Building Better Experiences B C E I n c . 2 0 1 9 A n n u a l R e p o r t BCE Inc. 2019 Annual Report OUR GOAL AND STRATEGY Our goal is to advance how Canadians connect with each other and the world In a new world of communication possibilities, Bell is committed to bringing the best digital connections and next-generation services to Canadians, with customer experience at the centre of everything we do. Underscoring our strengths and opportunities, Bell’s 6 Strategic Imperatives position us to deliver continued success in a fast-changing communications marketplace. 1. Build the best networks A critical competitive advantage as we continue to enhance Bell’s network leadership with the expansion of our fibre and wireless networks, including 5G. 2. Drive growth with innovative services Leveraging our leading networks to provide truly differentiated communications services to Canadians and drive revenue growth. 3. Deliver the most compelling content Taking a unified approach across our media and distribution assets to deliver the content Canadians want the most. 4. Champion customer experience Making it easier for customers to do business with Bell at every level, from sales to installation to ongoing support. 5. Operate with agility and cost efficiency Underscoring a focus on operational excellence and cost discipline throughout every part of our business. 6. Engage and invest in our people Strengthening our leading workplace culture, recognizing that Bell’s success requires a dynamic and engaged team. 2 BCE Inc. 2019 Annual Report Our 2019 results were in line with our financial guidance targets, and our 2020 guidance builds on this strong competitive momentum and positive financial and operational outlook for all our operating segments. Actual 2.1% 6.0% 16.6% Target 1%–3% 5%–7% ~16.5% $3.50 $3.48–$3.58 7.0% 7%–12% 2019 financial performance Revenue growth Adjusted EBITDA (1) growth Capital intensity Adjusted EPS (1) Free cash flow (1) growth Driving growth in shareholder value +17.5 % Total shareholder return in 2019 (2) +324% Total shareholder return 2009–2019 (2) +5 % Increase in dividend per common share for 2020 +128% Increase in dividend per common share 2009–2020 (1) Adjusted EBITDA, adjusted EPS, free cash flow and dividend payout ratio 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. For a full description of these measures, see section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) on pp. 105 to 108 of the MD&A. (2) 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. BCE Inc. 2019 Annual Report 3 FINANCIAL AND OPERATIONAL HIGHLIGHTS Network and service innovation is driving customer growth With the highest-performance networks and unmatched new services and content, Bell is building a better communications experience at home, in the workplace and on the go. And customers are responding: In 2019, Bell welcomed the industry’s highest number of new subscribers across the growth services of retail Internet, IPTV and wireless and diligently managed the decline in traditional home phone and other legacy services. The speed and quality of Canada’s Best National Mobile Network drove unparalleled gains in both postpaid and prepaid wireless, Internet growth accelerated with the fastest consumer home Internet service available, while Fibe TV and Alt TV are winning customers over with leading product and programing innovations. BCE retail subscribers (millions) 2019 2018 Change Wireless 9.96 9.61 +3.6% High-speed Internet (1) 3.56 3.41 +4.3% Television (1) 2.77 2.77 +0.2% Total growth services subscribers: retail Internet, IPTV and wireless 16.29 15.79 +3.2% Local residential telephone services (1) (2) 2.70 2.96 (8.9%) Total (2) 18.98 18.75 +1.3% 22.37M Total Bell consumer, business and wholesale customer connections New, fast Internet now in your area. (1) Excludes wholesale subscribers. (2) Excludes business telephone services. 4 BCE Inc. 2019 Annual Report FINANCIAL AND OPERATIONAL HIGHLIGHTS Marketplace momentum delivers solid financial performance With strong momentum in a highly competitive market environment, Bell’s wireless, wireline and media operating segments all contributed to increases in revenue and adjusted EBITDA, supporting growth in the free cash flow that fueled our capital investment program and dividend growth for shareholders. Operating revenues ($ millions) 2019 2018 +2.1% $23,964 $23,468 Operating revenues by segment (%) 2019 11.7% 2018 11.4% 50.4% 51.2% 37.9% 37.4% Bell Wireline Bell Wireless Bell Media Adjusted EBITDA ($ millions) Net earnings ($ millions) Adjusted net earnings (1) ($ millions) 2019 2018 +6.0% 2019 $10,106 $9,535 2018 +9.4% 2019 $3,253 2018 $2,973 Cash flows from operating activities ($ millions) Free cash flow ($ millions) Capital expenditures ($ millions) 2019 2018 +7.8% 2019 $7,958 2018 $7,384 +7.0% 2019 $3,818 2018 $3,567 +0.1% $3,153 $3,151 +0.4% $3,988 $3,971 (1) Adjusted net earnings 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. For a full description of this measure, see section 10.2, Non-GAAP financial measures and key performance indicators (KPIs) on p. 105 of the MD&A. For more information, please refer to section 7 on page 83 – Selected annual and quarterly information of the MD&A. BCE Inc. 2019 Annual Report 5 MESSAGE FROM THE CHAIR OF THE BOARD BCE ready for the new era of communications opportunity As Canada’s enduring communications leader, BCE delivers the networks, products and support that provide exceptional value to consumers, businesses and governments in every region, and the execution that delivers strong results and sustainable value to our shareholders. As the communications industry enters an exciting new phase of innovation and opportunity, the Bell group of companies will be ready to deliver the benefits to all stakeholders. BCE is renowned for its strong management team, and we are pleased to welcome seasoned Bell executive Mirko Bibic as our new President and Chief Executive Officer. The 14th chief executive in the 140-year history of our great Canadian company, Mirko brings to the role the vision, skills and experience necessary to build on Bell’s proven strengths and embrace the new opportunities of the future. Working closely with his predecessor George Cope, Mirko has been at the centre