE Income taxes (in $ millions) $1,069 in 2017 $995 in 2018 The following table reconciles the amount of reported income taxes in the income statements with income taxes calculated at a statutory income tax rate of 27.0% and 27.1% for 2018 and 2017, respectively. FOR THE YEAR ENDED DECEMBER 31 Net earnings Add back income taxes Earnings before income taxes Applicable statutory tax rate Income taxes computed at applicable statutory rates Non-taxable portion of losses on investments Uncertain tax positions Effect of change in provincial corporate tax rate Change in estimate relating to prior periods Non-taxable portion of equity losses Other Total income taxes Average effective tax rate 2018 2,973 995 3,968 27.0% (1,071) (9) 68 – 20 (10) 7 (995) 25.1% 2017 3,050 1,069 4,119 27.1% (1,116) (1) 16 (3) 51 (10) (6) (1,069) 25.9% Income taxes in 2018 decreased by $74 million compared to 2017 due mainly to lower taxable income and a higher value of uncertain tax positions favourably resolved in 2018 compared to 2017. 4.12 Net earnings attributable to common shareholders and EPS BCE Net earnings attributable to common shareholders (in $ millions) BCE EPS (in $) $2,866 $2,785 $3.20 $3.10 BCE Adjusted net earnings (in $ millions) BCE Adjusted EPS (in $) $3,058 $3,151 $3.42 $3.51 17 18 17 18 17 18 17 18 Net earnings attributable to common shareholders in 2018 decreased by $81 million, or $0.10 per common share, compared to 2017, due to higher other expense which included impairment charges of $200 million mainly relating to our Bell Media segment, higher depreciation and amortization expense, and higher finance costs. This was partly offset by higher adjusted EBITDA, as growing revenues more than offset an increase in operating costs, lower income taxes and lower severance, acquisition and other costs. Excluding the impact of severance, acquisition and other costs, net mark-to-market (losses) gains on derivatives used to economically hedge equity settled share-based compensation plans, net losses on investments, early debt redemption costs and impairment charges, adjusted net earnings in 2018 was $3,151 million, or $3.51 per common share, compared to $3,058 million, or $3.42 per common share, in 2017. 56 MD&AConsolidated financial analysis4 4.13 Capital expenditures BCE Inc. 2018 Annual Report BCE Capital expenditures (in $ millions) Capital intensity (%) $4,034 17.7% $3,971 16.9% $731 9.2% $656 7.8% $3,174 25.6% $3,201 25.3% $129 4.2% $114 3.7% 17 18 Bell Wireless Bell Wireline Bell Media 4.14 Cash flows In 2018, BCE’s cash flows from operating activities increased $26 million, compared to 2017, due mainly to higher adjusted EBITDA, partly offset by a higher voluntary DB pension plan contribution made in 2018. Free cash flow increased $149 million in 2018, compared to 2017, due mainly to higher cash flows from operating activities, excluding voluntary DB pension plan contributions, and acquisition and other costs paid, and lower capital expenditures. BCE capital expenditures of $3,971 million in 2018 declined $63 million, or 1.6%, compared to last year due to lower spending at Bell Wireless and Bell Media, partly offset by greater spending at Bell Wireline. Capital expenditures as a percentage of revenue also declined to 16.9% in 2018 compared to 17.7% in 2017. We continued to focus our strategic investments on the expansion of our FTTP footprint to more homes and businesses, the ongoing deployment of our LTE-A mobile network, spectrum carrier aggregation, the deployment of wireless small-cells to optimize mobile coverage, signal quality and data backhaul, along with the expansion of network capacity to support the growth in subscribers and data consumption and the initial rollout of fixed wireless broadband to rural locations in Ontario and Québec. Our capital expenditures also reflected the acquisition and integration of MTS. BCE Cash flows from operating activities (in $ millions) $7,358 $7,384 BCE Free cash flow (in $ millions) $3,418 $3,567 17 18 17 18 57 MD&AConsolidated financial analysis4 BCE Inc. 2018 Annual Report 5 Business segment analysis 5.1 Bell Wireless A consistent focus on operating profitability and cash flow, together with disciplined postpaid subscriber growth and customer retention spending, drove strong overall financial performance in 2018. FINANCIAL PERFORMANCE ANALYSIS 2018 PERFORMANCE HIGHLIGHTS Bell Wireless Revenues (in $ millions) $7,926 $8,422 77% 75% 23% 25% 17 18 Service Product +6.3% Bell Wireless Adjusted EBITDA (in $ millions) (% adjusted EBITDA margin) $3,376 in 2017 42.6% $3,566 in 2018 42.3% +5.6% s s e e r i l W l l e B i l s s y a n a t n e m g e s s s e n s u B i A & D M 5 Total subscriber growth (1) (2) +4.8% in 2018 Postpaid net activations in 2018 Prepaid net activations in 2018 447,682 32,129 Postpaid churn in 2018 1.16% Improved 7.4% vs. 2017 Improved 138.4% vs. 2017 Improved 0.03 pts vs. 2017 Blended ABPU (3) per month 2018: $67.76 2017: $67.77 (1) At the beginning of Q1 2018, we adjusted our postpaid wireless subscriber base to remove 16,116 subscribers with a corresponding increase to our high-speed Internet subscribers to reflect the transfer of fixed wireless Internet subscribers. (2) At the beginning of Q4 2018, we adjusted our postpaid wireless subscriber base to remove 20,000 subscribers that we divested to Xplornet as a result of BCE’s acquisition of MTS. (3) Our Q1 2018 blended ARPU and blended ABPU were adjusted to exclude the unfavourable retroactive impact of the recent CRTC decision on wholesale wireless domestic roaming rates of $14 million. BELL WIRELESS RESULTS REVENUES External service revenues Inter-segment service revenues Total operating service revenues External product revenues Inter-segment product revenues Total operating product revenues Total Bell Wireless revenues 58 2018 6,258 48 6,306 2,114 2 2,116 8,422 2017 6,048 42 6,090 1,833 3 1,836 7,926 $ CHANGE % CHANGE 210 6 216 281 (1) 280 496 3.5% 14.3% 3.5% 15.3% (33.3%) 15.3% 6.3% BCE Inc. 2018 Annual Report Bell Wireless operating revenues increased by 6.3% in 2018, compared to 2017, due to both higher service and product revenues. These factors were partially offset by: • Lower blended ARPU • Service revenues increased by 3.5% in 2018, compared to last year, due to: • The continued growth in our postpaid subscriber base • The contribution from the acquisition of MTS • The unfavourable retroactive impact of the CRTC decision on wholesale wireless domestic roaming rates of $14 million • Product revenues grew by 15.3% in 2018, compared to the prior year, due to increased sales of premium handsets with higher retail prices along with greater gross activations and upgrade volumes. OPERATING COSTS AND ADJUSTED EBITDA Operating costs Adjusted EBITDA Total adjusted EBITDA margin 2018 (4,856) 3,566 42.3% 2017 $ CHANGE % CHANGE (4,550) 3,376 42.6% (306) 190 (6.7%) 5.6% (0.3) pts Bell Wireless operating costs increased by 6.7% in 2018, compared to 2017, as a result of: • Increased product cost of goods sold driven by higher sales volumes and increased handset costs • Higher network operating costs driven by the expansion of network capacity to support subscriber growth and increased data consumption • Greater labour costs to support key initiatives and growth of the • Higher cost related to the acquisition of MTS Bell Wireless adjusted EBITDA increased by 5.6% in 2018, compared to the last year, due to the flow-through of revenue growth, partly offset by higher operating expenses. Adjusted EBITDA margin, based on wireless operating revenues, declined by 0.3 pts to 42.3% in 2018, compared to 42.6% in 2017, driven by a greater proportion of low-margin product sales in our total revenue base. business BELL WIRELESS OPERATING METRICS Blended ARPU ($/month) (1) Blended ABPU ($/month) (1) Gross activations Postpaid Prepaid Net activations Postpaid Prepaid Blended churn % (average per month) Postpaid Prepaid Subscribers (2) (3) Postpaid (2) (3) Prepaid 2018 55.22 67.76 2017 55.88 67.77 (0.66) (0.01) CHANGE % CHANGE 1,954,792 1,780,478 174,314 1,615,764 1,532,425 339,028 479,811 447,682 32,129 1.32% 1.16% 3.17% 248,053 333,084 416,779 (83,695) 1.36% 1.19% 3.17% 83,339 90,975 146,727 30,903 115,824 9,610,482 9,166,787 8,830,216 8,418,650 780,266 748,137 443,695 411,566 32,129 (1.2%) – 9.8% 5.4% 36.7% 44.1% 7.4% 138.4% 0.04 pts 0.03 pts – 4.8% 4.9% 4.3% (1) Our Q1 2018 blended ARPU and blended ABPU were adjusted to exclude the unfavourable retroactive impact of the recent CRTC decision on wholesale wireless domestic roaming rates of $14 million. (2) At the beginning of Q1 2018, we adjusted our postpaid wireless subscriber base to remove 16,116 subscribers with a corresponding increase to our high-speed Internet subscribers to reflect the transfer of fixed wireless Internet subscribers. (3) At the beginning of Q4 2018, we adjusted our postpaid wireless subscriber base to remove 20,000 subscribers that we divested to Xplornet as a result of BCE’s acquisition of MTS. Blended ARPU of $55.22 decreased by 1.2% in 2018, compared to the last year, driven by: • Decreased voice and data overages due to increased customer • Greater allocation of revenues to product revenues due to a larger proportion of premium smartphones in our sales mix combined with higher retail handset prices adoption of plans with greater usage thresholds These factors were partly offset by: • Lower ARPU generated from the contract with Shared Services Canada • Greater proportion of customers choosing higher-value monthly (SSC) • Dilutive impact from the continued ramp-up in prepaid customers from Lucky Mobile, our low-cost prepaid mobile service launched in December 2017 plans with greater data allotments • Flow-through of 2017 and 2018 pricing changes i l s s y a n a t n e m g e s s s e n s u B i s s e e r i l W l l e B A & D M 5 59 BCE Inc. 2018 Annual Report Blended ABPU approximates the average amount billed to customers on a monthly basis and is the same as blended ARPU prior to the adoption of IFRS 15. Blended ABPU of $67.76 remained stable in 2018, compared to the prior year, and was similarly impacted by the items affecting ARPU. However, since ABPU is based on average billing, it is not impacted by the greater allocation to product revenues. Total gross wireless activations increased by 9.8% in 2018, compared to 2017, due to both higher postpaid and prepaid gross activations. • Postpaid gross activations increased by 5.4% in 2018, compared to the prior year, driven by the continued on-boarding of customers from the contract with SSC, as well as reflecting our mobile network speed and technology leadership and effective sales execution across our retail channels • Prepaid gross activations increased by 36.7% in 2018, compared to the last year, driven by the ramp-up of Lucky Mobile Blended wireless churn of 1.32% improved by 0.04 pts in 2018, compared to 2017, primarily reflecting an improvement in postpaid churn. • Postpaid churn of 1.16% improved by 0.03 pts in 2018, compared to 2017, due to the favourable impact of our ongoing investments in network speeds, customer retention and improved client experience • Prepaid churn of 3.17% remained stable year over year Postpaid net activations increased by 7.4% in 2018, compared to the last year, driven by an increase in gross activations, offset in part by higher customer deactivations. Prepaid net activations increased by 115,824 or 138.4% in 2018, compared to 2017, driven by higher gross activations and lower customer deactivations. Wireless subscribers at December 31, 2018 totaled 9,610,482, an increase of 4.8% from 9,166,787 subscribers reported at the end of 2017. At the beginning of Q1 2018, we adjusted our postpaid wireless subscriber base to remove 16,116 subscribers with a corresponding increase to our high- speed Internet subscribers to reflect the transfer of fixed wireless Internet subscribers. Additionally, at the beginning of Q4 2018, we adjusted our postpaid wireless subscriber base to remove 20,000 subscribers as a result of the divestiture to Xplornet related to the acquisition of MTS. The proportion of Bell Wireless customers subscribing to our postpaid service remained stable year over year at 92%. COMPETITIVE LANDSCAPE AND INDUSTRY TRENDS COMPETITIVE LANDSCAPE The wireless market is the largest sector of the Canadian telecommu- nications industry, representing over 50% of total revenues, and is currently growing at a mid-single digit rate annually. The Canadian wireless industry has experienced strong subscriber growth in recent years, supported by immigration and population growth; the trend toward multiple devices, including tablets; the expanding functionality of data and related applications; and mobile adoption by both younger and older generations. The wireless penetration rate increased to approximately 89% in Canada at the end of 2018, with further increases in penetration expected to continue in 2019. By comparison, the wireless penetration rate in the U.S. is well over 100%, and even higher in Europe and Asia. In 2018, the wireless market was characterized by heightened retention and acquisition activity and the associated high costs of device subsidies on two-year contracts, a heightened level of competitive intensity, and the continued adoption of higher-value, data-centric smartphones. While higher handset costs, increased subsidies and the frequency of customer device upgrades put pressure on industry margins, adoption of the latest smartphones generally has a positive impact on ABPU and churn rates. The market continues to be highly competitive among three well- established national competitors as well as a number of regional competitors. Rogers Communications Inc. (Rogers) holds the largest share by virtue of its legacy global system for mobile communications (GSM) network. However, Bell has had significant success winning subscribers over the past decade, supported by the launch of our HSPA+, 4G LTE and LTE-A networks, industry-leading mobile network speeds, expanded retail distribution, the purchase of Virgin Mobile, a strong brand and improved customer service. Shaw Communications Inc.’s (Shaw) Freedom Mobile has focused on the build-out of an urban LTE network in major cities in Alberta, British Columbia and Ontario. Shaw’s re-farming of advanced wireless services-1 (AWS-1) spectrum and deployment of 2,500 MHz spectrum was completed in 2018, making older smartphone versions (iPhones and Galaxy) compatible with Freedom’s LTE network. Québecor Media’s Vidéotron Ltée (Vidéotron) continues to operate as a regional facilities- based wireless service provider in Québec, and Eastlink in Atlantic Canada. These cable TV-based wireless providers, in addition to the provincial carrier in Saskatchewan, represent the fourth carrier in their respective markets. i l s s y a n a t n e m g e s s s e n s u B i s s e e r i l W l l e B A & D M 5 60 Competitors • Large facilities-based national wireless service providers Rogers and the Telus Corporation group of companies (Telus) Canadian wireless market share Subscribers BCE Inc. 2018 Annual Report • Smaller facilities-based wireless service provider Freedom Mobile, which currently provides service in Toronto, Calgary, Vancouver, Edmonton and Ottawa, as well as in several communities in southwestern Ontario • Regional facilities-based wireless service providers Vidéotron, which provides service in Montréal and other parts of Québec; Saskatchewan Telecommunications Holding Corporation (SaskTel), which provides service in Saskatchewan; Eastlink, which provides service in Nova Scotia and Prince Edward Island; and Xplornet, which launched service in Manitoba in November 2018 • Mobile virtual network operators (MVNOs), who resell competitors’ wireless networks, such as PC Mobile 6% 4% 33% 29% 33 million subscribers at December 31, 2018 28% 29% Bell 28% Telus 33% Rogers 4% Freedom Mobile 6% Regional Revenues 9% 30% 32% 29% Total industry revenues of $28 billion in 2018 30% Bell 29% Telus 32% Rogers 9% Other INDUSTRY TRENDS ACCELERATING DATA CONSUMPTION Wireless data growth continues to be driven by the ongoing adoption of higher-value smartphones and tablets, and associated data plans. The demand for wireless data services is expected to continue to grow, due to ongoing investment in faster network technologies, such as LTE, LTE-A and 5G, that provide a richer user experience and lower network latency, a larger appetite for mobile connectivity, social networking and other applications, as well as increasing adoption of shared plans with multiple devices by families. Greater customer adoption of data services, including mobile TV, data roaming for travel, mobile commerce, mobile banking, and other IoT applications in the areas of retail and transportation (connected car, asset tracking, and remote monitoring) should also contribute to growth. In the consumer market, IoT represents a growth area for the industry as wireless connectivity on everyday devices, from home automation to cameras, becomes ubiquitous. SIGNIFICANT INVESTMENTS IN WIRELESS NETWORKS Fast growth in mobile data traffic is increasingly putting a strain on wireless carriers’ networks and their ability to manage and service this traffic. Industry Canada’s 700 MHz, advanced wireless services-3 (AWS-3), and 2500 MHz spectrum auctions that concluded in 2014 and 2015 provided wireless carriers with prime spectrum to roll out faster next- generation wireless networks and build greater capacity. Carrier aggregation is a technology currently being employed by Canadian wireless carriers that allows for multiple channels of spectrum to be used together, thereby significantly increasing network capacity and data transfer rates. Investments in fibre backhaul to cell sites and the deployment of small-cell technology further increase the efficient utilization of carriers’ spectrum holdings. CUSTOMERS BRINGING THEIR OWN DEVICES With the CRTC’s Wireless Code limiting wireless contract terms to two years from three years, the number of customers on expired contracts has increased. Subscribers are increasingly bringing their own devices or keeping their existing devices for longer periods of time and therefore may not enter into new contracts for wireless services. This may negatively impact carriers’ subscriber churn, but may also create gross addition opportunities as a result of increased churn from other carriers. Additionally, this trend may negatively impact the monthly service fees charged to subscribers; however, the service revenue generated by these customers helps improve margins due to lower spending on device subsidies. i l s s y a n a t n e m g e s s s e n s u B i s s e e r i l W l l e B A & D M 5 61 BCE Inc. 2018 Annual Report BUSINESS OUTLOOK AND ASSUMPTIONS 2019 OUTLOOK We expect revenue growth to be driven primarily by postpaid and prepaid subscriber base expansion. We expect ABPU to continue to be impacted negatively by reductions in data and voice overage revenue resulting from larger data allotments and talk minutes in monthly rate plans, as well as the onboarding of customer activations from the federal SSC contract and Lucky Mobile prepaid customer growth. We will seek to achieve higher revenues from the flow-through of pricing changes, data growth through increased customer usage of our 4G LTE and LTE-A networks, higher demand for services such as social media, music and streaming of content, as well as nascent services including mobile commerce and other IoT applications. Our intention is to introduce new services to the market in a way that balances innovation with profitability. We also remain focused on sustaining our market share of incumbent postpaid net additions in a disciplined and cost-conscious manner, while also growing our share of new industry prepaid net additions. We plan to deliver adjusted EBITDA growth in 2019 from flow through of higher revenue, which should be partly offset by increased operating costs reflecting higher handset costs and increased customer support costs due to growth in the subscriber base and increased network operating expenses. KEY GROWTH DRIVERS ASSUMPTIONS • Maintain our market share of incumbent wireless postpaid net additions • Higher prepaid customer net additions • Continued adoption of smartphone devices, tablets and data applications, as well as the introduction of more 4G LTE and LTE-A devices and new data services • Higher subscriber acquisition and retention spending, driven by higher handset costs and more customer device upgrades • Improving blended ABPU, driven by a higher postpaid smartphone mix, increased data consumption on 4G LTE and LTE-A networks, and higher access rates partly offset by the impact of a higher prepaid mix in our overall subscriber base and more customer migrations from Bell Mobility’s SSC contract • Expansion of the LTE-A network coverage to approximately 94% of the Canadian population, and continued 5G preparations with network technology trials, as well as the deployment of small cells and equipping all new sites with fibre • Ability to monetize increasing data usage and customer subscriptions to new data services • No material financial, operational or competitive consequences of changes in regulations affecting our wireless business s s e e r i l W l l e B • Increasing Canadian wireless industry penetration • Increasing customer adoption of smartphones, tablets and other i l s s y a n a t n e m g e s s s e n s u B i • Greater number of customers on our 4G LTE and LTE-A networks 4G LTE and LTE-A devices to increase mobile data usage • Customer usage of new data applications and services PRINCIPAL BUSINESS RISKS This section discusses certain principal business risks specifically related to the Bell Wireless segment. For a detailed description of the principal risks that could have a material adverse effect on our business, refer to section 9, Business risks. AGGRESSIVE COMPETITION REGULATORY ENVIRONMENT RISK • The intensity of competitive activity from incumbent wireless operators, newer wireless entrants, non-traditional players and resellers POTENTIAL IMPACT • Pressure on our adjusted EBITDA, ABPU, churn and cost of acquisition and retention would likely result if competitors continue to aggressively increase discounts for handsets and price plans, offer shared plans based on sophisticated pricing requirements or offer other incentives, such as new data plans or unlimited data plans, instalment plans for smartphones or multi-product bundles, to attract new customers RISK • Greater regulation of wireless services, pricing and infrastructure (e.g. additional mandated access to wireless networks and limitations placed on future spectrum bidding) POTENTIAL IMPACT • Greater regulation could limit our flexibility, influence the market structure, improve the business positions of our competitors and negatively impact the financial performance of our wireless business MARKET MATURITY AND INCREASED DEVICE COSTS RISK • Slower subscriber growth due to high Canadian smartphone penetration and increased device costs POTENTIAL IMPACT • A maturing wireless market and higher device costs could challenge subscriber growth and cost of acquisition and retention, putting pressure on the financial performance of our wireless business A & D M 5 62 5.2 Bell Wireline Bell Wireline achieved stronger organic revenue and adjusted EBITDA growth in 2018, reflecting robust Internet and IPTV subscriber base expansion, higher household ARPU, improved business markets results and operating cost savings that maintained a North American industry-leading margin of 41.7%. BCE Inc. 2018 Annual Report FINANCIAL PERFORMANCE ANALYSIS 2018 PERFORMANCE HIGHLIGHTS Bell Wireline Revenues (in $ millions) $12,400 $12,662 59% 60% Bell Wireline Adjusted EBITDA (in $ millions) (% adjusted EBITDA margin) Data services Voice Product Other services $5,190 in 2017 41.9% $5,276 in 2018 41.7% 32% 7% 2% 31% 7% 2% +2.1% 17 18 +1.7% TV (1) +0.7% Subscriber growth in 2018 IPTV (1) 110,790 Fibre footprint 9.5 million Total net subscriber activations in 2018 Improved 2.9% vs. 2017 Homes and businesses at the end of 2018 High-speed Internet (1) (2) High-speed Internet Residential NAS lines (1) +3.8% Subscriber growth in 2018 107,839 Total net subscriber activations in 2018 Improved 22.7% vs. 2017 (7.5%) Subscriber decline in 2018 (1) At the beginning of Q1 2018, our high-speed Internet subscriber base was increased by 19,835, our IPTV by 14,599 and our residential NAS by 23,441, mainly as a result of a small acquisition made in Q1 2018. (2) At the beginning of Q1 2018, we adjusted our high-speed Internet subscriber base to add 16,116 subscribers with a corresponding decrease to our postpaid wireless subscribers to reflect the transfer of fixed wireless Internet subscribers. i l s s y a n a t n e m g e s s s e n s u B i e n i l e r i W l l e B A & D M 5 63 BCE Inc. 2018 Annual Report BELL WIRELINE RESULTS REVENUES Data Voice Other services Total external service revenues Inter-segment service revenues Total operating service revenues Data Equipment and other Total external product revenues Inter-segment product revenues Total operating product revenues Total Bell Wireline revenues 2018 7,466 3,793 247 11,506 241 11,747 466 447 913 2 915 2017 7,192 3,968 211 11,371 199 11,570 410 419 829 1 830 12,662 12,400 $ CHANGE % CHANGE 274 (175) 36 135 42 177 56 28 84 1 85 262 3.8% (4.4%) 17.1% 1.2% 21.1% 1.5% 13.7% 6.7% 10.1% 100.0% 10.2% 2.1% Bell Wireline operating revenues grew by 2.1% in 2018, compared to last year, driven by increases in data services, other services, and product revenues, partly offset by the ongoing decline in voice revenues. Bell Wireline operating service revenues increased by 1.5% in 2018, compared to 2017. • Voice revenues declined by 4.4% in 2018, compared to 2017, driven by: • Continued NAS line erosion from technological substitution to wireless and Internet-based services • Large business customer conversions to IP-based data services • Competitive pricing pressures • Data revenues increased by 3.8% in 2018, compared to 2017, due to: • Long distance rate pressure in our residential market from customer • The flow-through of 2017 and 2018 pricing changes adoption of premium rate plans • Internet and IPTV subscriber growth • Reduced usage of traditional long distance services by residential • The contribution from the acquisition of MTS and business customers • Increased IP connectivity and business solutions services sales to enterprise customers, including the contribution from the acquisition of Axia in late August 2018 These factors were partially offset by: • The contribution from the acquisition of MTS • The flow-through of 2017 and 2018 pricing changes These factors were partially offset by: • Higher sales of international long distance minutes in our wholesale • Greater acquisition, retention and bundle discounts on residential market services due to aggressive offers from cable competitors • The continued decline in our satellite TV subscriber base • Ongoing legacy data erosion due in part to migrations to IP-based services • Competitive pricing pressures within our business markets • Other services revenues increased by 17.1% in 2018, primarily due to the contribution from the acquisition of AlarmForce. Bell Wireline operating product revenues grew by 10.2% in 2018, compared to prior year, resulting from increased demand for equipment by large business customers, higher sales of consumer electronics at The Source and the contribution from the acquisition of MTS. OPERATING COSTS AND ADJUSTED EBITDA Operating costs Adjusted EBITDA Adjusted EBITDA margin Bell Wireline operating costs increased by 2.4% in 2018, compared to 2017, attributable to: • Acquisitions, including MTS • Greater cost of goods sold attributable to increased product sales • Increased business solutions services costs associated with the revenue growth • Higher pension expense due to a gain in Q1 2017 on post-employment benefit expense related to an alignment of certain Bell Aliant DB pension plans with those of Bell Canada • Increased fleet and real estate costs due in part to rate increases 2018 (7,386) 5,276 41.7% 2017 $ CHANGE % CHANGE (7,210) 5,190 41.9% (176) 86 (2.4%) 1.7% (0.2) pts These factors were partially offset by: • Lower labour costs resulting from workforce reductions, fewer call volumes to our customer service centres and vendor contract savings Bell Wireline adjusted EBITDA increased by 1.7% in 2018, compared to 2017, as a result of the flow-through of the revenue growth, offset in part by higher operating expenses. Adjusted EBITDA margin decreased to 41.7% in 2018, compared to the 41.9% achieved last year, due mainly to more low-margin product sales in the total revenue base. i l s s y a n a t n e m g e s s s e n s u B i e n i l e r i W l l e B A & D M 5 64 BELL WIRELINE OPERATING METRICS DATA High-speed Internet High-speed Internet net activations High-speed Internet subscribers (1) (2) BCE Inc. 2018 Annual Report 2018 107,839 2017 87,860 CHANGE 19,979 3,933,931 3,790,141 143,790 % CHANGE 22.7% 3.8% (1) At the beginning of Q1 2018, our high-speed Internet subscriber base was increased by 19,835, mainly as a result of a small acquisition made in Q1 2018. (2) At the beginning of Q1 2018, we adjusted our high-speed Internet subscriber base to add 16,116 subscribers with a corresponding decrease to our postpaid wireless subscribers to reflect the transfer of fixed wireless Internet subscribers. High-speed Internet subscriber net activations increased by 22.7% in 2018, compared to 2017, driven by increased retail activations in our expanded FTTP footprint, richer retail offers, greater IPTV pull-through and higher activations in our business markets. This was partly offset by higher deactivations resulting from aggressive offers from cable competitors in both our retail and wholesale markets, combined with a larger number of residential customers coming off promotional offers. High-speed Internet subscribers at December 31, 2018 totaled 3,933,931, up 3.8% from the end of last year. At the beginning of Q1 2018, our high- speed Internet subscriber base was increased by 19,835, mainly as a result of a small acquisition. We further adjusted our subscriber base in Q1 2018 to add 16,116 subscribers with a corresponding decrease to our postpaid wireless subscribers to reflect the transfer of fixed wireless Internet subscribers. TV Net subscriber activations (losses) IPTV Total subscribers (1) IPTV (1) 2018 6,182 110,790 2017 (20,716) 107,712 2,853,081 2,832,300 CHANGE 26,898 3,078 20,781 1,675,706 1,550,317 125,389 % CHANGE 129.8% 2.9% 0.7% 8.1% (1) At the beginning of Q1 2018, our IPTV subscriber base was increased by 14,599 as a result of a small acquisition made in Q1 2018. IPTV net subscriber activations increased by 2.9% in 2018, compared to last year, driven by ongoing growth in activations from our application- based live TV service Alt TV, combined with greater activations in our expanded FTTP footprint. This was moderated by increased deactivations due to aggressive residential offers for service bundles from cable competitors, a higher number of retail customers coming off promotional offers, increased substitution of traditional TV services with OTT services, the impact of maturing Fibe TV markets, along with fewer customer migrations from satellite TV. Satellite TV net customer losses improved by 18.5% in 2018, compared to 2017, driven by lower retail deactivations and reduced migrations to IPTV, attributable to a more mature subscriber base geographically better-suited for satellite TV service, combined with a reduced number of retail customers coming off promotional offers and fewer promotional offers from cable competitors in rural markets. Total TV net subscriber activations (IPTV and satellite TV combined) increased by 26,898 in 2018, compared to 2017, due to lower satellite TV net losses and higher IPTV net activations. IPTV subscribers at December 31, 2018 totaled 1,675,706, up 8.1% from 1,550,317 subscribers reported at the end of 2017. At the beginning of Q1 2018, our IPTV subscriber base was increased by 14,599, as a result of a small acquisition. Satellite TV subscribers at December 31, 2018 totaled 1,177,375, down 8.2% from 1,281,982 subscribers at the end of last year. Total TV subscribers (IPTV and satellite TV combined) at December 31, 2018 were 2,853,081, representing a 0.7% increase since the end of 2017. At the beginning of Q1 2018, our total TV subscriber base was increased by 14,599, as a result of a small acquisition. VOICE Residential NAS lines (1) Residential NAS net losses 2018 2017 CHANGE % CHANGE 2,990,188 3,231,308 (264,561) (242,094) (241,120) (22,467) (7.5%) (9.3%) (1) At the beginning of Q1 2018, our residential NAS subscriber base was increased by 23,441 as a result of a small acquisition made in Q1 2018. Residential NAS net losses increased by 9.3% in 2018, compared to last year, driven by lower activations attributable to ongoing wireless and Internet-based technology substitution, lower acquisition of three- product households, reduced pull-through from our IPTV service bundle offers, as well as aggressive competitive offers from cable TV providers. Residential NAS subscribers at December 31, 2018 totaled 2,990,188, representing a 7.5% decrease compared to the 3,231,308 subscribers reported at the end of 2017. This represents a significant decline over the 0.6% subscriber base erosion experienced in 2017, which benefited from the subscribers acquired from MTS. At the beginning of Q1 2018, our residential NAS subscriber base was increased by 23,441, as a result of a small acquisition. i l s s y a n a t n e m g e s s s e n s u B i e n i l e r i W l l e B A & D M 5 65 BCE Inc. 2018 Annual Report COMPETITIVE LANDSCAPE AND INDUSTRY TRENDS COMPETITIVE LANDSCAPE The financial performance of the overall Canadian wireline telecommunications market continues to be impacted by the ongoing declines in legacy voice service revenues resulting from technological substitution to wireless and OTT services, as well as by ongoing conversion to IP-based data services and networks by large business customers. Sustained competition from cable companies also continues to erode traditional telephone providers’ market share of residential local telephony. Canada’s four largest cable companies had approximately 3.8 million telephony subscribers at the end of 2018, representing a national residential market share of approximately 45%. Other non-facilities-based competitors also offer local and long distance VoIP services and resell high-speed Internet services. Although the residential Internet market is maturing, with over 86% penetration across Canada, subscriber growth is expected to continue over the next several years. At the end of 2018, the four largest cable companies had more than 7 million Internet subscribers, representing 54% of the total Internet market based on publicly reported data (1), while incumbent local exchange carriers (ILECs) held the remaining 46% or 6 million subscribers. Bell continues to make market share gains due to the expansion of our fibre optic network and the pull-through of subscribers from our IP-based Fibe TV and Alt TV services. While Canadians still watch traditional TV, digital platforms are playing an increasingly important role in the broadcasting industry. Popular online video services are providing Canadians with more choice about where, when and how to access their video content. In 2018, ILECs offering IPTV service grew their subscriber bases by 8% to reach 2.9 million customers, driven by expanded network coverage, enhanced service offerings, and marketing and promotions focused on IPTV. This growth came at the expense of cable TV and satellite TV subscriber losses. At the end of the year, Canada’s four largest cable companies had approximately 5.5 million TV subscribers, or a 53% market share, compared to 55% at the end of 2017. In 2018, our primary cable TV competitor in Ontario, Rogers, launched Ignite TV, based on Comcast’s XFINITY X1 video platform. Vidéotron, our primary cable TV competitor in Québec, has announced its intention to adopt the Comcast X1 platform in 2019. Competitors • Cable TV providers offering cable TV, Internet and cable telephony services, including: Canadian market share Residential telephony • Rogers in Ontario, New Brunswick, Newfoundland and Labrador • Vidéotron in Québec e n i l e r i W l l e B • Cogeco Cable Inc. (a subsidiary of Cogeco Inc.) (Cogeco) in Ontario and Québec i l s s y a n a t n e m g e s s s e n s u B i • Shaw in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario • Shaw Direct, providing satellite TV service nationwide • Eastlink in every province except Saskatchewan, where it does not provide cable TV and 45% 55% A & D M 5 8 million total subscribers 55% ILECs 45% Cable Internet service • Telus provides residential voice, Internet and IPTV services in British Columbia, Alberta and Eastern Québec • Telus and Allstream Inc. provide wholesale products and business services across Canada • Various others (such as TekSavvy Solutions, Distributel, VMedia, and Vonage Canada (a division of Vonage Holdings Corp.) (Vonage) offer resale or VoIP-based local, long distance and Internet services • OTT voice and video services such as Skype, Netflix, Amazon Prime Video and YouTube • Digital media streaming devices such as Apple TV, Roku and Google Chromecast • Other Canadian ILECs and cable TV operators • Substitution to wireless services, including those offered by Bell Internet 54% 46% 13 million total subscribers 46% ILECs 54% Cable • Customized managed outsourcing solutions competitors, such as systems integrators CGI, EDS (a division of HP Enterprise Services) and IBM TV • Wholesale competitors include cable operators, domestic CLECs, U.S. or other international carriers for certain services, and electrical utility-based telecommunications providers • Competitors for home security range from local to national companies, such as ADT, Chubb Security, Stanley Security, Fluent and MONI Smart Security 53% 28% 19% 10 million total subscribers 28% IPTV 19% DTH satellite 53% Cable (1) Internet services provided by resellers are included as wholesale Internet subscribers for cable companies and ILECs. 66 BCE Inc. 2018 Annual Report users with the ability to consume live and on-demand content on laptops, smartphones, tablets and Apple TV without the need for a traditional TV STB. TECHNOLOGY SUBSTITUTION Technology substitution, enabled by the broad deployment of higher speed Internet; the pervasive use of e-mail, messaging and social media as alternatives to voice services; and the growth of wireless and VoIP services, continues to drive legacy voice revenue declines for telecommunications companies. Wireless-only households were estimated to represent approximately 46% of households in Ontario, Québec and Atlantic Canada at the end of 2018, compared to approximately 43% at the end of 2017, while the disconnection of and reduction in spending for traditional TV (cord-cutting and cord-shaving) continues to rise. Although Bell is a key provider of these substitution services, the decline in this legacy business continues as anticipated. ADOPTION OF IP-BASED SERVICES The convergence of IT and telecommunications, facilitated by the ubiquity of IP, continues to shape competitive investments for business customers. Telecommunications companies are providing professional and managed services, as well as other IT services and support, while IT service providers are bundling network connectivity with their software as service offerings. In addition, manufacturers continue to bring all-IP and converged (IP plus legacy) equipment to market, enabling ongoing migration to IP-based solutions. The development of IP-based platforms, which provide combined IP voice, data and video solutions, creates potential cost efficiencies that compensate, in part, for reduced margins resulting from the continuing shift from legacy to IP-based services. The evolution of IT has created significant opportunities for our business markets services, such as cloud services and data hosting, that can have a greater business impact than traditional telecommu- nications services. INDUSTRY TRENDS INVESTMENT IN BROADBAND FIBRE DEPLOYMENT The Canadian ILECs continue to make substantial investments in deploying broadband fibre within their territories, with a focus on direct FTTP access to maintain and enhance their ability to support enhanced IP-based services and higher broadband speeds. Cable TV companies continue to evolve their cable networks with the gradual rollout of the DOCSIS 3.1 platform. Although this platform increases speeds in the near term and is cost-efficient, it does not offer the same advanced capabilities as FTTP over the longer term. FTTP delivers broadband speeds of up to 1.5 Gbps currently, with faster speeds expected in the future as equipment evolves to support these higher speeds. Going forward, ILECs are expected to maintain high levels of capital spending for the ongoing expansion of their broadband fibre networks, with an increasing emphasis on upgrading current FTTN networks to FTTP. ALTERNATIVE TV AND OTT SERVICES The growing popularity of watching TV and on-demand content anywhere, particularly on handheld devices, is expected to continue as customers adopt services that enable them to view content on multiple screens. Streaming media providers, such as Netflix and Amazon Prime Video, continue to enhance OTT streaming services in order to compete for share of viewership in response to evolving viewing habits and consumer demand. TV providers are monitoring OTT developments and evolving their content and market strategy to compete with these non-traditional offerings. We view OTT as an opportunity to add increased capabilities to our linear and on-demand assets, provide customers with flexible options to choose the content they want and drive greater usage of Bell’s high-speed Internet and wireless networks. We continue to enhance our Fibe TV service with additional content and capabilities, including the ability to watch recorded content on the go and access Netflix and YouTube on STBs. We also launched Alt TV in 2017, Canada’s first widely available app-based live TV service, to address the growing cord-cutting and cord-shaving markets, providing BUSINESS OUTLOOK AND ASSUMPTIONS 2019 OUTLOOK We expect to generate positive revenue and adjusted EBITDA growth in 2019. This is predicated on a continued strong broadband Internet and TV subscriber growth trajectory supported by a broadening direct FTTP service footprint; the deployment of full broadband Internet service into rural locations with fixed wireless WTTP technology, scaling of Alt TV and new innovative TV features enabled by the new MediaFirst IPTV platform; annual residential price increases; improving year-over-year business markets performance; as well as cost reductions to counter competitive repricing pressures and the ongoing decline in voice revenues. TV subscriber growth within our wireline footprint is expected to be driven by increasing Fibe TV penetration of existing IPTV-enabled neighbourhoods and ongoing enhancements enabled by the MediaFirst platform. We also intend to seek greater penetration within the multiple- dwelling units (MDU) market and to combat the competitive impact of OTT video streaming services and a growing cord-cutter market with our Alt TV service. Although satellite TV net customer losses are expected to continue in 2019, as a result of aggressive residential promotional offers from cable competitors, they are expected to moderate, due to fewer residential deactivations and customer migrations to IPTV reflecting a more mature subscriber base geographically better-suited for satellite TV service. Internet subscriber base growth in 2019 is expected to be driven by a growing direct fibre service footprint together with increased household penetration of FTTP; the rollout of higher-speed fixed wireless broadband Internet service in rural markets enabled by our WTTP deployment; the pull-through of IPTV customer activations, including from Bell’s app-based live TV streaming service Alt TV; and enhancing Bell’s leadership position in Smart Home automation with services such as Whole Home Wi-Fi and home security. i l s s y a n a t n e m g e s s s e n s u B i e n i l e r i W l l e B A & D M 5 67 BCE Inc. 2018 Annual Report In business wireline, although the economy is growing, customers continue to look for opportunities to lower costs. As a result, telecom spending by large enterprise customers is expected to be variable and improve at a modest pace. This, combined with ongoing customer migration to IP-based systems and demand for cheaper bandwidth alternatives with faster speeds, will likely continue to negatively impact overall business markets results in 2019. We intend on seeking to minimize the overall revenue decline from legacy services by leveraging our market position to develop unique services and value enhancements, which further improve client experience by providing more features with improved flexibility to support client needs on demand. We intend to use marketing initiatives to slow NAS erosion, while investing in direct fibre expansion and new solutions in key portfolios such as Internet and private networks, data centre and cloud services, unified communications, security services and IoT. We will continue to deliver network-centric managed and professional services solutions to large and mid-sized businesses that increase the value of connectivity services. We also expect to experience sustained competitive intensity in our mass and mid-sized business markets as cable operators and other telecom competitors maintain their focus on these customer segments. We also intend to introduce service offerings that help drive innovative solutions and value for our mass and mid-sized customers by leveraging Bell’s network assets, broadband fibre expansion and service capabilities to expand our relationships with them. We will maintain a focus on overall profitability by seeking to increase revenue per customer and customer retention, as well as through improving our processes to achieve further operating efficiencies and productivity gains. Operating cost reduction will continue to be a key focus for our Bell Wireline segment, helping to offset costs related to the growth and retention of IPTV, Internet, IP broadband and hosted IP voice subscribers, the ongoing erosion of high-margin wireline voice and other legacy revenues, as well as competitive repricing pressures in our residential, business and wholesale markets. This, combined with further operating efficiencies driven by an expanding FTTP footprint, changes in consumer behaviour with product and customer service innovation, and the realization of additional synergies from the next phases of integration of Bell MTS, is expected to support our objective of maintaining our adjusted EBITDA margin relatively stable year over year. KEY GROWTH DRIVERS • Expansion of FTTP footprint • Buildout of fixed wireless WTTP network in rural markets • Increasing FTTP and WTTP penetration of households • Higher market share of industry TV and Internet subscribers ASSUMPTIONS • Positive full-year adjusted EBITDA growth • Continued growth in residential IPTV and Internet subscribers • Increasing wireless and Internet-based technological substitution • Residential services household ARPU growth from increased penetration of multi-product households and price increases • Continued aggressive residential service bundle offers from cable TV competitors in our local wireline areas • Continued large business customer migration to IP-based systems • Ongoing competitive repricing pressures in our business and wholesale markets • Continued competitive intensity in our small and mid-sized business markets as cable operators and other telecommunications competitors continue to intensify their focus on business customers • Traditional high-margin product categories challenged by large global cloud and OTT providers of business voice and data solutions expanding into Canada with on-demand services • Accelerating customer adoption of OTT services resulting in downsizing of TV packages • Further deployment of direct fibre to more homes and businesses within our wireline footprint and an acceleration in our fixed WTTP rural buildout • Growing consumption of OTT TV services and on-demand streaming video, as well as the proliferation of devices, such as tablets, that consume large quantities of bandwidth, will require considerable ongoing capital investment • Realization of cost savings related to management workforce reductions including attrition and retirements, lower contracted rates from our suppliers, operating efficiencies enabled by a growing direct fibre footprint, changes in consumer behaviour and product innovation, as well as the realization of additional synergies from the next phases of integration of MTS • No material financial, operational or competitive consequences of changes in regulations affecting our wireline business • Increased business customer spending on connectivity services and managed and professional services solutions • Expansion of our business customer relationships to drive higher revenue per customer • Ongoing service innovation and product value enhancements i l s s y a n a t n e m g e s s s e n s u B i e n i l e r i W l l e B A & D M 5 68 PRINCIPAL BUSINESS RISKS This section discusses certain principal business risks specifically related to the Bell Wireline segment. For a detailed description of the principal risks that could have a material adverse effect on our business, refer to section 9, Business risks. BCE Inc. 2018 Annual Report AGGRESSIVE COMPETITION REGULATORY ENVIRONMENT RISK • The intensity of competitive activity coupled with new product launches (e.g., IoT, smart home systems and devices, innovative TV platforms, etc.) from incumbent operators, non-traditional players and wholesalers RISK • The CRTC mandates rates for the new disaggregated wholesale high-speed access service available on FTTP facilities that are materially different from the rates we proposed, and which do not sufficiently account for the investment required in these facilities POTENTIAL IMPACT • An increase in the intensity level of POTENTIAL IMPACT • The mandating of rates for the new competitive activity could result in higher churn, increased acquisition and retention expenses and increased use of promotional competitive offers to acquire and keep customers, all of which would put pressure on Bell Wireline’s adjusted EBITDA disaggregated wholesale high-speed access service available on FTTP facilities that are materially different from the rates we proposed could improve the business position of our competitors, further accelerate penetration and disintermediation by OTT players, and change our investment strategy, especially in relation to investment in next-generation wireline networks in smaller communities and rural areas CHANGING CUSTOMER BEHAVIOUR RISK • The traditional TV viewing model (i.e., the subscription for bundled channels) is challenged by an increasing number of legal and illegal viewing options available in the market offered by traditional, non-traditional and global players, as well as increasing cord-cutting and cord-shaving trends • Changing customer habits further contribute to the erosion of NAS lines POTENTIAL IMPACT • Our market penetration and number of TV subscribers could decline as a result of BDU offerings, an increasing number of domestic and global unregulated OTT providers, as well as a significant volume of content piracy. The proliferation of IP-based products, including OTT content offerings directly to consumers, may accelerate the disconnection of TV services or the reduction of TV spending • The ongoing loss of NAS lines from technological substitution to wireless and Internet-based services and large business customer conversions to IP-based data services challenge our traditional voice revenues and compel us to develop other service offerings i l s s y a n a t n e m g e s s s e n s u B i e n i l e r i W l l e B A & D M 5 69 BCE Inc. 2018 Annual Report 5.3 Bell Media Bell Media generated positive revenue growth in 2018, driven by stronger TV advertising performance, growth in direct-to-consumer video streaming services and higher OOH advertising revenue, as operating costs grew due to increased costs for sports broadcast rights and content investments that support TV and on-demand programming. FINANCIAL PERFORMANCE ANALYSIS 2018 PERFORMANCE HIGHLIGHTS Bell Media Revenues (in $ millions) $3,104 $3,121 Bell Media Adjusted EBITDA (in $ millions) $716 $693 +0.5% 17 18 17 18 i a d e M l l e B Bell Media Revenue mix (product) i l s s y a n a t n e m g e s s s e n s u B i A & D M 5 3% 2017 33% 3% 2018 33% 64% 64% CTV is the most-watched Canadian TV network 10 of top 20 programs Nationally among total viewers 2017–2018 broadcast year (3.2%) Bell Media Revenue mix (line of business) 8% 14% 2017 78% 8% 14% 2018 78% 64% Advertising 33% Subscriber 3% Other 64% Advertising 33% Subscriber 3% Other 78% TV 14% Radio 8% OOH 78% TV 14% Radio 8% OOH BELL MEDIA RESULTS REVENUES Total external revenues Inter-segment revenues Total Bell Media revenues 2018 2,677 444 3,121 2017 2,676 428 3,104 $ CHANGE % CHANGE 1 16 17 – 3.7% 0.5% 70 BCE Inc. 2018 Annual Report Bell Media operating revenues increased by 0.5% in 2018, compared to 2017, driven by both higher subscriber and advertising revenues compared to last year. • Subscriber revenues grew in 2018, compared to last year, mainly due to: • Advertising revenues increased in 2018, compared to 2017, mainly driven by: • Higher specialty TV advertising revenues led by the broadcast of the 2018 FIFA World Cup along with improved audience levels and rate increases • Continued growth in our TV Everywhere products • Higher OOH advertising revenues from increased demand on digital • Rate increases to certain BDUs faces • The contribution from TSN and RDS Direct, our direct-to-consumer • Continued growth in our digital TV properties sports streaming services that were launched in June 2018 These factors were partially offset by: These factors were partially offset by fewer subscribers. OPERATING COSTS AND ADJUSTED EBITDA Operating costs Adjusted EBITDA Adjusted EBITDA margin • Lower overall audience levels and the ongoing shift in customer spending to OTT and digital platforms, which unfavourably impacted conventional TV and radio • The shift in advertising dollars