of Bell’s resurgence over the last decade as a formidable competitor in the marketplace and the industry’s innovation and investment leader. As our Chief Operating Officer, Mirko led the Bell business units in delivering outstanding growth in new customers and driving a strong financial performance for BCE in 2019. A solid financial performer Each of BCE’s wireless, wireline and media segments contributed to growth in revenue, adjusted EBITDA and free cash flow in 2019, and this steady financial and operating momentum is reflected in our growth targets for 2020. We have a positive business outlook and the foundation of an investment-grade balance sheet, substantial liquidity position and fully funded pension plan. Together with government and regulatory policies that support investment, BCE is well positioned to continue our ambitious network capital investment program and deliver consistent dividend growth to our shareholders. Our latest 5% increase in the BCE common share dividend to $3.33 is effective with the Q1 2020 payment on April 15, 2020. This is the 12th consecutive year in which we have increased the dividend by 5% or more while maintaining our payout ratio within the target policy range of 65% to 75% of free cash flow. Our total shareholder return over that timeframe has been 324%. 6 BCE Inc. 2019 Annual Report At the same time, Bell continued our industry-best investments in network deployment, service enhancement and communications research and development. The rollout of our world-leading all-fibre network across 7 provinces continues apace alongside our unprecedented deployment of broadband Internet service to rural Canada. And we continued to enhance Bell’s 4G wireless network as we laid the groundwork for the mobile 5G revolution. Further strengthening our financial position, Bell Canada renewed its public debt program in 2019, enabling the company to offer up to $5 billion of debt securities. Bell Canada successfully accessed the capital markets to raise a total of approximately $1.95 billion in gross proceeds from the public issuance of debt securities, allowing us to maintain our after-tax cost of outstanding publicly issued debt securities at a historically low 3.1%. Our strategy to reinforce the solvency position of our Defined Benefit (DB) pension plans through $3.6 billion in voluntary deficit funding over the last 10 years has resulted in all BCE DB plans now being fully funded. This strong position eliminated the need for any supplementary special pension deficit funding in 2019 while positively impacting our free cash flow. A leading Canadian corporation BCE is committed to the corporate responsibility leadership that has been the hallmark of the Bell brand since 1880. We abide by the highest levels of corporate governance, shareholder accountability and ethical business conduct, and we take our responsibility to the community seriously. The Bell Let’s Talk mental health initiative has brought meaningful change to the lives of countless Canadians. As the program enters its second decade, we have renewed our support for the mental health cause with an enhanced total commitment of at least $150 million in funding for new research, workplace initiatives and access to care. Surpassing our original $100 million funding target on Bell Let’s Talk Day 2019, Bell has already committed more than $108 million in funding to Canadian mental health programs. Bell was again named one of Canada’s Top 100 Employers in 2019, and also honoured as a leading green employer for our consistent focus on environmental sustainability; one of Canada’s best workplaces for young people, reflecting our award-winning programs for new graduates; and an outstanding diversity employer. We are committed to attracting top leadership talent, and we enable a pay-for-performance culture at Bell that aligns with the interests of our shareholders. We seek to reflect the communities we serve and focus on promoting diversity and inclusion at the board and operational levels. For example, BCE is a member of the 30% Club and a signatory to the Catalyst Accord 2022, which aims to increase the percentage of women on Canadian corporate boards to at least 30% or greater by 2022. Your director nominees this year include 4 women, representing 29% of non-executive director nominees. As your chair, I would like to offer my gratitude to the members of the BCE board for their expert guidance and dedication to serving you. In anticipation of the retirements of directors Barry Allen, Robert Brown and Paul Weiss at the 2021 annual general shareholder meeting, we look forward to welcoming seasoned technology and telecom executive Thomas Richards to the board. Our thanks to you BCE is a company with momentum well prepared to take full advantage of the next generation of communications technologies and applications. It is an honour to serve as your chair, and on behalf of the board and the entire Bell team, I thank you for your support and confidence in us. We look forward to continuing to deliver for you and all BCE stakeholders as we enter this new era of communications opportunity. Workplace mental health has become core to Bell’s employment practices. With significant reductions in short term disability and relapse rates, taking care of mental health also offers a clear and significant return on investment. Gordon M. Nixon Chair of the Board BCE Inc. BCE Inc. 2019 Annual Report 7 MESSAGE FROM THE PRESIDENT AND CEO Advancing how Canadians connect with each other and the world For 140 years, consumers, businesses and communities have relied on Bell to deliver the best networks and latest communications services, unlocking new social, economic and innovation opportunities for Canadians everywhere. As we move forward focused on our goal to advance how Canadians connect with each other and the world, I am pleased to report that Bell remained the nation’s top communications choice in 2019. It is a true privilege to be appointed President and Chief Executive Officer of this great Canadian company, and an honour to assume the role following the highly successful tenure of George Cope. Having been fortunate to be part of BCE’s remarkable transformation in recent years, I am excited to lead the team forward in a time of new innovation and growth opportunities. This next era of communications is defined by breakthrough network technologies, like mobile 5G and ubiquitous all-fibre connections, and the unlimited service potential of emerging opportunities such as artificial intelligence, virtual reality and connected cars, homes and cities. Offering limitless new connectivity options for consumers and business, these are the technologies that will anchor our country’s economic growth opportunities for the future. With world-leading network infrastructure, the top brands in communications and the best team in the business, Bell is well positioned to keep Canada at the forefront of the dynamic communications sector. Building on our momentum, Bell’s new Strategic Imperatives highlight our team, assets and growth opportunities – and how we’ll deliver by making it easier to do business with Bell: 6 Strategic Imperatives 1. Build the best networks 2. Drive growth with innovative services 3. Deliver the most compelling content 4. Champion customer experience 5. Operate with agility and cost efficiency 6. Engage and invest in our people 8 BCE Inc. 2019 Annual Report Building Canada’s best networks Bell has been Canada’s primary network builder since 1880 and we continued to lead the way in 2019 in urban and rural regions alike. Our historic rollout of all-fibre connections across our wireline footprint reached over 5.1 million homes and businesses, 53% of target, by the end of 2019. Wireless Home Internet covered 250,000 locations in Ontario and Québec, while Bell and subsidiary Northwestel launched fixed wireless Internet and broadband wireless service in all 25 communities in the territory of Nunavut. Canada’s wireless industry is the envy of the world for its coverage, speed and reliability which, combined with declining service prices, is delivering unprecedented value to Canadian consumers. Bell has been at the centre of this national accomplishment, reaching more than 99% of the national population with mobile 4G LTE and over 94% with the latest LTE Advanced service. Bell is eager to embrace the potential of mobile 5G to accelerate the fastest connections across urban and rural locations alike. With the conditions in place to encourage the investment required to take Canadian wireless to the next level, Bell has the expertise, the fibre-connected infrastructure and the world-class partners to make it happen. Service and content innovation Bell’s best networks enable unmatched innovation in services, products and content across our business segments, which in turn drove growth in customer additions and key financial metrics in 2019. In the home, Bell enhanced Wi-Fi speeds and coverage, delivered exclusive new Fibe TV, Alt TV and Satellite TV viewing features and introduced new security and monitoring solutions from Bell Smart Home. Bell Media, with its unmatched Canadian content creation, strategic partnerships with global media players and innovative platforms like Crave, continued to set the pace in Canadian multimedia. Offering the most in-demand smartphones, tablets and industrial mobile devices across the industry’s largest national distribution network, Bell Mobility served every demand in the wireless marketplace, from the largest enterprises to the budget prepaid sector with our very popular Lucky Mobile service. Our expanding range of enterprise IoT solutions from Bell Business Markets (BBM) supported new applications like asset tracking, fleet management and pilot Smart City programs. BBM also remains on the leading edge of unified communications with Bell Total Connect with Cisco Webex and on-demand network solutions with cloud-based Bell Virtual Network Services. Customers are responding to the outstanding quality of Bell’s networks and services, with leading subscriber growth in the highest-demand communications services. Led by continued strong wireless growth and market share leadership, our total net customer additions in retail high-speed Internet, IPTV (including Fibe TV and Alt TV) and wireless were approximately 743,000 in 2019, the highest in the industry and a 5% increase over the year before. Bell Media’s Crave also grew year over year to reach 2.6 million subscribers. Empowering our team to deliver for you Championing the end-to-end customer experience is a strategic focus and rallying cry for our team as we focus on making it easier to do business with Bell. We’ve made clear and consistent progress in improving customer experience as evidenced by increased customer satisfaction and leading performance improvement among major carriers with the federal commission for consumer telecom and television complaints. Bell is dedicated to taking the customer experience further, to deliver for both our customers and shareholders. Our champions are all of us – the more than 52,000 team members at work in every province and territory of the nation. A highly motivated and well-equipped team is crucial to executing with agility and efficiency in our fast-changing sector, and to standing out in customer experience in a highly competitive marketplace. We’re equipping our front-line call centre, field and channel teams with new technologies, continually enhancing our leading mobile and online self-serve options, and investing directly in the team with flexible work programs, enhanced benefits – including unparalleled mental health support inspired by our Bell Let’s Talk commitment – and other leading workplace approaches. Embracing the opportunities ahead Our 2019 results underscore Bell’s momentum, and I am proud to be leading a team that is so successfully building on our company’s long legacy of investment, innovation and service for Canadians. We thank you, our shareholders, for your ongoing support as we move forward to deliver on our goal: Advancing how Canadians connect with each other and the world. Mirko Bibic President and Chief Executive Officer BCE Inc. and Bell Canada BCE Inc. 2019 Annual Report 9 STRATEGIC IMPERATIVE 1 Build the best networks Bell also continued to extend broadband communications to smaller towns and rural areas with our innovative 5G-capable Wireless Home Internet service, bringing high-speed Internet access to more than 250,000 locations in underserved smaller