in Q1 2018 to the main broadcaster of the PyeongChang 2018 Winter Olympics 2018 (2,428) 693 22.2% 2017 $ CHANGE % CHANGE (2,388) 716 23.1% (40) (23) (1.7%) (3.2%) (0.9) pts Bell Media operating costs increased by 1.7% in 2018, compared to last year, mainly due to continued escalation of programming and content costs for sports broadcast rights, including the 2018 FIFA World Cup rights and ongoing content expansion for our Crave products, as well as deal renewals for specialty TV programming. Bell Media adjusted EBITDA declined by 3.2% in 2018, compared to 2017, as the higher operating expenses more than offset the growth in operating revenues. BELL MEDIA OPERATING METRICS • CTV maintained its #1 ranking as the most-watched network in Canada for the 17th year in a row, and continued to lead with 10 of the top 20 programs nationally in all key demographics • Bell Media maintained its leadership position in the specialty and pay TV market, with its English specialty and pay TV properties reaching 84% of all Canadian English specialty and pay viewers and its French specialty and pay TV properties reaching 71% of French language TV viewers in an average week. Bell Media also ranked first with TSN, Canada’s most-watched specialty TV channel and RDS, the top French-language sports network. • Bell Media continued to rank first in digital media among Canadian broadcast and video network competitors, and sixth among online properties in the country, with 20.6 million unique visitors per month, reaching 67% of the digital audience • Bell Media remained Canada’s top radio broadcaster, reaching 16.6 million listeners who spent 71.7 million hours tuned in each week during 2018 • Astral is one of Canada’s leading OOH advertising companies, reaching 14 million consumers weekly, with an offering of five innovative product lines and owning more than 31,000 advertising faces at the end of 2018 strategically located in key urban cities across the country COMPETITIVE LANDSCAPE AND INDUSTRY TRENDS COMPETITIVE LANDSCAPE Competition in the Canadian media industry has changed in recent years as traditional media assets are increasingly being controlled by a small number of competitors with significant scale and financial resources. Technology has allowed new entrants to become media players in their own right. Some players have become more vertically integrated across both traditional and emerging platforms to better enable the acquisition and monetization of premium content. Global aggregators have also emerged and are competing for both content and viewers. Bell Media competes in the video, radio, OOH advertising and digital media markets: • Video: The TV market has become increasingly fragmented and this trend is expected to continue as new services and technologies increase the diversity of information and entertainment outlets available to consumers • Radio: Competition within the radio broadcasting industry occurs primarily in discrete local market areas among individual stations • OOH: The Canadian OOH advertising industry is fragmented, consisting of a few large companies as well as numerous smaller and local companies operating in a few local markets • Digital media: Consumers continue to shift their media consumption towards digital and online media, mobile devices and on-demand content, requiring industry players to increase their efforts in digital content and capabilities in order to compete. This trend is also causing advertisers to direct more of their spending to digital and online rather than traditional media. In addition, the number of competitors has increased as more digital and online media companies, including large global companies, enter the market. i l s s y a n a t n e m g e s s s e n s u B i i a d e M l l e B A & D M 5 71 BCE Inc. 2018 Annual Report Competitors TV • Conventional Canadian TV stations (local and distant signals) and specialty and pay channels, such as those owned by Corus, Rogers, Québecor, Canadian Broadcasting Corporation (CBC)/Société Radio-Canada (SRC) and Groupe V • U.S. conventional TV stations and specialty channels • OTT streaming providers such as Netflix, Amazon Prime Video and DAZN • Video-sharing websites such as YouTube RADIO • Large radio operators, such as Rogers, Corus, Cogeco and Stingray Group Inc. (Stingray) 30% that also own and operate radio station clusters in various local markets • Radio stations in specific local markets • Satellite radio provider SiriusXM • Music streaming services such as Spotify, Apple Music and Google Play Music • Music downloading services such as Apple’s iTunes Store • Other media such as newspapers, local weeklies, TV, magazines, outdoor advertising and the Internet OOH ADVERTISING • Large outdoor advertisers, such as Jim Pattison Broadcast Group, Outfront Media, Québecor, Dynamic and Clear Channel Outdoor • Numerous smaller and local companies operating a limited number of display faces in a few local markets • Other media such as TV, radio, print media and the Internet i a d e M l l e B i l s s y a n a t n e m g e s s s e n s u B i Canadian market share TV viewership (1) English language TV (2) 8% 7% 9% 14% 33% TV viewership (1) French language TV 38% 11% 9% 9% 14% 19% 33% Bell Media 30% Corus 14% U.S. 9% Rogers 7% CBC 8% Other 38% Québecor 19% SRC 14% Bell Media 9% Groupe V 9% Corus 11% Other Radio (1) Broadcaster hours tuned (3) 13% 16% 16% 37% 18% 37% Bell Media 18% Rogers 16% Corus 16% Cogeco 13% Stingray (1) Broadcast year-end at August 31, 2018, 2+ age category, Fall 2018 for radio. (2) Percentages may not add to 100 due to rounding. (3) Broadcaster hours tuned among top 5 broadcasters. INDUSTRY TRENDS TECHNOLOGY AND CONSUMER HABITS TRANSFORMING THE WAY TV IS DELIVERED Technology used in the media industry continues to evolve rapidly, which has led to alternative methods for the distribution, storage and consumption of content. These technological developments have driven and reinforced changes in consumer behaviour as consumers seek more control over when, where and how they consume content. Consumers now have the ability to watch content from a variety of media services on the screen of their choice, including TVs, computers, and mobile devices. The number of Canadian users who are connected to the Internet through their TVs is growing as connection becomes easier and more affordable. Changes in technology and consumer behaviour have resulted in a number of challenges for content aggregators and distributors. Ubiquitous access to content enabled by connected devices introduces risk to traditional distribution platforms by enabling content owners to provide content directly to distributors and consumers, thus bypassing traditional content aggregators. GROWTH OF ALTERNATIVES TO TRADITIONAL LINEAR TV Consumers continue to have access to an array of online entertainment and information alternatives that did not previously exist. While traditional linear TV has historically been the only way to access entertainment programming, the increase in alternative entertainment options has led to a fragmentation in consumption habits. Traditional linear TV still remains the most common form of video consumption, but people are increasingly consuming content on their own terms from an assortment of services and in a variety of formats. In particular, today’s viewers are consuming more content online, watching less scheduled programming live, time-shifting original broadcasts through PVRs, viewing more video on mobile devices, and catching up on an expanded library of past programming on-demand. While the majority of households use pure OTT services, like Netflix and Amazon Prime Video, to complement linear TV consumption, an increasing number are leveraging these services as alternatives to a traditional linear package. A & D M 5 72 BCE Inc. 2018 Annual Report ESCALATING CONTENT COSTS Premium video content has become increasingly important to media companies in attracting and retaining viewers and advertisers. This content, including live sports and special events, should continue to draw audiences and advertisers moving forward. Heightened competition for these rights from global competitors, including Netflix, Amazon, and DAZN, has already resulted in higher program rights costs, which is a trend that is expected to continue into the future. MEDIA COMPANIES ARE EVOLVING TO REMAIN COMPETITIVE In recognition of changing consumer behaviour, media companies are evolving their content and launching their own solutions with the objective of better competing with non-traditional offerings through direct-to- consumer services such as Bell Media’s Crave, TSN and RDS products, as well as authenticated TV Everywhere services featuring a series of apps including CTV, Discovery and Bravo. Access to live sports and other premium content has become even more important for acquiring and retaining audiences that in turn attract advertisers and subscriber revenue. Therefore, ownership of content and/or long-term agreements with content owners has also become increasingly important to media companies. In the future, short-form video content is expected to represent an area of focus for media companies seeking to connect with a different segment of the market. BUSINESS OUTLOOK AND ASSUMPTIONS 2019 OUTLOOK Subscriber revenue performance is expected to reflect higher anticipated rates from BDU carriage renewals, further growth in Crave, and continued scaling of direct-to-consumer products. However, the effects of shifting media consumption towards competing OTT and digital platforms, further TV cord-shaving and cord-cutting, as well as the financial impact of higher content costs for video, will continue to weigh on adjusted EBITDA in 2019. While the advertising market is expected to continue to be impacted by audience declines in 2019, we anticipate that our pricing and strategic initiatives will offset some of this pressure. We also intend to continue controlling costs by leveraging assets, achieving productivity gains and pursuing operational efficiencies across all of our media properties, while continuing to invest in premium content across all screens and platforms. In our video properties, we intend to leverage the strength of our market position combined with enhanced audience targeting to continue offering advertisers, both nationally and locally, premium opportunities to reach their target audiences. Success in this area requires that we focus on a number of factors, including: successfully acquiring highly rated programming and differentiated content; building and maintaining strategic supply arrangements for content across all screens and platforms; producing and commissioning high-quality Canadian content, including market-leading news; and further developing our data- enhanced planning, activation and measurement tools, which we introduced in 2018. Our sports specialty video offerings are expected to continue to deliver premium content and exceptional viewing experiences to our TV and direct-to-consumer audiences. Our NFL and NHL offerings, combined with the integration of our digital platforms, are integral parts of our strategy to enhance viewership and engagement. We will also continue to focus on creating innovative high-quality productions in the areas of sports news and editorial coverage. In non-sports specialty TV, audiences and advertising revenues are expected to be driven by investment in quality programming and production. As part of our objective to drive revenue growth, we intend to capitalize on our competitive position in key specialty services to improve both channel strength and channel selection. Through the recent launch of the new Crave, we will continue to leverage our investments in premium content (including HBO, SHOWTIME and STARZ) in order to attract Pay TV and direct-to-consumer subscribers. In our French-language pay and specialty services, we will continue to optimize our programming with a view to increasing our appeal to audiences. In radio, we intend to leverage the strength of our market position to continue offering advertisers, both nationally and locally, premium opportunities to reach their target audiences. Additionally, in conjunction with our local TV properties, we will continue to pursue opportunities that leverage our promotional capabilities, provide an expanded platform for content sharing, and offer other synergistic efficiencies. i l s s y a n a t n e m g e s s s e n s u B i i a d e M l l e B In our OOH operations, we plan to leverage the strength of our products to provide advertisers with premium opportunities in key Canadian markets. We will also continue to seek new opportunities in digital markets, including converting certain premium outdoor structures to digital. A & D M 5 ASSUMPTIONS • Revenue performance expected to reflect further Crave subscriber growth, flow-through of BDU rate increases, and strategic pricing on advertising sales • Operating cost growth driven by higher programming costs, mainly due to continued investment in Crave content • Continued scaling of Crave and sports direct-to-consumer products • Ability to successfully acquire and produce highly rated programming and differentiated content • Building and maintaining strategic supply arrangements for content across all screens and platforms • Monetization of content rights and Bell Media properties across all platforms • TV unbundling and growth in OTT viewing expected to result in lower subscriber levels for many Bell Media video properties • No material financial, operational or competitive consequences of changes in regulations affecting our media business 73 BCE Inc. 2018 Annual Report KEY GROWTH DRIVERS • Leveraging data to better inform media planning, activation, and • Successful renewal of BDU agreements measurement • Establishing unique partnerships and strategic content investments • Enhancing digital strategy, including scaling of direct-to-consumer • Converting premium OOH structures to digital products PRINCIPAL BUSINESS RISKS This section discusses certain principal business risks specifically related to the Bell Media segment. For a detailed description of the principal risks that could have a material adverse effect on our business, refer to section 9, Business risks. AGGRESSIVE COMPETITION AND REGULATORY CONSTRAINTS ADVERTISING AND SUBSCRIPTION REVENUE UNCERTAINTY RISING CONTENT COSTS AND ABILITY TO SECURE KEY CONTENT RISK • The intensity of competitive activity RISK • Advertising is heavily dependent on from traditional TV services, as well as from new technologies and alternative distribution platforms such as unregulated OTT content offerings, VOD, personal video platforms, pirated content and video services over mobile devices and the Internet, in combination with regulations that require all BDUs to make TV services available à la carte economic conditions and viewership, as well as on our ability to grow alternative advertising media such as digital and OOH platforms, in the context of a changing and fragmented advertising market. Conventional media is under increasing pressure for advertising spend against dominant non-traditional/global digital services • Acceleration among non-traditional • Bell Media has contracts with a variety RISK • Rising content costs, as an increasing number of domestic and global competitors seek to acquire the same content, and the ability to secure key content to drive revenues and subscriber growth POTENTIAL IMPACT • Rising programming costs could require us to incur unplanned expenses, which could result in negative pressure on adjusted EBITDA • Our inability to acquire popular programming content could adversely affect Bell Media’s viewership and subscription levels and, consequently, advertising and subscription revenues of BDUs, under which monthly subscription fees for specialty and pay TV services are earned, that expire on a specific date POTENTIAL IMPACT • Economic uncertainty could reduce advertisers’ spending. Our failure to increase or maintain viewership or capture our share of the changing and fragmented advertising market could result in the loss of advertising revenue • If we are not successful in obtaining favourable agreements with BDUs, it could result in the loss of subscription revenue i l s s y a n a t n e m g e s s s e n s u B i i a d e M l l e B global players developing more aggressive product and sales strategies in creating and distributing video A & D M 5 POTENTIAL IMPACT • Adverse impact on the level of subscriptions and/or viewership for Bell Media’s TV services and on Bell Media’s revenue streams 74 6 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. BCE Inc. 2018 Annual Report 6.1 Net debt Debt due within one year Long-term debt Preferred shares (1) Cash and cash equivalents Net debt DECEMBER 31, 2018 DECEMBER 31, 2017 $ CHANGE % CHANGE 4,645 19,760 2,002 (425) 25,982 5,178 18,215 2,002 (625) 24,770 (533) 1,545 – 200 1,212 (10.3%) 8.5% – 32.0% 4.9% (1) 50% of outstanding preferred shares of $4,004 million in 2018 and 2017 are classified as debt, consistent with the treatment by some credit rating agencies. The increase of $1,012 million in total debt, comprised of debt due within one year and long-term debt, was due to: The decrease in cash and cash equivalents of $200 million was due mainly to: • the issuance by Bell Canada of Series M-47 and M-48 MTN debentures with total principal amounts of $500 million and $1 billion, respectively • $2,679 million of dividends paid on BCE common shares • $395 million paid for business acquisitions mainly related to the • the issuance of Series US-1 Notes with a total principal amount of acquisitions of AlarmForce and Axia US $1,150 million (C$1,493 million) • $240 million paid for a voluntary DB pension plan contribution • a net increase of $242 million in our other debt and finance lease • $222 million paid for the purchase on the open market of shares for obligations Partly offset by: the settlement of share-based payments • $175 million paid for the repurchase of common shares through a NCIB • the early redemption of Series M-25 MTN debentures in the principal • $79 million acquisition and other costs paid amount of $1 billion • $56 million paid for the acquisition of spectrum licences • the early redemption of Series M-28 MTN debentures in the principal • $51 million return of capital to non-controlling interest (NCI) amount of $400 million • the early redemption of Series M-33 debentures in the principal amount of $300 million • the early redemption of Series 9 notes in the principal amount of $200 million • the early redemption of Series 8 notes in the principal amount of $200 million • a decrease in our notes payable (net of issuances) of $123 million Partly offset by: • $3,567 million of free cash flow • $160 million of debt issuances (net of repayments) • $68 million of disposition of intangibles and other assets for the sale of AlarmForce’s approximate 39,000 customer accounts to Telus 6.2 Outstanding share data COMMON SHARES OUTSTANDING Outstanding, January 1, 2018 Shares issued for the acquisition of AlarmForce 22,531 Granted Shares issued under employee stock option plan 266,941 Exercised (1) Repurchase of common shares (3,085,697) Forfeited NUMBER OF SHARES STOCK OPTIONS OUTSTANDING NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE ($) 900,996,640 Outstanding, January 1, 2018 Outstanding, December 31, 2018 898,200,415 Outstanding, December 31, 2018 14,072,332 Exercisable, December 31, 2018 4,399,588 (1) The weighted average share price for options exercised in 2018 was $55. 10,490,249 3,888,693 (266,941) (39,669) 55 56 42 58 56 52 At March 7, 2019, 898,497,707 common shares and 17,135,086 stock options were outstanding. 75 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report 6.3 Cash flows Cash flows from operating activities Capital expenditures Cash dividends paid on preferred shares Cash dividends paid by subsidiaries to non-controlling interest Acquisition and other costs paid Voluntary DB pension plan contribution Free cash flow Business acquisitions Acquisition and other costs paid Voluntary DB pension plan contribution Acquisition of spectrum licences Disposition of intangibles and other assets Other investing activities Net issuance of debt instruments Issue of common shares Repurchase of common shares Purchase of shares for settlement of share-based payments Cash dividends paid on common shares Return of capital to non-controlling interest Other financing activities Net decrease in cash and cash equivalents n.m.: not meaningful 2018 7,384 (3,971) (149) (16) 79 240 3,567 (395) (79) (240) (56) 68 (32) 160 11 (175) (222) (2,679) (51) (77) (200) 2017 7,358 (4,034) (127) (34) 155 100 3,418 (1,649) (155) (100) – 323 (77) 691 117 – (224) (2,512) – (60) (228) $ CHANGE % CHANGE 26 63 (22) 18 (76) 140 149 1,254 76 (140) (56) (255) 45 (531) (106) (175) 2 (167) (51) (17) 28 0.4% 1.6% (17.3%) 52.9% (49.0%) n.m. 4.4% 76.0% 49.0% n.m. n.m. (78.9%) 58.4% (76.8%) (90.6%) n.m. 0.9% (6.6%) n.m. (28.3%) 12.3% CASH FLOWS FROM OPERATING ACTIVITIES AND FREE CASH FLOW In 2018, BCE’s cash flows from operating activities increased $26 million, compared to 2017, due mainly to higher adjusted EBITDA, partly offset by a higher voluntary DB pension plan contribution made in 2018. Free cash flow increased $149 million in 2018, compared to 2017, due mainly to higher cash flows from operating activities, excluding voluntary DB pension plan contributions, and acquisition and other costs paid, and lower capital expenditures. CAPITAL EXPENDITURES Bell Wireless Capital intensity ratio Bell Wireline Capital intensity ratio Bell Media Capital intensity ratio BCE Capital intensity ratio 2018 656 7.8% 3,201 25.3% 114 3.7% 3,971 16.9% 2017 731 9.2% 3,174 25.6% 129 4.2% 4,034 17.7% $ CHANGE % CHANGE 75 (27) 15 63 10.3% 1.4 pts (0.9%) 0.3 pts 11.6% 0.5 pts 1.6% 0.8 pts 76 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report BCE capital expenditures of $3,971 million in 2018, declined by 1.6% or $63 million compared to last year. Capital expenditures as a percentage of revenue (capital intensity ratio) also declined in 2018 to 16.9%, compared to 17.7% in 2017. The decrease in capital spending was driven by lower spending in Bell Wireless and Bell Media, partly offset by higher spending in our Bell Wireline segment. The year-over-year decrease reflected: • Lower capital spending in our wireless segment of $75 million in 2018, due to a slower pace of spending compared to last year. Wireless capital investment continued to focus on the expansion of our LTE-A network, which reached 91% of the Canadian population at December 31, 2018, spectrum carrier aggregation, the deployment of wireless small-cells to optimize mobile coverage, signal quality and data backhaul, along with the expansion of network capacity to support the growth in subscribers and data consumption. • Lower capital spending at Bell Media of $15 million in 2018, due to greater investments last year relating to the execution of OOH contract wins and upgrades to Bell Media broadcast studios and TV production equipment • Higher capital investment in our wireline segment of $27 million in 2018, driven by the continued deployment of broadband fibre directly to more homes and businesses, the initial rollout of fixed wireless broadband Internet to rural locations in Ontario and Québec and the acquisition and integration of MTS BUSINESS ACQUISITIONS On August 31, 2018, BCE completed the acquisition of all of the issued and outstanding common shares of Axia for a total cash consideration of $155 million. On January 5, 2018, BCE acquired all of the issued and outstanding shares of AlarmForce for a total consideration of $182 million, of which $181 million was paid in cash and the remaining $1 million through the issuance of 22,531 BCE common shares. On March 17, 2017, BCE acquired all of the issued and outstanding common shares of MTS for a total consideration of $2,933 million, of which $1,339 million was paid in cash and the remaining $1,594 million through the issuance of approximately 27.6 million BCE common shares. On January 3, 2017, BCE acquired all of the issued and outstanding common shares of Cieslok Media Ltd. for a total cash consideration of $161 million. VOLUNTARY DB PENSION PLAN CONTRIBUTION In 2018, we made a voluntary contribution of $240 million, compared to a voluntary contribution of $100 million in 2017, to fund our post- employment benefit obligation. The voluntary contributions were funded from cash on hand at the end of 2018 and 2017. This will reduce the amount of BCE’s future pension funding obligations and the use of letters of credit for funding deficits. DISPOSITION OF INTANGIBLE AND OTHER ASSETS During Q1 2018, BCE sold AlarmForce’s approximate 39,000 customer accounts in British Columbia, Alberta and Saskatchewan to Telus for total proceeds of approximately $68 million. During Q2 2017, BCE completed the divestiture of approximately one-quarter of postpaid wireless subscribers and 15 retail locations previously held by MTS, as well as certain Manitoba network assets, to Telus for total proceeds of $323 million. DEBT INSTRUMENTS We use a combination of short-term and long-term debt to finance our operations. Our short-term debt consists mostly of notes payable under commercial paper programs, loans securitized by trade receivables and bank facilities. We usually pay fixed rates of interest on our long-term debt and floating rates on our short-term debt. As at December 31, 2018, all of our debt was denominated in Canadian dollars with the exception of our commercial paper and Series US-1 Notes, both of which are denominated in U.S. dollars and have been hedged for foreign currency fluctuations through forward currency contracts and cross currency basis swaps, respectively. 2018 We issued $160 million of debt, net of repayments. This included the issuances at Bell Canada of Series M-47 and M-48 MTN debentures with total principal amounts of $500 million and $1 billion, respectively, and the issuances of Series US-1 Notes with a total principal amount of US $1,150 million (C$1,493 million). These issuances were partly offset by the early redemption of Series M-25 and M-28 MTN debentures, Series M-33 debentures, Series 9 notes and Series 8 notes in the principal amounts of $1 billion, $400 million, $300 million, $200 million and $200 million, respectively, payments of finance leases and other debt of $610 million and net repayments of $123 million of notes payable. 2017 We issued $691 million of debt, net of repayments. This included the issuances of Series M-40 MTN, M-44 MTN, M-45 MTN and M-46 MTN debentures at Bell Canada with total principal amounts of $700 million, $1 billion, $500 million and $800 million, respectively and the net issuance of $333 million of notes payable. These issuances were partly offset by the early redemption of Series M-22 MTN, M-35 and M-36 debentures in the principal amounts of $1 billion, $350 million and $300 million, respectively, payments of finance leases and other debt of $512 million and the repayment of borrowings under our unsecured committed term credit facility of $480 million. 77 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report REPURCHASE OF COMMON SHARES In Q1 2018, BCE repurchased and cancelled 3,085,697 common shares for a total cost of $175 million. Of the total cost, $69 million represents stated capital and $3 million represents the reduction of the contributed surplus attributable to these common shares. The remaining $103 million was charged to the deficit. CASH DIVIDENDS PAID ON COMMON SHARES In 2018, cash dividends paid on common shares of $2,679 million increased by $167 million compared to 2017, due to a higher dividend paid in 2018 of $2.9825 per common share compared to $2.835 per common share in 2017 and a higher average number of outstanding common shares, principally as a result of shares issued for the acquisition of MTS. 6.4 Post-employment benefit plans For the year ended December 31, 2018, we recorded a decrease in our post-employment benefit obligations and a gain, before taxes, in OCI of $92 million. This was due to a higher actual discount rate of 3.8% at December 31, 2018, compared to 3.6% at December 31, 2017. The gain was partly offset by a lower-than-expected return on plan assets. For the year ended December 31, 2017, we recorded an increase in our post-employment benefit obligations and a loss, before taxes, in OCI of $338 million. This was due to a lower actual discount rate of 3.6% at December 31, 2017, compared to 4.0% at December 31, 2016. The loss was partly offset by a higher-than-expected return on plan assets. 6.5 Financial risk management Management’s objectives are to protect BCE and its subsidiaries on a consolidated basis against material economic exposures and variability of results from various financial risks that include credit risk, liquidity risk, foreign currency risk, interest rate risk, equity price risk and longevity risk. These risks are further described in Note 2, Significant accounting policies, Note 8, Other expense, Note 24, Post-employment benefit plans and Note 26, Financial and capital management in BCE’s 2018 consolidated financial statements. The following table outlines our financial risks, how we manage these risks and their financial statement classification. FINANCIAL RISK Credit risk DESCRIPTION OF RISK We are exposed to credit risk from operating activities and certain financing activities, the maximum exposure of which is represented by the carrying amounts reported in the statements of financial position. We are exposed to credit risk if counterparties to our trade receivables and derivative instruments are unable to meet their obligations. MANAGEMENT OF RISK AND FINANCIAL STATEMENT CLASSIFICATION • Large and diverse customer base • Deal with institutions with investment-grade credit ratings • Regularly monitor our credit risk and exposure • Our trade receivables and allowance for doubtful accounts balances at December 31, 2018 were $3,026 million and $51 million, respectively • Our contract assets and allowance for doubtful accounts balances at December 31, 2018 were $1,584 million and $91 million, respectively Liquidity risk We are exposed to liquidity risk for financial liabilities. Foreign currency risk We are exposed to foreign currency risk related to anticipated transactions and certain foreign currency debt. A 10% depreciation (appreciation) in the value of the Canadian dollar relative to the U.S. dollar would result in a loss (gain) of $2 million (nil) recognized in net earnings at December 31, 2018 and a gain (loss) of $140 million ($132 million) recognized in OCI at December 31, 2018, with all other variables held constant. Refer to the following Fair value section for details on our derivative financial instruments. • Sufficient cash from operating activities, possible capital markets financing and committed bank facilities to fund our operations and fulfill our obligations as they become due • Refer to section 6.7, Liquidity – Contractual obligations, for a maturity analysis of our recognized financial liabilities • Foreign currency forward contracts on our anticipated transactions and commercial paper maturing in 2019 to 2021 of $3.5 billion in U.S. dollars ($4.6 billion in Canadian dollars) at December 31, 2018, to manage foreign currency risk related to anticipated transactions and foreign currency debt • For cash flow hedges, changes in the fair value are recognized in OCI, except for any ineffective portion, which is recognized immediately in earnings in Other expense. Realized gains and losses in Accumulated OCI are reclassified to the income statements or to the initial cost of the non-financial asset in the same periods as the corresponding hedged transactions are recognized. • For economic hedges, changes in the fair value are recognized in Other expense • In 2018, we entered into cross currency basis swaps with a notional amount of $1,150 in U.S. dollars ($1,493 million in Canadian dollars). These cross currency basis swaps are used to hedge the U.S. currency exposure of our Series US-1 Notes maturing in 2048. • For cross currency basis swaps, changes in the fair value of these derivatives and the related debt are recognized in Other expense in the income statements and offset, unless a portion of the hedging relationship is ineffective 78 MD&AFinancial and capital management6 DESCRIPTION OF RISK MANAGEMENT OF RISK AND FINANCIAL STATEMENT CLASSIFICATION BCE Inc. 2018 Annual Report We are exposed to risk on the interest rates of our debt, our post-employment benefit plans and on dividend rate resets on our preferred shares. A 1% increase (decrease) in interest rates would result in a decrease (increase) of $31 million in net earnings at December 31, 2018. Refer to the following Fair value section for details on our derivative financial instruments. We are exposed to risk on our cash flow related to the settlement of equity settled share-based compensation plans and the equity price risk related to a cash-settled share-based payment plan. A 5% increase (decrease) in the market price of BCE’s common shares at December 31, 2018 would result in a gain (loss) of $34 million recognized in net earnings for 2018, all other variables held constant. Refer to the following Fair value section for details on our derivative financial instruments. We are exposed to life expectancy risk on our post-employment benefit plans. • We use interest rate swaps to manage the mix of fixed and floating interest rates of our debt. We also use interest rate locks to hedge the interest rates on future debt issuances and to economically hedge dividend rate resets on preferred shares. • There were no interest rate swaps and locks outstanding as of December 31, 2018 • For our post-employment benefit plans, the interest rate risk is managed using a liability matching approach which reduces the exposure of the DB pension plans to a mismatch between investment growth and obligation growth • Equity forward contracts with a fair value of $73 million at December 31, 2018 on BCE’s common shares to economically hedge the cash flow exposure related to the settlement of equity settled share-based compensation plans and the equity price risk related to a cash-settled share-based payment plan • Changes in the fair value are recorded in the income statements in Operating costs for derivatives used to hedge a cash-settled share-based payment plan and Other expense for derivatives used to hedge equity-settled share-based payment plans • The Bell Canada pension plan has an investment arrangement to hedge part of its exposure to potential increases in longevity which covers approximately $5 billion of post-employment benefit obligations FINANCIAL RISK Interest rate risk Equity price risk Longevity risk FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Certain fair value estimates are affected by assumptions we make about the amount and timing of future cash flows and discount rates, all of which reflect varying degrees of risk. Income taxes and other expenses that would be incurred on disposition of financial instruments are not reflected in the fair values. As a result, the fair values are not the net amounts that would be realized if these instruments were settled. The carrying values of our cash and cash equivalents, trade and other receivables, dividends payable, trade payables and accruals, compensation payable, severance and other costs payable, interest payable, notes payable and loans secured by trade receivables approximate fair value as they are short-term. The following table provides the fair value details of financial instruments measured at amortized cost in the statements of financial position. CLASSIFICATION FAIR VALUE METHODOLOGY Present value of estimated future cash flows discounted using observable market interest rates DECEMBER 31, 2018 DECEMBER 31, 2017 CARRYING VALUE 61 FAIR VALUE 61 CARRYING VALUE 111 FAIR VALUE 110 Present value of estimated future cash flows discounted using observable market interest rates 108 112 124 128 CRTC tangible benefits obligation CRTC deferral account obligation Trade payables and other liabilities and non-current liabilities Trade payables and other liabilities and non-current liabilities Debt securities, finance leases and other debt Debt due within one year and long-term debt Quoted market price of debt or present value of future cash flows discounted using observable market interest rates 20,285 21,482 19,321 21,298 79 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report The following table provides the fair value details of financial instruments measured at fair value in the statements of financial position. December 31, 2018 Publicly-traded and privately-held investments (3) Derivative financial instruments CLASSIFICATION Other non-current assets Other current assets, trade payables and other liabilities, other non-current assets and liabilities MLSE financial liability (4) Trade payables and other liabilities Other December 31, 2017 Publicly-traded and privately-held investments (3) Derivative financial instruments Other non-current assets and liabilities Other non-current assets Other current assets, trade payables and other liabilities, other non-current assets and liabilities MLSE financial liability (4) Trade payables and other liabilities Other Other non-current assets and liabilities FAIR VALUE CARRYING VALUE OF ASSET (LIABILITY) QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) OBSERVABLE MARKET DATA (LEVEL 2) (1) NON-OBSERVABLE MARKET INPUTS (LEVEL 3) (2) 110 181 (135) 43 103 (48) (135) 60 1 – – – 1 – – – – 181 – 114 – (48) – 106 109 – (135) (71) 102 – (135) (46) (1) Observable market data such as equity prices, interest rates, swap rate curves and foreign currency exchange rates. (2) Non-observable market inputs such as discounted cash flows and earnings multiples. A reasonable change in our assumptions would not result in a significant increase (decrease) to our level 3 financial instruments. (3) Unrealized gains and losses are recorded in OCI and impairment charges are recorded in Other expense in the income statements. (4) Represents BCE’s obligation to repurchase the BCE Master Trust Fund’s (Master Trust) 9% interest in MLSE at a price not less than an agreed minimum price should the Master Trust exercise its put option. The obligation to repurchase is marked to market each reporting period and the gain or loss is recorded in Other expense in the income statements. The option has been exercisable since 2017. 6.6 Credit ratings Credit ratings generally address the ability of a company to repay principal and pay interest on debt or dividends on issued and outstanding preferred shares. Our ability to raise financing depends on our ability to access the public equity and debt capital markets as well as the bank credit market. Our ability to access such markets and the cost and amount of funding available partly depend on the quality of our credit ratings at the time capital is raised. Investment-grade credit ratings usually mean that when we borrow money, we qualify for lower interest rates than companies that have ratings lower than investment-grade. A ratings downgrade could result in adverse consequences for our funding capacity or ability to access the capital markets. The following table provides BCE’s and Bell Canada’s credit ratings, which are considered investment grade, as at March 7, 2019 from DBRS, Moody’s and S&P. KEY CREDIT RATINGS MARCH 7, 2019 Commercial paper Long-term debt Subordinated long-term debt Preferred shares BELL CANADA (1) DBRS MOODY’S S&P R-2 (high) P-2 A-1 (Low) (Canadian scale) BBB (high) BBB (low) DBRS Pfd-3 Baa1 Baa2 BCE (1) MOODY’S A-2 (Global scale) BBB+ BBB S&P – P-2 (Low) (Canadian scale) BBB- (Global scale) (1) These credit ratings are not recommendations to buy, sell or hold any of the securities referred to above, and they may be revised or withdrawn at any time by the assigning rating organization. Each credit rating should be evaluated independently of any other credit rating. As of March 7, 2019, BCE and Bell Canada’s credit ratings have stable outlooks from DBRS, Moody’s and S&P. 80 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report 6.7 Liquidity SOURCES OF LIQUIDITY Our cash and cash equivalents balance at the end of 2018 was $425 million. We expect that this balance, our 2019 estimated cash flows from operations and capital markets financing, including commercial paper, will permit us to meet our cash requirements in 2019 for capital expenditures, post-employment benefit plans funding, dividend payments, the payment of contractual obligations, maturing debt, ongoing operations and other cash requirements. Should our 2019 cash requirements exceed our cash and cash equivalents balance, cash generated from our operations and capital markets financing, we would expect to cover such a shortfall by drawing under committed credit facilities that are currently in place or through new facilities to the extent available. In 2019, our cash flows from operations, cash and cash equivalents balance, capital markets financings, securitized trade receivable programs and credit facilities should give us flexibility in carrying out our plans for business growth, including business acquisitions, spectrum auctions and contingencies. The table below is a summary of our total bank credit facilities at December 31, 2018. DECEMBER 31, 2018 Committed credit facilities Unsecured revolving credit and expansion facilities (1) (2) Other Total committed credit facilities Total non-committed credit facilities Total committed and non-committed credit facilities TOTAL AVAILABLE DRAWN LETTERS OF CREDIT COMMERCIAL PAPER OUTSTANDING NET AVAILABLE 4,000 134 4,134 3,014 7,148 – – – – – – 107 107 1,964 2,071 3,156 – 3,156 – 3,156 844 27 871 1,050 1,921 (1) Bell Canada’s $2.5 billion and additional $500 million revolving credit facilities expire in November 2023 and November 2019, respectively, and its $1 billion committed expansion credit facility expires in November 2021. Bell Canada has the option, subject to certain conditions, to convert advances outstanding under the additional $500 million revolving credit facility into a term loan with a maximum one-year term. (2) As of December 31, 2018, Bell Canada’s outstanding commercial paper included $2,314 million in U.S. dollars ($3,156 million in Canadian dollars). All of Bell Canada’s commercial paper outstanding is included in debt due within one year. Bell Canada may issue notes under its Canadian and U.S. commercial paper programs up to the maximum aggregate principal amount of $3 billion in either Canadian or U.S. currency provided that at no time shall such maximum amount of notes exceed $4 billion in Canadian currency which equals the aggregate amount available under Bell Canada’s committed supporting revolving and expansion credit facilities as at December 31, 2018. The maximum amounts of the commercial paper programs and the committed credit facilities both reflect an increase of $500 million effective on December 6, 2018 and October 17, 2018, respectively, as compared to December 31, 2017. The total amount of the net committed available revolving and expansion credit facilities may be drawn at any time. Some of our credit agreements require us to meet specific financial ratios and to offer to repay and cancel the credit agreements upon a change of control of BCE or Bell Canada. In addition, some of our debt agreements require us to offer to repurchase certain series of debt securities upon the occurrence of a change of control event as defined in the relevant debt agreements. We are in compliance with all conditions and restrictions under such agreements. CASH REQUIREMENTS CAPITAL EXPENDITURES In 2019, our planned capital spending will be focused on our strategic imperatives, reflecting an appropriate level of investment in our networks and services. POST-EMPLOYMENT BENEFIT PLANS FUNDING Our post-employment benefit plans include DB pension and defined contribution (DC) pension plans, as well as other post-employment benefits (OPEBs) plans. The funding requirements of our post- employment benefit plans, resulting from valuations of our plan assets and liabilities, depend on a number of factors, including actual returns on post-employment benefit plan assets, long-term interest rates, plan demographics, and applicable regulations and actuarial standards. Our expected funding for 2019 is detailed in the following table and is subject to actuarial valuations that will be completed in mid-2019. Actuarial valuations were last performed for our significant post-employment benefit plans as at December 31, 2017. 2019 EXPECTED FUNDING DB pension plans – service cost DB pension plans – deficit DB pension plans OPEBs DC pension plans Total net post-employment benefit plans TOTAL 178 2 180 80 115 375 DIVIDEND PAYMENTS In 2019, the cash dividends to be paid on BCE’s common shares are expected to be higher than in 2018 as BCE’s annual common share dividend increased by 5.0% to $3.17 per common share from $3.02 per common share effective with the dividend payable on April 15, 2019. This increase is consistent with BCE’s common share dividend payout policy of a target payout between 65% and 75% of free cash flow. BCE’s dividend policy and the declaration of dividends are subject to the discretion of the BCE Board. 81 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report CONTRACTUAL OBLIGATIONS The following table is a summary of our contractual obligations at December 31, 2018 that are due in each of the next five years and thereafter. 2019 2020 2021 2022 2023 THERE- AFTER TOTAL 59 1,453 2,275 1,739 1,622 11,079 18,227 Recognized financial liabilities Long-term debt Notes payable Minimum future lease payments under finance leases Loans secured by trade receivables Interest payable on long-term debt, notes payable and loan secured by trade receivables Net interest receipts on cross currency basis swaps MLSE financial liability Commitments (off-balance sheet) Operating leases Commitments for property, plant and equipment and intangible assets Purchase obligations Total 3,201 586 919 866 (6) 135 317 1,029 618 7,724 BCE’s significant finance leases are for satellites and office premises. The office leases have an average lease term of 22 years. The leases for satellites, used to provide programming to our Bell TV customers, have a term of 15 years. These satellite leases are non-cancellable. Minimum future lease payments under finance leases include future finance costs of $527 million. BCE’s significant operating leases are for office premises, cellular tower sites, retail outlets and OOH advertising spaces with lease terms ranging from 1 to 40 years. These leases are non-cancellable. Rental expense relating to operating leases was $352 million in 2018 and $399 million in 2017. Our commitments for property, plant and equipment and intangible assets include program and feature film rights and investments to expand and update our networks to meet customer demand. Purchase obligations consist of contractual obligations under service and product contracts for operating expenditures and other purchase obligations. LITIGATION – 513 – 751 (6) – 286 784 525 – 344 – 709 (6) – 244 623 484 – 276 – 648 (6) – 187 484 434 – 238 – – 667 – 3,201 2,624 919 581 6,671 10,226 (6) – 142 385 271 (134) – (164) 135 436 1,612 698 519 4,003 2,851 4,306 4,673 3,762 3,233 19,936 43,634 INDEMNIFICATIONS AND GUARANTEES (OFF-BALANCE SHEET) As a regular part of our business, we enter into agreements that provide for indemnifications 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. While some of the agreements specify a maximum potential exposure, many do not specify a maximum amount or termination date. We cannot reasonably estimate the maximum potential amount we could be required to pay counterparties because of the nature of almost all of these indemnifications and guarantees. 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 indemnifications or guarantees in the past. In the ordinary course of our business, we become involved in various claims and legal proceedings seeking monetary damages and other relief. In particular, because of the nature of our consumer-facing business, we are exposed to class actions pursuant to which substantial monetary damages may be claimed. Due to the inherent risks and uncertainties of the litigation process, we cannot predict the final outcome or timing of claims and legal proceedings. Subject to the foregoing, and based on information currently available and management’s assessment of the merits of the claims and legal proceedings pending at March 7, 2019, management believes that the ultimate resolution of these claims and legal proceedings is unlikely to have a material and negative effect on our financial statements or operations. We believe that we have strong defences and we intend to vigorously defend our positions. You will find a description of the principal legal proceedings pending at March 7, 2019 in the BCE 2018 AIF. 82 MD&AFinancial and capital management6 BCE Inc. 2018 Annual Report 7 Selected annual and quarterly information 7.1 Annual financial information The following table shows selected consolidated financial data of BCE for 2018 and 2017 based on the annual consolidated financial statements, which are prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB). We discuss the factors that caused our results to vary over the past two years throughout this MD&A. Effective January 1, 2018, we applied IFRS 15, Revenue from Contracts with Customers, as described in section 10.1, Our accounting policies, retrospectively to each period in 2017 previously reported. We have also reclassified some amounts from previous periods to make them consistent with the presentation for the current period. CONSOLIDATED INCOME STATEMENTS Operating revenues Service Product Total operating revenues Operating costs Adjusted EBITDA Severance, acquisition and other costs Depreciation Amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Net earnings attributable to: Common shareholders Preferred shareholders Non-controlling interest Net earnings Net earnings per common share Basic and diluted RATIOS Adjusted EBITDA margin (%) Return on equity (%) (1) (1) Net earnings attributable to common shareholders divided by total average equity attributable to BCE shareholders excluding preferred shares. 