communities in Ontario and Québec by the end of 2019. Significant deployments included rural areas of Eastern Ontario, Niagara wine country and the Muskoka and Kawartha Lakes regions, as well as in the Eastern Townships and the Montérégie regions in Québec. The service is expected to ultimately reach 1 million rural households throughout Atlantic Canada, Québec, Ontario and Manitoba. We’re also installing LTE wireless equipment on 14 new towers in Québec’s Saguenay–Lac-Saint-Jean region, making high-speed Internet available for the first time to residents and businesses in the region. With the completion of the project in 2020, 99% of the Saguenay–Lac-Saint-Jean population will have access to broadband services on Bell’s LTE network. By investing more in new network infrastructure and communications R&D than any other Canadian company, Bell continues to deliver unmatched speeds and the most innovative products and services for our consumer, business and government customers across the country. With the most extensive fibre and mobile broadband infrastructure in Canada, Bell is the company best positioned to take advantage of converged wireline and wireless opportunities and provide Canadians with access to the fast and reliable connections they need in a new era of 5G, Internet of Things (IoT) and Smart Cities. We maintained our position as Canada’s broadband provider of choice with networks built for the future, supported by industry-leading capital expenditures of approximately $4 billion in 2019, to continue our historic fibre optic network build and expand our super fast 4G LTE network, which now covers more than 99% of Canada’s population, while LTE-A reaches over 94%. And, with the rollout of 5G service as Canada’s first capable handsets come to market in 2020, we announced that Nokia will be our first 5G network equipment partner. Bell increased our all-fibre footprint by 530,000 homes and businesses in 2019 to reach more than 5.1 million locations in major urban cities and smaller centres alike, approximately 53% of our long-term plan for direct fibre connections. With our Toronto fibre project largely completed in 2019, we continued our major fibre build throughout Montréal and announced the rollout of all-fibre links to more than 200,000 residential and business locations in Hamilton and 275,000 in Winnipeg. Our advantage in network performance is reflected in our #1 ranking as the fastest Internet provider in Canada among major service providers by PCMag for the second year in a row. In its Canadian Fastest ISPs of 2019 report, PCMag noted that Bell’s fibre investments are responsible for Canada’s fastest Internet connections with home Internet speeds up to 1.5 Gbps. 10 BCE Inc. 2019 Annual Report Build the best networks In 2019, Bell and subsidiary Northwestel announced the availability of fixed wireless Internet and broadband wireless service in all 25 communities in Nunavut, providing up to 20 times more Internet capacity than previously available by harnessing Telesat Ka-Band satellite technology, and delivering mobile data speeds up to 100 Mbps. The complex project to connect Canada’s northernmost territory was completed in under 2 years. As the first Canadian carrier to launch a 5G-ready LTE-M network in Canada, Bell is leading the way in the fast-growing IoT sector, supporting a broad range of large-scale IoT innovations including asset tracking, fleet management, smart sensors, Smart City applications and municipal water system management. In 2019, we announced a partnership with AT&T to provide our business customers with access to the carrier’s extensive LTE-M network throughout the US. With public policies that support the capital investment required, Bell is ready to deliver the next generation of wireless to rural and urban centres alike. Delivering the fastest consumer Internet available, Bell’s all-fibre connections expanded to more than 5.1 million home and business locations across 7 provinces. Bell’s fibre advantage also accelerates 5G wireless with the high speed and capacity of Bell’s fibre interconnections between cell sites. Bell remains a trusted partner for emergency responders, reflected in our selection by the government of Ontario to modernize the province’s Public Safety Radio Network with a 15-year, $765 million contract. Bell will build and operate the core Land Mobile Radio Network and all of the antennas and data centre equipment needed to provide essential public safety radio coverage across the province. In 2019, Bell also became the first Canadian carrier to offer a designated Mobile Broadband Service for First Responders across the country that provides police, fire and other first responders with priority access to wireless network service during emergency situations. Bell MTS continues to expand our fibre network in communities throughout Manitoba, including to approximately 2,800 locations in the northern City of Flin Flon and 1,600 locations in the Town of Carman. Gigabit Fibe Internet service is now available in more than 20 communities across the province. Bell MTS is also working with the Opaskwayak Cree Nation to bring direct fibre connections and the latest telecommunications equipment to all public buildings in the Indigenous community located 600 kilometres north of Winnipeg. Bell MTS was also chosen by the Manitoba government as the primary provider of wireless services and devices for all government departments and other public sector organizations. The contract, awarded in June 2019, is expected to save the provincial government up to $19 million over 5 years. BCE Inc. 2019 Annual Report 11 STRATEGIC IMPERATIVE 2 Drive growth with innovative services Bell’s leadership in broadband fibre and wireless networks enables the unparalleled service enhancements that continue to drive strong retail Internet and mobile customer growth. Bell continues to set the pace with innovations that are delivering the world’s best communications technologies for our customers. With next-generation mobile networks, the most in-demand smartphones, the fastest Internet and superior Wi-Fi service, Bell remains Canada’s communications leader in a highly competitive marketplace. Our network of more than 3,500 retail locations, including Bell and The Source stores, WirelessWave, Wireless etc., Tbooth and other retail partners, as well as online sales across all of our brands, provides Canadians with the most access to the best products and services across the country. Wireless leadership Our advanced wireless network attracted 515,000 net new postpaid and prepaid wireless customers in 2019 – our best overall annual subscriber performance since 2005. Strong demand for our low-cost Lucky Mobile service and our exclusive national retail distribution at more than 1,200 Dollarama stores contributed to an outstanding 253% increase in prepaid net additions compared to 2018. Wireless subscriber growth was also supported by even more choice in new service plans, including Unlimited Data options and Connect Everything plans that allow customers to share data between all of their connected devices like smartwatches, tablets, home security products and Bell Connected Car. We introduced Bell SmartPay, a new affordable way for customers to get the latest Bell smartphones with little upfront costs and zero-interest device payments over 24 months, separate from their monthly service plans. We expanded Canada’s leading lineup of LTE and LTE-A devices with the addition of more than 40 advanced models including Samsung’s Galaxy S10 series, the Galaxy A series and the Galaxy Note10, as well as Google’s Pixel 4 and 4 XL, LG’s Q70 and G8 ThinQ and Apple’s iPhone 11 and the latest iPad models. We announced Bell will offer the Samsung Galaxy S20 5G series, the first 5G smartphones in Canada. Apple’s MacBook Air and MacBook Pro also became available at The Source. Bell’s exclusive Wireless Home Internet service is bringing unprecedented Internet access to smaller towns and rural communities. 12 BCE Inc. 2019 Annual Report Drive growth with innovative services Bell Mobility and Virgin Mobile expanded their service offerings for customers with accessibility needs, introducing new GPS Navigation apps to help people who are blind or have low vision. BlindSquare Promo suggests detailed points of interest and intersections in response to voice commands to support safe travel, while Nearby Explorer Online provides audible descriptions of the customer’s location with details on road conditions, nearby retailers and other information. Wireline residential and business growth Bell’s investments to enhance our broadband fibre network quality and speeds were recognized by PCMag, which named Bell the fastest Internet provider in Canada in 2019 with home Internet speeds up to 1.5 Gbps. Bell also launched the next generation of our Whole Home Wi-Fi pods in 2019, enabling faster speeds of up to 500 Mbps throughout the home with fewer pods. With the Bell Wi-Fi app, customers can manage their entire home network remotely. Bell Business Markets (BBM) continues to strengthen our leadership in cloud solutions with the addition of managed database, application monitoring and security scanning to our extensive portfolio of Bell Cloud Managed Services for Microsoft Azure. Our Bell Cloud Connect service also offers Canadian businesses secure and reliable access to cloud solutions from Amazon, Google and IBM over our world-class broadband networks. BBM also introduced Bell Total Connect with Cisco Webex in 2019, a new unified communications platform for business meetings and team collaboration, and expanded its Bell Total Connect service footprint to cover NorthernTel and Télébec territories in Ontario and Québec. Bell Smart Home is transforming how Canadians connect and protect their homes with new self-serve monitoring and management services. Smart Homes and Smart Cities Our Bell Smart Home brand launched in Manitoba, bringing all of Bell’s connected home and security services previously offered under the AAA Security, Bell Aliant NextGen and AlarmForce banners under our national Smart Home brand. Bell’s high-capacity wireless and fibre networks continue to support Smart City and IoT projects across the country, including a major Smart City Accelerator Research Program in partnership with IBM for the City of Markham to improve the efficiency of municipal operations and enhance services for residents. BCE Inc. 2019 Annual Report 13 STRATEGIC IMPERATIVE 3 Deliver the most compelling content Bell’s strategy to lead in a fast-changing television and media marketplace is to deliver the most compelling content across every screen. With the top brands, leading content creation abilities and most innovative TV and other viewing platforms, Bell is well positioned to embrace the opportunities ahead. Bell is Canada’s largest TV provider, with Fibe TV, Alt TV and Satellite TV offering a full range of service and content options for every level of the TV marketplace alongside Bell Media’s popular Crave platform and other video streaming innovations like TSN Direct. In 2019, we enhanced our award-winning Fibe TV app with the launch of a live pause and rewind feature, which joins Download & Go, Restart and Wireless TV in a growing list of exclusive Fibe features. Alt TV, Bell’s innovative live TV streaming service, and Fibe TV continue to offer more choices for customers to watch TV on the screen of their choice with Google Chromecast joining other Android devices, Amazon Fire TV and Apple TV as Fibe TV and Alt TV platforms. Crave has evolved into a bilingual TV and streaming service offering more than 6,000 hours of exclusive new French-language content. Crave became Canadian rights holder for HBO Max original programming from Warner Bros. International Television Distribution, which joins HBO, Showtime, Starz (launched across TV and streaming platforms by Bell Media in 2019) and other premium Crave content, including award-winning Canadian originals like international comedy hit Letterkenny. Bell Media’s digital offerings expanded further in 2019 with the launch of Crave on Android platforms and CTV on Apple TV. We also introduced TSN and RDS Day Pass subscriptions, providing more streaming options for sports fans. Bell Media’s top content brands This year marked CTV’s 18th consecutive year as Canada’s top conventional network, led by the most-watched program in Canada The Good Doctor, the top national and local newscasts with CTV National News with Lisa LaFlamme and local brand CTV News, and