2018 2017 20,441 3,027 23,468 20,095 2,662 22,757 (13,933) (13,475) 9,535 (136) (3,145) (869) (1,000) (69) (348) (995) 2,973 2,785 144 44 2,973 9,282 (190) (3,034) (810) (955) (72) (102) (1,069) 3,050 2,866 128 56 3,050 3.10 3.20 40.6% 17.1% 40.8% 18.6% 83 MD&ASelected annual and quarterly information7 2018 2017 57,100 425 4,645 19,760 25,982 20,363 20,689 7,384 (4,386) (3,971) (395) 68 (3,198) 11 160 (2,679) (149) (16) 3,567 898.6 898.2 48,440 3.02 (2,712) (144) 53.93 55,802 625 5,178 18,215 24,445 20,302 20,625 7,358 (5,437) (4,034) (1,649) 323 (2,149) 117 691 (2,512) (127) (34) 3,418 894.3 901.0 54,402 2.87 (2,564) (128) 60.38 (5.6%) 8.9% 16.9% 17.40 17.7% 18.87 53 52 BCE Inc. 2018 Annual Report CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Total assets Cash and cash equivalents Debt due within one year (including notes payable and loans secured by trade receivables) Long-term debt Total non-current liabilities Equity attributable to BCE shareholders Total equity CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities Cash flows used in investing activities Capital expenditures Business acquisitions Disposition of intangibles and other assets Cash flows used in financing activities Issue of common shares Net issuance of debt instruments Cash dividends paid on common shares Cash dividends paid on preferred shares Cash dividends paid by subsidiaries to non-controlling interest Free cash flow SHARE INFORMATION Average number of common shares (millions) Common shares outstanding at end of year (millions) Market capitalization (1) Dividends declared per common share (dollars) Dividends declared on common shares Dividends declared on preferred shares Closing market price per common share (dollars) Total shareholder return RATIOS Capital intensity (%) Price to earnings ratio (times) (2) OTHER DATA Number of employees (thousands) (1) BCE’s common share price at the end of the year multiplied by the number of common shares outstanding at the end of the year. (2) BCE’s common share price at the end of the year divided by EPS. 84 MD&ASelected annual and quarterly information7 The following table shows selected consolidated financial data of BCE for 2016 as previously reported. This information was prepared in accordance with IFRS as issued by the IASB, prior to the adoption of IFRS 15, and is therefore not comparable to our 2018 and 2017 financial information. BCE Inc. 2018 Annual Report CONSOLIDATED INCOME STATEMENTS Operating revenues Service Product Total operating revenues Net earnings Net earnings attributable to common shareholders Net earnings per common share Basic and diluted CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Total assets Long-term debt Total non-current liabilities SHARE INFORMATION Dividends declared per common share (dollars) 2016 20,090 1,629 21,719 3,087 2,894 3.33 50,108 16,572 22,146 2.73 7.2 Quarterly financial information The following table shows selected BCE consolidated financial data by quarter for 2018 and 2017. This quarterly information is unaudited but has been prepared on the same basis as the annual consolidated financial statements. We discuss the factors that caused our results to vary over the past eight quarters throughout this MD&A. Operating revenues Service Product Total operating revenues Adjusted EBITDA Severance, acquisition and other costs Depreciation Amortization Finance costs 2018 2017 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 5,231 984 6,215 2,394 (58) (799) (216) 5,117 760 5,877 2,457 (54) (779) (220) 5,129 657 5,786 2,430 (24) (787) (221) 4,964 626 5,590 2,254 – (780) (212) 5,152 884 6,036 2,329 (47) (783) (208) 5,054 643 5,697 2,405 (23) (760) (207) 5,078 610 5,688 2,382 (36) (767) (210) 4,811 525 5,336 2,166 (84) (724) (185) Interest expense (259) (255) (246) (240) (241) (242) (238) (234) Interest on post-employment benefit obligations Other (expense) income Income taxes Net earnings Net earnings attributable to common shareholders Net earnings per common share (18) (158) (244) 642 606 (17) (41) (224) 867 814 (17) (88) (292) 755 704 (17) (61) (235) 709 661 (18) (62) (272) 698 656 (18) (56) (249) 850 803 (18) (1) (298) 814 765 (18) 17 (250) 688 642 Basic and diluted 0.68 0.90 0.79 0.73 0.72 0.90 0.85 0.73 Average number of common shares outstanding – basic (millions) OTHER INFORMATION Cash flows from operating activities Free cash flow Capital expenditures 898.1 898.0 898.0 900.2 900.6 900.4 900.1 875.7 1,788 1,022 2,043 1,014 2,057 994 (974) (1,010) (1,056) 1,496 537 (931) 1,658 652 2,233 1,183 2,154 1,094 (1,100) (1,040) (1,042) 1,313 489 (852) 85 MD&ASelected annual and quarterly information7 BCE Inc. 2018 Annual Report FOURTH QUARTER HIGHLIGHTS OPERATING REVENUES Bell Wireless Bell Wireline Bell Media Inter-segment eliminations Total BCE operating revenues ADJUSTED EBITDA Bell Wireless Bell Wireline Bell Media Total BCE adjusted EBITDA Q4 2018 2,248 3,296 850 (179) 6,215 Q4 2018 889 1,329 176 2,394 Q4 2017 2,149 3,218 834 (165) 6,036 Q4 2017 846 1,312 171 2,329 $ CHANGE % CHANGE 99 78 16 (14) 179 4.6% 2.4% 1.9% (8.5%) 3.0% $ CHANGE % CHANGE 43 17 5 65 5.1% 1.3% 2.9% 2.8% BCE operating revenues increased by 3.0% in Q4 2018, compared to last year, driven by growth across all three of our segments. The year- over-year increase reflected both higher service and product revenues of 1.5% and 11.3%, respectively. BCE net earnings decreased by 8.0% in Q4 2018 compared to Q4 2017, due mainly to higher other expense which included impairment charges of $190 million relating to our Bell Media segment, higher depreciation and amortization expense and higher finance costs, partly offset by higher adjusted EBITDA and lower income taxes. BCE adjusted EBITDA grew by 2.8% in Q4 2018, compared to Q4 2017, due to year-over-year increases in all three of our segments. BCE adjusted EBITDA margin of 38.5%, decreased marginally compared to last year’s margin of 38.6%, attributable to a greater proportion of low-margin product sales in our revenue base. Bell Wireless operating revenues increased by 4.6% in Q4 2018, compared to the same period in 2017, driven by both higher service and product revenues. Wireless service revenues increased by 2.2% year over year, due to continued growth in our postpaid subscriber base moderated by lower blended ARPU. The decline in blended ARPU was driven by lower voice and data overages due to increased customer adoption of plans with greater usage thresholds, greater allocation of revenues to product revenues due to a greater proportion of premium smartphone devices in our sales mix combined with higher retail handsets prices, lower ARPU generated from the contract with SSC and the dilutive impact on blended ARPU from the continued ramp-up in prepaid customers from Lucky Mobile. This was moderated by an increase in customers moving to higher-value monthly plans with greater data allotments and the flow-through of 2017 and 2018 pricing changes. Wireless product revenues grew 11.0% year over year, driven by increased sales of premium devices along with higher retail handset prices, partly offset by lower gross activations and upgrade volumes. Bell Wireless adjusted EBITDA increased 5.1% in Q4 2018, compared to the same period last year, driven by the flow-through of higher revenues, moderated by a 4.3% increase in operating expenses. The increase in operating expenses was primarily due to higher cost of goods sold driven by the sale of more premium devices and higher handset costs as well as increased network operating costs driven by the expansion of network capacity, partly offset by lower marketing expense mainly due to higher advertising spend in Q4 2017, in part relating to the launch of Lucky Mobile. Adjusted EBITDA margin, based on total operating revenues of 39.5% in Q4 2018, was essentially stable compared to the 39.4% achieved in Q4 2017. Bell Wireline operating revenues increased by 2.4% in Q4 2018, compared to last year, driven by both higher service revenues of 1.5% and product revenues of 12.0%. The growth in service revenues was due to the continued increases in our Internet and IPTV subscribers, the flow-through of 2017 and 2018 residential pricing changes, higher IP connectivity which reflects the contribution from the acquisition of Axia, business solutions services revenue growth, and higher sales of international long distance minutes in our wholesale market. This was offset in part by increased residential customer acquisition, retention and bundle discounts due to aggressive offers from cable competitors, coupled with ongoing erosion in our voice, satellite TV, and legacy data revenues. The year-over-year increase in product revenues reflected greater demand for equipment by large business customers, as well as higher sales of consumer electronics at The Source. Bell Wireline adjusted EBITDA grew by 1.3% in Q4 2018, over the same period last year, resulting from the flow-through of the revenue growth, partly offset by a 3.2% increase in operating costs driven by increased cost of revenue mainly related to the growth in product, business solutions services and international long distance minutes revenue, moderated by continued effective cost containment including workforce reductions. Adjusted EBITDA margin decreased to 40.3% in Q4 2018 over the 40.8% experienced in Q4 2017, driven by a greater proportion of low-margin product sales in our revenue base. Bell Media operating revenues increased by 1.9% in Q4 2018, compared to the same period last year, driven by higher advertising revenues due to rate increases for both conventional and specialty TV advertising, improved audience levels in specialty TV, as well as the favourable impact resulting from a strong fall programming schedule in conventional TV. The growth in OOH advertising revenues from digital and transit products also contributed to the increase in advertising revenues, partially offset by continued market softness in radio. Subscriber revenues were essentially stable in Q4 2018 compared to last year, as the decline in linear subscribers was largely offset by higher sports services driven by TSN and RDS direct, continued growth in our direct- to-consumer Crave product and rate increases to certain BDUs. Bell Media adjusted EBITDA increased by 2.9% in Q4 2018, compared to the same period last year, as the higher operating revenues more than offset a 1.7% increase in operating expenses relating to higher marketing expenses to support the November launch of the all-new Crave, our on-demand video streaming service (which now includes The Movie Network), increased programming and content costs primarily related to sports broadcast rights, higher OOH costs driven by the revenue increase and ongoing content expansion for our Crave products, moderated by savings in TV programming costs from schedule changes. 86 MD&ASelected annual and quarterly information7 BCE capital expenditures totaled $974 million in Q4 2018 with a corresponding capital intensity ratio of 15.7%, representing a decline of $126 million and 2.5 pts, respectively, compared to Q4 last year. The lower year-over-year capital investment was driven by reduced spending across all three of our segments. Bell Wireless spending declined by $86 million year over year due to the slower pace of spending compared to last year. The decline in Bell Wireline capital expenditures of $35 million in Q4 2018 was mainly driven by the timing of capital spending which was more weighted to the first half of the year. Bell Media capital expenditures decreased by $5 million in Q4 2018, primarily due to greater investments in 2017 related to the execution of OOH contract wins and upgrades to Bell Media broadcast studios and TV production equipment. BCE severance, acquisition and other costs of $58 million in Q4 2018 increased by $11 million, compared to Q4 2017, due mainly to higher other costs. BCE depreciation of $799 million in Q4 2018 increased by $16 million, year over year, mainly due to a higher asset base as we continued to invest in our broadband and wireless networks as well as our IPTV service. BCE amortization was $216 million in Q4 2018, up from $208 million in Q4 2017, due mainly to a higher asset base. BCE interest expense was $259 million in Q4 2018, up from $241 million in Q4 2017, mainly as a result of higher average debt levels and higher average interest rates on notes payable under commercial paper programs and loans securitized by trade receivables. SEASONALITY CONSIDERATIONS Some of our segments’ revenues and expenses vary slightly by season, which may impact quarter-to-quarter operating results. Bell Wireless operating results are influenced by the timing of new mobile device launches and seasonal promotional periods, such as back-to-school, Black Friday and the Christmas holiday period, as well as the level of overall competitive intensity. As a result of these seasonal effects, subscriber additions and retention costs due to device upgrades related to contract renewals are typically higher in the third and fourth quarters. Accordingly, adjusted EBITDA tends to be lower in the third and fourth quarters, due to the costs associated with higher seasonal loading volumes. With respect to ABPU, historically we have experienced seasonal sequential increases in the second and third quarters, due to higher levels of usage and roaming in the spring and summer months, followed by historical seasonal sequential declines in the fourth and first quarters. However, this seasonal effect on ABPU has moderated, as unlimited voice options and larger usage data plans with higher recurring monthly fees have become more prevalent, resulting in less variability in chargeable data usage. BCE Inc. 2018 Annual Report BCE other expense of $158 million in Q4 2018 increased by $96 million, year over year, mainly due to higher impairment charges at our Bell Media segment. BCE income taxes of $244 million in Q4 2018 were down from $272 million in Q4 2017, mainly as a result of lower taxable income. BCE net earnings attributable to common shareholders of $606 million in Q4 2018, or $0.68 per share, were lower than the $656 million, or $0.72 per share, reported in Q4 2017. The year-over-year decrease was due mainly to higher other expense which included impairment charges of $190 million relating to our Bell Media segment, higher depreciation and amortization expense and higher finance costs, partly offset by higher adjusted EBITDA and lower income taxes. Adjusted net earnings increased to $794 million, from $736 million in Q4 2017, and adjusted EPS increased to $0.89, from $0.82 in Q4 2017. BCE cash flows from operating activities was $1,788 million in Q4 2018 compared to $1,658 million in Q4 2017. The increase is mainly attributable to improved working capital, lower income taxes paid and higher adjusted EBITDA, partly offset by a higher voluntary DB pension plan contribution made in 2018. BCE free cash flow generated in Q4 2018 was $1,022 million, an increase of $370 million compared to Q4 2017. This was due mainly to higher cash flows from operating activities, excluding voluntary DB pension plan contributions, and acquisition and other costs paid, and lower capital expenditures. Bell Wireline revenues tend to be higher in the fourth quarter because of historically higher data and equipment product sales to business customers and higher consumer electronics equipment sales during the Christmas holiday period. However, this may vary from year to year depending on the strength of the economy and the presence of targeted sales initiatives, which can influence customer spending. Home Phone, TV and Internet subscriber activity is subject to modest seasonal fluctuations, attributable largely to residential moves during the summer months and the back-to-school period in the third quarter. Targeted marketing efforts conducted during various times of the year to coincide with special events or broad-based marketing campaigns also may have an impact on overall wireline operating results. Bell Media revenues and related expenses from TV and radio broadcasting are largely derived from the sale of advertising, the demand for which is affected by prevailing economic conditions, as well as cyclical and seasonal variations. Seasonal variations are driven by the strength of TV ratings, particularly during the fall programming season, major sports league seasons and other special sporting events such as the Olympic Games, NHL playoffs and World Cup soccer, as well as fluctuations in consumer retail activity during the year. 87 MD&ASelected annual and quarterly information7 BCE Inc. 2018 Annual Report 8 Regulatory environment Introduction 8.1 This section describes certain legislation that governs our business and provides highlights of recent regulatory initiatives and proceedings, government consultations and government positions that affect us, influence our business and may continue to affect our ability to compete in the marketplace. Bell Canada and several of its direct and indirect subsidiaries, including Bell Mobility, Bell ExpressVu Limited Partnership (Bell ExpressVu), Bell Media, NorthernTel, Limited Partnership (NorthernTel), Télébec, Limited Partnership (Télébec) and Northwestel Inc. (Northwestel), are governed by the Telecommunications Act, the Broadcasting Act, the Radiocommunication Act and/or the Bell Canada Act. Our business is affected by regulations, policies and decisions made by various regulatory agencies, including the CRTC, a quasi- judicial agency of the Government of Canada responsible for regulating Canada’s telecommunications and broadcasting industries, and other federal government departments, in particular ISED and the Competition Bureau. In particular, the CRTC regulates the prices we can charge for retail telecommunications services when it determines there is not enough competition to protect the interests of consumers. The CRTC has determined that competition is sufficient to grant forbearance from retail price regulation under the Telecommunications Act for the vast majority of our retail wireline and wireless telecommunications services. The CRTC can also mandate the provision of access by competitors to our wireline and wireless networks and the rates we can charge them. Notably, it currently mandates wholesale high-speed access for wireline broadband as well as domestic wireless roaming services. Additional mandated services, as well as lower mandated wholesale rates, could limit our flexibility, influence the market structure, undermine our incentives to invest in network improvements and extensions, improve 8.2 Telecommunications Act The Telecommunications Act governs telecommunications in Canada. It defines the broad objectives of Canada’s telecommunications policy and provides the Government of Canada with the power to give general direction to the CRTC on any of its policy objectives. It applies to several of the BCE group of companies and partnerships, including Bell Canada, Bell Mobility, NorthernTel, Télébec and Northwestel. Under the Telecommunications Act, all facilities-based telecommuni- cations service providers in Canada, known as telecommunications common carriers (TCCs), must seek regulatory approval for all tele- communications services, unless the services are exempt or forborne from regulation. The CRTC may exempt an entire class of carriers from regulation under the Telecommunications Act if the exemption meets the objectives of Canada’s telecommunications policy. In addition, a few large TCCs, including those in the BCE group, must also meet certain Canadian ownership requirements. BCE monitors and periodically reports on the level of non-Canadian ownership of its common shares. the business positions of our competitors and negatively impact the financial performance of our businesses. Our TV distribution and our TV and radio broadcasting businesses are subject to the Broadcasting Act and are, for the most part, not subject to retail price regulation. Although most of our retail services are not price-regulated, government agencies and departments such as the CRTC, ISED, Canadian Heritage and the Competition Bureau continue to play a significant role in regulatory matters such as mandatory access to networks, spectrum auctions, the imposition of consumer-related codes of conduct, approval of acquisitions, broadcast licensing and foreign ownership requirements. Adverse decisions by governments or regulatory agencies or increasing regulation could have negative financial, operational, reputational or competitive consequences for our business. REVIEW OF KEY LEGISLATION On June 5, 2018, the Minister of ISED and the Minister of Canadian Heritage announced the launch of a review of the Broadcasting Act, the Radiocommunication Act and the Telecommunications Act (the Acts). The legislative review is intended to modernize the Acts to better address new realities impacting the broadcasting and telecommunications industries. The review is being led by a panel of external experts tasked with consulting industry members and Canadian consumers. The panel is to return a report with recommendations for legislative reforms by January 31, 2020. While reforms of these key pieces of legislation could have material impacts for our broadcasting, telecommunications and wireless businesses, it is unclear what recommendations the panel may make, what impacts those recommendations may have, if adopted, and when any adopted reforms would come into force. in misleading or aggressive sales tactics, the controls that those carriers have in place to prevent misleading or aggressive sales tactics, existing consumer protections that promote fair treatment of consumers, and the most effective ways to expand consumer protections. The CRTC held hearings in October 2018 on the topic and issued its report on February 20, 2019. The CRTC concluded that misleading or aggressive retail sales practices are present in the telecommunications service provider market and, to some extent, in the television service provider market as a result of its investigation. It suggested a set of best practices for service providers and noted that it will take action where appropriate and conduct further public processes where needed. It is not clear what interventions, if any, the CRTC may undertake and as a result, we are unable to assess what potential impact, if any, the CRTC’s report may have on our business and financial results. REVIEW OF BASIC TELECOMMUNICATIONS SERVICES CRTC REPORT ON THE SALES PRACTICES OF LARGE TELECOMMUNICATIONS CARRIERS On June 14, 2018, the Governor in Council issued an Order in Council directing the CRTC to make a report regarding the retail sales practices of Canada’s large telecommunications carriers. In preparing its report, the CRTC investigated whether large service providers are engaging On December 21, 2016, the CRTC issued Telecom Regulatory Policy CRTC 2016-496, in which it determined broadband Internet to be a basic service and created a new fund designed to complement government investments in expanding access to broadband Internet across Canada (Broadband Fund). The Broadband Fund will collect and distribute $750 million over a five-year period to support an aspirational 88 MD&ARegulatory environment8 BCE Inc. 2018 Annual Report goal of bringing broadband Internet with speeds of 50 Mbps to 90% of Canadian households. Contributions to the Broadband Fund will be collected from telecommunications service providers, like those of the BCE group, and distributed through a competitive bidding process to support broadband deployment initiatives. The fund is to start at $100 million in its first year and grow by $25 million each year until it caps out at $200 million in the fifth year. While we will be required to contribute to the Broadband Fund based on our percentage of industry revenues for voice, data and Internet services, the extent of the impact of this new fund on our business is not yet known, as funds contributed may be offset by any funds received should we seek and be awarded funds to deploy broadband services as part of the CRTC’s program. The CRTC has launched a proceeding to determine the details of the competitive bidding process and we anticipate that the Broadband Fund will likely be operational in 2020. On September 27, 2018, the CRTC issued Telecom Regulatory Policy CRTC 2018-377 in which it clarified matters related to the Broadband Fund. Specifically, the CRTC determined that the Broadband Fund would cover four areas: (i) network transport; (ii) fixed broadband Internet access; (iii) mobile wireless; and (iv) broadband in satellite-served communities. The CRTC stated that it would prefer network transport projects with the potential to benefit several communities over individual access projects, and would prefer fixed access projects over mobile wireless projects. Up to 10% of the Broadband Fund will be reserved for satellite-served communities as had been previously determined. The Broadband Fund will be managed by the CRTC with the assistance of the Central Fund Administrator of the National Contribution Fund (which is currently subsidizing voice services and transitioning towards the Broadband Fund). The CRTC will use a comparative approach based on certain criteria much like the Federal Government’s Connect to Innovate fund, although no weightings were provided for each criteria. On February 14, 2019, the CRTC asked for comments on a preliminary application guide for the Broadband Fund. The CRTC will also conduct a mapping exercise to determine which geographic areas are eligible for funding. The CRTC did not provide any guidance on when it would start collecting funds for the Broadband Fund or when it could start issuing requests for bids. On June 26, 2018, in Telecom Regulatory Policy CRTC 2018-213, the CRTC decided to phase out the local service subsidy over three years, from January 1, 2019 to December 31, 2021, through semi-annual reductions. This subsidy, collected from the industry, is remitted to incumbent telephone providers, such as Bell Canada, to support residential local phone service in high-cost areas. BCE group entities both contribute to and draw from this subsidy fund, with BCE group entities currently in a small net beneficiary position. On the same date, the CRTC launched Telecom Notice of Consultation CRTC 2018-214 to review certain elements of the local service regime, including whether additional pricing flexibility or some form of compensation is required for incumbent telephone providers, given that the local service subsidy will be eliminated. This proceeding will also review the existing forbearance regimes for local residential and business services. The CRTC’s decision may result in greater flexibility to meet our obligation to serve voice customers and more deregulation of voice services, as well as remove the obligation to serve in certain areas such as those that are currently served by mobile wireless competitors. Conversely, it may maintain the obligation to serve while removing subsidies and capping certain retail rates, resulting in the forced provision of voice service at a loss in high-cost serving areas. The materiality of impacts will not be known until the CRTC issues its decision. PROCEEDINGS REGARDING WHOLESALE DOMESTIC WIRELESS SERVICES On June 1, 2017, the Federal Cabinet issued an order to the CRTC directing it to reconsider certain determinations made in Telecom Decision CRTC 2017-56 (Decision 2017-56). In Decision 2017-56, the CRTC determined that Bell Mobility, Rogers, and Telus were required to provide “incidental” access to their networks and not “permanent” access as part of the mandated roaming service. In addition, the CRTC determined that the use of generally available public Wi-Fi does not form part of the home network of a non-national wireless service provider (NNWP) for the purpose of establishing what constitutes incidental roaming access. As a result, NNWPs may not rely on the use of public Wi-Fi facilities to be eligible to purchase incidental roaming services. In its order, the Federal Cabinet asked the CRTC to consider whether allowing an end-user’s connectivity to public Wi-Fi to count as connectivity to a NNWP’s home network would make Canadian wireless services more affordable, and whether any affordability gains associated with such a changed rule would outweigh any disincentives for the national carriers to continue to invest in their networks. On March 22, 2018, in Telecom Decision CRTC 2018-97, the CRTC maintained its previous determination that permitting such access would negatively impact investments in wireless networks by wireless carriers and run against the long-standing policy to encourage facilities-based competition. Instead of mandating access for Wi-Fi-based wireless service providers, the CRTC initiated Telecom Notice of Consultation CRTC 2018-98, in which it directed Bell Mobility, Rogers and Telus to file proposals for affordable data-only plans that they could offer in the market. On December 17, 2018, the CRTC issued Telecom Decision CRTC 2018-475 in which it accepted the proposals by the national carriers and did not impose formal regulation. Instead, the CRTC stated an expectation that the national carriers implement the plans they had committed to and indicated that the CRTC will monitor compliance going forward. We are currently unable to assess the potential impact that Telecom Decision CRTC 2018-475 may have, if any, on our business and financial results. MANDATED WHOLESALE ACCESS TO FTTP NETWORKS On July 22, 2015, in Telecom Regulatory Policy CRTC 2015-326, the CRTC mandated the introduction of a new disaggregated wholesale high- speed access service, including over FTTP facilities, which had previously been exempt from mandated aggregated wholesale high-speed access. While this new service is mandated for all major incumbent telephone companies and cable carriers, the first stage of its implementation is to take place only in Ontario and Québec, our two largest markets. This adverse regulatory decision may impact the specific nature, magnitude, location and timing of our future FTTP investment decisions. In particular, the introduction by the CRTC of mandated wholesale services over FTTP undermines the incentives for facilities-based digital infrastructure providers to invest in next-generation wireline networks, particularly in smaller communities and rural areas. On September 20, 2016, the CRTC issued Telecom Decision CRTC 2016-379 concerning the technical design of our future disaggregated wholesale high-speed access service. On August 29, 2017, in Telecom Order CRTC 2017-312, the CRTC set interim rates for these services. The final rates remain to be determined. The mandating of final rates that are materially different from the rates we proposed could improve the business position of our competitors and further impact our investment strategy. 89 MD&ARegulatory environment8 BCE Inc. 2018 Annual Report PROPOSED EXPANSION OF AGGREGATED WHOLESALE ACCESS REGIME TO FTTP NETWORKS On November 7, 2018, the Canadian Network Operators Consortium Inc. (CNOC) (which represents wholesale ISPs) applied to the CRTC to obtain mandated access via aggregated services to FTTP facilities. In addition, CNOC is requesting the introduction of a third wholesale high-speed access service, which would feature some level of aggregation between that of the already well-established mandated aggregated wholesale high-speed access service and the newer disaggregated wholesale high-speed access service referred to under Mandated Wholesale Access to FTTP Networks above. The inclusion of FTTP facilities in the aggregated regime and the introduction of yet another mandated wholesale high-speed service could further undermine the incentives for facilities-based digital infrastructure providers to invest in next- generation wireline networks and improve the business position of our competitors. REVIEW OF WHOLESALE FTTN HIGH- SPEED ACCESS SERVICE RATES As part of its ongoing review of wholesale Internet rates, on October 6, 2016 the CRTC significantly reduced, on an interim basis, some of the wholesale rates that Bell Canada and other major providers charge for access by ISPs to FTTN or cable networks, as applicable. Should such substantially lowered wholesale rates remain in place in the long term and, in addition, should the interim rates be made retroactive, the business position of some of our competitors could improve, adversely affecting our financial performance, and our investment strategy could change, especially in relation to investment in next-generation wireline networks, particularly in smaller communities and rural areas. NATIONAL WIRELESS SERVICES CONSUMER CODE On June 3, 2013, the CRTC issued Telecom Regulatory Policy CRTC 2013-271, which established the Wireless Code. The Wireless Code applies to all wireless services provided to individual and small business consumers (i.e., businesses that on average spend less than $2,500 per month on telecommunications services) in all provinces and territories. The Wireless Code regulates certain aspects of the provision of wireless services. Most notably, the Wireless Code prevents wireless service providers from charging an early cancellation fee after a customer has been under contract for 24 months and requires providers to recover any handset subsidies in two years or less. These requirements have effectively removed contracts with terms greater than two years from the marketplace. On June 15, 2017, the CRTC issued Telecom Regulatory Policy CRTC 2017-200, making targeted changes to the Wireless Code, effective December 1, 2017, and clarifying existing rules. The revisions to the Wireless Code prevent service providers from selling locked devices, increase voice, text and data usage allowances for customers to try out their services during the mandatory 15-day buyer’s trial period for purchased devices, and establish additional controls related to data overage and data roaming charges, among other things. PROPOSED ORDER REGARDING CRTC POLICY OBJECTIVES On February 26, 2019, the Governor in Council announced that it will propose to make an order (the Proposed Order) directing the CRTC to implement objectives relating to competition, affordability, consumer interests and innovation in its telecommunications policy objectives. Interested persons may make representations concerning the Proposed Order within 30 days after the date of publication of the notice of the Proposed Order in the Canada Gazette. It is unclear what impact, if any, the Proposed Order and future related processes could have on our business and financial results. REVIEW OF MOBILE WIRELESS SERVICES On February 28, 2019, the CRTC launched its planned review of the regulatory framework for mobile wireless services. The purpose of the proceeding is to consider changes to the wireless regulatory framework developed in 2015. The main issues in the CRTC’s consultation include (i) competition in the retail market; (ii) the current wholesale mobile wireless service regulatory framework, with a focus on wholesale MVNO access; and (iii) the future of mobile wireless services in Canada, with a focus on reducing barriers to infrastructure deployment. With respect to MVNOs, the CRTC expressed the preliminary view that it would be appropriate for the national wireless carriers to provide wholesale MVNO access. The CRTC will hold a public hearing in January 2020 and a decision is expected later in 2020. It is unclear what impact, if any, the results of this consultation could have on our business and financial results. CANADA’S TELECOMMUNICATIONS FOREIGN OWNERSHIP RULES Under the Telecommunications Act, there are no foreign investment restrictions applicable to TCCs that have less than a 10% share of the total Canadian telecommunications market as measured by annual revenues. However, foreign investment in telecommunications companies can still be refused by the government under the Investment Canada Act. The absence of foreign ownership restrictions on such small or new entrant TCCs could result in more foreign companies entering the Canadian market, including by acquiring spectrum licences or Canadian TCCs. 8.3 Broadcasting Act The Broadcasting Act outlines the broad objectives of Canada’s broadcasting policy and assigns the regulation and supervision of the broadcasting system to the CRTC. Key policy objectives of the Broadcasting Act are to protect and strengthen the cultural, political, social and economic fabric of Canada and to encourage the development of Canadian expression. requirements if it is satisfied that non-compliance will not materially affect the implementation of Canadian broadcasting policy. A corporation must also meet certain Canadian ownership and control requirements to obtain a broadcasting or broadcasting distribution licence, and corporations must have the CRTC’s approval before they can transfer effective control of a broadcasting licensee. Most broadcasting activities require a programming or broadcasting distribution licence from the CRTC. The CRTC may exempt broadcasting undertakings from complying with certain licensing and regulatory Our TV distribution operations and our TV and radio broadcasting operations are subject to the requirements of the Broadcasting Act, the policies and decisions of the CRTC and their respective broadcasting 90 MD&ARegulatory environment8 licences. Any changes in the Broadcasting Act, amendments to regulations or the adoption of new ones, or amendments to licences, could negatively affect our competitive position or the cost of providing services. CHANGES TO SIMULTANEOUS SUBSTITUTION In Broadcasting Regulatory Policy CRTC 2015-25, the CRTC announced its intention to eliminate simultaneous substitution for the Super Bowl starting in 2017. This decision was implemented in Broadcasting Regulatory Policy CRTC 2016-334 (the Policy) and Broadcasting Order CRTC 2016-335 (the Order). Bell Canada and Bell Media appealed the application of the Order to the Federal Court of Appeal, as did the NFL. Bell Canada and Bell Media argued that the CRTC does not have jurisdiction under the Broadcasting Act to ban simultaneous substitution for the Super Bowl and that doing so constitutes unauthorized retrospective regulation and interference with Bell Media’s vested economic rights. The appeal was denied on December 18, 2017. On May 10, 2018, the Supreme Court of Canada granted leave for Bell Canada, Bell Media and the NFL to appeal the decision of the Federal Court of Appeal. The appeals were heard in December 2018 and the decision remains pending. The CRTC’s decision to eliminate simultaneous substitution for the Super Bowl has had an adverse impact on Bell Media’s conventional TV business and financial results, as a result of a reduction in viewership and advertising revenues. Such impacts will continue throughout the duration of our contract term with the NFL unless the CRTC’s Order is rescinded. Pursuant to the recently negotiated United States-Mexico-Canada Agreement (USMCA), the government of Canada is required to rescind the Policy and the Order. This would allow Bell Media to implement simultaneous substitution for the Super Bowl. As it is uncertain when the Policy and the Order will be rescinded, Bell Media applied to the CRTC for it to temporarily suspend the operation of the Order to allow the simultaneous substitution of U.S. commercials with Canadian commercials for the 2019 Super Bowl. On November 8, 2018, the CRTC denied this request, given that USMCA had not yet been formally ratified BCE Inc. 2018 Annual Report and also given the appeal to the Supreme Court of Canada. It remains uncertain when the Order will be rescinded. WHOLESALE CODE In Broadcasting Regulatory Policy CRTC 2015-438, the CRTC announced it would implement a new Wholesale Code to govern the commercial arrangements between BDUs, programming services and digital media services, including imposing additional restrictions on the sale of TV channels at wholesale and the carriage of TV channels by BDUs pursuant to Broadcasting Order CRTC 2015-439. Bell Canada and Bell Media appealed Broadcasting Order CRTC 2015-439 to the Federal Court of Appeal, arguing that the CRTC’s implementation of the Wholesale Code conflicts with the Copyright Act and is outside the CRTC’s jurisdiction under the Broadcasting Act. On October 1, 2018, the Federal Court of Appeal allowed the appeal and set aside Broadcasting Order CRTC 2015-439. The impact of the Federal Court of Appeal’s decision on our business is not known at this time. TELEVISION SERVICE PROVIDER CODE On January 7, 2016, the CRTC issued Broadcasting Regulatory Policy CRTC 2016-1, which established the Television Service Provider Code (the TV Code). The TV Code came into force on September 1, 2017 and requires all regulated TV service providers, as well as exempt TV service providers that are affiliated with a regulated service provider, to observe certain rules concerning their consumer agreements for TV services. The TV Code does not apply to other exempt providers, such as OTT providers not affiliated with a regulated service provider. The TV Code specifically imposes requirements relating to the clarity of offers, the content of contracts, trial periods for persons with disabilities, how consumers can change their programming options, and when services may be disconnected, among other things. As part of Broadcasting Regulatory Policy CRTC 2016-1, the CRTC also expanded the mandate of the Commissioner for Complaints for Telecommunications Services, now the Commission for Complaints for Telecom-Television Services (CCTS), to include the administration of the TV Code and to enable the CCTS to accept consumer complaints about TV services. 8.4 Radiocommunication Act ISED regulates the use of radio spectrum under the Radiocommunication Act to ensure that radiocommunication in Canada is developed and operated efficiently. All companies wishing to operate a wireless system in Canada must hold a spectrum licence to do so. Under the Radiocommunication Regulations, companies that are eligible for radio licences, such as Bell Canada and Bell Mobility, must meet the same ownership requirements that apply to companies under the Telecommunications Act. RENEWAL OF AWS-1 AND PCS G BLOCK AND I BLOCK SPECTRUM LICENCES On January 8, 2019, ISED approved the renewal of our AWS-1 and PCS G Block spectrum licences for a 20-year term, setting population coverage targets that apply within the first eight years and a second set of population coverage targets to be met by the end of the 20-year licence term. With respect to I Block licences, the current ecosystem does not support the viable deployment of this spectrum – an issue faced by all existing I Block licensees. As a result, I Block deployment targets are not able to be met and our three I Block licences were not renewed. Given that these licences have never been deployed, the impact is not material. CONSULTATION ON 3500 MHZ SPECTRUM On June 6, 2018, ISED issued the Consultation on Revisions to the 3500 MHz Band to Accommodate Flexible Use and Preliminary Consultation on Changes to the 3800 MHz Band. ISED is seeking comments on issues such as allowing flexible use spectrum licences in the 3450–3650 MHz band, the amount of spectrum existing licence holders need to return if they decide to convert their existing licences to flexible use licences, the transition plan for existing licence holders, and the extent to which the 3700–4200 MHz band can accommodate coexisting services (e.g., fixed-satellite service with mobile and/or fixed wireless access). ISED will launch a consultation on the technical, policy and licensing framework for flexible use licences in the 3500 MHz band after releasing its decision regarding the issues raised in this consultation. It is unclear what impact the results of this consultation and future related processes could have on our business and financial results. 91 MD&ARegulatory environment8 BCE Inc. 2018 Annual Report 600 MHZ SPECTRUM AUCTION On March 28, 2018, ISED released the Technical, Policy and Licensing Framework for Spectrum in the 600 MHz Band. In this framework, ISED confirmed that it will auction 70 MHz of spectrum in the 600 MHz band, 30 MHz of which will be set aside for set-aside-eligible entities. Set-aside- eligible entities must: (i) be registered with the CRTC as facilities-based providers; (ii) not be national incumbent service providers; and (iii) be actively providing commercial telecommunications services to the general public in the relevant service area of interest as of the application date to participate in the auction. The set-aside spectrum can only be transferred to set-aside-eligible entities for the first five years. All auctioned licences will have a 20-year term and be subject to certain deployment requirements, which require licensees to provide network coverage to a certain percentage of the population in each licence area at five, 10 and 20 years following licence issuance. While the adoption of set-aside provisions limits the spectrum that Bell Mobility can bid on, no further restrictions were adopted that would limit Bell Mobility’s participation in the auction process. Bidding in the auction is scheduled to begin March 12, 2019. CONSULTATION ON RELEASING MILLIMETRE WAVE SPECTRUM TO SUPPORT 5G On June 5, 2017, ISED launched a consultation entitled Consultation on Releasing Millimetre Wave Spectrum to Support 5G (Millimetre Wave Consultation). The consultation addresses the use of three key frequency bands, namely 28 GHz, 37-40 GHz and 64-71 GHz for possible 5G deployment. ISED has sought comments on a number of key technical and licensing policy considerations for the use of the above-noted spectrum. On June 6, 2018, ISED launched a consultation entitled Addendum to the Consultation on Releasing Millimetre Wave Spectrum to Support 5G. Through this addendum consultation, ISED is seeking stakeholder feedback on releasing additional spectrum in the 26 GHz band for flexible use to support 5G networks and systems, in addition to the frequency bands currently under consultation through the Millimetre Wave Consultation. As 5G is expected to be the next major advancement in mobile telecommunications standards, access to the millimetre wave spectrum will be important in order to facilitate the development and adoption of 5G technology. It is unclear what, if any, impact the results of this consultation could have on our business. 8.5 Bell Canada Act Among other things, the Bell Canada Act limits how Bell Canada voting shares and Bell Canada facilities may be sold or transferred. Specifically, under the Bell Canada Act, the CRTC must approve any sale or other disposal of Bell Canada voting shares that are held by BCE, unless the sale or disposal would result in BCE retaining at least 80% of all of the issued and outstanding voting shares of Bell Canada. Except in the ordinary course of business, the sale or other disposal of facilities integral to Bell Canada’s telecommunications activities must also receive CRTC approval. 8.6 Other key legislation PERSONAL INFORMATION PROTECTION AND ELECTRONIC DOCUMENTS ACT On November 1, 2018 the Personal Information Protection and Electronic Documents Act was amended to require organizations to report to the Privacy Commissioner of Canada breaches of security safeguards involving personal information that pose a real risk of significant harm to individuals; to notify affected individuals about those breaches; and to keep records of all breaches (whether there is a real risk of significant harm or not). Failure to comply with these notification requirements, or to record security breaches, may result in a fine of up to $100,000 per occurrence. In addition, the Office of the Privacy Commissioner of Canada (OPC) recently issued two sets of guidelines, namely the Guidance on Inappropriate Data Practices: Interpretation and Application of Subsection 5(3) and the Guidelines for Obtaining Meaningful Consent, which could have significant impacts on how personal information may be collected, used and disclosed for analytics and marketing purposes. In effect since July 1, 2018, the Guidance on Inappropriate Data Practices establishes six areas in which the collection, use or disclosure of personal information would effectively be prohibited, introducing limits on profiling that could be considered discriminatory, as well as limits on the surveillance of employee devices. The new Guidelines for Obtaining Meaningful Consent went into effect on January 1, 2019 and provide guidance regarding the meaningful obtention of consent, specify that meaningful consent must be obtained to the collection of data that is not required to provide services, and require the identification of the risk of harm related to information disclosure. 92 COPYRIGHT ACT REVIEW On December 13, 2017, the federal government passed a motion in Parliament to formally launch a review of the Copyright Act. This review is mandated by the Copyright Act itself, which requires that the legislation be examined every five years. The Standing Committee on Industry, Science and Technology, working in collaboration with the Standing Committee on Canadian Heritage, is leading the process, which began in February 2018. At this time, the impact of any potential amendments on our business and financial results is unknown. CANADA’S ANTI-SPAM LEGISLATION Federal legislation referred to as Canada’s anti-spam legislation (CASL) came into force on July 1, 2014. Pursuant to CASL, commercial electronic messages can be sent only if the recipient has provided prior consent and the message complies with certain formalities, including the ability to unsubscribe easily from subsequent messages. As of January 15, 2015, CASL also requires that an organization have prior informed consent before downloading software to an end-user’s computer. Penalties for non-compliance include administrative monetary penalties of up to $10 million. While CASL is also intended to provide individual Canadians with a private right of action to commence proceedings for statutory damages in relation to instances of non-compliance, these provisions were deferred indefinitely from coming into force by the Federal Cabinet on June 2, 2017. MD&ARegulatory environment8 BCE Inc. 2018 Annual Report 9 Business risks A risk is the possibility that an event might happen in the future that could have a negative effect on our financial position, financial performance, cash flows, business or reputation. The actual effect of any event could be materially different from what we currently anticipate. The risks described in this MD&A are not the only ones that could affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our financial position, financial performance, cash flows, business or reputation. This section describes the principal business risks that could have a material adverse effect on our financial position, financial performance, cash flows, business or reputation, and cause actual results or events to differ materially from our expectations expressed in, or implied by, our forward-looking statements. As indicated in the table below, certain of these principal business risks have already been discussed in other sections of this MD&A, and we refer the reader to those sections for a discussion of such risks. All of the risk discussions set out in the sections referred to in the table below are incorporated by reference in this section 9. RISKS DISCUSSED IN OTHER SECTIONS OF THIS MD&A Competitive environment SECTION REFERENCES Section 3.3, Principal business risks Section 5, Business segment analysis (Competitive landscape and industry trends section for each segment) Regulatory environment Security management Section 3.3, Principal business risks Section 8, Regulatory environment Section 3.3, Principal business risks Risks specifically relating to our Bell Wireless, Bell Wireline and Bell Media segments Section 5, Business segment analysis (Principal business risks section for each segment) The other principal business risks that could also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation are discussed below. TECHNOLOGY/INFRASTRUCTURE TRANSFORMATION The failure to optimize network and IT deployment and upgrade timelines, accurately assess the potential of new technologies, or invest and evolve in the appropriate direction, could have an adverse impact on our business and financial results Globalization, increased competition and ongoing technological advances are driving customer expectations of faster market responses, enhanced user experiences and cost-effective delivery. Meeting these expectations requires the deployment of new service and product technologies that are network-neutral and based on a more collaborative and integrated development environment. The availability of improved networks and software technologies provides the foundation for better and faster connections, which have in turn led to a significant growth in IoT applications. Change can be difficult and may present unforeseen obstacles that might impact successful execution, and this transition is made more challenging by the complexity of our multi-product environment, combined with the complexity of our network and IT structures. In addition, new technologies may quickly become obsolete or their launch may be delayed. The failure to optimize network and IT deployment and upgrade timelines, in light of customer demand and competitor activities, to accurately assess the potential of new technologies, or to invest and evolve in the appropriate direction in an environment of changing business models, could have an adverse impact on our business and financial results. In particular, our network and IT evolution activities seek to leverage new as well as evolving and developing technologies, including network functions virtualization, software-defined networks and cloud technologies, and to transform our network and systems to achieve our objectives of becoming more agile in our service delivery and operations as well as providing self-serve and instant-on capabilities for our customers, ensuring best quality and customer experience, and developing a new network infrastructure that enables a competitive cost structure and rapidly growing capacity. These evolution activities require an operational and cultural shift. Alignment across technology, product development and operations is increasingly critical to ensure appropriate trade-offs and optimization of capital allocation. If this cannot be achieved in accordance with our deployment schedules while maintaining network availability and performance through the migration process, we may lose customers as a result of poor service performance, which could adversely affect our ability to achieve our operational and financial objectives. Failure to leverage IP across all facets of our network and product and service portfolio could inhibit a fully customer-centric approach, limiting or preventing comprehensive self-serve convenience, real-time provisioning, cost savings and flexibility in delivery and consumption, leading to negative business and financial outcomes. Parallel to our focus on next-generation investment, adverse regulatory decisions may impact the specific nature, magnitude, location and timing of investment decisions. In particular, the introduction by the CRTC of mandated wholesale services over FTTP or wireless networks will undermine the incentives for facilities-based digital infrastructure providers to invest in next-generation wireline and wireless networks, particularly in smaller communities and rural areas. Failure to continue investment in next-generation capabilities in a disciplined and strategic manner could limit our ability to compete effectively and achieve desired business and financial results. 93 MD&ABusiness risks9 BCE Inc. 2018 Annual Report Other examples of risks affecting achievement of our desired technology/ infrastructure transformation include: • Network construction and deployment on municipal or private property requires the issuance of municipal or property owner consents, respectively, for the installation of network equipment, which could increase the cost of, and cause delays in, FTTP and wireless rollouts • The successful deployment of WTTP service could be impacted by various factors, including environmental factors (such as trees), affecting coverage and costs • We must be able to purchase high-quality network equipment and services from third-party suppliers on a timely basis and at a reasonable cost (refer to Dependence on third-party suppliers in this section 9 for more details) • The increasing dependence on apps for content delivery, sales, customer engagement and service experience drives the need for new and scarce capabilities (sourced internally or externally), which may not be available, as well as the need for associated operating processes integrated into ongoing operations CUSTOMER EXPERIENCE Driving a positive customer experience in all aspects of our engagement with customers is important to avoid brand degradation and other adverse impacts on our business and financial performance As the bar continues to be raised based on customers’ evolving expectations of service and value, failure to get ahead of such expectations and build a more robust and consistent service experience could hinder product and service differentiation and customer loyalty. The foundation of effective customer service stems from our ability to deliver high-quality, consistent and simple solutions to customers in an expeditious manner and on mutually agreeable terms. However, complexity in our operations resulting from multiple technology platforms, billing systems, sales channels, marketing databases and a myriad of rate plans, promotions and product offerings, in the context of a large customer base and workforce that continuously requires to be trained, monitored and replaced, may limit our ability to respond OPERATIONAL PERFORMANCE • New products, services or apps could reduce demand for our existing, more profitable service offerings or cause prices for those services to decline, and could result in shorter estimated useful lives for existing technologies, which could increase depreciation and amortization expense • As content consumption habits evolve and viewing options increase, our ability to develop alternative delivery vehicles in order to seek to compete in new markets and increase customer engagement and revenue streams may be hindered by the significant software development and network investment required • Successfully managing the development and deployment on a timely basis of relevant product solutions to match the speed of adoption of IoT in the areas of retail, business and government could be challenging • We must be able to leverage new opportunities, in order to meet our business objectives, such as those introduced by “big data” which is subject to many challenges including evolving customer perceptions as well as legal and regulatory developments. If we cannot build market-leading competencies in this field across sales, service and operational platforms that respect societal values and legal and regulatory requirements, we may miss important opportunities to grow our business through enhanced market intelligence and a more proactive customer service model. quickly to market changes and reduce costs, and may lead to customer confusion or billing, service or other errors, which could adversely affect customer satisfaction, acquisition and retention. These challenges may be exacerbated as services become more complex. Media attention to customer complaints could also erode our brand and reputation and adversely affect customer acquisition and retention. With the proliferation of connectivity services, apps and devices, customers are accustomed to doing things when, how and where they want through websites, self-serve options, web chat, call centres, Facebook, Twitter and other social media forums. Failure to embrace these new media in a positive way, incorporate them into multiple elements of our service delivery and ensure that we understand their potential impact on customer perceptions could adversely affect our reputation and brand value. Our networks, IT systems and data centre assets are the foundation of high-quality consistent services, which are critical to meeting service expectations Our ability to provide consistent wireless, wireline and media services to customers in a complex and constantly changing operating environment is crucial for sustained success. In particular, network capacity demands for TV and other bandwidth-intensive applications on our Internet and wireless networks have been growing at unprecedented rates. Unexpected capacity pressures on our networks may negatively affect our network performance and our ability to provide services. Issues relating to network availability, speed, consistency and traffic management on our more current as well as our aging networks could have an adverse impact on our business and financial performance. In addition, we currently use a very large number of interconnected operational and business support systems for provisioning, networking, distribution, broadcast management, billing and accounting, which may restrain our operational efficiency. If we fail to implement or maintain highly effective IT systems supported by an effective governance and operating framework, this may lead to inconsistent performance and dissatisfied customers, which over time could result in higher churn. Further examples of risks to operational performance that could impact our reputation, business operations and financial performance include the following: • We may need to incur significant capital expenditures beyond those already anticipated by our capital intensity target in order to provide additional capacity and reduce network congestion on our wireline 94 MD&ABusiness risks9 BCE Inc. 2018 Annual Report and wireless networks, and we may not be able to generate sufficient cash flows or raise the capital we need to fund such capital expenditures, which may result in service degradation • Corporate restructurings, system replacements and upgrades, process redesigns, staff reductions and the integration of business acquisitions may not deliver the benefits contemplated and could adversely impact our ongoing operations • If we fail to streamline our significant IT legacy system portfolio and proactively improve operating performance, this could adversely affect our business and financial outcomes • We may experience more service interruptions or outages due to aging legacy infrastructure. In some cases, vendor support is no longer available or legacy vendor operations have ceased. • There may be a lack of competent and cost-effective resources to perform the life-cycle management and upgrades necessary to maintain the operational status of legacy networks Our operations and business continuity depend on how well we protect, test, maintain and replace our networks, IT systems, equipment and other facilities Our operations, service performance, reputation and business continuity depend on how well we and our contracted product and service providers protect our networks and IT systems, as well as other infrastructure and facilities, from events such as information security attacks, unauthorized access or entry, fire, natural disaster (including, without limitation, seismic and severe weather-related events such as ice, snow and wind storms, flooding, hurricanes, tornadoes and tsunamis), power loss, building cooling loss, acts of war or terrorism, sabotage, vandalism, actions of neighbours and other events. Establishing response strategies and business continuity protocols to maintain service consistency if any disruptive event materializes is critical to the achievement of effective customer service. Any of the above-mentioned events, as well as the failure to complete planned and sufficient testing, maintenance or replacement of our networks, equipment and other facilities, which is, amongst others, dependent on our ability to purchase equipment and services from third-party suppliers, could disrupt our operations (including through disruptions such as network failures, billing errors or delays in customer service), require significant resources and result in significant remediation costs, which in turn could have an adverse effect on our business and financial performance, or impair our ability to keep existing subscribers or attract new ones. Satellites used to provide our satellite TV services are subject to significant operational risks that could have an adverse effect on our business and financial performance Pursuant to a set of commercial arrangements between Bell ExpressVu and Telesat Canada (Telesat), we currently have satellites under contract with Telesat. Telesat operates or directs the operation of these satellites, which utilize highly complex technology and operate in the harsh environment of space and are therefore subject to significant operational risks while in orbit. These risks include in-orbit equipment failures, malfunctions and other problems, commonly referred to as anomalies, that could reduce the commercial usefulness of a satellite used to provide our satellite TV services. Acts of war or terrorism, magnetic, electrostatic or solar storms, or space debris or meteoroids could also damage such satellites. Any loss, failure, manufacturing defect, damage or destruction of these satellites, of our terrestrial broadcasting infrastructure or of Telesat’s tracking, telemetry and control facilities to operate the satellites could have an adverse effect on our business and financial performance and could result in customers terminating their subscriptions to our satellite TV service. DEPENDENCE ON THIRD-PARTY SUPPLIERS We depend on third-party suppliers, outsourcers and consultants, some of which are critical, to provide an uninterrupted supply of the products and services we need to operate our business, deploy new network and other technologies and offer new products and services, as well as comply with various obligations supplier or outsourcer, this would decrease the number of available suppliers or outsourcers and could result in increased costs, transitional, support, service, quality or continuity issues; delay our ability to deploy new network and other technologies and offer new products and services; and adversely affect our business and financial results. We depend on key third-party suppliers and outsourcers, over which we have no operational or financial control, for products and services, some of which are critical to our operations. If there are gaps in our vendor selection, governance and oversight processes established to seek to ensure full risk transparency at point of purchase and throughout the relationship, including any contract renegotiations, there is the potential for a breakdown in supply, which could impact our ability to make sales, service customers and achieve our business and financial objectives. In addition, any such gaps could result in suboptimal management of our vendor base, increased costs and missed opportunities. Some of our third-party suppliers and outsourcers are located in foreign countries, which increases the potential for a breakdown in supply due to the risks of operating in foreign jurisdictions with different laws, geo-political environments and cultures, as well as the potential for localized natural disasters. We may have to select different third-party suppliers of equipment and other products and services, as well as outsourcers, in order to meet evolving internal company policies and guidelines as well as regulatory requirements. Should we decide, or be required by a governmental authority or otherwise, to terminate our relationship with an existing The outsourcing of services generally involves transfer of risk, and we must take appropriate steps to ensure that the outsourcers’ approach to risk management is aligned with our own standards in order to maintain continuity of supply and brand strength. Further, as cloud- based supplier models continue to evolve, our procurement and vendor management practices must also continue to evolve to fully address associated risk exposures. In addition, certain company initiatives rely heavily on professional consulting services provided by third parties, and a failure of such third parties may not be reasonably evident until their work is delivered or delayed. Depending on the size, complexity and level of third-party dependence, remedial strategies may be difficult to implement in respect of any professional consulting services provided by third parties that are not performed in a proper or timely fashion. Any such difficulty when implementing remedial strategies could result in an adverse effect on our ability to comply with various obligations, including applicable legal and accounting requirements. 95 MD&ABusiness risks9 BCE Inc. 2018 Annual Report Other examples of risks associated with our dependence on third-party suppliers include the following: • Demand for products and services available from only a limited number of suppliers, some of which dominate their global market, may lead to decreased availability, increased costs or delays in the delivery of such products and services, since suppliers may choose to favour global competitors that are larger than we are and, accordingly, purchase a larger volume of products and services. In addition, production issues affecting any such suppliers, or other suppliers, could result in decreased quantities or a total lack of supply of products or services. Any of these events could adversely impact our ability to meet customer commitments and demand. in, and/or bear primary financial responsibility for, a recall of its products, our ability to perform such recall programs at a reasonable cost and/or in a timely fashion may be negatively impacted. Any of the events referred to above could have an adverse effect on our operations and financial results. • Products (including software) and services supplied to us may contain security issues including, but not limited to, latent security issues that would not be apparent upon an inspection. When any such security issue is discovered, we seek to identify and develop remedial strategies both internally and with our suppliers. Should we or a supplier fail to correct a security issue in a timely fashion, there could be an adverse effect on our business and financial results. • Cloud-based solutions may increase the risk of security and data leakage exposure if security control protocols affecting our suppliers are bypassed • Failure to maintain strong discipline around vendor administration (especially around initial account setup) may mask potential financial or operational risks and complicate future problem resolutions • Temporary or permanent operational failures or service interruptions of the networks of other telecommunications carriers and suppliers on which we rely to deliver services could adversely affect our ability to provide services using such carriers’ and suppliers’ networks and could, consequently, have an adverse effect on our business and financial results • If products and services important to our operations have manufacturing defects or do not comply with applicable government regulations and standards (including product safety practices), our ability to sell products and provide services on a timely basis may be negatively impacted. We work with our suppliers to identify serious product defects (including safety incidents) and develop appropriate remedial strategies. Remedial strategies may include a recall of products. To the extent that a supplier does not actively participate • BCE depends on call centre and technical support services provided by a number of external suppliers and outsourcers, some of which are located in foreign countries. These vendors have access to customer and internal BCE information necessary for the support services that they provide. Information access and service delivery issues that are not managed appropriately may have an adverse impact on our reputation, the quality and speed of services provided to customers, and our ability to address technical issues. PEOPLE Our employees and contractors are key resources and there is a broad and complex range of risks that must be managed effectively to drive a winning corporate culture and outstanding performance Our business depends on the efforts, engagement and expertise of our management and non-management employees and contractors, who must be able to operate efficiently and safely based on the tasks they are completing and the environment in which they are functioning. Failure to achieve these basic expectations could adversely affect our organizational culture, reputation, business and financial results, as well as our ability to attract high-performing team members. Competition for highly skilled team members is intense, which makes essential the development of a comprehensive human resources strategy to adequately compete for talent and to identify and secure high-performing candidates for a broad range of job functions, roles and responsibilities. Failure to appropriately train, motivate, remunerate or deploy employees on initiatives that further our strategic imperatives, or to efficiently replace retiring employees, could have an adverse impact on our ability to attract and retain talent and drive performance across the organization. The positive engagement of members of our team represented by unions is contingent on negotiating collective agreements that deliver competitive labour conditions and uninterrupted service, both of which are critical to achieving our business objectives. In addition, if the skill sets, diversity and size of the workforce do not match the operational requirements of the business and foster a winning culture, we will likely not be able to sustain our performance. Other examples of people-related risks include the following: • The increasing technical and operational complexity of our businesses and the high demand in the market for skilled resources in strategic areas create a challenging environment for hiring, retaining and developing such skilled resources • Failure to establish a complete and effective succession plan, including preparation of internal talent and identification of potential external candidates, where relevant, for key roles, could impair our business until qualified replacements are found • Approximately 44% of our employees were represented by unions and were covered by collective bargaining agreements at December 31, 2018. Renegotiating collective bargaining agreements could result in higher labour costs, and during the renegotiation process there may be project delays and work disruptions, including work stoppages or work slowdowns, which could adversely affect service to our customers and, in turn, our customer relationships and financial performance. • Ensuring the safety of our workforce operating in different environments, including manholes, telephone poles, cell towers, vehicles, foreign news bureaus and war zones, requires focus, effective processes and flexibility to avoid injury, service interruption, fines and reputational impact • Deterioration in employee morale and engagement resulting from staff reductions, ongoing cost reductions or reorganizations could adversely affect our business and financial results 96 MD&ABusiness risks9 FINANCIAL MANAGEMENT If we are unable to raise the capital we need or generate sufficient cash flows from operating activities, we may need to limit our capital expenditures or our investments in new businesses, or try to raise capital by disposing of assets Our ability to meet our cash requirements, fund capital expenditures and provide for planned growth depends on having access to adequate sources of capital and on our ability to generate cash flows from operating activities, which is subject to various risks, including those described in this MD&A. Our ability to raise financing depends on our ability to access the public equity, debt capital and money markets, as well as the bank credit market. Our ability to access such markets and the cost and amount of funding available depend largely on prevailing market conditions and the outlook for our business and credit ratings at the time capital is raised. Risk factors such as capital market disruptions, political, economic and financial market instability in Canada or abroad, government policies, central bank monetary policies, changes to bank capitalization or other regulations, reduced bank lending in general or fewer banks as a result of reduced activity or consolidation, could reduce capital available or increase the cost of such capital. In addition, an increased level of debt borrowings could result in lower credit ratings, increased borrowing costs and a reduction in the amount of funding available to us, including through equity offerings. Business acquisitions could also adversely affect our outlook and credit ratings and have similar adverse consequences. In addition, participants in the public capital and bank credit markets have internal policies limiting their ability to invest in, or extend credit to, any single entity or entity group or a particular industry. Our bank credit facilities, including credit facilities supporting our commercial paper program, are provided by various financial institutions. While it is our intention to renew certain of such credit facilities from time to time, there are no assurances that these facilities will be renewed on favourable terms or in similar amounts. Differences between BCE’s actual or anticipated financial results and the published expectations of financial analysts, as well as events affecting our business or operating environment, may contribute to volatility in BCE’s securities. A major decline in the capital markets in general, or an adjustment in the market price or trading volumes of BCE’s securities, may negatively affect our ability to raise debt or equity capital, retain senior executives and other key employees, make strategic acquisitions or enter into joint ventures. If we cannot access the capital we need or generate cash flows to implement our business plan or meet our financial obligations on acceptable terms, we may have to limit our ongoing capital expenditures and our investment in new businesses or try to raise additional capital by selling or otherwise disposing of assets. Any of these could have an adverse effect on our cash flows from operating activities and on our growth prospects. We cannot guarantee that BCE’s dividend payout policy will be maintained or that dividends will be increased or declared From time to time, the BCE Board reviews the adequacy of BCE’s dividend payout policy with the objective of allowing sufficient financial flexibility to continue investing in our business while growing returns to shareholders. Under the current dividend payout policy, increases in the common share dividend are directly linked to growth in BCE’s free cash flow. BCE’s dividend payout policy, increases in the common share BCE Inc. 2018 Annual Report dividend and the declaration of dividends on any of BCE’s outstanding shares are subject to the discretion of the BCE Board and, consequently, there can be no guarantee that BCE’s dividend payout policy will be maintained, that the dividend on common shares will be increased or that dividends will be declared. BCE’s dividend payout policy, dividend increases and the declaration of dividends by the BCE Board are ultimately dependent on BCE’s operations and financial results which are, in turn, subject to various assumptions and risks, including those set out in this MD&A. We are exposed to various credit, liquidity and market risks Our exposure to credit, liquidity and market risks, including equity price, interest rate and currency fluctuations, is discussed in section 6.5, Financial risk management of this MD&A and in Note 26 to BCE’s 2018 consolidated financial statements. Our failure to identify and manage our exposure to changes in interest rates, foreign exchange rates (especially the weakening of the Canadian dollar), BCE’s share price and other market conditions could lead to missed opportunities, reduced profit margins, cash flow shortages, inability to complete planned capital expenditures, reputational damage, equity and debt securities devaluations, and challenges in raising capital on market-competitive terms. The economic environment, pension rules or ineffective governance could have an adverse effect on our pension obligations, liquidity and financial performance, and we may be required to increase contributions to our post-employment benefit plans in the future With a large pension plan membership and DB pension plans that are subject to the pressures of the global economic environment and changing regulatory and reporting requirements, our pension obligations are exposed to potential volatility. Failure to recognize and manage economic exposure and pension rule changes, or to ensure that effective governance is in place for management and funding of pension plan assets and obligations, could have an adverse impact on our liquidity and financial performance. The funding requirements of our post-employment benefit plans, based on valuations of plan assets and obligations, depend on a number of factors, including actual returns on post-employment benefit plan assets, long-term interest rates, plan demographics, and applicable regulations and actuarial standards. Changes in these factors could cause future contributions to significantly differ from our current estimates and could require us to increase contributions to our post- employment benefit plans in the future and, therefore, could have a negative effect on our liquidity and financial performance. There is no assurance that the assets of our post-employment benefit plans will earn their assumed rate of return. A substantial portion of our post-employment benefit plans’ assets is invested in public equity and debt securities. As a result, the ability of our post-employment benefit plans’ assets to earn the rate of return that we have assumed depends significantly on the performance of capital markets. Market conditions also impact the discount rate used to calculate our pension plan solvency obligations and could therefore also significantly affect our cash funding requirements. Our expected funding for 2019 is in accordance with the latest post- employment benefit plan valuations as of December 31, 2017, filed in June 2018, and takes into account voluntary contributions of $240 million in 2018. 97 MD&ABusiness risks9 BCE Inc. 2018 Annual Report Income and commodity tax amounts may materially differ from the expected amounts Our complex business operations are subject to various tax laws. The adoption of new tax laws, or regulations or rules thereunder, or changes thereto or in the interpretation thereof, could result in higher tax rates, new taxes or other adverse tax implications. In addition, while we believe that we have adequately provided for all income and commodity taxes based on all of the information that is currently available, the calculation of income taxes and the applicability of commodity taxes in many cases require significant judgment in interpreting tax rules and regulations. Our tax filings are subject to government audits that could result in material changes to the amount of current and deferred income tax assets and liabilities and other liabilities and could, in certain circumstances, result in an assessment of interest and penalties. The failure to reduce costs as well as unexpected increases in costs could adversely affect our ability to achieve our strategic imperatives and financial guidance Our objectives for targeted cost reductions continue to be aggressive but there is no assurance that we will be successful in reducing costs, especially since incremental cost savings are more difficult to achieve on an ongoing basis. Our cost reduction objectives require aggressive negotiations with our suppliers and there can be no assurance that such negotiations will be successful or that replacement products or services provided will not lead to operational issues. Examples of risks to our ability to reduce costs or of potential cost increases include: • Achieving timely cost reductions while moving to an IP-based network is dependent on disciplined network decommissioning, which can be delayed by customer contractual commitments, regulatory considerations and other unforeseen obstacles • Failure to contain growing operational costs related to network sites, footprint expansion, spectrum licences and content and equipment acquisition could have a negative effect on our financial performance • Fluctuations in energy prices are partly influenced by government policies to address climate change which, combined with growing data demand that increases our energy requirements, could increase our energy costs beyond our current expectations • Failure to successfully deliver on our contractual commitments, whether due to security events, operational challenges or other reasons, may result in financial penalties and loss of revenues The failure to evolve practices to effectively monitor and control fraudulent activities could result in financial loss and brand degradation As a public company with a range of desirable and valuable products and services and a large number of employees, BCE requires a disciplined program covering governance, exposure identification and assessment, prevention, detection and reporting that considers corruption, misappropriation of assets and intentional manipulation of financial statements by employees and/or external parties. Fraud events can result in financial loss and brand degradation. Specific examples relevant to us include: • Subscription fraud on accounts established with a false identity or paid with a stolen credit card • Network usage fraud such as call/sell operations using our wireline or wireless networks • Copyright theft and other forms of unauthorized use that undermine the exclusivity of Bell Media’s content offerings, which could potentially divert users to unlicensed or otherwise illegitimate platforms, thus impacting our ability to derive distribution and advertising revenues • TV distributors, including Bell Canada and Bell ExpressVu, are subject to ongoing efforts to steal their services through compromise or circumvention of signal security systems, causing revenue loss LITIGATION AND LEGAL OBLIGATIONS Legal proceedings, changes in applicable laws and the failure to proactively address our legal and regulatory obligations could have an adverse effect on our business and financial performance We become involved in various claims and legal proceedings as part of our business. Plaintiffs are able to launch and obtain certification of class actions on behalf of a large group of people with increasing ease, and securities laws facilitate the introduction of class action lawsuits by secondary market investors against public companies for alleged misrepresentations in public disclosure documents and oral statements. Changes in laws or regulations, or in how they are interpreted, and the adoption of new laws or regulations, as well as pending or future litigation, including an increase in certified class actions which, by their nature, could result in sizeable damage awards and costs relating to litigation, could have an adverse effect on our business and financial performance. Examples of legal and regulatory obligations that we must comply with include those resulting from: • As discussed in more detail in section 8, Regulatory environment, decisions, policies and other initiatives of the CRTC, ISED, the Competition Bureau and other governmental agencies, as well as laws of a regulatory nature • Consumer protection and privacy legislation • Tax legislation • Corporate and securities legislation • IFRS requirements • Environmental protection and health and safety laws • Payment card industry standards for protection against customer credit card infractions The failure to comply with any of the above or other legal or regulatory obligations could expose us to litigation, including pursuant to class actions, and significant fines and penalties, as well as result in reputational harm. For a description of the principal legal proceedings involving us, please see the section entitled Legal proceedings contained in the BCE 2018 AIF. Finally, the failure of our employees, suppliers or other business partners to comply with applicable legal and ethical standards including, without limitation, anti-bribery laws, as well as our policies and contractual obligations, could also expose us to litigation and significant fines and penalties, and result in reputational harm or being disqualified from bidding on contracts. 98 MD&ABusiness risks9 BCE Inc. 2018 Annual Report HEALTH AND ENVIRONMENTAL CONCERNS Health concerns about radiofrequency emissions from wireless communication devices and equipment, as well as epidemics and other health risks, could have an adverse effect on our business • Changes in scientific evidence and/or public perceptions could lead to additional government regulations and costs for retrofitting infrastructure and handsets to achieve compliance Many studies have been performed or are ongoing to assess whether wireless phones, networks and towers pose a potential health risk. While some studies suggest links to certain conditions, others conclude there is no established causation between mobile phone usage and adverse health effects. In 2011, the International Agency for Research on Cancer (IARC) of the World Health Organization classified radiofrequency electromagnetic fields from wireless phones as possibly carcinogenic to humans, but also indicated that chance, bias or confounding could not be ruled out with reasonable confidence. The IARC also called for additional research into long-term heavy use of mobile phones. • Public concerns could result in a slower deployment of, or in our inability to deploy, infrastructure necessary to maintain and/or expand our wireless network as required by market evolution In addition, epidemics, pandemics and other health risks could occur, which could adversely affect our ability to maintain operational networks and provide services to our customers. Any of these events could have an adverse effect on our business and financial performance. Climate change and other environmental concerns could have an adverse effect on our business ISED is responsible for approving radiofrequency equipment and performing compliance assessments and has chosen Health Canada’s Safety Code 6, which sets the limits for safe exposure to radiofrequency emissions at home or at work, as its exposure standard. This code also outlines safety requirements for the installation and operation of devices that emit radiofrequency fields such as mobile phones, Wi-Fi technologies and base station antennas. ISED has made compliance to Safety Code 6 mandatory for all proponents and operators of radio installations. Our business is heavily dependent on radiofrequency technologies, which could present significant challenges to our business and financial performance, such as the following: • We face current and potential lawsuits relating to alleged adverse health effects on customers, as well as relating to our marketing and disclosure practices in connection therewith, and the likely outcome of such lawsuits is unpredictable and may change over time Global climate change could exacerbate certain of the threats facing our business, including the frequency and severity of weather-related events referred to in Operational performance – Our operations and business continuity depend on how well we protect, test, maintain and replace our networks, IT systems, equipment and other facilities in this section 9. Several areas of our operations further raise environmental considerations, such as fuel storage, greenhouse gas emissions, disposal of hazardous residual materials, and recovery and recycling of end-of-life electronic products we sell or lease. Failure to recognize and adequately respond to changing governmental and public expectations on environmental matters could result in fines, missed opportunities, additional regulatory scrutiny or harm our brand and reputation. 99 MD&ABusiness risks9 BCE Inc. 2018 Annual Report 10 Financial measures, accounting policies and controls 10.1 Our accounting policies This section discusses key estimates and assumptions that management has made and how they affect the amounts reported in the financial statements and notes. It also describes key changes in accounting standards and our accounting policies, and how they affect our financial statements. We have prepared our consolidated financial statements using IFRS. Other significant accounting policies, not involving the same level of measurement uncertainty as those discussed in this section, are nevertheless important to an understanding of our financial statements. See Note 2, Significant accounting policies, in BCE’s 2018 consolidated financial statements for more information about the accounting principles we used to prepare our consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES AND KEY JUDGMENTS When preparing financial statements, management makes estimates and judgments relating to: • reported amounts of revenues and expenses • reported amounts of assets and liabilities • disclosure of contingent assets and liabilities We base our estimates on a number of factors, including historical experience, current events and actions that the company may undertake in the future, and other assumptions that we believe are reasonable under the circumstances. By their nature, these estimates and judgments are subject to measurement uncertainty and actual results could differ. We consider the estimates and judgments described in this section to be an important part of understanding our financial statements because they require management to make assumptions about matters that were highly uncertain at the time the estimates and judgments were made, and changes to these estimates and judgments could have a material impact on our financial statements and our segments. Our senior management has reviewed the development and selection of the critical accounting estimates and judgments described in this section with the Audit Committee of the BCE Board. Any sensitivity analysis included in this section should be used with caution as the changes are hypothetical and the impact of changes in each key assumption may not be linear. Our more significant estimates and judgments are described below. ESTIMATES USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS We review our estimates of the useful lives of property, plant and equipment and finite-life intangible assets on an annual basis and adjust depreciation or amortization on a prospective basis, as required. Property, plant and equipment represent a significant proportion of our total assets. Changes in technology or our intended use of these assets, as well as changes in business prospects or economic and industry factors, may cause the estimated useful lives of these assets to change. The estimated useful lives of property, plant and equipment and finite-life intangible assets are determined by internal asset life studies, which take into account actual and expected future usage, physical wear and tear, replacement history and assumptions about technology evolution. When factors indicate that assets’ useful lives are different from the prior assessment, we depreciate or amortize the remaining carrying value prospectively over the adjusted estimated useful lives. POST-EMPLOYMENT BENEFIT PLANS The amounts reported in the financial statements relating to DB pension plans and OPEBs are determined using actuarial calculations that are based on several assumptions. Our actuaries perform a valuation at least every three years to determine the actuarial present value of the accrued DB pension plan and OPEB obligations. The actuarial valuation uses management’s assumptions for, among other things, the discount rate, life expectancy, the rate of compensation increase, trends in healthcare costs 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 post-employment benefit obligations and future net post-employment benefit plans cost. We account for differences between actual and expected results in benefit obligations and plan performance in OCI, which are then recognized immediately in the deficit. The most significant assumptions used to calculate the net post- employment benefit plans cost are the discount rate and life expectancy. A discount rate is used to determine the present value of the future cash flows that we expect will be needed to settle post-employment benefit obligations. The discount rate is based on the yield on long-term, high-quality corporate fixed income investments, with maturities matching the estimated cash flows of the post-employment benefit plans. Life expectancy is based on publicly available Canadian mortality tables and is adjusted for the company’s specific experience. A lower discount rate and a higher life expectancy result in a higher net post-employment benefit obligation and a higher current service cost. 100 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report SENSITIVITY ANALYSIS The following table shows a sensitivity analysis of key assumptions used to measure the net post-employment benefit obligations and the net post-employment benefit plans cost for our DB pension plans and OPEB plans. Discount rate Life expectancy at age 65 IMPACT ON NET POST-EMPLOYMENT BENEFIT PLANS COST FOR 2018 – INCREASE/(DECREASE) IMPACT ON POST-EMPLOYMENT BENEFIT OBLIGATIONS AT DECEMBER 31, 2018 – INCREASE/(DECREASE) CHANGE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION 0.5% 1 year (77) 35 65 (34) (1,605) 796 1,716 (771) REVENUE FROM CONTRACTS WITH CUSTOMERS We are required to make estimates that affect the amount of revenue from contracts with customers, including estimating the stand-alone selling prices of products and services. For bundled arrangements, we account for individual products and services when they are separately identifiable and the customer can benefit from the product or service on its own or with other readily available resources. The total arrangement consideration is allocated to each product or service included in the contract with the customer based on its stand-alone selling price. We generally determine stand- alone selling prices based on the observable prices at which we sell products separately without a service contract and prices for non-bundled service offers with the same range of services, adjusted for market conditions and other factors, as appropriate. When similar products and services are not sold separately, we use the expected cost plus margin approach to determine stand-alone selling prices. Products and services purchased by a customer in excess of those included in the bundled arrangement are accounted for separately. IMPAIRMENT OF NON-FINANCIAL ASSETS Goodwill and indefinite-life intangible assets are tested for impairment annually or when there is an indication that the asset may be impaired. Property, plant and equipment and finite-life intangible assets are tested for impairment if events or changes in circumstances, assessed at each reporting period, indicate that their carrying amount may not be recoverable. For the purpose of impairment testing, assets other than goodwill are grouped at the lowest level for which there are separately identifiable cash inflows. Impairment losses are recognized and measured as the excess of the carrying value of the assets over their recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs of disposal and its value in use. Previously recognized impairment losses, other than those attributable to goodwill, are reviewed for possible reversal at each reporting date and, if the asset’s recoverable amount has increased, all or a portion of the impairment is reversed. We make a number of estimates when calculating recoverable amounts using discounted future cash flows or other valuation methods to test for impairment. These estimates include the assumed growth rates for future cash flows, the number of years used in the cash flow model, and the discount rate. When impairment charges occur they are recorded in Other expense. Impairment charges in 2018 included $145 million allocated to indefinite-life intangible assets, and $14 million allocated to finite-life intangible assets. These impairment charges primarily relate to our French TV channels within our Bell Media segment. These impairments were the result of revenue and profitability declines from lower audience levels and subscriber erosion. The charges were determined by comparing the carrying value of the CGUs to their fair value less costs of disposal. We estimated the fair value of the CGUs using both discounted cash flows and market-based valuation models, which include five-year cash flow projections derived from business plans reviewed by senior management for the period of January 1, 2019 to December 31, 2023, using a discount rate of 8.0% to 8.5% and a perpetuity growth rate of nil, as well as market multiple data from public companies and market transactions. The carrying value of these CGUs was $515 million at December 31, 2018. In the previous year’s impairment analysis, the company’s French Pay and French Specialty TV channels were tested for recoverability separately. In 2018, the CGUs were grouped to form one French CGU which reflects the evolution of the cash flows from our content strategies as well as the CRTC beginning to regulate Canadian broadcasters under a group licence approach based on language. Additionally, in 2018, we recorded an indefinite-life intangible asset impairment charge of $31 million within our Bell Media segment as a result of a strategic decision to retire a brand. In 2017, we recorded impairment charges of $82 million, of which $70 million was allocated to indefinite-life intangible assets, and $12 million to finite-life intangible assets. The impairment charges relate to our music TV channels and two small market radio station CGUs within our Bell Media segment. These impairments were the result of revenue and profitability declines from lower audience levels. The charges were determined by comparing the carrying value of the CGUs to their fair value less costs of disposal. We estimated the fair value of the CGUs using both discounted cash flows and market-based valuation models, which include five-year cash flow projections derived from business plans reviewed by senior management for the period of January 1, 2018 to December 31, 2022, using a discount rate of 8.5% and a perpetuity growth rate of nil, as well as market multiple data from public companies and market transactions. The carrying value of these CGUs was $67 million at December 31, 2017. GOODWILL IMPAIRMENT TESTING We perform an annual test for goodwill impairment in the fourth quarter for each of our CGUs or groups of CGUs to which goodwill is allocated, and whenever there is an indication that goodwill might be impaired. A CGU is the smallest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups of assets. 101 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report We identify any potential impairment by comparing the carrying value of a CGU or group of CGUs to its recoverable amount. The recoverable amount of a CGU or group of CGUs is the higher of its fair value less costs of disposal and its value in use. Both fair value less costs of disposal and value in use are based on estimates of discounted future cash flows or other valuation methods. Cash flows are projected based on past experience, actual operating results and business plans. When the recoverable amount of a CGU or group of CGUs is less than its carrying value, the recoverable amount is determined for its identifiable assets and liabilities. The excess of the recoverable amount of the CGU or group of CGUs over the total of the amounts assigned to its assets and liabilities is the recoverable amount of goodwill. An impairment charge is recognized in Other expense in the income statements for any excess of the carrying value of goodwill over its recoverable amount. For purposes of impairment testing of goodwill, our CGUs or groups of CGUs correspond to our reporting segments as disclosed in Note 4, Segmented information, in BCE’s 2018 consolidated financial statements. Any significant change in each of the estimates used could have a material impact on the calculation of the recoverable amount 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. We believe that any reasonable possible change in the key assumptions on which the estimate of recoverable amounts of the Bell Wireless or Bell Wireline groups of CGUs is based would not cause their carrying amounts to exceed their recoverable amounts. For the Bell Media group of CGUs, a decrease of (0.6%) in the perpetuity growth rate or an increase of 0.4% in the discount rate would have resulted in its recoverable amount being equal to its carrying value. There were no goodwill impairment charges in 2018 or 2017. DEFERRED TAXES Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply when the asset or liability is recovered or settled. Both our current and deferred tax assets and liabilities are calculated using tax rates that have been enacted or substantively enacted at the reporting date. Deferred taxes are provided on temporary differences arising from investments in subsidiaries, joint arrangements and associates, except where we control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amounts of deferred tax assets and liabilities are estimated with consideration given to the timing, sources and amounts of future taxable income. FAIR VALUE OF FINANCIAL INSTRUMENTS Certain financial instruments, such as investments in equity securities, derivative financial instruments and certain elements of borrowings, are carried in the statements of financial position at fair value, with changes in fair value reflected in the income statements and the statements of comprehensive income. Fair values are estimated by reference to published price quotations or by using other valuation techniques that may include inputs that are not based on observable market data, such as discounted cash flows and earnings multiples. CONTINGENCIES In the ordinary course of business, we become involved in various claims and legal proceedings seeking monetary damages and other relief. Pending claims and legal proceedings represent a potential cost to our business. We estimate the amount of a loss by analyzing potential outcomes and assuming various litigation and settlement strategies, based on information that is available at the time. 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 adverse effect on our consolidated financial statements in the period in which the judgment or settlement occurs. ONEROUS CONTRACTS A provision for onerous contracts is recognized when the unavoidable costs of meeting our obligations under a contract exceed the expected benefits to be received under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of completing the contract. JUDGMENTS POST-EMPLOYMENT BENEFIT PLANS The determination of the discount rate used to value our post- employment benefit obligations requires judgment. The rate is set by reference to market yields of high-quality corporate fixed income investments at the beginning of each fiscal year. Significant judgment is required when setting the criteria for fixed income investments to be included in the population from which the yield curve is derived. The most significant criteria considered for the selection of investments include the size of the issue and credit quality, along with the identification of outliers, which are excluded. INCOME TAXES The calculation of income taxes requires judgment in interpreting tax rules and regulations. There are transactions and calculations for which the ultimate tax determination is uncertain. Our tax filings are also subject to audits, the outcome of which could change the amount of current and deferred tax assets and liabilities. Management believes that it has sufficient amounts accrued for outstanding tax matters based on information that currently is available. Management judgment is used to determine the amounts of deferred tax assets and liabilities to be recognized. In particular, judgment is required when assessing the timing of the reversal of temporary differences to which future income tax rates are applied. REVENUE FROM CONTRACTS WITH CUSTOMERS The identification of performance obligations within a contract and the timing of satisfaction of performance obligations under long-term contracts requires judgment. For bundled arrangements, we account for individual products and services when they are separately identifiable and the customer can benefit from the product or service on its own or with other readily available resources. When our right to consideration from a customer corresponds directly with the value to the customer of the products and services transferred to date, we recognize revenue in the amount to which we have a right to invoice. We recognize product revenues from the sale of wireless handsets and devices and wireline equipment when a customer takes possession of the product. We recognize service revenues over time, as the services are provided. Revenues on certain long-term contracts are recognized using output methods based on products delivered, performance completed to date, time elapsed or milestones met. 102 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report Additionally, the determination of costs to obtain a contract, including the identification of incremental costs, also requires judgment. Incremental costs of obtaining a contract with a customer, principally comprised of sales commissions and prepaid contract fulfillment costs, are included in contract costs in the statements of financial position, except where the amortization period is one year or less, in which case costs of obtaining a contract are immediately expensed. Capitalized costs are amortized on a systematic basis that is consistent with the period and pattern of transfer to the customer of the related products or services. CGUs The determination of CGUs or groups of CGUs for the purpose of impairment testing requires judgment. CONTINGENCIES The determination of whether a loss is probable from claims and legal proceedings and whether an outflow of resources is likely requires judgment. We accrue a potential loss if we believe a loss is probable and an outflow of resources is likely and can be reasonably estimated, based on information that is available at the time. Any accrual would be charged to earnings and included in Trade payables and other liabilities or Other non-current liabilities. Any payment as a result of a judgment or cash settlement would be deducted from cash from operating activities. We estimate the amount of a loss by analyzing potential outcomes and assuming various litigation and settlement strategies. ADOPTION OF NEW OR AMENDED ACCOUNTING STANDARDS As required, effective January 1, 2018, we adopted the following new or amended accounting standards. STANDARD DESCRIPTION IMPACT IFRS 15 – Revenue from Contracts with Customers Establishes principles to record revenues from contracts for the sale of goods or services, unless the contracts are in the scope of IAS 17 – Leases or other IFRSs. Under IFRS 15, revenue is recognized at an amount that reflects the expected consideration receivable in exchange for transferring goods or services to a customer, applying the following five steps: 1. Identify the contract with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation The new standard also provides guidance relating to principal versus agent relationships, licences of intellectual property, contract costs and the measurement and recognition of gains and losses on the sale of certain non-financial assets such as property and equipment. Additional disclosures are also required under the new standard. We applied IFRS 15 retrospectively to each prior period presented. The impacts of adopting IFRS 15 on our income statement and statement of cash flows for the year ended December 31, 2017 along with our statements of financial position as at January 1, 2017 and December 31, 2017 are provided in the section below, Adoption of IFRS 15. IFRS 15 principally affects the timing of revenue recognition and how we classify revenues between product and service in our Bell Wireless segment. IFRS 15 also affects how we account for costs to obtain a contract. • Under multiple-element arrangements, revenue allocated to a satisfied performance obligation is no longer limited to the amount that is not contingent upon the satisfaction of additional performance obligations. Although the total revenue recognized during the term of a contract is largely unaffected, revenue recognition may be accelerated and reflected ahead of the associated cash inflows. This results in the recognition of a contract asset on the balance sheet, corresponding to the amount of revenue recognized and not yet billed to a customer. The contract asset is realized over the term of the customer contract. • As revenues allocated to a satisfied performance obligation are no longer limited to the non-contingent amount, a greater proportion of the total revenue recognized during the term of certain customer contracts may be attributed to a delivered product, resulting in a corresponding decrease in service revenue • Sales commissions and any other incremental costs of obtaining a contract with a customer are recognized on the statement of financial position and amortized on a systematic basis that is consistent with the period and pattern of transfer to the customer of the related products or services, except as noted below Under IFRS 15, we applied the following practical expedients: • Completed contracts that begin and end within the same annual reporting period and those completed before January 1, 2017 are not restated • Contracts modified prior to January 1, 2017 are not restated. The aggregate effect of these modifications is reflected when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations. • When our right to consideration from a customer corresponds directly with the value to the customer of the products and services transferred to date, we recognize revenue in the amount to which we have a right to invoice. For such contracts and for performance obligations that are part of a contract that has an original expected duration of one year or less, the transaction price amount allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue are not disclosed. • Costs of obtaining a contract that would be amortized within one year or less are immediately expensed 103 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report STANDARD DESCRIPTION IMPACT We applied IFRS 9, Financial Instruments (as revised in July 2014) and the related consequential amendments to other IFRSs retrospectively, except for the changes to hedge accounting described below which are applied prospectively. In accordance with the transition requirements, comparative periods have not been restated. The adoption of IFRS 9 did not have a significant impact on the carrying amounts of our financial instruments as at January 1, 2018. As a result of the adoption of IFRS 9, our January 1, 2018 deficit increased by $4 million. IFRS 9 replaces the classification and measurement models in IAS 39, Financial Instruments: Recognition and Measurement, with a single model under which financial assets are classified and measured at amortized cost, FVOCI or fair value through profit or loss (FVTPL). This classification is based on the business model in which a financial asset is managed and its contractual cash flow characteristics and eliminates the IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. The adoption of IFRS 9 did not, however, change the measurement bases of our financial assets. • Cash and cash equivalents and trade and other receivables continue to be measured at amortized cost under IFRS 9 • Derivatives measured at FVTPL under IAS 39 continue to be measured as such under IFRS 9; derivatives that qualify for hedge accounting continue to be measured at fair value under IFRS 9, with changes in fair value recognized in Other comprehensive income (loss) • Portfolio investments in equity securities measured at FVOCI under IAS 39 continue to be measured as such under IFRS 9 The impairment of financial assets under IFRS 9 is based on an ECL model, as opposed to the incurred loss model in IAS 39. IFRS 9 applies to financial assets measured at amortized cost and contract assets and requires that we consider factors that include historical, current and forward-looking information when measuring the ECL. We use the simplified approach for measuring losses based on the lifetime ECL for trade receivables and contract assets. Amounts considered uncollectible are written off and recognized in Operating costs in the income statement. We have adopted the general hedge accounting model in IFRS 9 which requires that we ensure hedge accounting relationships are consistent with our risk management objectives and strategies. We also apply a more qualitative and forward-looking approach in assessing hedge effectiveness as a retrospective assessment is no longer required. • Under IFRS 9, amounts related to cash flow hedges of anticipated purchases of non-financial assets settled during the period are reclassified from Accumulated other comprehensive (loss) income to the initial cost of the non-financial asset when it is recognized. Under IAS 39, such amounts were reclassified from Other comprehensive income (loss). Amounts related to cash flow hedges of other anticipated purchases continue to be reclassified from Other comprehensive income (loss) to net earnings under IFRS 9. The amendments to IFRS 2 did not have a significant impact on our financial statements. IFRS 9 – Financial Instruments Sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. The new standard establishes a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. It also provides guidance on an entity’s own credit risk relating to financial liabilities and modifies the hedge accounting model to better link the economics of risk management with its accounting treatment. Additional disclosures are also required under the new standard. Amendments to IFRS 2 – Share-based Payment Clarifies the classification and measurement of cash-settled share-based payment transactions that include a performance condition, share- based payment transactions with a net settlement feature for withholding tax obligations, and modifications of a share-based payment transaction from cash-settled to equity-settled. 