the #1 new Canadian comedy Jann. Leveraging CTV’s top name in entertainment television, Bell Media successfully rebranded specialty channels The Comedy Network, Space, Bravo and Gusto as CTV Comedy Channel, CTV Sci-Fi Channel, CTV Drama Channel and CTV Life Channel. TSN was Canada’s most-watched specialty channel of any kind and the country’s #1 sports network, setting new audience records with the Toronto Raptors historic NBA Championship win, watched by 16.3 million viewers across TSN, CTV and RDS; record tennis viewership with an audience of over 3.4 million watching Bianca Andreescu’s historic US Open win; and the most-watched IIHF World Championship gold medal game ever broadcast from Europe. RDS also maintained its position as Canada’s top French-language sports network, with the Super Bowl, Montreal Canadiens hockey, US Open final in tennis, Montreal Alouettes playoffs and the F1 Grand Prix du Canada its most-watched programs. Bell Media is Canada’s destination for news, sports and entertainment across every screen: top viewership in conventional television, pay TV and specialty channels and continued growth in digital platforms like the bilingual Crave. 14 BCE Inc. 2019 Annual Report Deliver the most compelling content Bell Media has the scale and brands to maintain its position as Canada’s leading content creation company in a dynamic marketplace. Pinewood Toronto partnered with Netflix to lease soundstages as part of their dedicated production hub and began construction on the studio’s expansion. For the 2019–2020 broadcast year, Bell Media is working with approximately 60 production companies across the country to create hundreds of hours of original content in both French and English. Bell Media and its partners received 227 nominations for the 2020 Canadian Screen Awards, including 142 television and digital nominations and 85 for Bell Media-supported films. Crave was recognized with the Industry Leadership Award and CTV’s Anton Koschany with the Gordon Sinclair Award for Broadcast Journalism. BCE Inc. 2019 Annual Report 15 With 109 stations and the iHeartRadio Canada brand, Bell Media remains Canada’s top radio broadcaster. Audiences grew to 16.8 million listeners, up from 16.6 million in 2018, who spent approximately 77 million hours tuning into Bell Media radio stations every week during fall 2019, or 2.5 times the audience of our closest competitor. Astral, Bell Media’s out-of-home advertising division, reached 18 million consumers weekly. Astral offers 6 innovative product lines accessible through programmatic platforms and more than 50,000 advertising locations in key urban markets across Canada. Strategic investments and partnerships In 2019, Bell Media announced an agreement with Groupe V Média to acquire French-language conventional network V and ad-supported video on demand service Noovo.ca, a transaction which remains subject to regulatory approval. TSN and RDS announced a multi-year media rights extension with the CFL, as well as a long-term media rights agreement with Hockey Canada that extends through the 2033–34 season. STRATEGIC IMPERATIVE 4 Champion customer experience We continue to focus on making it easier than ever to do business with Bell – improving online service, sales and support tools and the resources our service teams employ to deliver a consistently faster and more efficient customer experience. And our teams never stop working to improve the experience, from shopping and purchasing to installation and ongoing service delivery. We strive to provide a consistent user experience that matches the speed and quality of our networks and Internet, TV and wireless services. We continued to make significant investments to enhance MyBell.ca, our award-winning app, and the tools we use to support our customer experience teams (for more on Bell’s award-winning self-serve apps, please see page 18). For an impressive fourth time in the last five years, J.D. Power again named Virgin Mobile #1 in customer care satisfaction. New tools support field services In 2019, we launched additional mobile tools for our Field Services teams to improve training and coaching, troubleshooting and diagnostics, and communications and information sharing between technicians. Technicians also leveraged existing technologies like the Manage Your Appointment web service that allows customers to manage their own appointments, communicate directly with technicians and provide valuable feedback. In 2019 alone, customers provided feedback 195,000 times, sent 240,000 messages to technicians and rescheduled 15,000 appointments themselves. These improvements supported strong customer experience results last year: overall satisfaction with our field technicians was an impressive 96%. Championing the customer experience, our team members are focused on making it easier to do business with Bell. 16 BCE Inc. 2019 Annual Report Champion customer experience Our strategy is coming together While these results reflect the hard work and passion of our Field teams, they also show how our overall strategy fits together. By giving customers the self-serve capability to make appointment updates directly in our calendar tool, we can offer more precise technician arrival times, which ultimately contributes to a better overall experience. Our advanced all-fibre network is also driving decreases in repairs and technician truck rolls, which were down by 24%, while improvements to MyBell.ca, and our self-serve mobile apps have helped reduce calls to our contact centres by 7%. In our contact centres, agents are receiving more personalized coaching to help our customers get the right outcome the first time – ensuring more customers connect to our services seamlessly. At Bell, each improved service experience, whether it’s in person, online, on your mobile device or over your phone, is a building block that makes doing business with us that much easier. For some, like our Small Business Markets and Bell MTS sales teams, those building blocks helped deliver record setting sales results last year. Ongoing investment in our Customer Experience teams is delivering consistent service improvement. J.D. Power again named Virgin Mobile #1 in customer care satisfaction. BCE Inc. 2019 Annual Report 17 STRATEGIC