104 MD&AFinancial measures, accounting policies and controls10 ADOPTION OF IFRS 15 As a result of adopting IFRS 15, we have changed the comparative figures for the year ended December 31, 2017 and the opening statement of financial position as at January 1, 2017. The impacts of adopting IFRS 15 on our previously reported 2017 results are provided below. CONSOLIDATED INCOME STATEMENTS The table below shows the impacts of adopting IFRS 15 on our previously reported 2017 consolidated income statements. BCE Inc. 2018 Annual Report (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT SHARE AMOUNTS) Operating revenues Operating costs Severance, acquisition and other costs Depreciation Amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Net earnings attributable to: Common shareholders Preferred shareholders Non-controlling interest Net earnings Net earnings per common share – basic Net earnings per common share – diluted Average number of common shares outstanding – basic (millions) 2017 AS PREVIOUSLY REPORTED 22,719 (13,541) (190) (3,037) (813) (955) (72) (102) (1,039) 2,970 2,786 128 56 2,970 3.12 3.11 894.3 YEAR ENDED DECEMBER 31, 2017 IFRS 15 IMPACTS 38 66 – 3 3 – – – (30) 80 80 – – 80 0.08 0.09 – 2017 UPON ADOPTION OF IFRS 15 22,757 (13,475) (190) (3,034) (810) (955) (72) (102) (1,069) 3,050 2,866 128 56 3,050 3.20 3.20 894.3 105 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report CONSOLIDATED STATEMENT OF FINANCIAL POSITION The table below shows the impacts of adopting IFRS 15 on our previously reported 2017 consolidated statement of financial position. FOR THE YEAR ENDED DECEMBER 31 Cash Cash equivalents Trade and other receivables Inventory Contract assets Contract costs Prepaid expenses Other current assets Total current assets Contract assets Contract costs Property, plant and equipment Intangible assets Deferred tax assets Investments in associates and joint ventures Other non-current assets Goodwill Total non-current assets Total assets Trade payables and other liabilities Contract liabilities Interest payable Dividends payable Current tax liabilities Debt due within one year Total current liabilities Contract liabilities Long-term debt Deferred tax liabilities Post-employment benefit obligations Other non-current liabilities Total non-current liabilities Total liabilities Preferred shares Common shares Contributed surplus Accumulated other comprehensive loss Deficit Total equity attributable to BCE shareholders Non-controlling interest Total equity Total liabilities and equity 2017 AS PREVIOUSLY REPORTED IFRS 15 IMPACTS RECLASSIFICATIONS (1) 2017 UPON ADOPTION OF IFRS 15 442 183 3,135 380 – – 375 124 4,639 – – 24,033 13,305 144 814 900 10,428 49,624 54,263 4,623 – 168 678 140 5,178 10,787 – 18,215 2,447 2,108 1,223 23,993 34,780 4,004 20,091 1,162 (17) (6,080) 19,160 323 19,483 54,263 – – 9 – 923 206 – – 1,138 400 162 (4) – – – – – 558 1,696 – 97 – – – – 97 34 – 423 – – 457 554 – – – – 1,142 1,142 – 1,142 1,696 – – (15) – (91) 144 (158) (2) (122) 31 124 – (47) – – (143) – (35) (157) (748) 596 – – – – (152) 167 – – – (172) (5) (157) – – – – – – – – (157) 442 183 3,129 380 832 350 217 122 5,655 431 286 24,029 13,258 144 814 757 10,428 50,147 55,802 3,875 693 168 678 140 5,178 10,732 201 18,215 2,870 2,108 1,051 24,445 35,177 4,004 20,091 1,162 (17) (4,938) 20,302 323 20,625 55,802 (1) We have reclassified some of the amounts for previous periods to conform with IFRS 15 presentation requirements. 106 MD&AFinancial measures, accounting policies and controls10 The table below shows the impacts of adopting IFRS 15 on our January 1, 2017 consolidated statement of financial position. BCE Inc. 2018 Annual Report AS AT Cash Cash equivalents Trade and other receivables Inventory Contract assets Contract costs Prepaid expenses Other current assets Total current assets Contract assets Contract costs Property, plant and equipment Intangible assets Deferred tax assets Investments in associates and joint ventures Other non-current assets Goodwill Total non-current assets Total assets Trade payables and other liabilities Contract liabilities Interest payable Dividends payable Current tax liabilities Debt due within one year Total current liabilities Contract liabilities Long-term debt Deferred tax liabilities Post-employment benefit obligations Other non-current liabilities Total non-current liabilities Total liabilities Preferred shares Common shares Contributed surplus Accumulated other comprehensive income Deficit Total equity attributable to BCE shareholders Non-controlling interest Total equity Total liabilities and equity JANUARY 1, 2017 IFRS 15 IMPACTS RECLASSIFICATIONS (1) JANUARY 1, 2017 UPON ADOPTION OF IFRS 15 603 250 2,979 403 – – 420 200 4,855 – – 22,346 11,998 89 852 1,010 8,958 45,253 50,108 4,326 – 156 617 122 4,887 10,108 – 16,572 2,192 2,105 1,277 22,146 32,254 4,004 18,370 1,160 46 (6,040) 17,540 314 17,854 50,108 – – 11 – 851 195 – – 1,057 357 151 (5) – – – – – 503 1,560 – 71 – – – – 71 34 – 393 – – 427 498 – – – – 1,062 1,062 – 1,062 1,560 – – (2) – (113) 148 (189) (2) (158) 26 124 – – – – (113) – 37 (121) (655) 574 – – – – (81) 169 – – – (209) (40) (121) – – – – – – – – (121) 603 250 2,988 403 738 343 231 198 5,754 383 275 22,341 11,998 89 852 897 8,958 45,793 51,547 3,671 645 156 617 122 4,887 10,098 203 16,572 2,585 2,105 1,068 22,533 32,631 4,004 18,370 1,160 46 (4,978) 18,602 314 18,916 51,547 (1) We have reclassified some of the amounts for previous periods to conform with IFRS 15 presentation requirements. 107 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report The table below provides a reconciliation of our deficit at January 1, 2017 and December 31, 2017 from amounts previously reported in 2017 to the amounts reported under IFRS 15. All amounts are after tax. Total deficit as previously reported Timing of revenue recognition Cost to obtain a contract Total deficit upon adoption of IFRS 15 AT DECEMBER 31, 2017 AT JANUARY 1, 2017 (6,080) (6,040) 873 269 809 253 (4,938) (4,978) CONSOLIDATED STATEMENT OF CASH FLOWS The table below shows the impacts of adopting IFRS 15 on select line items of our previously reported 2017 statement of cash flows. Cash flows from operating activities Net earnings Depreciation and amortization Income taxes Net change in operating assets and liabilities Cash flows from operating activities YEAR ENDED DECEMBER 31, 2017 2017 AS PREVIOUSLY REPORTED IFRS 15 IMPACTS 2017 UPON ADOPTION OF IFRS 15 2,970 3,850 1,039 480 7,358 80 (6) 30 (104) – 3,050 3,844 1,069 376 7,358 FUTURE CHANGES TO ACCOUNTING STANDARDS The following new or amended standards and interpretation issued by the IASB have an effective date after December 31, 2018 and have not yet been adopted by BCE. EFFECTIVE DATE Annual periods beginning on or after January 1, 2019, using a modified retrospective approach. STANDARD IFRS 16 – Leases DESCRIPTION IMPACT Eliminates the distinction between operating and finance leases for lessees, requiring instead that leases be capitalized by recognizing the present value of the lease payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. If lease payments are made over time, an entity recognizes a financial liability representing its obligation to make future lease payments. A depreciation charge for the lease asset is recorded within operating costs and an interest expense on the lease liability is recorded within finance costs. IFRS 16 does not substantially change lease accounting for lessors. We continue to make progress towards adoption of IFRS 16 according to our detailed implementation plan. Changes and enhancements to our existing IT systems, business processes, and systems of internal control are being completed. We will adopt IFRS 16 on January 1, 2019, using a modified retrospective approach whereby the financial statements of prior periods presented are not restated. The cumulative effect of the initial adoption of IFRS 16 will be reflected as an adjustment to the deficit at January 1, 2019. We will recognize lease liabilities at January 1, 2019 for leases previously classified as operating leases, the present value of which will be measured using the discount rate at that date. Corresponding right-of-use assets will also be recognized at January 1, 2019. As permitted by IFRS 16, we have elected not to recognize lease liabilities and right-of-use assets for short-term leases and will apply certain practical expedients to facilitate the initial adoption and ongoing application of IFRS 16, most notably: • We will not separate non-lease components from lease components for certain classes of underlying assets. Each lease component and any associated non-lease components will be accounted for as a single lease component. While our testing and data validation process is ongoing, we expect the adoption of IFRS 16 to result in an increase in our right-of-use assets and a corresponding increase in our lease liabilities within the range of $2.1 billion to $2.3 billion and an increase to our net debt leverage ratio. 108 MD&AFinancial measures, accounting policies and controls10 STANDARD DESCRIPTION IMPACT IFRIC 23 will not have a significant impact on our financial statements. BCE Inc. 2018 Annual Report EFFECTIVE DATE Annual periods beginning on or after January 1, 2019, using a full retrospective approach. International Financial Reporting Interpretations Committee (IFRIC) 23 – Uncertainty over Income Tax Treatments Amendments to IFRS 3 - Business Combinations Clarifies the application of recognition and measurement requirements in IAS 12 – Income Taxes when there is uncertainty over income tax treatments. It specifically addresses whether an entity considers uncertain tax treatments separately or as a group, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates and how an entity considers changes in facts and circumstances. These amendments to the implementation guidance of IFRS 3 clarify the definition of a business to assist entities to determine whether a transaction should be accounted for as a business combination or an asset acquisition. The amendments to IFRS 3 - Business Combinations may affect whether future acquisitions are accounted for as business combinations or asset acquisitions, along with the resulting allocation of the purchase price between the net identifiable assets acquired and goodwill. Prospectively for acquisitions occurring on or after January 1, 2020, with early adoption permitted. 10.2 Non-GAAP financial measures and key performance indicators (KPIs) This section describes the non-GAAP financial measures and KPIs we use in this MD&A to explain our financial results. It also provides reconciliations of the non-GAAP financial measures to the most comparable IFRS financial measures. In Q1 2018, we updated our definition of adjusted net earnings and adjusted EPS to exclude net mark-to-market losses (gains) on derivatives used to economically hedge equity settled share-based compensation plans as they may affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. Adjusted net earnings and adjusted EPS for 2017 have also been updated for comparability purposes. ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN The terms adjusted EBITDA and adjusted EBITDA margin do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. We define adjusted EBITDA as operating revenues less operating costs as shown in BCE’s consolidated income statements. Adjusted EBITDA for BCE’s segments is the same as segment profit as reported in Note 4, Segmented information, in BCE’s 2018 consolidated financial statements. We define adjusted EBITDA margin as adjusted EBITDA divided by operating revenues. We use adjusted EBITDA and adjusted EBITDA margin to evaluate the performance of our businesses as they reflect their ongoing profitability. We believe that certain investors and analysts use adjusted EBITDA to measure a company’s ability to service debt and to meet other payment obligations or as a common measurement to value companies in the telecommunications industry. We believe that certain investors and analysts also use adjusted EBITDA and adjusted EBITDA margin to evaluate the performance of our businesses. Adjusted EBITDA is also one component in the determination of short-term incentive compen- sation for all management employees. 109 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report Adjusted EBITDA and adjusted EBITDA margin have no directly comparable IFRS financial measure. Alternatively, the following table provides a reconciliation of net earnings to adjusted EBITDA. Net earnings Severance, acquisition and other costs Depreciation Amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Adjusted EBITDA BCE operating revenues Adjusted EBITDA margin 2018 2,973 136 3,145 869 1,000 69 348 995 9,535 23,468 2017 3,050 190 3,034 810 955 72 102 1,069 9,282 22,757 40.6% 40.8% ADJUSTED NET EARNINGS AND ADJUSTED EPS The terms adjusted net earnings and adjusted EPS do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. We define adjusted net earnings as net earnings attributable to common shareholders before severance, acquisition and other costs, net mark- to-market losses (gains) on derivatives used to economically hedge equity settled share-based compensation plans, net losses (gains) on investments, early debt redemption costs and impairment charges, net of tax and NCI. We define adjusted EPS as adjusted net earnings per BCE common share. We use adjusted net earnings and adjusted EPS, and we believe that certain investors and analysts use these measures, among other ones, to assess the performance of our businesses without the effects of severance, acquisition and other costs, net mark-to-market losses (gains) on derivatives used to economically hedge equity settled share- based compensation plans, net losses (gains) on investments, early debt redemption costs and impairment charges, net of tax and NCI. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. Excluding these items does not imply they are non-recurring. The most comparable IFRS financial measures are net earnings attributable to common shareholders and EPS. The following table is a reconciliation of net earnings attributable to common shareholders and EPS to adjusted net earnings on a consolidated basis and per BCE common share (adjusted EPS), respectively. Net earnings attributable to common shareholders Severance, acquisition and other costs Net mark-to-market losses (gains) on derivatives used to economically hedge equity settled share-based compensation plans Net losses on investments Early debt redemption costs Impairment charges Adjusted net earnings 2018 2017 TOTAL 2,785 100 58 47 15 146 3,151 PER SHARE 3.10 0.11 0.07 0.05 0.02 0.16 3.51 TOTAL 2,866 143 (55) 29 15 60 3,058 PER SHARE 3.20 0.16 (0.05) 0.03 0.02 0.06 3.42 110 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report FREE CASH FLOW AND DIVIDEND PAYOUT RATIO The terms free cash flow and dividend payout ratio do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. We define free cash flow as cash flows from operating activities, excluding acquisition and other costs paid (which include significant litigation costs) and voluntary pension funding, less capital expenditures, preferred share dividends and dividends paid by subsidiaries to NCI. We exclude acquisition and other costs paid and voluntary pension funding because they affect the comparability of our financial results and could potentially distort the analysis of trends in business perfor- mance. Excluding these items does not imply they are non-recurring. We consider free cash flow to be an important indicator of the financial strength and performance of our businesses because it shows how much cash is available to pay dividends on common shares, repay debt and reinvest in our company. We believe that certain investors and analysts use free cash flow to value a business and its underlying assets and to evaluate the financial strength and performance of our businesses. The most comparable IFRS financial measure is cash flows from operating activities. We define dividend payout ratio as dividends paid on common shares divided by free cash flow. We consider dividend payout ratio to be an important indicator of the financial strength and performance of our businesses because it shows the sustainability of the company’s dividend payments. The following table is a reconciliation of cash flows from operating activities to free cash flow on a consolidated basis. Cash flows from operating activities Capital expenditures Cash dividends paid on preferred shares Cash dividends paid by subsidiaries to NCI Acquisition and other costs paid Voluntary DB pension plan contribution Free cash flow NET DEBT 2018 7,384 (3,971) (149) (16) 79 240 2017 7,358 (4,034) (127) (34) 155 100 3,567 3,418 The term net debt does not have any standardized meaning under IFRS. Therefore, it is unlikely to be comparable to similar measures presented by other issuers. We define net debt as debt due within one year plus long-term debt and 50% of preferred shares, less cash and cash equivalents, as shown in BCE’s consolidated statements of financial position. We include 50% of outstanding preferred shares in our net debt as it is consistent with the treatment by certain credit rating agencies. We consider net debt to be an important indicator of the company’s financial leverage because it represents the amount of debt that is not covered by available cash and cash equivalents. We believe that certain investors and analysts use net debt to determine a company’s financial leverage. Net debt has no directly comparable IFRS financial measure, but rather is calculated using several asset and liability categories from the statements of financial position, as shown in the following table. Debt due within one year Long-term debt 50% of outstanding preferred shares Cash and cash equivalents Net debt 2018 4,645 19,760 2,002 (425) 25,982 2017 5,178 18,215 2,002 (625) 24,770 NET DEBT LEVERAGE RATIO The net debt leverage ratio does not have any standardized meaning under IFRS. Therefore, it is unlikely to be comparable to similar measures presented by other issuers. We use, and believe that certain investors and analysts use, the net debt leverage ratio as a measure of financial leverage. The net debt leverage ratio represents net debt divided by adjusted EBITDA. For the purposes of calculating our net debt leverage ratio, adjusted EBITDA is twelve-month trailing adjusted EBITDA. 111 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report ADJUSTED EBITDA TO NET INTEREST EXPENSE RATIO The ratio of adjusted EBITDA to net interest expense does not have any standardized meaning under IFRS. Therefore, it is unlikely to be comparable to similar measures presented by other issuers. We use, and believe that certain investors and analysts use, the adjusted EBITDA to net interest expense ratio as a measure of financial health of the company. The adjusted EBITDA to net interest expense ratio represents adjusted EBITDA divided by net interest expense. For the purposes of calculating our adjusted EBITDA to net interest expense ratio, adjusted EBITDA is twelve-month trailing adjusted EBITDA. Net interest expense is twelve- month trailing net interest expense as shown in our statements of cash flows, plus 50% of declared preferred share dividends as shown in our income statements. KPIs In addition to the non-GAAP financial measures described previously, we use a number of KPIs to measure the success of our strategic imperatives. These KPIs are not accounting measures and may not be comparable to similar measures presented by other issuers. KPI ABPU ARPU DEFINITION Average billing per user (ABPU) or subscriber approximates the average amount billed to customers on a monthly basis, which is used to track our recurring billing streams. This measure is the same as blended ARPU prior to the adoption of IFRS 15. Wireless blended ABPU is calculated by dividing certain customer billings by the average subscriber base for the specified period and is expressed as a dollar unit per month. Average revenue per user (ARPU) or subscriber is a measure used to track our recurring revenue streams, which has been updated to reflect the adoption of IFRS 15. Wireless blended ARPU is calculated by dividing certain service revenues by the average subscriber base for the specified period and is expressed as a dollar unit per month. Capital intensity Capital expenditures divided by operating revenues. Churn Subscriber unit Churn is the rate at which existing subscribers cancel their services. It is a measure of our ability to retain our customers. Wireless churn is calculated by dividing the number of deactivations during a given period by the average number of subscribers in the base for the specified period and is expressed as a percentage per month. Wireless subscriber unit is comprised of an active revenue-generating unit (e.g. mobile device, tablet or wireless Internet products), with a unique identifier (typically International Mobile Equipment Identity (IMEI) number), that has access to our wireless networks. We report wireless subscriber units in two categories: postpaid and prepaid. Prepaid subscriber units are considered active for a period of 120 days following the expiry of the subscriber’s prepaid balance. Wireline subscriber unit consists of an active revenue-generating unit with access to our services, including Internet, satellite TV, IPTV, and/or NAS. A subscriber is included in our subscriber base when the service has been installed and is operational at the customer premise and a billing relationship has been established. • Internet, IPTV and satellite TV subscribers have access to stand-alone services, and are primarily represented by a dwelling unit • NAS subscribers are based on a line count and are represented by a unique telephone number 10.3 Effectiveness of internal controls DISCLOSURE CONTROLS AND PROCEDURES Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under Canadian and U.S. securities laws is recorded, processed, summarized and reported within the time periods specified under those laws, and include controls and procedures that are designed to ensure that the information is accumulated and communicated to management, including BCE’s President and CEO and Executive Vice-President and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. As at December 31, 2018, management evaluated, under the supervision of and with the participation of the CEO and the CFO, the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the U.S. Securities Exchange Act of 1934, as amended, and under National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as at December 31, 2018. 112 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the U.S. Securities Exchange Act of 1934, as amended, and under National Instrument 52-109. Our internal control over financial reporting is a process designed under the supervision of the CEO and CFO, and effected by the Board, management and other personnel of BCE, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Management evaluated, under the supervision of and with the partic- ipation of the CEO and the CFO, the effectiveness of our internal control over financial reporting as at December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, the CEO and CFO concluded that our internal control over financial reporting was effective as at December 31, 2018. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes during the year ended December 31, 2018 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On January 1, 2018, we adopted IFRS 15 – Revenue from Contracts with Customers, and we completed the design of internal controls with respect to the adoption of this new standard and implemented them with no significant changes to our internal control over financial reporting. The adoption of IFRS 16 – Leases, requires the implementation of new accounting systems and processes, which will change the company’s internal controls over lease recognition and financial reporting. We are in the process of completing the design of these controls. We do not expect significant changes to our internal control over financial reporting due to the adoption of this new standard in 2019. 113 MD&AFinancial measures, accounting policies and controls10 BCE Inc. 2018 Annual Report Reports on internal controls MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of BCE Inc. (BCE) is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer and effected by the board of directors, management and other personnel of BCE, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer, the effectiveness of our internal control over financial reporting as at December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer concluded that our internal control over financial reporting was effective as at December 31, 2018. There were no material weaknesses that have been identified by BCE’s management in internal control over financial reporting as at December 31, 2018. Our internal control over financial reporting as at December 31, 2018 has been audited by Deloitte LLP, independent registered public accounting firm, who also audited our consolidated financial statements for the year ended December 31, 2018. Deloitte LLP issued an unqualified opinion on the effectiveness of our internal control over financial reporting as at December 31, 2018. (signed) George A. Cope President and Chief Executive Officer (signed) Glen LeBlanc Executive Vice-President and Chief Financial Officer (signed) Thierry Chaumont Senior Vice-President and Controller March 7, 2019 l s o r t n o c l a n r e t n i n o s t r o p e R 114 BCE Inc. 2018 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of BCE Inc. OPINION ON INTERNAL CONTROL OVER FINANCIAL REPORTING DEFINITION AND LIMITATIONS OF INTERNAL CONTROL OVER FINANCIAL REPORTING We have audited the internal control over financial reporting of BCE Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as at and for the year ended December 31, 2018, of the Company and our report dated March 7, 2019 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in accounting for revenue from contracts with customers in fiscal year 2018 due to the adoption of the new revenue standard. BASIS FOR OPINION The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte LLP 1 Chartered Professional Accountants Montréal, Canada March 7, 2019 1 CPA auditor, CA, public accountancy permit No. A124391 l s o r t n o c l a n r e t n i n o s t r o p e R 115 BCE Inc. 2018 Annual Report Consolidated financial statements MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING These financial statements form the basis for all of the financial information that appears in this annual report. The financial statements and all of the information in this annual report are the responsibility of the management of BCE Inc. (BCE) and have been reviewed and approved by the board of directors. The board of directors is responsible for ensuring that management fulfills its financial reporting responsibilities. Deloitte LLP, Independent Registered Public Accounting Firm, have audited the financial statements. The board of directors has appointed an Audit Committee, which is made up of unrelated and independent directors. The Audit Committee’s responsibilities include reviewing the financial statements and other information in this annual report, and recommending them to the board of directors for approval. You will find a description of the Audit Committee’s other responsibilities on page 170 of this annual report. The internal auditors and the shareholders’ auditors have free and independent access to the Audit Committee. Management has prepared the financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Under these principles, management has made certain estimates and assumptions that are reflected in the financial statements and notes. Management believes that these financial statements fairly present BCE’s consolidated financial position, results of operations and cash flows. Management has a system of internal controls designed to provide reasonable assurance that the financial statements are accurate and complete in all material respects. This is supported by an internal audit group that reports to the Audit Committee, and includes communication with employees about policies for ethical business conduct. Management believes that the internal controls provide reasonable assurance that our financial records are reliable and form a proper basis for preparing the financial statements, and that our assets are properly accounted for and safeguarded. (signed) George A. Cope President and Chief Executive Officer (signed) Glen LeBlanc Executive Vice-President and Chief Financial Officer (signed) Thierry Chaumont Senior Vice-President and Controller March 7, 2019 s t n e m e t a t s l i a c n a n fi d e t a d i l o s n o C 116 BCE Inc. 2018 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of BCE Inc. OPINION ON THE FINANCIAL STATEMENTS BASIS FOR OPINION We have audited the accompanying consolidated statements of financial position of BCE Inc. and subsidiaries (the “Company”) as at December 31, 2018, December 31, 2017 and January 1, 2017, the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity, and consolidated statements of cash flows, for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018, December 31, 2017 and January 1, 2017, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2018, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting. CHANGE IN ACCOUNTING PRINCIPLE As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue in 2017 and 2018 due to adoption of IFRS 15 – Revenue from Contracts with Customers. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte LLP 1 Chartered Professional Accountants Montréal, Canada March 7, 2019 We have served as the Company’s auditor since 1880. 1 CPA auditor, CA, public accountancy permit No. A124391 s t n e m e t a t s l i a c n a n fi d e t a d i l o s n o C 117 BCE Inc. 2018 Annual Report CONSOLIDATED INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT SHARE AMOUNTS) Operating revenues Operating costs Severance, acquisition and other costs Depreciation Amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Net earnings attributable to: Common shareholders Preferred shareholders Non-controlling interest Net earnings Net earnings per common share Basic and diluted Average number of common shares outstanding – basic (millions) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS) Net earnings Other comprehensive income (loss), net of income taxes Items that will be subsequently reclassified to net earnings Net change in value of publicly-traded and privately-held investments, net of income taxes of nil for 2018 and 2017 Net change in value of derivatives designated as cash flow hedges, net of income taxes of ($15) million and $21 million for 2018 and 2017, respectively (1) Items that will not be reclassified to net earnings Actuarial gains (losses) on post-employment benefit plans, net of income taxes of ($25) million and $92 million for 2018 and 2017, respectively Net change in value of derivatives designated as cash flow hedges, net of income taxes of ($23) million and nil for 2018 and 2017, respectively (1) Other comprehensive income (loss) Total comprehensive income Total comprehensive income attributable to: Common shareholders Preferred shareholders Non-controlling interest Total comprehensive income NOTE 4 4, 5 6 15 16 7 24 8 9 33 10 2018 23,468 (13,933) (136) (3,145) (869) (1,000) (69) (348) (995) 2,973 2,785 144 44 2,973 3.10 898.6 2017 22,757 (13,475) (190) (3,034) (810) (955) (72) (102) (1,069) 3,050 2,866 128 56 3,050 3.20 894.3 NOTE 2018 2,973 2017 3,050 6 43 67 61 177 3,150 2,957 144 49 3,150 – (65) (246) – (311) 2,739 2,557 128 54 2,739 24 33 (1) Amounts relating to the net change in value of derivatives for the year ended December 31, 2017 have not been restated, in accordance with the transition requirements upon adoption of IFRS 9 – Financial Instruments on January 1, 2018. See Note 2, Significant accounting policies, for further details. 118 Consolidated financial statements CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN MILLIONS OF CANADIAN DOLLARS) NOTE DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 BCE Inc. 2018 Annual Report ASSETS Current assets Cash Cash equivalents Trade and other receivables Inventory Contract assets Contract costs Prepaid expenses Other current assets Total current assets Non-current assets Contract assets Contract costs Property, plant and equipment Intangible assets Deferred tax assets Investments in associates and joint ventures Other non-current assets Goodwill Total non-current assets Total assets LIABILITIES Current liabilities Trade payables and other liabilities Contract liabilities Interest payable Dividends payable Current tax liabilities Debt due within one year Total current liabilities Non-current liabilities Contract liabilities Long-term debt Deferred tax liabilities Post-employment benefit obligations Other non-current liabilities Total non-current liabilities Total liabilities Commitments and contingencies EQUITY Equity attributable to BCE shareholders Preferred shares Common shares Contributed surplus Accumulated other comprehensive income (loss) Deficit Total equity attributable to BCE shareholders Non-controlling interest Total equity Total liabilities and equity 11 12 13 14 13 14 15 16 9 17 18 19 20 13 21 13 22 9 24 25 31 27 27 27 33 425 – 3,006 432 987 370 244 329 442 183 3,129 380 832 350 217 122 603 250 2,988 403 738 343 231 198 5,793 5,655 5,754 506 337 24,844 13,205 112 798 847 10,658 51,307 57,100 431 286 24,029 13,258 144 814 757 10,428 50,147 55,802 383 275 22,341 11,998 89 852 897 8,958 45,793 51,547 3,941 3,875 3,671 703 196 691 253 4,645 10,429 196 19,760 3,163 1,866 997 25,982 36,411 4,004 20,036 1,170 90 (4,937) 20,363 326 20,689 57,100 693 168 678 140 5,178 10,732 201 18,215 2,870 2,108 1,051 24,445 35,177 4,004 20,091 1,162 (17) (4,938) 20,302 323 20,625 55,802 645 156 617 122 4,887 10,098 203 16,572 2,585 2,105 1,068 22,533 32,631 4,004 18,370 1,160 46 (4,978) 18,602 314 18,916 51,547 119 Consolidated financial statements BCE Inc. 2018 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY ATTRIBUTABLE TO BCE SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2018 (IN MILLIONS OF CANADIAN DOLLARS) NOTE PREFERRED SHARES COMMON SHARES CONTRI- BUTED SURPLUS Balance at December 31, 2017 4,004 20,091 1,162 Adoption of IFRS 9 2 – – – Balance at January 1, 2018 4,004 20,091 1,162 27 27 3, 27 Net earnings Other comprehensive income Total comprehensive income Common shares issued under employee stock option plan Other share-based compensation Repurchase of common shares Common shares issued for the acquisition of AlarmForce Industries Inc. (AlarmForce) Dividends declared on BCE common and preferred shares Dividends declared by subsidiaries to non-controlling interest Settlement of cash flow hedges transferred to the cost basis of hedged items Return of capital to non-controlling interest Other – – – – – – – – – – – – – – – 13 – (69) 1 – – – – – – – – (1) 12 (3) – – – – – – ACCUMU- LATED OTHER COMPRE- HENSIVE (LOSS) INCOME (17) – (17) – 106 106 – – – – – – 1 – – DEFICIT TOTAL (4,938) 20,302 (4) (4) (4,942) 20,298 2,929 66 2,995 – (24) (103) 2,929 172 3,101 12 (12) (175) – 1 (2,856) (2,856) NON- CONTROL- LING INTEREST 323 – 323 44 5 49 – – – – – TOTAL EQUITY 20,625 (4) 20,621 2,973 177 3,150 12 (12) (175) 1 (2,856) – – (7) – – 1 (7) – (5) (5) – (44) 3 1 (51) 3 Balance at December 31, 2018 4,004 20,036 1,170 90 (4,937) 20,363 326 20,689 ATTRIBUTABLE TO BCE SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2017 (IN MILLIONS OF CANADIAN DOLLARS) NOTE PREFERRED SHARES COMMON SHARES CONTRI- BUTED SURPLUS Balance at January 1, 2017 4,004 18,370 1,160 Net earnings Other comprehensive loss Total comprehensive (loss) income Common shares issued under employee stock option plan Common shares issued under employee savings plan Other share-based compensation Common shares issued for the acquisition of Manitoba Telecom Services Inc. (MTS) Dividends declared on BCE common and preferred shares Dividends declared by subsidiaries to non-controlling interest 27 27 3, 27 – – – – – – – – – – – – – – – 122 (6) 5 – 1,594 – – – 8 – – – ACCUMU- LATED OTHER COMPRE- HENSIVE (LOSS) INCOME 46 – (63) (63) – – – – – – DEFICIT TOTAL NON- CONTROL- LING INTEREST TOTAL EQUITY (4,978) 18,602 314 18,916 2,994 (246) 2,748 – – (16) 2,994 (309) 2,685 116 5 (8) – 1,594 (2,692) (2,692) – – 56 (2) 54 – – – – – 3,050 (311) 2,739 116 5 (8) 1,594 (2,692) (45) 323 (45) 20,625 Balance at December 31, 2017 4,004 20,091 1,162 (17) (4,938) 20,302 120 Consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS) Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows from operating activities BCE Inc. 2018 Annual Report NOTE 2018 2017 2,973 3,050 Severance, acquisition and other costs Depreciation and amortization Post-employment benefit plans cost Net interest expense Losses on investments Income taxes Contributions to post-employment benefit plans Payments under other post-employment benefit plans Severance and other costs paid Interest paid Income taxes paid (net of refunds) Acquisition and other costs paid Net change in operating assets and liabilities Cash flows from operating activities Cash flows used in investing activities Capital expenditures Business acquisitions Disposition of intangibles and other assets Acquisition of spectrum licenses Other investing activities Cash flows used in investing activities Cash flows used in financing activities (Decrease) increase in notes payable Issue of long-term debt Repayment of long-term debt Issue of common shares Purchase of shares for settlement of share-based payments Repurchase of common shares Cash dividends paid on common shares Cash dividends paid on preferred shares Cash dividends paid by subsidiaries to non-controlling interest Return of capital to non-controlling interest Other financing activities Cash flows used in financing activities Net decrease in cash Cash at beginning of year Cash at end of year Net decrease in cash equivalents Cash equivalents at beginning of year Cash equivalents at end of year 6 15, 16 24 8 9 24 24 4 3 3 22 22 27 28 27 136 4,014 335 987 34 995 (539) (75) (138) (990) (650) (79) 381 190 3,844 314 942 5 1,069 (413) (77) (147) (965) (675) (155) 376 7,384 7,358 (3,971) (395) 68 (56) (32) (4,034) (1,649) 323 – (77) (4,386) (5,437) (123) 2,996 (2,713) 11 (222) (175) (2,679) (149) (16) (51) (77) (3,198) (17) 442 425 (183) 183 – 333 3,011 (2,653) 117 (224) – (2,512) (127) (34) – (60) (2,149) (161) 603 442 (67) 250 183 121 Consolidated financial statements BCE Inc. 2018 Annual Report Notes to consolidated financial statements We, us, our, BCE and the company mean, as the context may require, either BCE Inc. or, collectively, BCE Inc., Bell Canada, their subsidiaries, joint arrangements and associates. MTS means, as the context may require, until March 17, 2017, either Manitoba Telecom Services Inc. or, collectively, Manitoba Telecom Services Inc. and its subsidiaries; and Bell MTS means, from March 17, 2017, the combined operations of MTS and Bell Canada in Manitoba. Note 1 Corporate information BCE is incorporated and domiciled in Canada. BCE’s head office is located at 1, Carrefour Alexander-Graham-Bell, Verdun, Québec, Canada. BCE is a telecommunications and media company providing wireless, wireline, Internet and television (TV) services to residential, business and wholesale customers nationally across Canada. Our Bell Media segment provides conventional TV, specialty TV, pay TV, streaming services, digital media services, radio broadcasting services and out-of-home (OOH) advertising services to customers nationally across Canada. The consolidated financial statements (financial statements) were approved by BCE’s board of directors on March 7, 2019. Note 2 Significant accounting policies A) BASIS OF PRESENTATION The financial statements were prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The financial statements have been prepared on a historical cost basis, except for certain financial instruments that are measured at fair value as described in our accounting policies. Effective January 1, 2018, we applied IFRS 15 retrospectively to each prior period presented. The impacts of adopting IFRS 15 on our consolidated income statement and consolidated statement of cash flows for the year ended December 31, 2017, along with our statements of financial position as at January 1, 2017 and December 31, 2017, are provided in this note in section T) Adoption of new or amended accounting standards and Note 34, Adoption of IFRS 15. All amounts are in millions of Canadian dollars, except where noted. FUNCTIONAL CURRENCY The financial statements are presented in Canadian dollars, the company’s functional currency. B) BASIS OF CONSOLIDATION We consolidate the financial statements of all of our subsidiaries. Subsidiaries are entities we control, where control is achieved when the company is exposed or has the right to variable returns from its involvement with the investee and has the current ability to direct the activities of the investee that significantly affect the investee’s returns. The results of subsidiaries acquired during the year are consolidated from the date of acquisition and the results of subsidiaries sold during the year are deconsolidated from the date of disposal. Where necessary, adjustments are made to the financial statements of acquired subsidiaries to conform their accounting policies to ours. All intercompany transactions, balances, income and expenses are eliminated on consolidation. Changes in BCE’s ownership interest in a subsidiary that do not result in a change of control are accounted for as equity transactions, with no effect on net earnings or on Other comprehensive income (loss). C) REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue is measured based on the value of the expected consideration in a contract with a customer and excludes sales taxes and other amounts we collect on behalf of third parties. We recognize revenue when control of a product or service is transferred to a customer. When our right to consideration from a customer corresponds directly with the value to the customer of the products and services transferred to date, we recognize revenue in the amount to which we have a right to invoice. products separately without a service contract and prices for non-bundled service offers with the same range of services, adjusted for market conditions and other factors, as appropriate. When similar products and services are not sold separately, we use the expected cost plus margin approach to determine stand-alone selling prices. Products and services purchased by a customer in excess of those included in the bundled arrangement are accounted for separately. For bundled arrangements, we account for individual products and services when they are separately identifiable and the customer can benefit from the product or service on its own or with other readily available resources. The total arrangement consideration is allocated to each product or service included in the contract with the customer based on its stand-alone selling price. We generally determine stand- alone selling prices based on the observable prices at which we sell We may enter into arrangements with subcontractors and others who provide services to our customers. When we act as the principal in these arrangements, we recognize revenues based on the amounts billed to our customers. Otherwise, we recognize the net amount that we retain as revenues. 122 Notes to consolidated financial statements A contract asset is recognized in the consolidated statements of financial position (statements of financial position) when our right to consideration from the transfer of products or services to a customer is conditional on our obligation to transfer other products or services. Contract assets are transferred to trade receivables when our right to consideration becomes conditional only as to the passage of time. A contract liability is recognized in the statements of financial position when we receive consideration in advance of the transfer of products or services to the customer. Contract assets and liabilities relating to the same contract are presented on a net basis. Incremental costs of obtaining a contract with a customer, principally comprised of sales commissions and prepaid contract fulfillment costs, are included in contract costs in the statements of financial position, except where the amortization period is one year or less, in which case costs of obtaining a contract are immediately expensed. Capitalized costs are amortized on a systematic basis that is consistent with the period and pattern of transfer to the customer of the related products or services. WIRELESS SEGMENT REVENUES Our Wireless segment principally generates revenue from providing integrated digital wireless voice and data communications products and services to residential and business customers. We recognize product revenues from the sale of wireless handsets and devices when a customer takes possession of the product. We recognize wireless service revenues over time, as the services are provided. For bundled arrangements, stand-alone selling prices are determined using observable prices adjusted for market conditions and other factors, as appropriate. For wireless products and services that are sold separately, customers usually pay in full at the point of sale for products and on a monthly basis for services. For wireless products and services sold in bundled arrangements, customers pay monthly over a contract term of up to 24 months for residential customers and up to 36 months for business customers. D) SHARE-BASED PAYMENTS Our share-based payment arrangements include stock options, restricted share units and performance share units (RSUs/PSUs), deferred share units (DSUs), an employee savings plan (ESP) and a deferred share plan (DSP). STOCK OPTIONS We use a fair value-based method to measure the cost of our employee stock options, based on the number of stock options that are expected to vest. We recognize compensation expense in Operating costs in the consolidated income statements (income statements). Compensation expense is adjusted for subsequent changes in management’s estimate of the number of stock options that are expected to vest. We credit contributed surplus for stock option expense recognized over the vesting period. When stock options are exercised, we credit share capital for the amount received and the amounts previously credited to contributed surplus. BCE Inc. 2018 Annual Report WIRELINE SEGMENT REVENUES Our Wireline segment principally generates revenue from providing data, including Internet access and Internet protocol television (IPTV), local telephone, long distance, satellite TV service and connectivity, as well as other communications services and products to residential and business customers. Our Wireline segment also includes revenues from our wholesale business, which buys and sells local telephone, long distance, data and other services from or to resellers and other carriers. We recognize product revenues from the sale of wireline equipment when a customer takes possession of the product. We recognize service revenues over time, as the services are provided. Revenues on certain long-term contracts are recognized using output methods based on products delivered, performance completed to date, time elapsed or milestones met. For bundled arrangements, stand-alone selling prices are determined using observable prices adjusted for market conditions and other factors, as appropriate, or the expected cost plus margin approach for customized business arrangements. For wireline customers, products are usually paid in full at the point of sale. Services are paid on a monthly basis except where a billing schedule has been established with certain business customers under long-term contracts that can generally extend up to seven years. MEDIA SEGMENT REVENUES Our Media segment principally generates revenue from conventional TV, specialty TV, digital media, radio broadcasting and OOH advertising and subscriber fees from specialty TV, pay TV and streaming services. We recognize advertising revenue when advertisements are aired on the radio or TV, posted on our websites or appear on our advertising panels and street furniture. Revenues relating to subscriber fees are recorded on a monthly basis as the services are provided. Customer payments are due monthly as the services are provided. RSUs/PSUs For each RSU/PSU granted, we recognize compensation expense in Operating costs in the income statements, equal to the market value of a BCE common share at the date of grant and based on the number of RSUs/PSUs expected to vest, recognized over the term of the vesting period, with a corresponding credit to contributed surplus. Additional RSUs/PSUs are issued to reflect dividends declared on the common shares. Compensation expense is adjusted for subsequent changes in management’s estimate of the number of RSUs/PSUs that are expected to vest. The effect of these changes is recognized in the period of the change. Upon settlement of the RSUs/PSUs, any difference between the cost of shares purchased on the open market and the amount credited to contributed surplus is reflected in the deficit. Vested RSUs/ PSUs are settled in BCE common shares, DSUs, or a combination thereof. 