IMPERATIVE 5 Operate with agility and cost efficiency A highly competitive industry requires a dedication to operational efficiency and the ability to be nimble and adaptable in a fast-changing marketplace. Bell is building on our industry-leading cost structure with initiatives including modernizing our network core and streamlining IT systems. With ongoing productivity enhancements and a relentless focus on identifying efficiencies, the Bell team continues to improve cost performance across our business. This includes significant progress on the continued transformation of our networks to the software defined systems of the future and further technology investments in customer experience, to capturing increased efficiencies through our rapidly expanding all-fibre network footprint. Increasingly, systems automation and the application of machine learning and artificial intelligence are enhancing the customer experience. In 2019, Bell began an artificial intelligence research project as part of Montréal’s scale.ai supercluster to optimize technician dispatch. Working with industry partners Exfo, VuPoint Systems and Ivado Labs, Bell is developing a system that uses Field Services, Network and Customer Operations data to analyze the complexity of tasks and increase the efficiency of technician dispatch. Continued investments in technology to enhance customer experience, including new self-serve options like the Lucky Mobile My Account app that allows customers to easily manage prepaid accounts from their phones, resulted in 7% fewer calls to our contact centres in 2019. Customer-completed transactions through self-serve channels topped 19.5 million in 2019, an increase of 9% over the previous year. Making self-serve easy For the second year in a row, a Bell product has been named the Top Telecom app by the MobileWebAwards. Lucky Mobile’s My Account app, introduced in October 2019, followed up on the MyBell mobile app award win in 2018. Along with content, mobile functionality and improvements to MyBell.ca, our self-serve options helped grow customer online transactions by 9% and reduce customer calls by 7% year over year. By continuing to invest in top-end self-serve tools, Bell will continue to focus on making it easy for customers to serve themselves and gain more control over their own experiences. 18 BCE Inc. 2019 Annual Report Operate with agility and cost efficiency Ongoing efficiencies resulting from the integrations of Bell MTS and Axia NetMedia continued in 2019, along with cost savings and increased streamlining of operations with the integration of AAA Security in Manitoba, Bell Aliant NextGen and AlarmForce into the Bell Smart Home brand. Significant operating savings were also realized from workforce adjustments completed in 2018 including the continued effective management of attrition and retirements. Bell raised approximately $1.95 billion in gross proceeds in the public debt capital markets in 2019. We maintained our after-tax cost of outstanding publicly issued debt securities at a historically low 3.1% and increased average term to maturity to 11.5 years, enhancing our liquidity position and financing flexibility for 2020 as no long-term debt matures until 2021. Significant de-risking steps have been taken with our pension plans over the past 10 years, with voluntary deficit funding contributions of approximately $3.6 billion alone. At the end of 2019, the defined benefit pension plan was in a fully funded position, which is expected to reduce pension funding requirements significantly in coming years. A corporate responsibility leader Bell is committed to innovation and investment that balances economic growth, social responsibility and environmental sustainability in order to drive our success. Bell’s ongoing success ensures our continued ability to support the advancement of Canada’s social, technological and economic prosperity. We actively seek suppliers who share our strong commitment to corporate responsibility when it comes to the environment, health and safety, labour and ethics. Our environmental commitment is also delivering significant operational savings. In 2019, Bell continued migrating customers to e-billing and implemented customer onboarding solutions to make e-billing the default at point of sale, significantly reducing the costs associated with paper bills. Ongoing energy conservation efforts at Bell buildings and improved efficiencies of our networks also continued to drive significant savings, with electricity consumption reduced by more than 20,000 Megawatt hours in 2019. Fuel consumption across the Bell service fleet decreased by more than 300,000 litres in 2019 through ongoing fleet modernization, including hybrid and electric vehicles. The updated My Fuel Receipts app used by Bell drivers to collect additional information about each fuel purchase provides the Fleet team with extra insights to help us better manage costs. In a highly competitive and fast-changing marketplace, our team executes with agility and efficiency to deliver value to all Bell stakeholders. BCE Inc. 2019 Annual Report 19 STRATEGIC IMPERATIVE 6 Engage and invest in our people The Bell team is critical to our company’s success, enabling our strategy of investment and innovation while also making a difference in communities across the country. Our 52,000+ team members are a key competitive differentiator for Bell in a dynamic and fast-changing marketplace. Bell is committed to the success of our team, in enhancing the customer experience, building the best networks, or innovating with great products and content to take Bell to the next level, and in career development. In 2019, new mobile tools for our Field Services teams improved processes for dispatching, troubleshooting, communications and coaching, while self serve and other enhancements are making it easier for our contact centre teams to provide faster, more personalized service. We’re also leveraging machine learning, artificial intelligence and Agile approaches to deliver more effective and efficient solutions. A leading Canadian workplace In 2019, Bell was named one of Canada’s Top 100 Employers for the 5th consecutive year, supported by our outstanding learning and career development opportunities, family-friendly