123 Notes to consolidated financial statements BCE Inc. 2018 Annual Report DSUs DSP If compensation is elected to be taken in DSUs, we issue DSUs equal to the fair value of the services received. Additional DSUs are issued to reflect dividends declared on the common shares. DSUs are settled in BCE common shares purchased on the open market following the cessation of employment or when a director leaves the board. We credit contributed surplus for the fair value of DSUs at the issue date. Upon settlement of the DSUs, any difference between the cost of shares purchased on the open market and the amount credited to contributed surplus is reflected in the deficit. ESP We recognize our ESP contributions as compensation expense in Operating costs in the income statements. We credit contributed surplus for the ESP expense recognized over the two-year vesting period, based on management’s estimate of the accrued contributions that are expected to vest. Upon settlement of shares under the ESP, any difference between the cost of shares purchased on the open market and the amount credited to contributed surplus is reflected in the deficit. E) INCOME AND OTHER TAXES Current and deferred income tax expense is recognized in the income statements, except to the extent that the expense relates to items recognized in Other comprehensive income (loss) or directly in equity. A current or non-current tax asset (liability) is the estimated tax receivable (payable) on taxable earnings (loss) for the current or past periods. We use the liability method to account for deferred tax assets and liabilities, which arise from: • temporary differences between the carrying amount of assets and liabilities recognized in the statements of financial position and their corresponding tax bases • the carryforward of unused tax losses and credits, to the extent they can be used in the future Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply when the asset or liability is recovered or settled. Both our current and deferred tax assets and liabilities are calculated using tax rates that have been enacted or substantively enacted at the reporting date. For each deferred share granted under the DSP, we recognize compensation expense in Operating costs in the income statements equal to the market value of a BCE common share. Deferred shares are no longer granted except those issued to reflect dividends declared on common shares. Compensation expense is adjusted for subsequent changes in the market value of BCE common shares. The cumulative effect of any change in value is recognized in the period of the change. Participants have the option to receive either BCE common shares or a cash equivalent for each vested deferred share upon qualifying for payout under the terms of the grant. Deferred taxes are provided on temporary differences arising from investments in subsidiaries, joint arrangements and associates, except where we control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Tax liabilities are, where permitted, offset against tax assets within the same taxable entity and tax jurisdiction. INVESTMENT TAX CREDITS (ITCs), OTHER TAX CREDITS AND GOVERNMENT GRANTS We recognize ITCs, other tax credits and government grants given on eligible expenditures when it is reasonably assured that they will be realized. They are presented as part of Trade and other receivables in the statements of financial position when they are expected to be utilized in the next year. We use the cost reduction method to account for ITCs and government grants, under which the credits are applied against the expense or asset to which the ITC or government grant relates. F) CASH EQUIVALENTS Cash equivalents are comprised of highly liquid investments with original maturities of three months or less from the date of purchase. G) SECURITIZATION OF TRADE RECEIVABLES Proceeds on the securitization of trade receivables are recognized as a collateralized borrowing as we do not transfer control and substantially all the risks and rewards of ownership to another entity. H) INVENTORY We measure inventory at the lower of cost and net realizable value. Inventory includes all costs to purchase, convert and bring the inventories to their present location and condition. We determine cost using specific identification for major equipment held for resale and the weighted average cost formula for all other inventory. We maintain inventory valuation reserves for inventory that is slow-moving or potentially obsolete, calculated using an inventory aging analysis. 124 Notes to consolidated financial statements I) PROPERTY, PLANT AND EQUIPMENT We record property, plant and equipment at historical cost. Historical cost includes expenditures that are attributable directly to the acquisition or construction of the asset, including the purchase cost, and labour. Borrowing costs are capitalized for qualifying assets, if the time to build or develop is in excess of one year, at a rate that is based on our weighted average interest rate on our outstanding long-term debt. Gains or losses on the sale or retirement of property, plant and equipment are recorded in Other expense in the income statements. LEASES Leases of property, plant and equipment are recognized as finance leases when we obtain substantially all the risks and rewards of ownership of the underlying assets. At the inception of the lease, we record an asset together with a corresponding long-term lease liability, at the lower of the fair value of the leased asset or the present value of the minimum future lease payments. If there is reasonable certainty that the lease transfers ownership of the asset to us by the end of the J) INTANGIBLE ASSETS FINITE-LIFE INTANGIBLE ASSETS Finite-life intangible assets are recorded at cost less accumulated amortization, and accumulated impairment losses, if any. SOFTWARE We record internal-use software at historical cost. Cost includes expenditures that are attributable directly to the acquisition or development of the software, including the purchase cost and labour. Software development costs are capitalized when all the following conditions are met: • technical feasibility can be demonstrated • management has the intent and the ability to complete the asset for use or sale BCE Inc. 2018 Annual Report lease term, the asset is amortized over its useful life. Otherwise, the asset is amortized over the shorter of its useful life and the lease term. The long-term lease liability is measured at amortized cost using the effective interest method. All other leases are classified as operating leases. We recognize operating lease expense in Operating costs in the income statements on a straight-line basis over the term of the lease. ASSET RETIREMENT OBLIGATIONS (AROs) We initially measure and record AROs at management’s best estimate using a present value methodology, adjusted subsequently for any changes in the timing or amount of cash flows and changes in discount rates. We capitalize asset retirement costs as part of the related assets and amortize them into earnings over time. We also increase the ARO and record a corresponding amount in interest expense to reflect the passage of time. at acquisition cost less accumulated amortization, and accumulated impairment losses, if any. Programs and feature films under licence agreements are recorded as assets for rights acquired and Iiabilities for obligations incurred when: • we receive a broadcast master and the cost is known or reasonably determinable for new program and feature film licences; or • the licence term commences for licence period extensions or syndicated programs Related liabilities of programs and feature films are classified as current or non-current, based on the payment terms. Amortization of program and feature film rights is recorded in Operating costs in the income statements. • it is probable that economic benefits will be generated INDEFINITE-LIFE INTANGIBLE ASSETS • costs attributable to the asset can be measured reliably CUSTOMER RELATIONSHIPS Customer relationship assets are acquired through business combinations and are recorded at fair value at the date of acquisition. PROGRAM AND FEATURE FILM RIGHTS We account for program and feature film rights as intangible assets when these assets are acquired for the purpose of broadcasting. Program and feature film rights, which include producer advances and licence fees paid in advance of receipt of the program or film, are stated Brand assets, mainly comprised of the Bell, Bell Media and Bell MTS brands, and broadcast licences are acquired through business combinations and are recorded at fair value at the date of acquisition, less accumulated impairment losses, if any. Wireless spectrum licences are recorded at acquisition cost, including borrowing costs when the time to build or develop the related network is in excess of one year. Borrowing costs are calculated at a rate that is based on our weighted average interest rate on our outstanding long-term debt. Currently there are no legal, regulatory, competitive or other factors that limit the useful lives of our brands or spectrum licences. K) DEPRECIATION AND AMORTIZATION We depreciate property, plant and equipment and amortize finite-life intangible assets on a straight-line basis over their estimated useful lives. We review our estimates of useful lives on an annual basis and adjust depreciation and amortization on a prospective basis, as required. Land and assets under construction or development are not depreciated. Property, plant and equipment Network infrastructure and equipment Buildings Finite-life intangible assets Software Customer relationships Program and feature film rights ESTIMATED USEFUL LIFE 2 to 40 years 5 to 50 years 2 to 12 years 3 to 26 years Up to 5 years 125 Notes to consolidated financial statements BCE Inc. 2018 Annual Report L) INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS Our financial statements incorporate our share of the results of our associates and joint ventures using the equity method of accounting, except when the investment is classified as held for sale. Equity income from investments is recorded in Other expense in the income statements. Investments in associates and joint ventures are recognized initially at cost and adjusted thereafter to include the company’s share of income or loss and comprehensive income or loss on an after-tax basis. Investments are reviewed for impairment at each reporting period and we compare their recoverable amount to their carrying amount when there is an indication of impairment. We recognize our share of the assets, liabilities, revenues and expenses of joint operations in accordance with the related contractual agreements. M) BUSINESS COMBINATIONS AND GOODWILL Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value at the date of acquisition. Acquisition-related transaction costs are expensed as incurred and recorded in Severance, acquisition and other costs in the income statements. Identifiable assets and liabilities, including intangible assets, of acquired businesses are recorded at their fair values at the date of acquisition. When we acquire control of a business, any previously-held equity interest is remeasured to fair value and any gain or loss on remeasurement is recognized in Other expense in the income statements. The excess of the purchase consideration and any previously-held equity interest over the fair value of identifiable net assets acquired is recorded as Goodwill in the statements of financial position. If the fair value of identifiable net assets acquired exceeds the purchase consideration and any previously-held equity interest, the difference is recognized in Other expense in the income statements immediately as a bargain purchase gain. Changes in our ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions. Any difference between the change in the carrying amount of non-controlling interest (NCI) and the consideration paid or received is attributed to owner’s equity. N) IMPAIRMENT OF NON-FINANCIAL ASSETS Goodwill and indefinite-life intangible assets are tested for impairment annually or when there is an indication that the asset may be impaired. Property, plant and equipment and finite-life intangible assets are tested for impairment if events or changes in circumstances, assessed at each reporting period, indicate that their carrying amount may not be recoverable. For the purpose of impairment testing, assets other than goodwill are grouped at the lowest level for which there are separately identifiable cash inflows. Impairment losses are recognized and measured as the excess of the carrying value of the assets over their recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs of disposal and its value in use. Previously recognized impairment losses, other than those attributable to goodwill, are reviewed for possible reversal at each reporting date and, if the asset’s recoverable amount has increased, all or a portion of the impairment is reversed. GOODWILL IMPAIRMENT TESTING We perform an annual test for goodwill impairment in the fourth quarter for each of our cash generating units (CGUs) or groups of CGUs to which goodwill is allocated, and whenever there is an indication that goodwill might be impaired. A CGU is the smallest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups of assets. We identify any potential impairment by comparing the carrying value of a CGU or group of CGUs to its recoverable amount. The recoverable amount of a CGU or group of CGUs is the higher of its fair value less costs of disposal and its value in use. Both fair value less costs of disposal and value in use are based on estimates of discounted future cash flows or other valuation methods. Cash flows are projected based on past experience, actual operating results and business plans. When the recoverable amount of a CGU or group of CGUs is less than its carrying value, the recoverable amount is determined for its identifiable assets and liabilities. The excess of the recoverable amount of the CGU or group of CGUs over the total of the amounts assigned to its assets and liabilities is the recoverable amount of goodwill. An impairment charge is recognized in Other expense in the income statements for any excess of the carrying value of goodwill over its recoverable amount. For purposes of impairment testing of goodwill, our CGUs or groups of CGUs correspond to our reporting segments as disclosed in Note 4, Segmented information. O) FINANCIAL INSTRUMENTS AND CONTRACT ASSETS We measure trade and other receivables at amortized cost using the effective interest method, net of any allowance for doubtful accounts. Our portfolio investments in equity securities are classified as fair value through other comprehensive income (FVOCI) and are presented in our statements of financial position as Other non-current assets. These securities are recorded at fair value on the date of acquisition, including related transaction costs, and are adjusted to fair value at each reporting date. The corresponding unrealized gains and losses are recorded in Other comprehensive income (loss) in the consolidated statements of comprehensive income (statements of comprehensive income) and are reclassified from Accumulated other comprehensive (loss) income to Deficit in the statements of financial position when realized. Other financial liabilities, which include trade payables and accruals, compensation payable, obligations imposed by the Canadian Radio- television and Telecommunications Commission (CRTC), interest payable and long-term debt, are recorded at amortized cost using the effective interest method. 126 Notes to consolidated financial statements BCE Inc. 2018 Annual Report We measure the allowance for doubtful accounts and impairment of contract assets based on an expected credit loss (ECL) model, which takes into account current economic conditions, historical information, and forward-looking information. We use the simplified approach for measuring losses based on the lifetime ECL for trade and other receivables and contract assets. Amounts considered uncollectible are written off and recognized in Operating costs in the income statements. The cost of issuing debt is included as part of long-term debt and is accounted for at amortized cost using the effective interest method. The cost of issuing equity is reflected in the consolidated statements of changes in equity as a charge to the deficit. P) DERIVATIVE FINANCIAL INSTRUMENTS We use derivative financial instruments to manage interest rate risk, foreign currency risk and cash flow exposures related to share-based payment plans, capital expenditures, long-term debt instruments and operating revenues and expenses. We do not use derivative financial instruments for speculative or trading purposes. Derivatives that mature within one year are included in Other current assets or Trade payables and other liabilities in the statements of financial position, whereas derivatives that have a maturity of more than one year are included in Other non-current assets or Other non-current liabilities. HEDGE ACCOUNTING To qualify for hedge accounting, we document the relationship between the derivative and the related identified risk exposure, and our risk management objective and strategy. This includes associating each derivative to a specific asset or liability, commitment, or anticipated transaction. We assess the effectiveness of a derivative in managing an identified risk exposure when hedge accounting is initially applied, and on an ongoing basis thereafter. If a hedging relationship ceases to meet the qualifying criteria, we discontinue hedge accounting prospectively. CASH FLOW HEDGES We enter into cash flow hedges to mitigate foreign currency risk on certain debt instruments and anticipated purchases and sales, as well as interest rate risk related to anticipated debt issuances. We use foreign currency forward contracts to manage the foreign currency exposure relating to anticipated purchases and sales denominated in foreign currencies. Changes in the fair value of these foreign currency forward contracts are recognized in our statements of comprehensive income, except for any ineffective portion, which is recognized immediately in Other expense in the income statements. Realized gains and losses in Accumulated other comprehensive (loss) income are reclassified to the income statements or to the initial cost of the non-financial asset in the same periods as the corresponding hedged transactions are recognized. We use cross currency basis swaps and foreign currency forward contracts to manage our U.S. dollar debt under our U.S. commercial paper program and our U.S. dollar long-term debt. Changes in the fair value of these derivatives and the related debt are recognized in Other expense in the income statements and offset, unless a portion of the hedging relationship is ineffective. DERIVATIVES USED AS ECONOMIC HEDGES We use derivatives to manage cash flow exposures related to equity- settled share-based payment plans and anticipated purchases, and equity price risk related to a cash-settled share-based payment plan. As these derivatives do not qualify for hedge accounting, the changes in their fair value are recorded in the income statements in Operating costs for derivatives used to hedge cash-settled share-based payments and in Other expense for other derivatives. Q) POST-EMPLOYMENT BENEFIT PLANS DEFINED BENEFIT (DB) AND OTHER POST-EMPLOYMENT BENEFIT (OPEB) PLANS We maintain DB pension plans that provide pension benefits for certain employees. Benefits are based on the employee’s length of service and average rate of pay during the highest paid consecutive five years of service. Most employees are not required to contribute to the plans. Certain plans provide cost of living adjustments to help protect the income of retired employees against inflation. We are responsible for adequately funding our DB pension plans. We make contributions to them based on various actuarial cost methods permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections, future service and life expectancy. We provide OPEBs to some of our employees, including: • healthcare and life insurance benefits during retirement, which were phased out for new retirees since December 31, 2016. We do not fund most of these OPEB plans. • other benefits, including workers’ compensation and medical benefits to former or inactive employees, their beneficiaries and dependants, from the time their employment ends until their retirement starts, under certain circumstances We accrue our obligations and related costs under post-employment benefit plans, net of the fair value of the benefit plan assets. Pension and OPEB costs are determined using: • the projected unit credit method, prorated on years of service, which takes into account future pay levels • a discount rate based on market interest rates of high-quality corporate fixed income investments with maturities that match the timing of benefits expected to be paid under the plans • management’s best estimate of pay increases, retirement ages of employees, expected healthcare costs and life expectancy We value post-employment benefit plan assets at fair value using current market values. Post-employment benefit plans current service cost is included in Operating costs in the income statements. Interest on our post- employment benefit assets and obligations is recognized in Finance costs in the income statements and represents the accretion of interest on the assets and obligations under our post-employment benefit plans. The interest rate is based on market conditions that existed at the 127 Notes to consolidated financial statements BCE Inc. 2018 Annual Report beginning of the year. Actuarial gains and losses for all post-employment benefit plans are recorded in Other comprehensive income (loss) in the statements of comprehensive income in the period in which they occur and are recognized immediately in the deficit. December 31 is the measurement date for our significant post- employment benefit plans. Our actuaries perform a valuation based on management’s assumptions at least every three years to determine the actuarial present value of the accrued DB pension plan and OPEB obligations. The most recent actuarial valuation of our significant pension plans was as at December 31, 2017. DEFINED CONTRIBUTION (DC) PENSION PLANS We maintain DC pension plans that provide certain employees with benefits. Under these plans, we are responsible for contributing a predetermined amount to an employee’s retirement savings, based on a percentage of the employee’s salary. We recognize a post-employment benefit plans service cost for DC pension plans when the employee provides service to the company, essentially coinciding with our cash contributions. Generally, new employees can participate only in the DC pension plans. R) PROVISIONS Provisions are recognized when all the following conditions are met: • the company has a present legal or constructive obligation based on past events • it is probable that an outflow of economic resources will be required to settle the obligation • the amount can be reasonably estimated Provisions are measured at the present value of the estimated expenditures expected to settle the obligation, if the effect of the time value of money is material. The present value is determined using current market assessments of the discount rate and risks specific to the obligation. The obligation increases as a result of the passage of time, resulting in interest expense which is recognized in Finance costs in the income statements. S) ESTIMATES AND KEY JUDGMENTS When preparing the financial statements, management makes estimates and judgments relating to: • reported amounts of revenues and expenses • reported amounts of assets and liabilities • disclosure of contingent assets and liabilities We base our estimates on a number of factors, including historical experience, current events and actions that the company may undertake in the future, and other assumptions that we believe are reasonable under the circumstances. By their nature, these estimates and judgments are subject to measurement uncertainty and actual results could differ. Our more significant estimates and judgments are described below. ESTIMATES USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS Property, plant and equipment represent a significant proportion of our total assets. Changes in technology or our intended use of these assets, as well as changes in business prospects or economic and industry factors, may cause the estimated useful lives of these assets to change. POST-EMPLOYMENT BENEFIT PLANS The amounts reported in the financial statements relating to DB pension plans and OPEBs are determined using actuarial calculations that are based on several assumptions. The actuarial valuation uses management’s assumptions for, among other things, the discount rate, life expectancy, the rate of compensation increase, trends in healthcare costs and expected average remaining years of service of employees. The most significant assumptions used to calculate the net post- employment benefit plans cost are the discount rate and life expectancy. The discount rate is based on the yield on long-term, high-quality corporate fixed income investments, with maturities matching the estimated cash flows of the post-employment benefit plans. Life expectancy is based on publicly available Canadian mortality tables and is adjusted for the company’s specific experience. REVENUE FROM CONTRACTS WITH CUSTOMERS We are required to make estimates that affect the amount of revenue from contracts with customers, including estimating the stand-alone selling prices of products and services. IMPAIRMENT OF NON-FINANCIAL ASSETS We make a number of estimates when calculating recoverable amounts using discounted future cash flows or other valuation methods to test for impairment. These estimates include the assumed growth rates for future cash flows, the number of years used in the cash flow model and the discount rate. DEFERRED TAXES The amounts of deferred tax assets and liabilities are estimated with consideration given to the timing, sources and amounts of future taxable income. FAIR VALUE OF FINANCIAL INSTRUMENTS Certain financial instruments, such as investments in equity securities, derivative financial instruments and certain elements of borrowings, are carried in the statements of financial position at fair value, with changes in fair value reflected in the income statements and the statements of comprehensive income. Fair values are estimated by reference to published price quotations or by using other valuation techniques that may include inputs that are not based on observable market data, such as discounted cash flows and earnings multiples. CONTINGENCIES In the ordinary course of business, we become involved in various claims and legal proceedings seeking monetary damages and other relief. Pending claims and legal proceedings represent a potential cost to our business. We estimate the amount of a loss by analyzing potential outcomes and assuming various litigation and settlement strategies, based on information that is available at the time. 128 Notes to consolidated financial statements BCE Inc. 2018 Annual Report ONEROUS CONTRACTS A provision for onerous contracts is recognized when the unavoidable costs of meeting our obligations under a contract exceed the expected benefits to be received under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of completing the contract. JUDGMENTS POST-EMPLOYMENT BENEFIT PLANS The determination of the discount rate used to value our post- employment benefit obligations requires judgment. The rate is set by reference to market yields of high-quality corporate fixed income investments at the beginning of each fiscal year. Significant judgment is required when setting the criteria for fixed income investments to be included in the population from which the yield curve is derived. The most significant criteria considered for the selection of investments include the size of the issue and credit quality, along with the identification of outliers, which are excluded. INCOME TAXES The calculation of income taxes requires judgment in interpreting tax rules and regulations. There are transactions and calculations for which the ultimate tax determination is uncertain. Our tax filings are also subject to audits, the outcome of which could change the amount of current and deferred tax assets and liabilities. Management judgment is used to determine the amounts of deferred tax assets and liabilities to be recognized. In particular, judgment is required when assessing the timing of the reversal of temporary differences to which future income tax rates are applied. REVENUE FROM CONTRACTS WITH CUSTOMERS The identification of performance obligations within a contract and the timing of satisfaction of performance obligations under long-term contracts requires judgment. Additionally, the determination of costs to obtain a contract, including the identification of incremental costs, also requires judgment. CGUs The determination of CGUs or groups of CGUs for the purpose of impairment testing requires judgment. CONTINGENCIES The determination of whether a loss is probable from claims and legal proceedings and whether an outflow of resources is likely requires judgment. T) ADOPTION OF NEW OR AMENDED ACCOUNTING STANDARDS As required, effective January 1, 2018, we adopted the following new or amended accounting standards. STANDARD DESCRIPTION IMPACT IFRS 15 – Revenue from Contracts with Customers Establishes principles to record revenues from contracts for the sale of goods or services, unless the contracts are in the scope of IAS 17 – Leases or other IFRSs. Under IFRS 15, revenue is recognized at an amount that reflects the expected consideration receivable in exchange for transferring goods or services to a customer, applying the following five steps: 1. Identify the contract with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation The new standard also provides guidance relating to principal versus agent relationships, licences of intellectual property, contract costs and the measurement and recognition of gains and losses on the sale of certain non-financial assets such as property and equipment. Additional disclosures are also required under the new standard. We applied IFRS 15 retrospectively to each prior period presented. The impacts of adopting IFRS 15 on our income statement and statement of cash flows for the year ended December 31, 2017, along with our statements of financial position as at January 1, 2017 and December 31, 2017, are provided in Note 34, Adoption of IFRS 15. IFRS 15 principally affects the timing of revenue recognition and how we classify revenues between product and service in our Bell Wireless segment. IFRS 15 also affects how we account for costs to obtain a contract. • Under multiple-element arrangements, revenue allocated to a satisfied performance obligation is no longer limited to the amount that is not contingent upon the satisfaction of additional performance obligations. Although the total revenue recognized during the term of a contract is largely unaffected, revenue recognition may be accelerated and reflected ahead of the associated cash inflows. This results in the recognition of a contract asset on the balance sheet, corresponding to the amount of revenue recognized and not yet billed to a customer. The contract asset is realized over the term of the customer contract. • As revenues allocated to a satisfied performance obligation are no longer limited to the non-contingent amount, a greater proportion of the total revenue recognized during the term of certain customer contracts may be attributed to a delivered product, resulting in a corresponding decrease in service revenue • Sales commissions and any other incremental costs of obtaining a contract with a customer are recognized on the statement of financial position and amortized on a systematic basis that is consistent with the period and pattern of transfer to the customer of the related products or services, except as noted below Under IFRS 15, we applied the following practical expedients: • Completed contracts that begin and end within the same annual reporting period and those completed before January 1, 2017 are not restated • Contracts modified prior to January 1, 2017 are not restated. The aggregate effect of these modifications is reflected when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations. • When our right to consideration from a customer corresponds directly with the value to the customer of the products and services transferred to date, we recognize revenue in the amount to which we have a right to invoice. For such contracts and for performance obligations that are part of a contract that has an original expected duration of one year or less, the transaction price amount allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue are not disclosed. • Costs of obtaining a contract that would be amortized within one year or less are immediately expensed 129 Notes to consolidated financial statements BCE Inc. 2018 Annual Report STANDARD DESCRIPTION IMPACT We applied IFRS 9 – Financial Instruments (as revised in July 2014) and the related consequential amendments to other IFRSs retrospectively, except for the changes to hedge accounting described below which are applied prospectively. In accordance with the transition requirements, comparative periods have not been restated. The adoption of IFRS 9 did not have a significant impact on the carrying amounts of our financial instruments as at January 1, 2018. As a result of the adoption of IFRS 9, our January 1, 2018 deficit increased by $4 million. IFRS 9 replaces the classification and measurement models in IAS 39 – Financial Instruments: Recognition and Measurement, with a single model under which financial assets are classified and measured at amortized cost, FVOCI or fair value through profit or loss (FVTPL). This classification is based on the business model in which a financial asset is managed and its contractual cash flow characteristics and eliminates the IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. The adoption of IFRS 9 did not, however, change the measurement bases of our financial assets. • Cash and cash equivalents and trade and other receivables continue to be measured at amortized cost under IFRS 9 • Derivatives measured at FVTPL under IAS 39 continue to be measured as such under IFRS 9; derivatives that qualify for hedge accounting continue to be measured at fair value under IFRS 9, with changes in fair value recognized in Other comprehensive income (loss) • Portfolio investments in equity securities measured at FVOCI under IAS 39 continue to be measured as such under IFRS 9 The impairment of financial assets under IFRS 9 is based on an ECL model, as opposed to the incurred loss model in IAS 39. IFRS 9 applies to financial assets measured at amortized cost and contract assets and requires that we consider factors that include historical, current and forward-looking information when measuring the ECL. We use the simplified approach for measuring losses based on the lifetime ECL for trade receivables and contract assets. Amounts considered uncollectible are written off and recognized in Operating costs in the income statement. We have adopted the general hedge accounting model in IFRS 9 which requires that we ensure hedge accounting relationships are consistent with our risk management objectives and strategies. We also apply a more qualitative and forward-looking approach in assessing hedge effectiveness as a retrospective assessment is no longer required. • Under IFRS 9, amounts related to cash flow hedges of anticipated purchases of non-financial assets settled during the period are reclassified from Accumulated other comprehensive (loss) income to the initial cost of the non-financial asset when it is recognized. Under IAS 39, such amounts were reclassified from Other comprehensive income (loss). Amounts related to cash flow hedges of other anticipated purchases continue to be reclassified from Other comprehensive income (loss) to net earnings under IFRS 9. The amendments to IFRS 2 did not have a significant impact on our financial statements. IFRS 9 – Financial Instruments Sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. The new standard establishes a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. It also provides guidance on an entity’s own credit risk relating to financial liabilities and modifies the hedge accounting model to better link the economics of risk management with its accounting treatment. Additional disclosures are also required under the new standard. Amendments to IFRS 2 – Share-based Payment Clarifies the classification and measurement of cash-settled share-based payment transactions that include a performance condition, share-based payment transactions with a net settlement feature for withholding tax obligations, and modifications of a share-based payment transaction from cash-settled to equity-settled. 130 Notes to consolidated financial statements BCE Inc. 2018 Annual Report U) FUTURE CHANGES TO ACCOUNTING STANDARDS The following new or amended standards and interpretation issued by the IASB have an effective date after December 31, 2018 and have not yet been adopted by BCE. STANDARD DESCRIPTION IMPACT IFRS 16 – Leases Eliminates the distinction between operating and finance leases for lessees, requiring instead that leases be capitalized by recognizing the present value of the lease payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. If lease payments are made over time, an entity recognizes a financial liability representing its obligation to make future lease payments. A depreciation charge for the lease asset is recorded within operating costs and an interest expense on the lease liability is recorded within finance costs. IFRS 16 does not substantially change lease accounting for lessors. We continue to make progress towards adoption of IFRS 16 according to our detailed implementation plan. Changes and enhancements to our existing information technology (IT) systems, business processes, and systems of internal control are being completed. We will adopt IFRS 16 on January 1, 2019, using a modified retrospective approach whereby the financial statements of prior periods presented are not restated. The cumulative effect of the initial adoption of IFRS 16 will be reflected as an adjustment to the deficit at January 1, 2019. We will recognize lease liabilities at January 1, 2019 for leases previously classified as operating leases, the present value of which will be measured using the discount rate at that date. Corresponding right-of- use assets will also be recognized at January 1, 2019. As permitted by IFRS 16, we have elected not to recognize lease liabilities and right-of-use assets for short-term leases and will apply certain practical expedients to facilitate the initial adoption and ongoing application of IFRS 16, most notably: EFFECTIVE DATE Annual periods beginning on or after January 1, 2019, using a modified retrospective approach. • We will not separate non-lease components from lease components for certain classes of underlying assets. Each lease component and any associated non-lease components will be accounted for as a single lease component. While our testing and data validation process is ongoing, we expect the adoption of IFRS 16 to result in an increase in our right-of-use assets and a corresponding increase in our lease liabilities within the range of $2.1 billion to $2.3 billion and an increase to our net debt leverage ratio. For the definition of our net debt leverage ratio see Note 26, Financial and capital management. IFRIC 23 will not have a significant impact on our financial statements. The amendments to IFRS 3 - Business Combinations may affect whether future acquisitions are accounted for as business combinations or asset acquisitions, along with the resulting allocation of the purchase price between the net identifiable assets acquired and goodwill. Annual periods beginning on or after January 1, 2019, using a full retrospective approach. Prospectively for acquisitions occurring on or after January 1, 2020, with early adoption permitted. International Financial Reporting Interpretations Committee (IFRIC) 23 – Uncertainty over Income Tax Treatments Amendments to IFRS 3 - Business Combinations Clarifies the application of recognition and measurement requirements in IAS 12 – Income Taxes when there is uncertainty over income tax treatments. It specifically addresses whether an entity considers uncertain tax treatments separately or as a group, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates and how an entity considers changes in facts and circumstances. These amendments to the implementation guidance of IFRS 3 clarify the definition of a business to assist entities to determine whether a transaction should be accounted for as a business combination or an asset acquisition. 131 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 3 Business acquisitions and dispositions 2018 ACQUISITION OF AXIA NETMEDIA CORPORATION (AXIA) On August 31, 2018, BCE completed the acquisition of all of the issued and outstanding common shares of Axia for a total cash consideration of $155 million. Axia provides broadband network services to commercial and government accounts throughout the province of Alberta. The acquisition of Axia expands BCE’s broadband operations in Alberta and will add approximately 10,000 kilometres of fibre capacity to our footprint. Axia is included in our Bell Wireline segment in our consolidated financial statements. The purchase price allocation includes provisional estimates, in particular for property, plant and equipment and finite-life intangible assets. The following table summarizes the fair value of the consideration paid and the fair value assigned to each major class of assets and liabilities. Cash consideration Total cost to be allocated Trade and other receivables Other non-cash working capital Property, plant and equipment Finite-life intangible assets Other non-current liabilities Cash and cash equivalents Fair value of net assets acquired Goodwill (1) TOTAL 155 155 6 (9) 64 19 (8) 72 3 75 80 (1) Goodwill arises principally from expected synergies and is not deductible for tax purposes. Goodwill arising from the transaction was allocated to our Bell Wireline group of CGUs. The transaction did not have a significant impact on our consolidated operating revenues and net earnings for the year ended December 31, 2018. ACQUISITION OF ALARMFORCE On January 5, 2018, BCE acquired all of the issued and outstanding shares of AlarmForce for a total consideration of $182 million, of which $181 million was paid in cash and the remaining $1 million through the issuance of 22,531 BCE common shares. AlarmForce provides security alarm monitoring, personal emergency response monitoring, video surveillance and related services to residential and commercial subscribers. The acquisition of AlarmForce supports our strategic expansion in the Smart Home marketplace. Subsequent to the acquisition of AlarmForce, on January 5, 2018, BCE sold AlarmForce’s approximate 39,000 customer accounts in British Columbia, Alberta and Saskatchewan to TELUS Communications Inc. (Telus) for total proceeds of approximately $68 million. AlarmForce is included in our Bell Wireline segment in our consolidated financial statements. 132 Notes to consolidated financial statements The following table summarizes the fair value of the consideration paid and the fair value assigned to each major class of assets and liabilities. BCE Inc. 2018 Annual Report Cash consideration Issuance of 22,531 BCE common shares (1) Total cost to be allocated Assets held for sale (2) Other non-cash working capital Property, plant and equipment Finite-life intangible assets (3) Indefinite-life intangible assets Other non-current assets Deferred tax liabilities Cash and cash equivalents Fair value of net assets acquired Goodwill (4) TOTAL 181 1 182 68 (5) 8 34 1 1 (7) 100 4 104 78 (1) Recorded at fair value based on the market price of BCE common shares on the acquisition date. (2) Consists mainly of customer relationships recorded at fair value less costs to sell. (3) Consists mainly of customer relationships. (4) Goodwill arises principally from expected synergies and future growth and is not deductible for tax purposes. Goodwill arising from the transaction was allocated to our Bell Wireline group of CGUs. Operating revenues of $43 million from AlarmForce are included in the consolidated income statements from the date of acquisition. The transaction did not have a significant impact on our consolidated net earnings for the year ended December 31, 2018. These amounts reflect the amortization of certain elements of the purchase price allocation and related tax adjustments. TERMINATION OF AGREEMENT TO ACQUIRE SÉRIES+ AND HISTORIA SPECIALTY CHANNELS On October 17, 2017, BCE entered into an agreement with Corus Entertainment Inc. (Corus) to acquire French-language specialty channels Séries+ and Historia. On May 28, 2018, the Competition Bureau announced that it did not approve the sale of the channels to BCE. As a result, BCE and Corus terminated their agreement. 2017 ACQUISITION OF MTS On March 17, 2017, BCE acquired all of the issued and outstanding common shares of MTS for a total consideration of $2,933 million, of which $1,339 million was paid in cash and the remaining $1,594 million through the issuance of approximately 27.6 million BCE common shares. BCE funded the cash component of the transaction through debt financing. The acquisition of MTS allows us to reach more Canadians through the expansion of our wireless and wireline broadband networks while supporting our goal of being recognized by customers as Canada’s leading communications company. The results from the acquired MTS operations are included in our Bell Wireline and Bell Wireless segments from the date of acquisition. Bell MTS is an information and communications technology provider offering wireless, Internet, TV, phone services, security systems and information solutions including unified cloud and managed services to residential and business customers in Manitoba. 133 Notes to consolidated financial statements BCE Inc. 2018 Annual Report The following table summarizes the fair value of the consideration paid and the fair value assigned to each major class of assets and liabilities. Cash consideration Issuance of 27.6 million BCE common shares (1) Total cost to be allocated Trade and other receivables Other non-cash working capital (6) Assets held for sale (2) Property, plant and equipment Finite-life intangible assets (3) (6) Indefinite-life intangible assets (4) Deferred tax assets Other non-current assets (6) Debt due within one year Long-term debt Other non-current liabilities (6) Cash and cash equivalents Fair value of net assets acquired Goodwill (5) TOTAL 1,339 1,594 2,933 91 (121) 302 978 929 280 32 137 (251) (721) (50) 1,606 (16) 1,590 1,343 (1) Recorded at fair value based on the market price of BCE common shares on the acquisition date. (2) Consists of finite-life and indefinite-life intangible assets recorded at fair value less costs to sell. (3) Consists mainly of customer relationships. (4) Indefinite-life intangible assets of $228 million and $52 million were allocated to our Bell Wireless and Bell Wireline groups of CGUs, respectively. (5) Goodwill arises principally from the assembled workforce, expected synergies and future growth. Goodwill is not deductible for tax purposes. Goodwill arising from the transaction of $677 million and $666 million was allocated to our Bell Wireless and Bell Wireline groups of CGUs, respectively. (6) Reflects the impact of the retrospective adoption of IFRS 15 on January 1, 2018. See Note 34, Adoption of IFRS 15, for additional details. As a result of the acquisition of MTS, we acquired non-capital tax loss carryforwards of approximately $1.5 billion and recognized a deferred tax asset of approximately $300 million which was realized in 2017. In 2017, operating revenues of $730 million and net earnings of $100 million from the acquired MTS operations are included in the consolidated income statements from the date of acquisition. BCE’s consolidated operating revenues and net earnings for the year ended December 31, 2017 would have been $22,950 million and $3,061 million, respectively, had the acquisition of MTS occurred on January 1, 2017. These proforma amounts reflect the elimination of intercompany transactions, financing costs and the amortization of certain elements of the purchase price allocation and related tax adjustments. During Q2 2017, BCE completed the previously announced divestiture of approximately one-quarter of postpaid wireless subscribers and 15 retail locations previously held by MTS, as well as certain Manitoba network assets, to Telus for total proceeds of $323 million. Subsequent to the acquisition of MTS, on March 17, 2017, BCE transferred to Xplornet Communications Inc. (Xplornet) a total of 40 Megahertz (MHz) of 700 MHz, advanced wireless services-1 and 2500 MHz wireless spectrum which was previously held by MTS. As previously agreed to, BCE transferred wireless customers to Xplornet in Q4 2018 as Xplornet launched its mobile wireless service. 134 Notes to consolidated financial statements ACQUISITION OF CIESLOK MEDIA LTD. (CIESLOK MEDIA) On January 3, 2017, BCE acquired all of the issued and outstanding common shares of Cieslok Media for a total cash consideration of $161 million. and strengthening our digital presence in OOH advertising. Cieslok Media is included in our Bell Media segment in our consolidated financial statements. Cieslok Media specializes in large-format outdoor advertising in key urban areas across Canada. This acquisition contributes to growing The following table summarizes the fair value of the consideration paid and the fair value assigned to each major class of assets and liabilities. BCE Inc. 2018 Annual Report Cash consideration Total cost to be allocated Trade and other receivables Other non-cash working capital Property, plant and equipment Finite-life intangible assets Indefinite-life intangible assets Deferred tax liabilities Other non-current liabilities Cash and cash equivalents Fair value of net assets acquired Goodwill (1) TOTAL 161 161 11 (4) 13 6 76 (20) (1) 81 1 82 79 (1) Goodwill arises principally from the assembled workforce, expected synergies and future growth. Goodwill is not deductible for tax purposes. The goodwill arising from the transaction was allocated to our Bell Media group of CGUs. The transaction did not have a significant impact on our consolidated operating revenues and net earnings for the year ended December 31, 2017. Note 4 Segmented information The accounting policies used in our segment reporting are the same as those we describe in Note 2, Significant accounting policies. Our results are reported in three segments: Bell Wireless, Bell Wireline and Bell Media. Our segments reflect how we manage our business and how we classify our operations for planning and measuring performance. Accordingly, we operate and manage our segments as strategic business units organized by products and services. Segments negotiate sales with each other as if they were unrelated parties. We measure the performance of each segment based on segment profit, which is equal to operating revenues less operating costs for the segment. Substantially all of our severance, acquisition and other costs, depreciation and amortization, finance costs and other expense are managed on a corporate basis and, accordingly, are not reflected in segment results. Substantially all of our operations and assets are located in Canada. On March 17, 2017, BCE acquired all of the issued and outstanding common shares of MTS. The results from the acquired MTS operations are included in our Bell Wireless and Bell Wireline segments from the date of acquisition. Our Bell Wireless segment provides wireless voice and data communication products and services to our residential, small and medium-sized business and large enterprise customers across Canada. Our Bell Wireline segment provides data, including Internet access and IPTV, local telephone, long distance, as well as other communications services and products to our residential, small and medium-sized business and large enterprise customers primarily in Ontario, Québec, the Atlantic provinces and Manitoba, while satellite TV service and connectivity to business customers are available nationally across Canada. In addition, this segment includes our wholesale business, which buys and sells local telephone, long distance, data and other services from or to resellers and other carriers. Our Bell Media segment provides conventional TV, specialty TV, pay TV, streaming services, digital media services, radio broadcasting services and OOH advertising services to customers nationally across Canada. 135 Notes to consolidated financial statements BCE Inc. 2018 Annual Report SEGMENTED INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2018 NOTE BELL WIRELESS BELL WIRELINE BELL MEDIA INTER-SEGMENT ELIMINATIONS Operating revenues External customers Inter-segment Total operating revenues Operating costs Segment profit (1) Severance, acquisition and other costs Depreciation and amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Goodwill Indefinite-life intangible assets Capital expenditures 5 6 15, 16 7 24 8 9 19 16 8,372 50 8,422 (4,856) 3,566 12,419 243 12,662 (7,386) 5,276 2,677 444 3,121 (2,428) 693 – (737) (737) 737 – 3,048 3,948 656 4,679 1,692 3,201 2,931 2,467 114 – – – (1) The chief operating decision maker uses primarily one measure of profit to make decisions and assess performance, being operating revenues less operating costs. FOR THE YEAR ENDED DECEMBER 31, 2017 NOTE BELL WIRELESS BELL WIRELINE BELL MEDIA INTER-SEGMENT ELIMINATIONS Operating revenues External customers Inter-segment Total operating revenues Operating costs Segment profit (1) Severance, acquisition and other costs Depreciation and amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Goodwill Indefinite-life intangible assets Capital expenditures 5 6 15, 16 7 24 8 9 19 16 7,881 45 7,926 (4,550) 3,376 12,200 200 12,400 (7,210) 5,190 2,676 428 3,104 (2,388) 716 – (673) (673) 673 – 3,032 3,891 731 4,497 1,692 3,174 2,899 2,645 129 – – – (1) The chief operating decision maker uses primarily one measure of profit to make decisions and assess performance, being operating revenues less operating costs. BCE 23,468 – 23,468 (13,933) 9,535 (136) (4,014) (1,000) (69) (348) (995) 2,973 10,658 8,107 3,971 BCE 22,757 – 22,757 (13,475) 9,282 (190) (3,844) (955) (72) (102) (1,069) 3,050 10,428 8,228 4,034 136 Notes to consolidated financial statements REVENUES BY SERVICES AND PRODUCTS The following table presents our revenues disaggregated by type of services and products. FOR THE YEAR ENDED DECEMBER 31 2018 2017 BCE Inc. 2018 Annual Report Services (1) Wireless Data Voice Media Other services Total services Products (2) Wireless Data Equipment and other Total products Total operating revenues (1) Our service revenues are generally recognized over time. (2) Our product revenues are generally recognized at a point in time. Note 5 Operating costs FOR THE YEAR ENDED DECEMBER 31 Labour costs Wages, salaries and related taxes and benefits 6,258 7,466 3,793 2,677 247 6,048 7,192 3,968 2,676 211 20,441 20,095 2,114 466 447 3,027 23,468 1,833 410 419 2,662 22,757 NOTE 2018 2017 (4,274) (266) (1,043) 1,093 (4,490) (7,360) (2,083) (4,156) (242) (1,056) 1,043 (4,411) (7,014) (2,050) (13,933) (13,475) Post-employment benefit plans service cost (net of capitalized amounts) 24 Other labour costs (1) Less: Capitalized labour Total labour costs Cost of revenues (2) Other operating costs (3) Total operating costs (1) Other labour costs include contractor and outsourcing costs. (2) Cost of revenues includes costs of wireless devices and other equipment sold, network and content costs, and payments to other carriers. (3) Other operating costs include marketing, advertising and sales commission costs, bad debt expense, taxes other than income taxes, IT costs, professional service fees and rent. Research and development expenses of $106 million and $119 million are included in operating costs for 2018 and 2017, respectively. Note 6 Severance, acquisition and other costs FOR THE YEAR ENDED DECEMBER 31 Severance Acquisition and other Total severance, acquisition and other costs SEVERANCE COSTS 2018 (92) (44) (136) 2017 (79) (111) (190) Severance costs consist of charges related to workforce reduction initiatives and include a 4% reduction in management workforce across BCE in 2018. 137 Notes to consolidated financial statements BCE Inc. 2018 Annual Report ACQUISITION AND OTHER COSTS Acquisition and other costs consist of transaction costs, such as legal and financial advisory fees, related to completed or potential acquisitions, employee severance costs related to the purchase of a business, the costs to integrate acquired companies into our operations and litigation costs, when they are significant. Acquisition costs also include a loss on transfer of spectrum licences relating to the MTS acquisition in 2017. Note 7 Interest expense FOR THE YEAR ENDED DECEMBER 31 Interest expense on long-term debt Interest expense on other debt Capitalized interest Total interest expense 2018 (918) (133) 51 (1,000) 2017 (898) (101) 44 (955) Interest expense on long-term debt includes interest on finance leases of $142 million and $145 million for 2018 and 2017, respectively. Capitalized interest was calculated using an average rate of 3.88% and 3.81% for 2018 and 2017, respectively, which represents the weighted average interest rate on our outstanding long-term debt. Note 8 Other expense FOR THE YEAR ENDED DECEMBER 31 Impairment of assets Net mark-to-market (losses) gains on derivatives used to economically hedge equity settled share-based compensation plans (1) Equity losses from investments in associates and joint ventures Loss on investment Operations Loss on investments Early debt redemption costs Gains (losses) on retirements and disposals of property, plant and equipment and intangible assets Other (1) Total other expense (1) We have reclassified amounts from the previous period to make them consistent with the presentation for the current period. NOTE 15, 16 17 22 2018 (200) (80) (20) (15) (34) (20) 11 10 2017 (82) 76 (22) (9) (5) (20) (47) 7 (348) (102) IMPAIRMENT OF ASSETS 2018 Impairment charges in 2018 included $145 million allocated to indefinite-life intangible assets, and $14 million allocated to finite-life intangible assets. These impairment charges primarily relate to our French TV channels within our Bell Media segment. These impairments were the result of revenue and profitability declines from lower audience levels and subscriber erosion. The charges were determined by comparing the carrying value of the CGUs to their fair value less costs of disposal. We estimated the fair value of the CGUs using both discounted cash flows and market-based valuation models, which include five-year cash flow projections derived from business plans reviewed by senior management for the period of January 1, 2019 to December 31, 2023, using a discount rate of 8.0% to 8.5% and a perpetuity growth rate of nil, as well as market multiple data from public companies and market transactions. The carrying value of these CGUs was $515 million at December 31, 2018. In the previous year’s impairment analysis, the company’s French Pay and French Specialty TV channels were tested for recoverability separately. In 2018, the CGUs were grouped to form one French CGU which reflects the evolution of the cash flows from our content strategies as well as the CRTC beginning to regulate Canadian broadcasters under a group licence approach based on language. Additionally, in 2018, we recorded an indefinite-life intangible asset impairment charge of $31 million within our Bell Media segment as a result of a strategic decision to retire a brand. 2017 In 2017, we recorded impairment charges of $82 million, of which $70 million was allocated to indefinite-life intangible assets, and $12 million to finite-life intangible assets. The impairment charges relate to our music TV channels and two small market radio station CGUs within our Bell Media segment. These impairments were the result of revenue and profitability declines from lower audience levels. The charges were determined by comparing the carrying value of the CGUs 138 Notes to consolidated financial statements BCE Inc. 2018 Annual Report to their fair value less costs of disposal. We estimated the fair value of the CGUs using both discounted cash flows and market-based valuation models, which include five-year cash flow projections derived from business plans reviewed by senior management for the period of January 1, 2018 to December 31, 2022, using a discount rate of 8.5% and a perpetuity growth rate of nil, as well as market multiple data from public companies and market transactions. The carrying value of these CGUs was $67 million at December 31, 2017. EQUITY LOSSES FROM INVESTMENTS IN ASSOCIATES AND JOINT VENTURES We recorded a loss on investment of $20 million in 2018 and 2017, related to equity losses on our share of an obligation to repurchase at fair value the minority interest in one of BCE’s joint ventures. The obligation is marked to market each reporting period and the gain or loss on investment is recorded as equity gains or losses from investments in associates and joint ventures. LOSSES ON INVESTMENTS In 2018, we recorded losses on investments of $34 million which included a loss on an obligation to repurchase at fair value the minority interest in one of our subsidiaries. Note 9 The following table shows the significant components of income taxes deducted from net earnings. Income taxes FOR THE YEAR ENDED DECEMBER 31 Current taxes Current taxes Uncertain tax positions Change in estimate relating to prior periods Deferred taxes Deferred taxes relating to the origination and reversal of temporary differences Change in estimate relating to prior periods Recognition and utilization of loss carryforwards Effect of change in provincial corporate tax rate Resolution of uncertain tax positions Total income taxes 2018 2017 (775) 8 12 (352) 8 44 – 60 (758) (9) 40 (71) 11 (304) (3) 25 (995) (1,069) The following table reconciles the amount of reported income taxes in the income statements with income taxes calculated at a statutory income tax rate of 27.0% and 27.1% for 2018 and 2017, respectively. FOR THE YEAR ENDED DECEMBER 31 Net earnings Add back income taxes Earnings before income taxes Applicable statutory tax rate Income taxes computed at applicable statutory rates Non-taxable portion of losses on investments Uncertain tax positions Effect of change in provincial corporate tax rate Change in estimate relating to prior periods Non-taxable portion of equity losses Other Total income taxes Average effective tax rate 2018 2,973 995 3,968 27.0% (1,071) (9) 68 – 20 (10) 7 (995) 25.1% 2017 3,050 1,069 4,119 27.1% (1,116) (1) 16 (3) 51 (10) (6) (1,069) 25.9% 139 Notes to consolidated financial statements BCE Inc. 2018 Annual Report The following table shows aggregate current and deferred taxes relating to items recognized outside the income statements. FOR THE YEAR ENDED DECEMBER 31 Current taxes Deferred taxes Total income taxes (expense) recovery 2018 2017 OTHER COMPREHENSIVE INCOME 41 (104) (63) DEFICIT 5 (11) (6) OTHER COMPREHENSIVE LOSS 10 103 113 DEFICIT 9 2 11 The following table shows deferred taxes resulting from temporary differences between the carrying amounts of assets and liabilities recognized in the statements of financial position and their corresponding tax basis, as well as tax loss carryforwards. NET DEFERRED TAX LIABILITY NOTE January 1, 2017 Income statement Business acquisitions 3 Other comprehensive income Deficit Other December 31, 2017 Income statement Business acquisitions Other comprehensive income Deficit Other NON- CAPITAL LOSS CARRY- FORWARDS POST- EMPLOY- MENT BENEFIT PLANS INDEFINITE- LIFE INTANGIBLE ASSETS PROPERTY, PLANT AND EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS INVESTMENT TAX CREDITS 21 (304) 300 – – – 17 109 3 – – – 454 (1,680) (1,198) (31) (11) 82 – – 494 (14) – (65) – – (8) (73) – – – 10 (209) – – (3) (1,761) (1,400) (2) – – – – (248) (16) – – 15 (9) 7 (5) – – – (7) 3 – – – – CRTC TANGIBLE BENEFITS 44 (14) – – – – 30 (14) – – – – OTHER (128) TOTAL (2,496) (2) 10 21 2 (2) (99) (74) 1 (39) (11) 27 (342) 12 103 2 (5) (2,726) (240) (12) (104) (11) 42 December 31, 2018 129 415 (1,763) (1,649) (4) 16 (195) (3,051) At December 31, 2018, BCE had $645 million of non-capital loss carryforwards. We: At December 31, 2017, BCE had $208 million of non-capital loss carryforwards. We: • recognized a deferred tax asset of $129 million for $478 million of the non-capital loss carryforwards. These non-capital loss carryforwards expire in varying annual amounts from 2024 to 2038. • recognized a deferred tax asset of $17 million for $64 million of the non-capital loss carryforwards. These non-capital loss carryforwards expire in varying annual amounts from 2029 to 2037. • did not recognize a deferred tax asset for $167 million of non-capital loss carryforwards. This balance expires in varying annual amounts from 2023 to 2038. • did not recognize a deferred tax asset for $144 million of non-capital loss carryforwards. This balance expires in varying annual amounts from 2023 to 2037. At December 31, 2018, BCE had $806 million of unrecognized capital loss carryforwards which can be carried forward indefinitely. At December 31, 2017, BCE had $827 million of unrecognized capital loss carryforwards which can be carried forward indefinitely. Note 10 Earnings per share The following table shows the components used in the calculation of basic and diluted earnings per common share for earnings attributable to common shareholders. FOR THE YEAR ENDED DECEMBER 31 Net earnings attributable to common shareholders – basic Dividends declared per common share (in dollars) Weighted average number of common shares outstanding (in millions) Weighted average number of common shares outstanding – basic Assumed exercise of stock options (1) Weighted average number of common shares outstanding – diluted (in millions) 2018 2,785 3.02 898.6 0.3 898.9 2017 2,866 2.87 894.3 0.6 894.9 (1) The calculation of the assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. It excludes options for which the exercise price is higher than the average market value of a BCE common share. The number of excluded options was 12,252,594 in 2018 and 3,031,125 in 2017. 140 Notes to consolidated financial statements Note 11 Trade and other receivables AS AT Trade receivables (1) Allowance for doubtful accounts Allowance for revenue adjustments Current tax receivable Other accounts receivable Total trade and other receivables (1) The details of securitized trade receivables are set out in Note 21, Debt due within one year. BCE Inc. 2018 Annual Report NOTE DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 3,026 3,135 2,973 26 (51) (106) 14 123 3,006 (54) (84) 31 101 3,129 (60) (83) 35 123 2,988 Note 12 Inventory AS AT Wireless devices and accessories Merchandise and other Total inventory DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 202 230 432 179 201 380 179 224 403 The total amount of inventory subsequently recognized as an expense in cost of revenues was $2,980 million and $2,689 million for 2018 and 2017, respectively. Note 13 Contract assets and liabilities The table below provides a reconciliation of the significant changes in the contract assets and the contract liabilities balances. CONTRACT ASSETS (1) CONTRACT LIABILITIES FOR THE YEAR ENDED DECEMBER 31 Opening balance, January 1 Revenue recognized included in contract liabilities at the beginning of the year Revenue recognized from contract liabilities included in contract assets at the beginning of the year Increase in contract liabilities during the year Increase in contract liabilities included in contract assets during the year Increase in contract assets from revenue recognized during the year Contract assets transferred to trade receivables Acquisitions Contract terminations transferred to trade receivables Other Ending balance, December 31 2018 1,263 – 154 – (168) 1,770 (1,321) – (219) 14 1,493 2017 1,121 – 139 – (144) 1,483 (1,172) 50 (207) (7) 1,263 2018 894 (625) – 628 – – – 13 (4) (7) 899 2017 848 (634) – 658 – – – 29 (2) (5) 894 (1) Net of allowance for doubtful accounts of $91 million, $96 million and $92 million at December 31,2018, December 31, 2017 and January 1, 2017, respectively. See Note 26, Financial and capital management , for additional details. Note 14 Contract costs The table below provides a reconciliation of the contract costs balance. FOR THE YEAR ENDED DECEMBER 31 Opening balance, January 1 Incremental costs of obtaining a contract and contract fulfillment costs Amortization included in operating costs Impairment charges included in operating costs Ending balance, December 31 Contract costs are amortized over a period ranging from 12 to 84 months. 2018 636 567 (477) (19) 707 2017 618 526 (508) – 636 141 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 15 Property, plant and equipment NETWORK INFRASTRUCTURE AND EQUIPMENT NOTE LAND AND BUILDINGS ASSETS UNDER CONSTRUCTION TOTAL (1) 61,484 2,699 144 898 (969) (8) 5,961 72 49 43 (54) – 1,774 1,437 – (1,447) – – 64,248 6,071 1,764 41,949 2,923 (931) (107) 3,241 222 (52) (6) 43,834 3,405 – – – – – 19,535 20,414 2,720 2,666 1,774 1,764 69,219 4,208 193 (506) (1,023) (8) 72,083 45,190 3,145 (983) (113) 47,239 24,029 24,844 NETWORK INFRASTRUCTURE AND EQUIPMENT LAND AND BUILDINGS ASSETS UNDER CONSTRUCTION TOTAL (1) 58,670 2,491 653 775 (1,105) 61,484 40,228 2,813 (1,054) (38) 41,949 18,442 19,535 5,572 70 264 77 (22) 5,961 3,047 221 (19) (8) 3,241 2,525 2,720 1,374 1,587 76 (1,263) – 1,774 – – – – – 1,374 1,774 65,616 4,148 993 (411) (1,127) 69,219 43,275 3,034 (1,073) (46) 45,190 22,341 24,029 FOR THE YEAR ENDED DECEMBER 31, 2018 COST January 1, 2018 Additions Acquisition through business combinations Transfers Retirements and disposals Impairment losses recognized in earnings 8 December 31, 2018 ACCUMULATED DEPRECIATION January 1, 2018 Depreciation Retirements and disposals Other December 31, 2018 NET CARRYING AMOUNT January 1, 2018 December 31, 2018 (1) Includes assets under finance leases. FOR THE YEAR ENDED DECEMBER 31, 2017 COST January 1, 2017 Additions Acquisition through business combinations Transfers Retirements and disposals December 31, 2017 ACCUMULATED DEPRECIATION January 1, 2017 Depreciation Retirements and disposals Other December 31, 2017 NET CARRYING AMOUNT January 1, 2017 December 31, 2017 (1) Includes assets under finance leases. 142 Notes to consolidated financial statements FINANCE LEASES BCE’s significant finance leases are for satellites and office premises. The office leases have an average lease term of 22 years. The leases for satellites, used to provide programming to our Bell TV customers, have a term of 15 years. These satellite leases are non-cancellable. The following table shows additions to and the net carrying amount of assets under finance leases. BCE Inc. 2018 Annual Report FOR THE YEAR ENDED DECEMBER 31 Network infrastructure and equipment Land and buildings Total ADDITIONS NET CARRYING AMOUNT 2018 405 1 406 2017 334 2 336 2018 1,487 460 1,947 2017 1,435 467 1,902 The following table provides a reconciliation of our minimum future lease payments to the present value of our finance lease obligations. AT DECEMBER 31, 2018 Minimum future lease payments Less: Future finance costs Present value of future lease obligations NOTE 26 2019 586 (120) 466 2020 513 (101) 412 2021 344 (83) 261 2022 276 (66) 210 2023 238 (49) 189 THERE- AFTER 667 (108) 559 TOTAL 2,624 (527) 2,097 Note 16 Intangible assets NOTE SOFTWARE FINITE-LIFE CUSTOMER RELATION- SHIPS PROGRAM AND FEATURE FILM RIGHTS OTHER TOTAL BRANDS INDEFINITE-LIFE SPECTRUM AND OTHER LICENCES BROADCAST LICENCES TOTAL INTANGIBLE ASSETS TOTAL FOR THE YEAR ENDED DECEMBER 31, 2018 COST January 1, 2018 Additions Acquired through business combinations Transfers Retirements and disposals Impairment losses recognized in earnings 8 Amortization included in operating costs 8,689 1,950 362 9 506 (41) – – 13 51 – – – – December 31, 2018 9,525 2,014 ACCUMULATED AMORTIZATION January 1, 2018 Amortization Retirements and disposals Other 5,976 707 (39) 76 612 115 – – December 31, 2018 6,720 727 741 967 – – – (14) (990) 704 – – – – – 393 106 1 4 (4) – – 11,773 2,443 3,534 2,251 8,228 20,001 1,448 61 510 (45) – 1 (4) – (14) (31) (990) – 56 – – (1) (2) – – 5 – – 56 1,504 6 (4) (1) 67 506 (46) (145) (178) (192) – – (990) 500 12,743 2,409 3,587 2,111 8,107 20,850 155 47 (4) – 6,743 869 (43) 76 198 7,645 – – – – – – – – – – – – – – – – – – – – 6,743 869 (43) 76 7,645 NET CARRYING AMOUNT January 1, 2018 December 31, 2018 2,713 2,805 1,338 1,287 741 704 238 302 5,030 5,098 2,443 2,409 3,534 3,587 2,251 2,111 8,228 13,258 8,107 13,205 143 Notes to consolidated financial statements – – – – (950) 741 – – – – – BCE Inc. 2018 Annual Report FOR THE YEAR ENDED DECEMBER 31, 2017 NOTE SOFTWARE FINITE-LIFE CUSTOMER RELATION- SHIPS PROGRAM AND FEATURE FILM RIGHTS OTHER TOTAL BRANDS INDEFINITE-LIFE SPECTRUM AND OTHER LICENCES BROADCAST LICENCES TOTAL INTANGIBLE ASSETS TOTAL COST January 1, 2017 Additions Acquired through business combinations Transfers Retirements and disposals Impairment losses recognized in earnings 8 Amortization included in operating costs 7,861 1,159 682 350 10,052 2,333 3,288 2,322 7,943 17,995 344 31 1,009 7 1,391 – – 98 407 (21) – – 780 – (20) – – 103 – (55) 981 407 (96) (12) (12) – (950) 110 246 – – – – – – – – – – (1) – – 1,391 356 1,337 (1) – 406 (96) (70) (70) (82) – – (950) December 31, 2017 8,689 1,950 ACCUMULATED AMORTIZATION January 1, 2017 Amortization Retirements and disposals Other 5,316 672 (21) 9 513 99 – – December 31, 2017 5,976 612 393 11,773 2,443 3,534 2,251 8,228 20,001 168 5,997 39 (52) – 810 (73) 9 155 6,743 – – – – – – – – – – – – – – – – – – – – 5,997 810 (73) 9 6,743 NET CARRYING AMOUNT January 1, 2017 December 31, 2017 2,545 2,713 646 1,338 682 741 182 238 4,055 5,030 2,333 2,443 3,288 3,534 2,322 2,251 7,943 11,998 8,228 13,258 Investments in associates and joint ventures Note 17 The following tables provide summarized financial information with respect to BCE’s associates and joint ventures. For more details on our associates and joint ventures see Note 32, Related party transactions. STATEMENTS OF FINANCIAL POSITION AS AT Assets Liabilities Total net assets BCE’s share of net assets INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31 Revenues Expenses Total net losses BCE’s share of net losses 144 DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 3,819 (2,253) 1,566 798 NOTE 8 3,796 (2,155) 1,641 814 2018 2,128 (2,191) (63) (35) 3,856 (2,119) 1,737 852 2017 1,863 (1,924) (61) (31) Notes to consolidated financial statements Note 18 Other non-current assets AS AT NOTE DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 BCE Inc. 2018 Annual Report Net assets of post-employment benefit plans Investments (1) Publicly-traded and privately-held investments Long-term notes and other receivables Derivative assets Other Total other non-current assets 24 26 26 331 114 110 89 68 135 847 262 106 103 101 51 134 757 403 88 103 64 126 113 897 (1) These amounts have been pledged as security related to obligations for certain employee benefits and are not available for general use. Note 19 Goodwill The following table provides details about the changes in the carrying amounts of goodwill for the years ended December 31, 2018 and 2017. BCE’s groups of CGUs correspond to our reporting segments. Balance at January 1, 2017 Acquisitions and other Balance at December 31, 2017 Acquisitions and other Balance at December 31, 2018 BELL WIRELESS BELL WIRELINE 2,304 728 3,032 16 3,048 3,831 666 4,497 182 4,679 BELL MEDIA 2,823 76 2,899 32 2,931 BCE 8,958 1,470 10,428 230 10,658 IMPAIRMENT TESTING As described in Note 2, Significant accounting policies, goodwill is tested annually for impairment by comparing the carrying value of a CGU or group of CGUs to the recoverable amount, where the recoverable amount is the higher of fair value less costs of disposal or value in use. VALUE IN USE The value in use for a CGU or group of CGUs is determined by discounting five-year cash flow projections derived from business plans reviewed by senior management. The projections reflect management’s expectations of revenue, segment profit, capital expenditures, working capital and operating cash flows, based on past experience and future expectations of operating performance. Cash flows beyond the five-year period are extrapolated using perpetuity growth rates. None of the perpetuity growth rates exceed the long-term historical growth rates for the markets in which we operate. The discount rates are applied to the cash flow projections and are derived from the weighted average cost of capital for each CGU or group of CGUs. The following table shows the key assumptions used to estimate the recoverable amounts of the groups of CGUs. GROUPS OF CGUS Bell Wireless Bell Wireline Bell Media ASSUMPTIONS USED PERPETUITY GROWTH RATE 0.8% 1.0% 1.0% DISCOUNT RATE 9.1% 6.0% 8.5% The recoverable amounts determined in a prior year for the Bell Wireless and Bell Wireline groups of CGUs exceed their corresponding current carrying values by a substantial margin and have been carried forward and used in the impairment test for the current year. We believe that any reasonable possible change in the key assumptions on which the estimate of recoverable amounts of the Bell Wireless or Bell Wireline groups of CGUs is based would not cause their carrying amounts to exceed their recoverable amounts. For the Bell Media group of CGUs, a decrease of (0.6%) in the perpetuity growth rate or an increase of 0.4% in the discount rate would have resulted in its recoverable amount being equal to its carrying value. 145 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 20 Trade payables and other liabilities AS AT Trade payables and accruals Compensation payable Taxes payable Maple Leaf Sports and Entertainment Ltd. (MLSE) financial liability (1) Derivative liabilities CRTC tangible benefits obligation Provisions Severance and other costs payable CRTC deferral account obligation Other current liabilities Total trade payables and other liabilities NOTE DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 2,535 2,448 2,319 26 26 26 23 26 589 129 135 27 38 66 63 16 343 3,941 560 150 135 96 38 55 29 28 336 3,875 531 137 135 18 51 39 30 32 379 3,671 (1) Represents BCE’s obligation to repurchase the BCE Master Trust Fund’s (Master Trust Fund) 9% interest in MLSE at a price not less than an agreed minimum price should the Master Trust Fund exercise its put option. The obligation to repurchase is marked to market each reporting period and the gain or loss is recorded in Other expense in the income statements. Note 21 Debt due within one year Notes payable (1) Loans secured by trade receivables Long-term debt due within one year (2) Unsecured committed term credit facility (3) Net unamortized discount Unamortized debt issuance costs NOTE 26 26 WEIGHTED AVERAGE INTEREST RATE AT DECEMBER 31, 2018 2.82% 2.83% 5.16% Total long-term debt due within one year 22 Total debt due within one year DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 3,201 919 525 – – – 525 4,645 3,151 921 1,106 – – – 1,106 5,178 2,649 931 835 479 (1) (6) 1,307 4,887 (1) Includes commercial paper of $2,314 million in U.S. dollars ($3,156 million in Canadian dollars), $2,484 million in U.S. dollars ($3,116 million in Canadian dollars) and $1,945 million in U.S. dollars ($2,612 million in Canadian dollars) as at December 31, 2018, December 31, 2017 and January 1, 2017, respectively, which were issued under our U.S. commercial paper program and have been hedged for foreign currency fluctuations through forward currency contracts. See Note 26, Financial and capital management, for additional details. (2) Included in long-term debt due within one year is the current portion of finance leases of $466 million, $445 million and $435 million as at December 31, 2018, December 31, 2017 and January 1, 2017, respectively. (3) In 2017, Bell Canada repaid $357 million in U.S. dollars (approximately $480 million in Canadian dollars) representing all of the borrowings outstanding under its unsecured committed term credit facility. Accordingly, this credit facility was closed and the cross currency basis swap which was used to hedge the U.S. currency exposure under such credit facility was settled. See Note 26, Financial and capital management, for additional details. 146 Notes to consolidated financial statements SECURITIZED TRADE RECEIVABLES Our securitized trade receivables programs are recorded as floating rate revolving loans secured by certain trade receivables and expire on December 31, 2019 and November 1, 2020. The following table provides further details on our securitized trade receivables programs. Average interest rate throughout the year DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 2.41% 1.74% 1.51% Securitized trade receivables 1,998 1,867 1,904 BCE Inc. 2018 Annual Report We continue to service these trade receivables. The buyers’ interest in the collection of these trade receivables ranks ahead of our interests, which means that we are exposed to certain risks of default on the amounts securitized. We have provided various credit enhancements in the form of overcollateralization and subordination of our retained interests. The buyers will reinvest the amounts collected by buying additional interests in our trade receivables until the securitized trade receivables agreements expire or are terminated. The buyers and their investors have no further claim on our other assets if customers do not pay the amounts owed. CREDIT FACILITIES Bell Canada may issue notes under its Canadian and U.S. commercial paper programs up to the maximum aggregate principal amount of $3 billion in either Canadian or U.S. currency provided that at no time shall such maximum amount of notes exceed $4 billion in Canadian currency which equals the aggregate amount available under Bell Canada’s committed supporting revolving and expansion credit facilities as at December 31, 2018. The maximum amounts of the commercial paper programs and the committed credit facilities both reflect an increase of $500 million effective on December 6, 2018 and October 17, 2018, respectively, as compared to December 31, 2017. The total amount of the net committed available revolving and expansion credit facilities may be drawn at any time. The table below is a summary of our total bank credit facilities at December 31, 2018. Committed credit facilities Unsecured revolving credit and expansion facilities (1) (2) Other Total committed credit facilities Total non-committed credit facilities Total committed and non-committed credit facilities TOTAL AVAILABLE DRAWN LETTERS OF CREDIT COMMERCIAL PAPER OUTSTANDING NET AVAILABLE 4,000 134 4,134 3,014 7,148 – – – – – – 107 107 1,964 2,071 3,156 – 3,156 – 3,156 844 27 871 1,050 1,921 (1) Bell Canada’s $2.5 billion and additional $500 million revolving credit facilities expire in November 2023 and November 2019, respectively, and its $1 billion committed expansion credit facility expires in November 2021. Bell Canada has the option, subject to certain conditions, to convert advances outstanding under the additional $500 million revolving credit facility into a term loan with a maximum one-year term. (2) As of December 31, 2018, Bell Canada’s outstanding commercial paper included $2,314 million in U.S. dollars ($3,156 million in Canadian dollars). All of Bell Canada’s commercial paper outstanding is included in debt due within one year. RESTRICTIONS Some of our credit agreements: • require us to meet specific financial ratios • require us to offer to repay and cancel the credit agreement upon a change of control of BCE or Bell Canada We are in compliance with all conditions and restrictions under such credit agreements. 147 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 22 Long-term debt WEIGHTED AVERAGE INTEREST RATE AT DECEMBER 31, 2018 NOTE MATURITY DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 Debt securities 1997 trust indenture 1976 trust indenture 2011 trust indenture (1) 2001 trust indenture (1) 2016 U.S. trust indenture (2) 1996 trust indenture (subordinated) Finance leases Unsecured committed term credit facility (3) Other Total debt Net unamortized premium Unamortized debt issuance costs Less: Amount due within one year Total long-term debt 15 21 3.85% 9.54% 4.00% 4.46% 8.21% 6.67% 2020–2047 2021–2054 2024 2048 2026–2031 2019–2047 14,750 1,100 225 – 1,569 275 2,097 – 308 14,950 1,100 425 200 – 275 2,172 – 195 13,600 1,100 – – – 275 2,260 479 188 20,324 19,317 17,902 21 (60) (525) 19,760 50 (46) (1,106) 18,215 18 (41) (1,307) 16,572 (1) As part of the acquisition of MTS, on March 17, 2017, Bell Canada assumed all of MTS’ debt issued under its 2001 and 2011 trust indentures. The 2001 trust indenture was closed following the redemption in October 2018 of the remaining outstanding notes under such trust indenture. (2) In 2018, Bell Canada issued notes under the 2016 U.S. trust indenture for an aggregate amount of $1,150 million in U.S. dollars ($1,493 million in Canadian dollars), which have been hedged for foreign currency fluctuations through cross currency basis swaps. See Note 26, Financial and capital management, for additional details. (3) In 2017, Bell Canada repaid $357 million in U.S. dollars ($480 million in Canadian dollars) representing all of the borrowings outstanding under its unsecured committed term credit facility. Accordingly, this credit facility was closed and the cross currency basis swap which was used to hedge the U.S. currency exposure under such credit facility was settled. See Note 26, Financial and capital management, for additional details. Bell Canada’s debt securities have been issued in Canadian dollars with the exception of debt securities issued under the 2016 U.S. trust indenture, which have been issued in U.S. dollars. All debt securities bear a fixed interest rate. RESTRICTIONS Some of our debt agreements: • impose covenants and new issue tests • require us to make an offer to repurchase certain series of debt securities upon the occurrence of a change of control event as defined in the relevant debt agreements We are in compliance with all conditions and restrictions under such debt agreements. All outstanding debt securities have been issued under trust indentures and are unsecured. All debt securities have been issued in series and certain series are redeemable at Bell Canada’s option prior to maturity at the prices, times and conditions specified for each series. 2018 On October 15, 2018, Bell Canada redeemed, prior to maturity, its 5.625% Series 8 notes, having an outstanding principal amount of $200 million, which were due on December 16, 2019. On September 21, 2018, Bell Canada redeemed, prior to maturity, its 3.35% Series M-25 medium term notes (MTN) debentures, having an outstanding principal amount of $1 billion, which were due on June 18, 2019. On September 14, 2018, and March 29, 2018, Bell Canada issued 4.464% Series US-1 Notes under its 2016 U.S. trust indenture, with a principal amount of US $400 million (C$526 million) and US $750 million (C$967 million), respectively, which mature on April 1, 2048. On August 21, 2018, Bell Canada issued 3.80% Series M-48 MTN debentures under its 1997 trust indenture, with a principal amount of $1 billion, which mature on August 21, 2028. 148 Notes to consolidated financial statements On May 4, 2018, Bell Canada redeemed, prior to maturity, its 3.50% Series M-28 MTN debentures, having an outstanding principal amount of $400 million, which were due on September 10, 2018. On March 12, 2018, Bell Canada issued 3.35% Series M-47 MTN debentures under its 1997 trust indenture, with a principal amount of $500 million, which mature on March 12, 2025. BCE Inc. 2018 Annual Report On April 16, 2018, Bell Canada redeemed, prior to maturity, its 4.59% Series 9 notes, having an outstanding principal amount of $200 million, which were due on October 1, 2018. In addition, on the same date, Bell Canada redeemed, prior to maturity, its 5.52% Series M-33 debentures, having an outstanding principal amount of $300 million, which were due on February 26, 2019. 2017 For the year ended December 31, 2018, we incurred early debt redemption charges of $20 million, which were recorded in Other expense in the income statement. On October 30, 2017, Bell Canada redeemed, prior to maturity, its 4.40% Series M-22 MTN debentures, having an outstanding principal amount of $1 billion, which were due on March 16, 2018. On May 12, 2017, Bell Canada redeemed, prior to maturity, its 4.37% Series M-35 debentures, having an outstanding principal amount of $350 million, which were due on September 13, 2017. On October 9, 2017, Bell Canada redeemed, prior to maturity, its 4.88% Series M-36 debentures, having an outstanding principal amount of $300 million, which were due on April 26, 2018. On September 29, 2017, Bell Canada issued 3.00% Series M-40 MTN debentures under its 1997 trust indenture, with a principal amount of $700 million, which mature on October 3, 2022. The Series M-40 MTN debentures were issued as part of an existing series of MTN debentures. In addition, on the same date, Bell Canada issued 3.60% Series M-46 MTN debentures under its 1997 trust indenture, with a principal amount of $800 million, which mature on September 29, 2027. On February 27, 2017, Bell Canada issued 2.70% Series M-44 MTN debentures under its 1997 trust indenture, with a principal amount of $1 billion, which mature on February 27, 2024. In addition, on the same date, Bell Canada issued 4.45% Series M-45 MTN debentures under its 1997 trust indenture, with a principal amount of $500 million, which mature on February 27, 2047. For the year ended December 31, 2017, we incurred early debt redemption charges of $20 million, which were recorded in Other expense in the income statement. Note 23 Provisions FOR THE YEAR ENDED DECEMBER 31 January 1, 2018 Additions Usage Reversals Acquired through business combinations December 31, 2018 Current Non-current December 31, 2018 NOTE 20 25 AROs 170 38 (4) (5) – 199 16 183 199 OTHER (1) 158 47 (29) (8) 4 172 50 122 172 TOTAL 328 85 (33) (13) 4 371 66 305 371 (1) Other includes environmental, legal, regulatory and vacant space provisions. AROs reflect management’s best estimates of expected future costs to restore current leased premises to their original condition prior to lease inception. Cash outflows associated with our ARO liabilities are generally expected to occur at the restoration dates of the assets to which they relate, which are long-term in nature. The timing and extent of restoration work that will be ultimately required for these sites is uncertain. 149 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 24 Post-employment benefit plans POST-EMPLOYMENT BENEFIT PLANS COST We provide pension and other benefits for most of our employees. These include DB pension plans, DC pension plans and OPEBs. options offered to plan participants, lies with the Pension Fund Committee, a committee of our board of directors. We operate our DB and DC pension plans under applicable Canadian and provincial pension legislation, which prescribes minimum and maximum DB funding requirements. Plan assets are held in trust, and the oversight of governance of the plans, including investment decisions, contributions to DB plans and the selection of the DC plans investment The interest rate risk is managed using a liability matching approach, which reduces the exposure of the DB plans to a mismatch between investment growth and obligation growth. The longevity risk is managed using a longevity swap, which reduces the exposure of the DB plans to an increase in life expectancy. COMPONENTS OF POST-EMPLOYMENT BENEFIT PLANS SERVICE COST FOR THE YEAR ENDED DECEMBER 31 DB pension DC pension OPEBs Plan amendment gain on OPEBs and DB pension Less: Capitalized benefit plans cost Total post-employment benefit plans service cost included in operating costs Other costs recognized in severance, acquisition and other costs Total post-employment benefit plans service cost COMPONENTS OF POST-EMPLOYMENT BENEFIT PLANS FINANCING COST FOR THE YEAR ENDED DECEMBER 31 DB pension OPEBs Total interest on post-employment benefit obligations The statements of comprehensive income include the following amounts before income taxes. Cumulative losses recognized directly in equity, January 1 Actuarial gains (losses) in other comprehensive income (1) Decrease (increase) in the effect of the asset limit (2) Cumulative losses recognized directly in equity, December 31 (1) The cumulative actuarial losses recognized in the statements of comprehensive income are $3,138 million in 2018. (2) The cumulative decrease in the effect of the asset limit recognized in the statements of comprehensive income is $246 million in 2018. 2018 (213) (106) (3) – 56 (266) (4) (270) 2018 (23) (46) (69) 2018 (2,984) 79 13 (2,892) 2017 (208) (102) (6) 16 58 (242) (10) (252) 2017 (18) (54) (72) 2017 (2,646) (313) (25) (2,984) 150 Notes to consolidated financial statements COMPONENTS OF POST-EMPLOYMENT BENEFIT (OBLIGATIONS) ASSETS The following table shows the change in post-employment benefit obligations and the fair value of plan assets. Post-employment benefit obligations, January 1 (24,404) (20,853) (1,653) (1,684) (26,057) (22,537) DB PENSION PLANS OPEB PLANS TOTAL 2018 2017 2018 2017 2018 2017 BCE Inc. 2018 Annual Report Current service cost Interest on obligations Actuarial gains (losses) (1) Net curtailment (losses) gains Loss on plan transfer Benefit payments Employee contributions Acquisition of MTS Plan transfer Other (213) (864) 750 (4) – (208) (896) (1,193) (4) (6) 1,342 1,320 (11) – – – (10) (2,677) 122 1 (3) (56) 163 – – 80 – – – – (6) (65) (28) 16 – 81 – (5) – 38 (216) (920) 913 (4) – (214) (961) (1,221) 12 (6) 1,422 1,401 (11) – – – (10) (2,682) 122 39 Post-employment benefit obligations, December 31 (23,404) (24,404) (1,469) (1,653) (24,873) (26,057) Fair value of plan assets, January 1 Expected return on plan assets (2) Actuarial (losses) gains (1) Benefit payments Employer contributions Employee contributions Acquisition of MTS Plan transfer 23,945 20,563 299 280 24,244 20,843 841 (817) 878 896 (1,342) (1,320) 433 11 – – 305 10 2,735 (122) 10 (17) (80) 75 – – – 11 12 (81) 77 – – – 851 (834) 889 908 (1,422) (1,401) 508 11 – – 382 10 2,735 (122) Fair value of plan assets, December 31 23,071 23,945 287 299 23,358 24,244 Plan deficit Effect of asset limit Post-employment benefit liability, December 31 Post-employment benefit assets included in other non-current assets Post-employment benefit obligations (333) (20) (353) 331 (684) (459) (33) (492) 262 (754) (1,182) (1,354) (1,515) (1,813) – – (20) (33) (1,182) (1,354) (1,535) (1,846) – – 331 262 (1,182) (1,354) (1,866) (2,108) (1) Actuarial gains (losses) include experience (losses) gains of ($693 million) in 2018 and $911 million in 2017. (2) The actual return on plan assets was $17 million or 0.2% in 2018 and $1,797 million or 8.2% in 2017. On January 15, 2016, MTS completed the sale of its wholly-owned subsidiaries Allstream Inc., Allstream Fibre U.S., and Delphi Solutions Corp. (collectively, Allstream), to Zayo Group Holdings Inc. As part of the sale agreement, MTS retained Allstream’s two existing DB pension plans including the benefit obligations for retirees and other former employees. On October 31, 2017, we completed the transfer of assets and liabilities related to pre-closing service obligations for Allstream’s active employees from the existing Allstream DB pension plans to two new Zayo Canada Inc. pension plans. FUNDED STATUS OF POST-EMPLOYMENT BENEFIT PLANS COST The following table shows the funded status of our post-employment benefit obligations. FUNDED PARTIALLY FUNDED (1) UNFUNDED (2) DEC. 31, 2018 DEC. 31, 2017 JAN 1, 2017 DEC. 31, 2018 DEC. 31, 2017 JAN 1, 2017 DEC. 31, 2018 DEC. 31, 2017 JAN 1, 2017 DEC. 31, 2018 TOTAL DEC. 31, 2017 JAN 1, 2017 Present value of post-employment benefit obligations (22,765) (23,746) (20,249) (1,816) (1,976) (1,995) (292) (335) (293) (24,873) (26,057) (22,537) Fair value of plan assets 23,018 23,894 20,520 340 350 323 – – – 23,358 24,244 20,843 Plan surplus (deficit) 253 148 271 (1,476) (1,626) (1,672) (292) (335) (293) (1,515) (1,813) (1,694) (1) The partially funded plans consist of supplementary executive retirement plans (SERPs) for eligible employees and OPEBs. The company partially funds the SERPs through letters of credit and a retirement compensation arrangement account with Canada Revenue Agency. Certain paid-up life insurance benefits are funded through life insurance contracts. (2) Our unfunded plans consist of OPEBs, which are pay-as-you-go. 151 Notes to consolidated financial statements BCE Inc. 2018 Annual Report SIGNIFICANT ASSUMPTIONS We used the following key assumptions to measure the post-employment benefit obligations and the net benefit plans cost for the DB pension plans and OPEB plans. These assumptions are long-term, which is consistent with the nature of post-employment benefit plans. AS AT Post-employment benefit obligations Discount rate Rate of compensation increase Cost of living indexation rate (1) Life expectancy at age 65 (years) (1) Cost of living indexation rate is only applicable to DB pension plans. FOR THE YEAR ENDED DECEMBER 31 Net post-employment benefit plans cost Discount rate Rate of compensation increase Cost of living indexation rate (1) Life expectancy at age 65 (years) (1) Cost of living indexation rate is only applicable to DB pension plans. DB PENSION PLANS AND OPEB PLANS DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 3.8% 2.25% 1.6% 23.1 3.6% 2.25% 1.6% 23.2 4.0% 2.25% 1.6% 23.1 DB PENSION PLANS AND OPEB PLANS 2018 2017 3.7% 2.25% 1.6% 23.2 4.2% 2.25% 1.6% 23.1 The weighted average duration of the post-employment benefit obligation is 14 years. Assumed trend rates in healthcare costs have a significant effect on the amounts reported for the healthcare plans. We assumed the following trend rates in healthcare costs: • an annual increase in the cost of medication of 7% for 2018 decreasing The following table shows the effect of a 1% change in the assumed trend rates in healthcare costs. to 4.5% over 20 years • an annual increase in the cost of covered dental benefits of 4% • an annual increase in the cost of covered hospital benefits of 3.3% • an annual increase in the cost of other covered healthcare benefits of 3% EFFECT ON POST-EMPLOYMENT BENEFITS – INCREASE/(DECREASE) Total service and interest cost Post-employment benefit obligations 1% INCREASE 1% DECREASE 5 111 (3) (90) SENSITIVITY ANALYSIS The following table shows a sensitivity analysis of key assumptions used to measure the net post-employment benefit obligations and the net post-employment benefit plans cost for our DB pension plans and OPEB plans. Discount rate Life expectancy at age 65 IMPACT ON NET POST-EMPLOYMENT BENEFIT PLANS COST FOR 2018 – INCREASE/(DECREASE) IMPACT ON POST-EMPLOYMENT BENEFIT OBLIGATIONS AT DECEMBER 31, 2018 – INCREASE/(DECREASE) CHANGE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION 0.5% 1 year (77) 35 65 (34) (1,605) 796 1,716 (771) POST-EMPLOYMENT BENEFIT PLAN ASSETS The investment strategy for the post-employment benefit plan assets is to maintain a diversified portfolio of assets invested in a prudent manner to maintain the security of funds. The following table shows the target allocations for 2018 and the allocation of our post-employment benefit plan assets at December 31, 2018 and 2017, and at January 1, 2017. ASSET CATEGORY Equity securities Debt securities Alternative investments Total 152 WEIGHTED AVERAGE TARGET ALLOCATION TOTAL PLAN ASSETS FAIR VALUE 2018 DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 20%–40% 60%–100% 0%–40% 20% 64% 16% 100% 22% 65% 13% 100% 22% 68% 10% 100% Notes to consolidated financial statements The following table shows the fair value of the DB pension plan assets for each category. AS AT Observable markets data Equity securities Canadian Foreign Debt securities Canadian Foreign Money market Non-observable markets inputs Alternative investments Private equities Hedge funds Real estate Other Total Equity securities included approximately $8 million of BCE common shares, or 0.03% of total plan assets, at December 31, 2018, approximately $13 million of BCE common shares, or 0.05% of total plan assets, at December 31, 2017 and approximately $17 million of BCE common shares, or 0.08% of total plan assets, at January 1, 2017. Debt securities included approximately $68 million of Bell Canada debentures, or 0.30% of total plan assets, at December 31, 2018, approximately $11 million of Bell Canada debentures, or 0.05% of total plan assets, at December 31, 2017 and approximately $15 million of Bell Canada debentures, or 0.07% of total plan assets, at January 1, 2017. Alternative investments included the pension plan’s investment in MLSE of $135 million, or 0.59% of total plan assets, at December 31, 2018, $135 million, or 0.56% of total plan assets, at December 31, 2017, and $135 million, or 0.66% of total plan assets, at January 1, 2017. BCE Inc. 2018 Annual Report DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 844 3,770 12,457 2,004 327 1,804 1,014 758 93 1,045 4,349 13,126 1,890 491 901 3,682 12,469 1,068 387 1,484 1,164 965 484 111 726 55 111 23,071 23,945 20,563 The Bell Canada pension plan has an investment arrangement which hedges part of its exposure to potential increases in longevity, which covers approximately $5 billion of post-employment benefit obligations. The fair value of the arrangement is included within other alternative investments. As a hedging arrangement of the pension plan, the transaction requires no cash contributions from BCE. CASH FLOWS We are responsible for adequately funding our DB pension plans. We make contributions to them based on various actuarial cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections and future service benefits. Changes in these factors could cause actual future contributions to differ from our current estimates and could require us to increase contributions to our post-employment benefit plans in the future, which could have a negative effect on our liquidity and financial performance. We contribute to the DC pension plans as employees provide service. The following table shows the amounts we contributed to the DB and DC pension plans and the payments made to beneficiaries under OPEB plans. FOR THE YEAR ENDED DECEMBER 31 Contributions 2018 (433) 2017 (305) 2018 (106) 2017 (108) 2018 (75) 2017 (77) DB PLANS (1) DC PLANS OPEB PLANS (1) Includes voluntary contributions of $240 million in 2018 and $100 million in 2017. We expect to contribute approximately $180 million to our DB pension plans in 2019, subject to actuarial valuations being completed. We expect to pay approximately $80 million to beneficiaries under OPEB plans and to contribute approximately $115 million to the DC pension plans in 2019. 153 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 25 Other non-current liabilities AS AT Long-term disability benefits obligation Provisions CRTC deferral account obligation CRTC tangible benefits obligation Other (1) Total other non-current liabilities NOTE DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 23 26 26 288 305 92 23 289 997 322 273 96 73 287 1,051 302 273 104 115 274 1,068 (1) We have reclassified amounts from the previous period to make them consistent with the presentation for the current period. Note 26 Financial and capital management FINANCIAL MANAGEMENT Management’s objectives are to protect BCE and its subsidiaries on a consolidated basis against material economic exposures and variability of results from various financial risks that include credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk. DERIVATIVES We use derivative instruments to manage our exposure to foreign currency risk, interest rate risk and changes in the price of BCE common shares under our share-based payment plans. The following derivative instruments were outstanding during 2018 and/or 2017: • foreign currency forward contracts and options that manage the foreign currency risk of certain anticipated purchases and sales • cross currency basis swaps that hedge foreign currency risk on a portion of our debt due within one year and long-term debt • forward contracts on BCE common shares that mitigate the cash flow exposure related to share-based payment plans FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Certain fair value estimates are affected by assumptions we make about the amount and timing of future cash flows and discount rates, all of which reflect varying degrees of risk. Income taxes and other expenses that would be incurred on disposition of financial instruments are not reflected in the fair values. As a result, the fair values are not the net amounts that would be realized if these instruments were settled. The carrying values of our cash and cash equivalents, trade and other receivables, dividends payable, trade payables and accruals, compensation payable, severance and other costs payable, interest payable, notes payable and loans secured by trade receivables approximate fair value as they are short-term. The following table provides the fair value details of financial instruments measured at amortized cost in the statements of financial position. CLASSIFICATION FAIR VALUE METHODOLOGY CRTC tangible benefits obligation Trade payables and other liabilities and non-current liabilities CRTC deferral account obligation Trade payables and other liabilities and non-current liabilities Debt securities, finance leases and other debt Debt due within one year and long-term debt Present value of estimated future cash flows discounted using observable market interest rates Present value of estimated future cash flows discounted using observable market interest rates Quoted market price of debt or present value of future cash flows discounted using observable market interest rates DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 NOTE 20, 25 CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE 61 61 111 110 166 FAIR VALUE 169 20, 25 108 112 124 128 136 145 21, 22 20,285 21,482 19,321 21,298 17,879 20,093 154 Notes to consolidated financial statements The following table provides the fair value details of financial instruments measured at fair value in the statements of financial position. CLASSIFICATION NOTE CARRYING VALUE OF ASSET (LIABILITY) QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) OBSERVABLE MARKET DATA (LEVEL 2) (1) NON-OBSERVABLE MARKET INPUTS (LEVEL 3) (2) FAIR VALUE BCE Inc. 2018 Annual Report December 31, 2018 Publicly-traded and privately-held investments Derivative financial instruments Other non-current assets 18 Other current assets, trade payables and other liabilities, other non-current assets and liabilities MLSE financial liability (3) Trade payables and other liabilities 20 Other Other non-current assets and liabilities December 31, 2017 Publicly-traded and privately-held investments Derivative financial instruments Other non-current assets 18 Other current assets, trade payables and other liabilities, other non-current assets and liabilities MLSE financial liability (3) Trade payables and other liabilities 20 Other Other non-current assets and liabilities January 1, 2017 Publicly-traded and privately-held investments Derivative financial instruments Other non-current assets 18 Other current assets, trade payables and other liabilities, other non-current assets and liabilities MLSE financial liability (3) Trade payables and other liabilities 20 Other Other non-current assets and liabilities 110 181 (135) 43 103 (48) (135) 60 103 166 (135) 35 1 – – – 1 – – – 1 – – – – 181 – 114 – (48) – 106 – 166 – 88 109 – (135) (71) 102 – (135) (46) 102 – (135) (53) (1) Observable market data such as equity prices, interest rates, swap rate curves and foreign currency exchange rates. (2) Non-observable market inputs such as discounted cash flows and earnings multiples. A reasonable change in our assumptions would not result in a significant increase (decrease) to our level 3 financial instruments. (3) Represents BCE’s obligation to repurchase the Master Trust Fund’s 9% interest in MLSE at a price not less than an agreed minimum price should the Master Trust Fund exercise its put option. The obligation to repurchase is marked to market each reporting period and the gain or loss is recorded in Other expense in the income statements. The option has been exercisable since 2017. CREDIT RISK We are exposed to credit risk from operating activities and certain financing activities, the maximum exposure of which is represented by the carrying amounts reported in the statements of financial position. We are exposed to credit risk if counterparties to our trade receivables and derivative instruments are unable to meet their obligations. The concentration of credit risk from our customers is minimized because we have a large and diverse customer base. There was minimal credit risk relating to derivative instruments at December 31, 2018 and 2017. We deal with institutions that have investment-grade credit ratings, and as such we expect that they will be able to meet their obligations. We regularly monitor our credit risk and credit exposure. The following table provides the change in allowance for doubtful accounts for trade receivables. NOTE Balance, January 1 Adoption of IFRS 9 (1) Additions Usage Balance, December 31 11 2018 (54) (4) (84) 91 (51) 2017 (60) – (99) 105 (54) (1) We adopted IFRS 9, Financial Instruments, effective January 1, 2018. See Note 2, Significant accounting policies, for additional details. In many instances, trade receivables are written off directly to bad debt expense if the account has not been collected after a predetermined period of time. 155 Notes to consolidated financial statements BCE Inc. 2018 Annual Report The following table provides further details on trade receivables not impaired. AS AT Trade receivables not past due Trade receivables past due and not impaired Under 60 days 60 to 120 days Over 120 days DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 2,091 2,255 2,192 508 304 72 491 279 56 286 360 75 Trade receivables, net of allowance for doubtful accounts 2,975 3,081 2,913 The following table provides the change in allowance for doubtful accounts for contract assets. Balance, January 1 Additions Usage Balance, December 31 Current Non-current Balance, December 31 LIQUIDITY RISK NOTE 13 2018 (96) (50) 55 (91) (44) (47) (91) 2017 (92) (39) 35 (96) (47) (49) (96) Our cash and cash equivalents, cash flows from operations and possible capital markets financing are expected to be sufficient to fund our operations and fulfill our obligations as they become due. Should our cash requirements exceed the above sources of cash, we would expect to cover such a shortfall by drawing on existing committed bank facilities and new ones, to the extent available. The following table is a maturity analysis for recognized financial liabilities at December 31, 2018 for each of the next five years and thereafter. AT DECEMBER 31, 2018 Long-term debt Notes payable Minimum future lease payments under finance leases Loan secured by trade receivables Interest payable on long-term debt, notes payable and loan secured by trade receivables Net interest receipts on cross currency basis swaps MLSE financial liability Total NOTE 22 21 15 21 20 2019 59 3,201 2020 1,453 – 2021 2,275 – 2022 1,739 – 586 919 866 (6) 135 513 – 751 (6) – 344 – 709 (6) – 276 – 648 (6) – 2023 1,622 – 238 – THERE- AFTER TOTAL 11,079 18,227 – 3,201 667 – 2,624 919 581 6,671 10,226 (6) – (134) – (164) 135 5,760 2,711 3,322 2,657 2,435 18,283 35,168 We are also exposed to liquidity risk for financial liabilities due within one year as shown in the statements of financial position. MARKET RISK CURRENCY EXPOSURES We use forward contracts, options and cross currency basis swaps to manage foreign currency risk related to anticipated purchases and sales and certain foreign currency debt. In 2017, we settled a cross currency basis swap with a notional amount of $357 million in U.S. dollars ($480 million in Canadian dollars) used to hedge borrowings under a credit facility that was repaid in 2017. See Note 22, Long-term debt, for additional details. In 2018, we entered into cross currency basis swaps with a notional amount of $1,150 million in U.S. dollars ($1,493 million in Canadian dollars). These cross currency basis swaps are used to hedge the U.S. currency exposure of our Series US-1 Notes maturing in 2048. See Note 22, Long-term debt, for additional details. A 10% depreciation (appreciation) in the value of the Canadian dollar relative to the U.S. dollar would result in a loss (gain) of $2 million (nil) recognized in net earnings at December 31, 2018 and a gain (loss) of $140 million ($132 million) recognized in Other comprehensive income (loss) at December 31, 2018, with all other variables held constant. 156 Notes to consolidated financial statements BCE Inc. 2018 Annual Report The following table provides further details on our outstanding foreign currency forward contracts as at December 31, 2018. TYPE OF HEDGE Cash flow Cash flow Cash flow Cash flow Economic Economic – call options Economic – put options BUY CURRENCY USD USD CAD USD USD USD USD AMOUNT TO RECEIVE 2,329 779 15 256 120 48 60 SELL CURRENCY CAD CAD USD CAD CAD CAD CAD AMOUNT TO PAY 3,077 973 12 324 153 60 74 MATURITY HEDGED ITEM 2019 2019 2019 Commercial paper Anticipated transactions Anticipated transactions 2020–2021 Anticipated transactions 2019 2020 Anticipated transactions Anticipated transactions 2019–2020 Anticipated transactions INTEREST RATE EXPOSURES A 1% increase (decrease) in interest rates would result in a decrease (increase) of $31 million in net earnings at December 31, 2018. EQUITY PRICE EXPOSURES We use equity forward contracts on BCE’s common shares to economically hedge the cash flow exposure related to the settlement of equity settled share-based compensation plans and the equity price risk related to a cash-settled share-based payment plan. See Note 28, Share-based payments, for details on our share-based payment arrangements. The fair value of our equity forward contracts at December 31, 2018 was a liability of $73 million (December 31, 2017 – $45 million, and January 1, 2017 – $111 million). A 5% increase (decrease) in the market price of BCE’s common shares at December 31, 2018 would result in a gain (loss) of $34 million recognized in net earnings for 2018, with all other variables held constant. CAPITAL MANAGEMENT We have various capital policies, procedures and processes which are utilized to achieve our objectives for capital management. These include optimizing our cost of capital and maximizing shareholder return while balancing the interests of our stakeholders. Our definition of capital includes equity attributable to BCE shareholders, debt, and cash and cash equivalents. The key ratios that we use to monitor and manage our capital structure are a net debt leverage ratio (1) and an adjusted EBITDA to net interest expense ratio (2). In 2018 and 2017, our net debt leverage ratio target range was 1.75 to 2.25 times adjusted EBITDA and our adjusted EBITDA to net interest expense ratio target was greater than 7.5 times. We monitor our capital structure and make adjustments, including to our dividend policy, as required. At December 31, 2018, we had exceeded the limit of our internal net debt leverage ratio target range by 0.47. These ratios do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. We use, and believe that certain investors and analysts use, our net debt leverage ratio and adjusted EBITDA to net interest expense ratio as measures of financial leverage and health of the company. The following table provides a summary of our key ratios. AT DECEMBER 31 Net debt leverage ratio Adjusted EBITDA to net interest expense ratio 2018 2.72 9.00 2017 2.67 9.23 In Q1 2018, BCE completed a normal course issuer bid program (NCIB). See Note 27, Share capital, for additional details. On February 6, 2019, the board of directors of BCE approved an increase of 5.0% in the annual dividend on BCE’s common shares, from $3.02 to $3.17 per common share. In addition, the board of directors of BCE declared a quarterly dividend of 0.7925 per common share, payable on April 15, 2019 to shareholders of record at March 15, 2019. On February 7, 2018, the board of directors of BCE approved an increase of 5.2% in the annual dividend on BCE’s common shares, from $2.87 to $3.02 per common share. (1) Our net debt leverage ratio represents net debt divided by adjusted EBITDA. We define net debt as debt due within one year plus long-term debt and 50% of preferred shares less cash and cash equivalents as shown in our statements of financial position. Adjusted EBITDA is defined as operating revenues less operating costs as shown in our income statements. (2) Our adjusted EBITDA to net interest expense ratio represents adjusted EBITDA divided by net interest expense. Adjusted EBITDA is defined as operating revenues less operating costs as shown in our income statements. Net interest expense is net interest expense as shown in our statements of cash flows and 50% of declared preferred share dividends as shown in our income statements. 157 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 27 Share capital PREFERRED SHARES BCE’s articles of amalgamation, as amended, provide for an unlimited number of First Preferred Shares and Second Preferred Shares, all without par value. The terms set out in the articles authorize BCE’s directors to issue the shares in one or more series and to set the number of shares and the conditions for each series. The following table provides a summary of the principal terms of BCE’s First Preferred Shares as at December 31, 2018. There were no Second Preferred Shares issued and outstanding at December 31, 2018. BCE’s articles of amalgamation, as amended, describe the terms and conditions of these shares in detail. ANNUAL DIVIDEND RATE CONVERTIBLE INTO SERIES CONVERSION DATE REDEMPTION DATE REDEMPTION PRICE AUTHORIZED ISSUED AND OUTSTANDING DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 NUMBER OF SHARES STATED CAPITAL Q R (1) S T (1) Y Z (1) AA (1) AB AC (1) AD AE AF (1) AG (1) AH AI (1) AJ AK (1) AL (2) floating Series R December 1, 2025 $25.50 8,000,000 – 4.13% Series Q December 1, 2020 December 1, 2020 $25.00 8,000,000 8,000,000 floating Series T November 1, 2021 At any time $25.50 8,000,000 3,513,448 3.019% Series S November 1, 2021 November 1, 2021 $25.00 8,000,000 4,486,552 floating Series Z December 1, 2022 At any time $25.50 10,000,000 8,081,491 3.904% Series Y December 1, 2022 December 1, 2022 $25.00 10,000,000 1,918,509 3.61% Series AB September 1, 2022 September 1, 2022 $25.00 20,000,000 11,398,396 floating Series AA September 1, 2022 At any time $25.50 20,000,000 8,601,604 4.38% Series AD March 1, 2023 March 1, 2023 $25.00 20,000,000 10,029,691 floating Series AC March 1, 2023 At any time $25.50 20,000,000 9,970,309 floating Series AF February 1, 2020 At any time $25.50 24,000,000 9,292,133 3.11% Series AE February 1, 2020 February 1, 2020 $25.00 24,000,000 6,707,867 2.80% Series AH May 1, 2021 May 1, 2021 $25.00 22,000,000 4,985,351 floating Series AG May 1, 2021 At any time $25.50 22,000,000 9,014,649 2.75% Series AJ August 1, 2021 August 1, 2021 $25.00 22,000,000 5,949,884 floating Series AI August 1, 2021 At any time $25.50 22,000,000 8,050,116 2.954% Series AL December 31, 2021 December 31, 2021 $25.00 25,000,000 22,745,921 floating Series AK December 31, 2021 At any time 25,000,000 2,254,079 AM (1) 2.764% Series AN March 31, 2021 March 31, 2021 $25.00 30,000,000 9,546,615 AN (2) AO (1) AP (3) AQ (1) AR (3) floating Series AM March 31, 2021 At any time 30,000,000 1,953,385 4.26% Series AP March 31, 2022 March 31, 2022 $25.00 30,000,000 4,600,000 floating Series AO March 31, 2027 30,000,000 – 4.812% Series AR September 30, 2023 September 30, 2023 $25.00 30,000,000 9,200,000 floating Series AQ September 30, 2028 30,000,000 – – 200 88 112 202 48 291 219 256 254 232 168 125 225 149 201 569 56 218 45 118 – 228 – – 200 88 112 202 48 291 219 129 381 232 168 125 225 149 201 569 56 218 45 118 – 228 – – 200 88 112 219 31 259 251 129 381 232 168 125 225 149 201 569 56 218 45 118 – 228 – 4,004 4,004 4,004 (1) BCE may redeem each of these series of First Preferred Shares on the applicable redemption date and every five years after that date. (2) BCE may redeem Series AL and AN First Preferred Shares at $25.00 per share on December 31, 2021 and March 31, 2021, respectively, and every five years thereafter (each, a Series conversion date). Alternatively, BCE may redeem Series AL or AN First Preferred Shares at $25.50 per share on any date which is not a Series conversion date for the applicable series of First Preferred Shares. (3) If Series AP or AR First Preferred Shares are issued on March 31, 2022 and September 30, 2023 respectively, BCE may redeem such shares at $25.00 per share on March 31, 2027 and September 30, 2028, respectively, and every five years thereafter (each, a Series conversion date). Alternatively, BCE may redeem Series AP or AR First Preferred Shares at $25.50 per share on any date which is not a Series conversion date for the applicable series of First Preferred Shares. VOTING RIGHTS All of the issued and outstanding First Preferred Shares at December 31, 2018 are non-voting, except under special circumstances, when the holders are entitled to one vote per share. PRIORITY AND ENTITLEMENT TO DIVIDENDS The First Preferred Shares of all series rank at parity with each other and in priority to all other shares of BCE with respect to payment of dividends and with respect to distribution of assets in the event of liquidation, dissolution or winding up of BCE. Holders of Series R, T, Z, AA, AC, AF, AG, AI, AK, AM, AO and AQ First Preferred Shares are entitled to fixed cumulative quarterly dividends. The dividend rate on these shares is reset every five years, as set out in BCE’s articles of amalgamation, as amended. Holders of Series S, Y, AB, AD, AE, AH and AJ First Preferred Shares are entitled to floating adjustable cumulative monthly dividends. The floating dividend rate on these shares is calculated every month, as set out in BCE’s articles of amalgamation, as amended. 158 Notes to consolidated financial statements Holders of Series AL and AN First Preferred Shares are entitled to floating cumulative quarterly dividends. The floating dividend rate on these shares is calculated every quarter, as set out in BCE’s articles of amalgamation, as amended. Dividends on all series of First Preferred Shares are paid as and when declared by the board of directors of BCE. CONVERSION FEATURES All of the issued and outstanding First Preferred Shares at December 31, 2018 are convertible at the holder’s option into another associated series of First Preferred Shares on a one-for-one basis according to the terms set out in BCE’s articles of amalgamation, as amended. BCE Inc. 2018 Annual Report CONVERSION AND DIVIDEND RATE RESET OF FIRST PREFERRED SHARES The annual fixed dividend rate on BCE’s Cumulative Redeemable First Preferred Shares, Series AQ, was reset for the next five years, effective September 30, 2018, at 4.812% from 4.25%. On March 1, 2018, 397,181 of BCE’s 5,069,935 fixed-rate Cumulative Redeemable First Preferred Shares, Series AC (Series AC Preferred Shares) were converted, on a one-for-one basis, into floating rate Cumulative Redeemable First Preferred Shares, Series AD (Series AD Preferred Shares). In addition, on March 1, 2018, 5,356,937 of BCE’s 14,930,065 Series AD Preferred Shares were converted, on a one-for-one basis, into Series AC Preferred Shares. The annual fixed dividend rate on BCE’s Series AC Preferred Shares was reset for the next five years, effective March 1, 2018, at 4.38% from 3.55%. The Series AD Preferred Shares continue to pay a monthly floating cash dividend. COMMON SHARES AND CLASS B SHARES BCE’s articles of amalgamation provide for an unlimited number of voting common shares and non-voting Class B shares, all without par value. The common shares and the Class B shares rank equally in the payment of dividends and in the distribution of assets if BCE is liquidated, dissolved or wound up, after payments due to the holders of preferred shares. No Class B shares were outstanding at December 31, 2018 and 2017 and January 1, 2017. The following table provides details about the outstanding common shares of BCE. Outstanding, January 1 900,996,640 20,091 870,706,332 NOTE NUMBER OF SHARES STATED CAPITAL NUMBER OF SHARES 2018 2017 Shares issued for the acquisition of AlarmForce Shares issued for the acquisition of MTS Shares issued under employee stock option plan Repurchase of common shares Shares issued under ESP Outstanding, December 31 3 3 28 22,531 – 266,941 (3,085,697) – 1 – 13 (69) – – 27,642,714 2,555,863 – 91,731 898,200,415 20,036 900,996,640 20,091 STATED CAPITAL 18,370 – 1,594 122 – 5 In Q1 2018, BCE repurchased and canceled 3,085,697 common shares for a total cost of $175 million through a NCIB. Of the total cost, $69 million represents stated capital and $3 million represents the reduction of the contributed surplus attributable to these common shares. The remaining $103 million was charged to the deficit. CONTRIBUTED SURPLUS Contributed surplus in 2018 and 2017 includes premiums in excess of par value upon the issuance of BCE common shares and share-based compensation expense net of settlements. Note 28 Share-based payments The following share-based payment amounts are included in the income statements as operating costs. FOR THE YEAR ENDED DECEMBER 31 ESP RSUs/PSUs Other (1) Total share-based payments (1) Includes DSP, DSUs and stock options. 2018 (29) (50) (10) (89) 2017 (28) (44) (9) (81) 159 Notes to consolidated financial statements BCE Inc. 2018 Annual Report DESCRIPTION OF THE PLANS ESP The ESP is designed to encourage employees of BCE and its participating subsidiaries to own shares of BCE. Each year, employees can choose to have a certain percentage of their eligible annual earnings withheld through regular payroll deductions for the purchase of BCE common shares. In some cases, the employer also will contribute a percentage of the employee’s eligible annual earnings to the plan, up to a specified maximum. Dividends are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividends paid on BCE common shares. The ESP allows employees to contribute up to 12% of their annual earnings with a maximum employer contribution of 2%. Employer contributions to the ESP and related dividends are subject to employees holding their shares for a two-year vesting period. The trustee of the ESP buys BCE common shares for the participants on the open market, by private purchase or from treasury. BCE determines the method the trustee uses to buy the shares. At December 31, 2018, 5,591,566 common shares were authorized for issuance from treasury under the ESP. The following table summarizes the status of unvested employer contributions at December 31, 2018 and 2017. NUMBER OF ESP SHARES Unvested contributions, January 1 Contributions (1) Dividends credited Vested Forfeited Unvested contributions, December 31 2018 2017 1,039,030 1,073,212 671,911 56,926 (501,089) (146,352) 610,657 49,299 (553,837) (140,301) 1,120,426 1,039,030 (1) The weighted average fair value of the shares contributed was $55 in 2018 and $60 in 2017. RSUs/PSUs RSUs/PSUs are granted to executives and other eligible employees. The value of an RSU/PSU at the grant date is equal to the value of one BCE common share. Dividends in the form of additional RSUs/PSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid on BCE common shares. Executives and other eligible employees are granted a specific number of RSUs/PSUs for a given performance period based on their position and level of contribution. RSUs/PSUs vest fully after three years of continuous employment from the date of grant and, in certain cases, if performance objectives are met, as determined by the board of directors. The following table summarizes outstanding RSUs/PSUs at December 31, 2018 and 2017. NUMBER OF RSUs/PSUs Outstanding, January 1 Granted (1) Dividends credited Settled Forfeited Outstanding, December 31 Vested, December 31 (2) 2018 2017 2,740,392 2,928,698 1,006,586 149,258 879,626 132,402 (1,027,321) (1,096,403) (56,218) (103,931) 2,812,697 2,740,392 880,903 985,382 (1) The weighted average fair value of the RSUs/PSUs granted was $57 in 2018 and $58 in 2017. (2) The RSUs/PSUs vested on December 31, 2018 were fully settled in February 2019 with BCE common shares and/or DSUs. DSP DSUs The value of a deferred share is equal to the value of one BCE common share. Dividends in the form of additional deferred shares are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid on BCE common shares. The liability related to the DSP is recorded in Trade payables and other liabilities in the statements of financial position and was $26 million and $30 million at December 31, 2018 and 2017, respectively, and $37 million at January 1, 2017. Eligible bonuses and RSUs/PSUs may be paid in the form of DSUs when executives or other eligible employees elect to or are required to participate in the plan. The value of a DSU at the issuance date is equal to the value of one BCE common share. For non-management directors, compensation is paid in DSUs until the minimum share ownership requirement is met; thereafter, at least 50% of their compensation is paid in DSUs. There are no vesting requirements relating to DSUs. Dividends in the form of additional DSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividends paid on BCE common shares. DSUs are settled when the holder leaves the company. 160 Notes to consolidated financial statements The following table summarizes the status of outstanding DSUs at December 31, 2018 and 2017. NUMBER OF DSUs Outstanding, January 1 Issued (1) Settlement of RSUs/PSUs Dividends credited Settled Outstanding, December 31 BCE Inc. 2018 Annual Report 2018 2017 4,309,528 4,131,229 94,580 112,675 240,879 69,742 101,066 203,442 (365,665) (195,951) 4,391,997 4,309,528 (1) The weighted average fair value of the DSUs issued was $55 in 2018 and $59 in 2017. STOCK OPTIONS Under BCE’s long-term incentive plans, BCE may grant options to executives to buy BCE common shares. The subscription price of a grant is based on the higher of: • the volume-weighted average of the trading price on the trading day immediately prior to the effective date of the grant At December 31, 2018, 10,737,659 common shares were authorized for issuance under these plans. Options vest fully after three years of continuous employment from the date of grant. All options become exercisable when they vest and can be exercised for a period of seven years from the date of grant. • the volume-weighted average of the trading price for the last five consecutive trading days ending on the trading day immediately prior to the effective date of the grant The following table summarizes BCE’s outstanding stock options at December 31, 2018 and 2017. Outstanding, January 1 Granted Exercised (1) Forfeited Outstanding, December 31 Exercisable, December 31 NOTE NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE ($) NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE ($) 2018 2017 27 10,490,249 3,888,693 (266,941) (39,669) 14,072,332 4,399,588 55 56 42 58 56 52 10,242,162 3,043,448 (2,555,863) (239,498) 10,490,249 2,013,983 52 59 45 58 55 45 (1) The weighted average share price for options exercised was $55 in 2018 and $60 in 2017. The following table provides additional information about BCE’s stock option plans at December 31, 2018. RANGE OF EXERCISE PRICES $40-$49 $50-$59 $60 & above STOCK OPTIONS OUTSTANDING WEIGHTED AVERAGE REMAINING LIFE (YEARS) WEIGHTED AVERAGE EXERCISE PRICE ($) 2 5 5 4 46 57 61 56 NUMBER 1,747,042 12,232,011 93,279 14,072,332 ASSUMPTIONS USED IN STOCK OPTION PRICING MODEL The fair value of options granted was determined using a variation of a binomial option pricing model that takes into account factors specific to the share incentive plans, such as the vesting period. The following table shows the principal assumptions used in the valuation. Weighted average fair value per option granted Weighted average share price Weighted average exercise price Dividend yield Expected volatility Risk-free interest rate Expected life (years) 2018 $2.13 $57 $56 5% 12% 2% 4 Expected volatilities are based on the historical volatility of BCE’s share price. The risk-free rate used is equal to the yield available on Government of Canada bonds at the date of grant with a term equal to the expected life of the options. 161 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 29 Additional cash flow information The following table provides a reconciliation of changes in liabilities arising from financing activities. (1) Included in Other current assets and Other non-current assets in the statements of financial position. January 1, 2018 Cash flows from (used in) financing activities Decrease in notes payable Issue of long-term debt Repayments of long-term debt Cash dividends paid on common and preferred shares Cash dividends paid by subsidiaries to non-controlling interests Other financing activities Total cash flows from (used in) financing activities excluding equity Non-cash changes arising from Finance lease additions Dividends declared on common and preferred shares Dividends declared by subsidiaries to non-controlling interests Effect of changes in foreign exchange rates Business acquisitions Other Total non-cash changes December 31, 2018 NOTE DEBT DUE WITHIN ONE YEAR AND LONG-TERM DEBT 23,393 33 (241) 2,996 (2,713) – – (42) – 414 – – 341 96 161 1,012 24,405 January 1, 2017 Cash flows from (used in) financing activities Increase in notes payable Issue of long-term debt Repayments of long-term debt Cash dividends paid on common and preferred shares Cash dividends paid by subsidiaries to non-controlling interests Other financing activities Total cash flows from (used in) financing activities excluding equity Non-cash changes arising from Finance lease additions Dividends declared on common and preferred shares Dividends declared by subsidiaries to non-controlling interests Effect of changes in foreign exchange rates Business acquisitions Other Total non-cash changes December 31, 2017 NOTE DEBT DUE WITHIN ONE YEAR AND LONG-TERM DEBT 21,459 452 3,011 (2,653) – – (44) 766 339 – – (198) 972 55 1,168 23,393 33 3 DERIVATIVE TO HEDGE FOREIGN CURRENCY ON DEBT (1) 54 118 – – – – – DIVIDENDS PAYABLE 678 – – – (2,828) (16) – 118 (2,844) – – – (341) – – (341) (169) DERIVATIVE TO HEDGE FOREIGN CURRENCY ON DEBT (1) (31) (119) – – – – 6 – 2,856 5 – – (4) 2,857 691 DIVIDENDS PAYABLE 617 – – – (2,639) (34) – (113) (2,673) – – – 198 – – 198 54 – 2,692 45 – – (3) 2,734 678 OTHER LIABILITIES – – – – – – (35) (35) – – – – – 35 35 – OTHER LIABILITIES – – – – – – (22) (22) – – – – – 22 22 – TOTAL 24,125 (123) 2,996 (2,713) (2,828) (16) (77) (2,761) 414 2,856 5 – 96 192 3,563 24,927 TOTAL 22,045 333 3,011 (2,653) (2,639) (34) (60) (2,042) 339 2,692 45 – 972 74 4,122 24,125 162 (1) Included in Other current assets and Trade payables and other liabilities in the statements of financial position. Notes to consolidated financial statements Note 30 Remaining performance obligations The following table includes revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as at December 31, 2018. BCE Inc. 2018 Annual Report Wireline Wireless Total 2019 1,261 1,737 2,998 2020 821 781 1,602 2021 512 93 605 2022 261 44 305 2023 81 33 114 THERE- AFTER 80 57 137 TOTAL 3,016 2,745 5,761 When estimating minimum transaction prices allocated to the remaining unfulfilled, or partially unfulfilled, performance obligations, BCE applied the practical expedient to not disclose information about remaining performance obligations that have an original expected duration of one year or less and for those contracts where we bill the same value as that which is transferred to the customer. Note 31 Commitments and contingencies COMMITMENTS The following table is a summary of our contractual obligations at December 31, 2018 that are due in each of the next five years and thereafter. Operating leases Commitments for property, plant and equipment and intangible assets Purchase obligations Total 2019 317 1,029 618 1,964 2020 286 784 525 2021 244 623 484 2022 187 484 434 1,595 1,351 1,105 2023 142 385 271 798 THERE- AFTER 436 698 519 1,653 TOTAL 1,612 4,003 2,851 8,466 BCE’s significant operating leases are for office premises, cellular tower sites, retail outlets and OOH advertising spaces with lease terms ranging from 1 to 40 years. These leases are non-cancellable. Rental expense relating to operating leases was $352 million in 2018 and $399 million in 2017. Our commitments for property, plant and equipment and intangible assets include program and feature film rights and investments to expand and update our networks to meet customer demand. Purchase obligations consist of contractual obligations under service and product contracts for operating expenditures and other purchase obligations. CONTINGENCIES In the ordinary course of business, we become involved in various claims and legal proceedings seeking monetary damages and other relief. In particular, because of the nature of our consumer-facing business, we are exposed to class actions pursuant to which substantial monetary damages may be claimed. Due to the inherent risks and uncertainties of the litigation process, we cannot predict the final outcome or timing of claims and legal proceedings. Subject to the foregoing, and based on information currently available and management’s assessment of the merits of the claims and legal proceedings pending at March 7, 2019, management believes that the ultimate resolution of these claims and legal proceedings is unlikely to have a material and negative effect on our financial statements. We believe that we have strong defences and we intend to vigorously defend our positions. 163 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 32 Related party transactions SUBSIDIARIES The following table shows BCE’s significant subsidiaries at December 31, 2018. BCE has other subsidiaries which have not been included in the table as each represents less than 10% individually and less than 20% in aggregate of total consolidated revenues. All of these significant subsidiaries are incorporated in Canada and provide services to each other in the normal course of operations. The value of these transactions is eliminated on consolidation. SUBSIDIARY Bell Canada Bell Mobility Bell Media OWNERSHIP PERCENTAGE 2018 100% 100% 100% 2017 100% 100% 100% TRANSACTIONS WITH JOINT ARRANGEMENTS AND ASSOCIATES During 2018 and 2017, BCE provided communication services and received programming content and other services in the normal course of business on an arm’s length basis to and from its joint arrangements and associates. Our joint arrangements and associates include MLSE, Glentel Inc. and Dome Productions Partnership. From time to time, BCE may be required to make capital contributions in its investments. In 2018, BCE recognized revenues and incurred expenses with our joint arrangements and associates of $17 million (2017 – $11 million) and $187 million (2017 – $177 million), respectively. BCE MASTER TRUST FUND Bimcor Inc. (Bimcor), a wholly-owned subsidiary of Bell Canada, is the administrator of the Master Trust Fund. Bimcor recognized management fees of $11 million from the Master Trust Fund for 2018 and $10 million for 2017. The details of BCE’s post-employment benefit plans are set out in Note 24, Post-employment benefit plans. COMPENSATION OF KEY MANAGEMENT PERSONNEL AND BOARD OF DIRECTORS The following table includes compensation of key management personnel and the board of directors for the years ended December 31, 2018 and 2017 included in our income statements. Key management personnel include the company’s Chief Executive Officer (CEO), Chief Operating Officer (COO), Group President and the executives who report directly to them. FOR THE YEAR ENDED DECEMBER 31 Wages, salaries, fees and related taxes and benefits Post-employment benefit plans and OPEBs cost Share-based compensation Key management personnel and board of directors compensation expense 2018 (27) (4) (23) (54) 2017 (23) (3) (23) (49) 164 Notes to consolidated financial statements Note 33 Significant partly-owned subsidiaries The following tables show summarized financial information for our subsidiary with significant non-controlling interest (NCI). BCE Inc. 2018 Annual Report SUMMARIZED STATEMENTS OF FINANCIAL POSITION Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity attributable to BCE shareholders NCI DECEMBER 31, 2018 DECEMBER 31, 2017 JANUARY 1, 2017 CTV SPECIALTY (1) (2) 337 993 1,330 142 201 343 685 302 328 1,013 1,341 153 184 337 700 304 293 1,013 1,306 130 195 325 687 294 (1) At December 31, 2018 and 2017 and January 1, 2017, the ownership interest held by NCI in CTV Specialty Television Inc. (CTV Specialty) was 29.9%. CTV Specialty was incorporated and operated in Canada as at such dates. (2) CTV Specialty’s net assets at December 31, 2018 and 2017 and January 1, 2017, include $10 million, $6 million and $2 million, respectively, directly attributable to NCI. SELECTED INCOME AND CASH FLOW INFORMATION FOR THE YEAR ENDED DECEMBER 31 Operating revenues Net earnings Net earnings attributable to NCI Total comprehensive income Total comprehensive income attributable to NCI Cash dividends paid to NCI (1) CTV Specialty’s net earnings and total comprehensive income include $4 million directly attributable to NCI for 2018 and $3 million for 2017. CTV SPECIALTY (1) 2018 857 131 42 149 47 16 2017 832 179 56 172 54 34 165 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Note 34 Adoption of IFRS 15 As a result of adopting IFRS 15, we have changed the comparative figures for the year ended December 31, 2017 and the opening statement of financial position as at January 1, 2017. The impacts of adopting IFRS 15 on our previously reported 2017 results are provided below. CONSOLIDATED INCOME STATEMENTS The table below shows the impacts of adopting IFRS 15 on our previously reported 2017 consolidated income statements. (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT SHARE AMOUNTS) Operating revenues Operating costs Severance, acquisition and other costs Depreciation Amortization Finance costs Interest expense Interest on post-employment benefit obligations Other expense Income taxes Net earnings Net earnings attributable to: Common shareholders Preferred shareholders Non-controlling interest Net earnings Net earnings per common share – basic Net earnings per common share – diluted Average number of common shares outstanding – basic (millions) 2017 AS PREVIOUSLY REPORTED 22,719 (13,541) (190) (3,037) (813) (955) (72) (102) (1,039) 2,970 2,786 128 56 2,970 3.12 3.11 894.3 YEAR ENDED DECEMBER 31, 2017 IFRS 15 IMPACTS 38 66 – 3 3 – – – (30) 80 80 – – 80 0.08 0.09 – 2017 UPON ADOPTION OF IFRS 15 22,757 (13,475) (190) (3,034) (810) (955) (72) (102) (1,069) 3,050 2,866 128 56 3,050 3.20 3.20 894.3 166 Notes to consolidated financial statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION The table below shows the impacts of adopting IFRS 15 on our previously reported 2017 consolidated statement of financial position. BCE Inc. 2018 Annual Report FOR THE YEAR ENDED DECEMBER 31 Cash Cash equivalents Trade and other receivables Inventory Contract assets Contract costs Prepaid expenses Other current assets Total current assets Contract assets Contract costs Property, plant and equipment Intangible assets Deferred tax assets Investments in associates and joint ventures Other non-current assets Goodwill Total non-current assets Total assets Trade payables and other liabilities Contract liabilities Interest payable Dividends payable Current tax liabilities Debt due within one year Total current liabilities Contract liabilities Long-term debt Deferred tax liabilities Post-employment benefit obligations Other non-current liabilities Total non-current liabilities Total liabilities Preferred shares Common shares Contributed surplus Accumulated other comprehensive loss Deficit Total equity attributable to BCE shareholders Non-controlling interest Total equity Total liabilities and equity 2017 AS PREVIOUSLY REPORTED IFRS 15 IMPACTS RECLASSIFICATIONS (1) 2017 UPON ADOPTION OF IFRS 15 442 183 3,135 380 – – 375 124 4,639 – – 24,033 13,305 144 814 900 10,428 49,624 54,263 4,623 – 168 678 140 5,178 10,787 – 18,215 2,447 2,108 1,223 23,993 34,780 4,004 20,091 1,162 (17) (6,080) 19,160 323 19,483 54,263 – – 9 – 923 206 – – 1,138 400 162 (4) – – – – – 558 1,696 – 97 – – – – 97 34 – 423 – – 457 554 – – – – 1,142 1,142 – 1,142 1,696 – – (15) – (91) 144 (158) (2) (122) 31 124 – (47) – – (143) – (35) (157) (748) 596 – – – – (152) 167 – – – (172) (5) (157) – – – – – – – – (157) 442 183 3,129 380 832 350 217 122 5,655 431 286 24,029 13,258 144 814 757 10,428 50,147 55,802 3,875 693 168 678 140 5,178 10,732 201 18,215 2,870 2,108 1,051 24,445 35,177 4,004 20,091 1,162 (17) (4,938) 20,302 323 20,625 55,802 (1) We have reclassified some of the amounts for previous periods to conform with IFRS 15 presentation requirements. 167 Notes to consolidated financial statements BCE Inc. 2018 Annual Report The table below shows the impacts of adopting IFRS 15 on our January 1, 2017 consolidated statement of financial position. AS AT Cash Cash equivalents Trade and other receivables Inventory Contract assets Contract costs Prepaid expenses Other current assets Total current assets Contract assets Contract costs Property, plant and equipment Intangible assets Deferred tax assets Investments in associates and joint ventures Other non-current assets Goodwill Total non-current assets Total assets Trade payables and other liabilities Contract liabilities Interest payable Dividends payable Current tax liabilities Debt due within one year Total current liabilities Contract liabilities Long-term debt Deferred tax liabilities Post-employment benefit obligations Other non-current liabilities Total non-current liabilities Total liabilities Preferred shares Common shares Contributed surplus Accumulated other comprehensive income Deficit Total equity attributable to BCE shareholders Non-controlling interest Total equity Total liabilities and equity JANUARY 1, 2017 IFRS 15 IMPACTS RECLASSIFICATIONS (1) JANUARY 1, 2017 UPON ADOPTION OF IFRS 15 603 250 2,979 403 – – 420 200 4,855 – – 22,346 11,998 89 852 1,010 8,958 45,253 50,108 4,326 – 156 617 122 4,887 10,108 – 16,572 2,192 2,105 1,277 22,146 32,254 4,004 18,370 1,160 46 (6,040) 17,540 314 17,854 50,108 – – 11 – 851 195 – – 1,057 357 151 (5) – – – – – 503 1,560 – 71 – – – – 71 34 – 393 – – 427 498 – – – – 1,062 1,062 – 1,062 1,560 – – (2) – (113) 148 (189) (2) (158) 26 124 – – – – (113) – 37 (121) (655) 574 – – – – (81) 169 – – – (209) (40) (121) – – – – – – – – (121) 603 250 2,988 403 738 343 231 198 5,754 383 275 22,341 11,998 89 852 897 8,958 45,793 51,547 3,671 645 156 617 122 4,887 10,098 203 16,572 2,585 2,105 1,068 22,533 32,631 4,004 18,370 1,160 46 (4,978) 18,602 314 18,916 51,547 (1) We have reclassified some of the amounts for previous periods to conform with IFRS 15 presentation requirements. 168 Notes to consolidated financial statements The table below provides a reconciliation of our deficit at January 1, 2017 and December 31, 2017 from amounts previously reported in 2017 to the amounts reported under IFRS 15. All amounts are after tax. BCE Inc. 2018 Annual Report Total deficit as previously reported Timing of revenue recognition Cost to obtain a contract Total deficit upon adoption of IFRS 15 AT DECEMBER 31, 2017 AT JANUARY 1, 2017 (6,080) (6,040) 873 269 809 253 (4,938) (4,978) CONSOLIDATED STATEMENT OF CASH FLOWS The table below shows the impacts of adopting IFRS 15 on select line items of our previously reported 2017 statement of cash flows. Cash flows from operating activities Net earnings Depreciation and amortization Income taxes Net change in operating assets and liabilities Cash flows from operating activities YEAR ENDED DECEMBER 31, 2017 2017 AS PREVIOUSLY REPORTED IFRS 15 IMPACTS 2017 UPON ADOPTION OF IFRS 15 2,970 3,850 1,039 480 7,358 80 (6) 30 (104) – 3,050 3,844 1,069 376 7,358 REVENUES BY SERVICES AND PRODUCTS The following table shows the impacts of adopting IFRS 15 on our revenues disaggregated by type. FOR THE YEAR ENDED DECEMBER 31 Services (1) Wireless Data Voice Media Other services Total services Products (2) Wireless Data Equipment and other Total products Total operating revenues 2017 AS PREVIOUSLY REPORTED 7,308 7,146 3,800 2,676 213 IFRS 15 IMPACTS (1,260) (5) 3 – (2) 21,143 (1,264) 530 519 527 1,576 22,719 1,303 1 (2) 1,302 38 OTHER (3) 2017 UPON ADOPTION OF IFRS 15 – 51 165 – – 216 – (110) (106) (216) – 6,048 7,192 3,968 2,676 211 20,095 1,833 410 419 2,662 22,757 (1) Our service revenues are generally recognized over time. (2) Our product revenues are generally recognized at a point in time. (3) We have reclassified some of the amounts for previous periods to make them consistent with the presentation for the current period. 169 Notes to consolidated financial statements BCE Inc. 2018 Annual Report Board of directors AS OF MARCH 7, 2019 Gordon M. Nixon ONTARIO, CANADA Corporate Director Chair of the Board, BCE Inc. and Bell Canada Director since November 2014 Barry K. Allen FLORIDA, UNITED STATES Operating Partner, Providence Equity Partners LLC Director since May 2009 Sophie Brochu QUÉBEC, CANADA President and Chief Executive Officer, Énergir Inc. Director since May 2010 Robert E. Brown QUÉBEC, CANADA Corporate Director Director since May 2009 George A. Cope ONTARIO, CANADA President and Chief Executive Officer, BCE Inc. and Bell Canada Director since July 2008 David F. Denison, FCPA, FCA ONTARIO, CANADA Corporate Director Director since October 2012 COMMITTEES OF THE BOARD MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE R.E. Brown (Chair), B.K. Allen, S. Brochu, I. Greenberg, C. Rovinescu The MRCC assists the board in the oversight of: • the compensation, nomination, evaluation and succession of officers and other management personnel • BCE’s workplace policies and practices (including health and safety policies, policies ensuring a respectful workplace free from harassment and policies ensuring a diverse and inclusive workplace). AUDIT COMMITTEE P.R. Weiss (Chair), D.F. Denison, R.P. Dexter, I. Greenberg, K. Lee, M.F. Leroux, R.C. Simmonds The audit committee assists the board in the oversight of: • the integrity of BCE Inc.’s financial statements and related information • BCE Inc.’s compliance with applicable legal and regulatory requirements • the independence, qualifications and appointment of the external auditors • the performance of both the external and internal auditors • management’s responsibility for assessing and reporting on the effectiveness of internal controls • BCE Inc.’s enterprise risk management processes. Robert P. Dexter NOVA SCOTIA, CANADA Chair and Chief Executive Officer, Maritime Travel Inc. Director since November 2014 Ian Greenberg QUÉBEC, CANADA Corporate Director Director since July 2013 Katherine Lee ONTARIO, CANADA Corporate Director Director since August 2015 Monique F. Leroux, C.M., O.Q., FCPA, FCA QUÉBEC, CANADA Corporate Director Director since April 2016 Calin Rovinescu QUÉBEC, CANADA President and Chief Executive Officer, Air Canada Director since April 2016 Karen Sheriff TORONTO, ONTARIO Corporate Director Director since April 2017 Robert C. Simmonds ONTARIO, CANADA Chair, Lenbrook Corporation Director since May 2011 Paul R. Weiss, FCPA, FCA ONTARIO, CANADA Corporate Director Director since May 2009 PENSION FUND COMMITTEE D.F. Denison (Chair), R.P. Dexter, K. Lee, C. Rovinescu, K. Sheriff, P.R. Weiss The PFC assists the board in the oversight of: • the administration, funding and investment of BCE Inc.’s pension plans and funds • the unitized pooled funds sponsored by BCE Inc. for the collective investment of the funds and the participant subsidiaries’ pension funds. CORPORATE GOVERNANCE COMMITTEE B.K. Allen (Chair), S. Brochu, R.E. Brown, M.F. Leroux, R.C. Simmonds The CGC assists the board in: • developing and implementing BCE Inc.’s corporate governance policies and guidelines • identifying individuals qualified to become members of the board • determining the composition of the board and its committees • determining the directors’ remuneration for board and committee service • developing and overseeing a process to assess the Chair of the board, the board, committees of the board, Chairs of committees and individual directors • reviewing and recommending for board approval BCE Inc.’s policies concerning business conduct, ethics, public disclosure of material information and other matters. 170 Board of directors / Executives Executives AS OF MARCH 7, 2019 George A. Cope President and Chief Executive Officer, BCE Inc. and Bell Canada Mirko Bibic Chief Operating Officer, BCE Inc. and Bell Canada BCE Inc. 2018 Annual Report Glen LeBlanc Executive Vice-President and Chief Financial Officer, BCE Inc. and Bell Canada Bernard le Duc Executive Vice-President, Corporate Services, BCE Inc. and Bell Canada Michael Cole Executive Vice-President and Chief Information Officer, Bell Canada Stephen Howe Executive Vice-President and Chief Technology Officer, Bell Canada Rizwan Jamal President, Bell Residential & Small Business, Bell Canada Blaik Kirby President, Bell Mobility, Bell Canada Randy Lennox President, Bell Media, Bell Canada Thomas Little President, Bell Business Markets, Bell Canada Wade Oosterman Vice Chair & Group President, BCE Inc. and Bell Canada Martine Turcotte Vice Chair, Québec, BCE Inc. and Bell Canada John Watson Executive Vice-President, Customer Experience, Bell Canada 171 Board of directors / Executives BCE Inc. 2018 Annual Report Investor information SHARE FACTS TAX ASPECTS Shareholders are required to pay tax on dividends received as well as on capital gains they realize, if any, when they sell their shares or are deemed to have sold them. THE SALE OR DISPOSITION OF YOUR SHARES COULD TRIGGER A CAPITAL GAIN IMPORTANT: If you received Nortel Networks common shares in May 2000 and/or Bell Aliant Regional Communications Income Fund units in July 2006, you should contact the Investor Relations group to learn more about the tax implications of these plans of arrangement and the impact on the calculation of your cost, or visit BCE.ca. DIVIDENDS Since January 1, 2006 and unless stated otherwise, dividends paid by BCE Inc. to Canadian residents are eligible dividends as per the Canadian Income Tax Act. Since March 24, 2006 and unless stated otherwise, dividends paid by BCE Inc. to Québec residents also qualify as eligible dividends. NON-RESIDENTS OF CANADA Dividends paid or credited to non-residents of Canada are subject to a 25% withholding tax unless reduced by a tax treaty. Under current tax treaties, U.S. and U.K. residents are subject to a 15% withholding tax. Beginning in 2012, the Canada Revenue Agency introduced new rules requiring residents of any country with which Canada has a tax treaty to certify that they reside in that country and are eligible to have Canadian non-resident tax withheld on the payment of their dividends at the tax treaty rate. Registered shareholders should have completed the Declaration of Eligibility for Benefits under a Tax Treaty for a Non-Resident Taxpayer and returned it to the transfer agent. U.S. RESIDENTS In addition to the Declaration of Eligibility for Benefits under a Tax Treaty for a Non-Resident Taxpayer mentioned above, we are required to solicit taxpayer identification numbers and Internal Revenue Service (IRS) Form W-9 certifications of residency from certain U.S. residents. If these have not been received, we may be required to deduct the IRS’s specified backup withholding tax. For more information, please contact the transfer agent or the Investor Relations group. SYMBOL BCE LISTINGS TSX and NYSE stock exchanges You will find a summary of the differences between our governance practices and the NYSE corporate governance rules in the Governance section of our website at BCE.ca. COMMON SHARES OUTSTANDING December 31, 2018 – 898,200,415 QUARTERLY DIVIDEND* $0.7925 per common share 2019 DIVIDEND SCHEDULE* Record date March 15, 2019 June 14, 2019 September 16, 2019 December 16, 2019 Payment date** April 15, 2019 July 15, 2019 October 15, 2019 January 15, 2020 * Subject to dividends being declared by the board of directors ** When a dividend payment date falls on a weekend, the payment is made on the following business day 2019 QUARTERLY EARNINGS RELEASE DATES First quarter Second quarter Third quarter Fourth quarter May 2, 2019 August 1, 2019 October 31, 2019 February 6, 2020 Quarterly and annual reports as well as other corporate documents can be found on our website. Copies can be requested from the Investor Relations group. 172 Investor information SHAREHOLDER SERVICES CONTACT INFORMATION DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN TRANSFER AGENT AND REGISTRAR A convenient method for eligible shareholders to reinvest their dividends and make optional cash contributions to purchase additional common shares without brokerage costs. DIVIDEND DIRECT DEPOSIT SERVICE Avoid postal delays and trips to the bank by subscribing to the dividend direct deposit service. DIRECT REGISTRATION (DRS) HOLDING YOUR SHARES ELECTRONICALLY IN LIEU OF SHARE CERTIFICATES Holdings are represented by a statement issued when establishing or subsequently modifying your DRS balance. This option removes the risks of holding share certificates, including their safekeeping, and, most importantly, eases the replacement process. Note that there is a cost to replace lost or stolen certificates as well as certificates mailed and never received by the shareholder (if claimed two years after mailing). Generally, this cost is a percentage of the value of the shares represented. E-DELIVERY SERVICE Enrol in the e-delivery service to receive the proxy material, the annual report and/or quarterly reports by e-mail. By doing so, you will receive your documents faster and in an environmentally friendly manner while helping your company reduce its costs. DUPLICATE MAILINGS Eliminate duplicate mailings by consolidating your accounts. MANAGE YOUR SHAREHOLDER ACCOUNT Enrol in Investor Central at www.astfinancial.com and benefit from a wide variety of self-service tools to help track and manage your shares. For more details on any of these services, registered shareholders (shares are registered under your name) must contact the transfer agent. Non-registered shareholders must contact their brokers. For information on shareholder services or any other inquiries regarding your account (including stock transfer, address change, lost certificates and tax forms), contact: AST Trust Company (Canada) 1 Toronto Street, Suite 1200 Toronto, Ontario M5C 2V6 e-mail tel fax bce@astfinancial.com 416 682-3861 or 1 800 561-0934 (toll free in Canada and the U.S.) 514 985-8843 or 1 888 249-6189 (toll free in Canada and the U.S.) website www.astfinancial.com INVESTOR RELATIONS For financial inquiries: Building A, 8th Floor 1 Carrefour Alexander-Graham-Bell Verdun, Québec H3E 3B3 e-mail tel fax investor.relations@bce.ca 1 800 339-6353 514 786-3970 or visit the Investors section of our website at BCE.ca Trade-marks: The following are trade-marks referred to and used as such in this annual report that BCE Inc., its subsidiaries, joint arrangements, associates or other entities in which we hold an equity interest own or use under licence. BCE is a trade-mark of BCE Inc.; AAA Security, Aliant, Alt TV, Bell, Bell Canada, Bell Centre, Bell Connected Car, Bell Media, Bell Mobility, Bell MTS, Bell Smart Home, Bell TV, Fibe, Let’s Talk, MTS, Q9, Q9 Networks, Roam Better, Today Just Got Better, TV Everywhere and Whole Home Wi-Fi are trade-marks of Bell Canada; Astral, BNN, Canal D, Canal Vie, Comedy, Crave, CTV, CTV Movies, CTV News Channel, CTV Super Hub, CTV Throwback, CTV Two, eTalk, SnackableTV, Space, Super Écran, The Launch, The Movie Network, The Social, TMN and TMN Encore are trade-marks of Bell Media Inc.; Lucky Mobile is a trade-mark of Bell Mobility Inc.; AlarmForce is a trade-mark of AlarmForce Industries Inc.; Axia is a trade-mark of Axia NetMedia Corporation; Bloomberg is a trade-mark of Bloomberg L.P.; Bravo is a trade-mark of Bravo Media LLC; Comedy Central is a trade-mark of Comedy Partners; Discovery is a trade-mark of Discovery Communications, LLC; E Z Rock is a trade-mark of Bell Media Radio G.P.; ExpressVu is a trade-mark of Bell ExpressVu Limited Partnership; Glentel, Tbooth Wireless, WIRELESSWAVE and WIRELESS etc. are trade-marks of Glentel Inc.; HBO Canada is a trade-mark of Home Box Office Inc.; iHeartRadio is a trade-mark of iHM Identity, Inc.; MLSE, Toronto Maple Leafs and Toronto Raptors are trade-marks of Maple Leaf Sports & Entertainment Partnership; Montreal Canadiens is a trade-mark of Club de Hockey Canadien, Inc.; NorthernTel is a trade-mark of Nortel Networks Limited; Northwestel and N-NorthwesTel Design are trade-marks of Northwestel Inc.; RDS, RDS Direct, TSN and TSN Direct are trade-marks of The Sports Network Inc.; Showtime is a trade-mark of Showtime Networks Inc.; Starz is a trade-mark of Starz Entertainment, LLC; Télébec is a trade-mark of Télébec, Limited Partnership; The Source is a trade-mark of The Source (Bell) Electronics Inc.; Toronto Argonauts is a trade-mark of Argonauts Holdings Limited Partnership; Toronto FC is a trade-mark of MLS Canada LP; Virgin Mobile, Virgin Mobile Canada and Virgin Radio are trade-marks of Virgin Enterprises Limited. We believe that our trade-marks are very important to our success and take appropriate measures to protect, renew and defend them. Any other trade-marks used in this annual report are the property of their respective owners. © BCE Inc., 2019. All rights reserved. bce.ca