benefits and commitment to mental health. Bell was named a Top Employer for Young People, a Montréal Top Employer, and was recognized as one of Canada’s Best Diversity Employers, Greenest Employers and Most Family-Friendly Employers. Bell team members can access a broad range of learning opportunities, career resources and tools to support personal and professional development and grow their careers on our team. These include technical training, mentoring, leadership development, external educational assistance and access to more than 15,000 free, on-demand courses through our new LinkedIn Learning platform. We actively recruit top young talent from across Canada, welcoming more than 1,000 students each year through university co-op programs, paid internships and other placements. Our award-winning Graduate Leadership Program offers young leaders the chance to explore careers in a variety of business areas, along with mentorship and networking opportunities with senior leaders across the country. Our commitment to a fair, inclusive and accessible workplace where everyone feels valued, respected and supported helps drive our success. Led by Bell’s Diversity Leadership Council, our initiatives include diversity and inclusion training, networking events and ongoing education. We are constantly working to promote employee health and well-being, with new initiatives like Bell continues to build the next generation of leaders with an unmatched range of learning and career development opportunities. 20 BCE Inc. 2019 Annual Report Engage and invest in our people our Flexible Work Policy to help balance work, family and other life commitments, and a new online virtual health care program providing free, confidential access to health care professionals using a smartphone, tablet or laptop. A newly enhanced mobile hub provides employees with quick and easy access to Bell work apps for career management, learning opportunities, health and more, directly from their corporate mobile devices. Engaged in our communities In addition to delivering the most advanced broadband communications products and services to our customers, Bell team members make substantial contributions to the communities in which we live and work, in every province and territory. The Bell team donated a record-breaking $2.5 million to 1,500 community and charitable organizations in our 2019 Employee Giving Campaign, with Bell matching donations to the Canadian Mental Health Association, United Way Centraide and Canadian universities and colleges. To support and recognize team members who give their time to charitable causes of all kinds, Bell also launched a new Volunteer Initiative in 2019 to track volunteer time, communicate opportunities and help celebrate team member engagement in their communities. Bell is consistently recognized as one of Canada’s top employers for our comprehensive employee support programs, including our leadership in workplace mental health. A leader in workplace mental health Inspired by our Bell Let’s Talk commitment, Bell has been building a workplace culture that supports mental health at every level, including mental health training for more than 25,000 team members and expanded benefits coverage for mental health support services, as well as support and guidance for other Canadian companies building mental health workplace programs. Since Bell launched our workplace mental health programs, we have seen a 20% decrease in our short-term mental health disability claims and a 50% reduction in relapse and recurrence rates after team members return to work. A 2019 study by Deloitte Canada of 10 major Canadian companies found organizations operating workplace mental health programs achieve a significant return on investment (ROI) with clear human resources and financial benefits. Deloitte’s The ROI in workplace mental health programs: Good for people, good for business found that corporate mental health programs delivered a median annual ROI of $1.62 for companies with programs in place up to 3 years and $2.18 for those with initiatives in place longer than 3 years. Bell’s ROI for its workplace mental health program was determined to be $4.10. BCE Inc. 2019 Annual Report 21 COMMUNITY INVESTMENTS 10th anniversary Bell Let’s Talk Day celebrated from Pole to Pole Every action counts in record-breaking show of support for mental health When it comes to mental health, every action counts. With another record-breaking Bell Let’s Talk Day in the books, it’s clear that people across the country and around the world are ready to create positive change for mental health, with Bell Let’s Talk leading the way. Bell Let’s Talk has ignited a transformative conversation about mental health, centred on its 4 action pillars – anti-stigma, care and access, research and workplace leadership. Building on the progress made over our first decade in destigmatizing mental illness, the 2020 Bell Let’s Talk Day awareness campaign theme – Mental Health: Every Action Counts – highlighted the ways Canadians and people around the globe can take action to make a real and lasting difference in mental health. This year’s multimedia campaign featured 8 outstanding Canadian organizations that provide support on a daily basis for people experiencing mental health challenges: the Canadian Mental Health Association, Canadian Red Cross, Foundry, Jack.org, Kids Help Phone, Revivre, St. John Ambulance and Strongest Families Institute. The work of each of these institutions – from setting up one-stop shops for young people to access care, to providing mental health training in the workplace – stood alongside the actions of individuals, listening to a friend or advocating for a family member, even taking the time to care for their own mental health. Record-breaking engagement continues On Bell Let’s Talk Day, Bell donates 5 cents for every eligible call, text and social media interaction supporting mental health, at no cost to participants beyond what they would normally pay their provider for phone or online access. This year’s campaign saw millions of people share positive actions that can make a difference to individual and community mental health all year round, and resulted in a record 154,387,425 messages of support. The results showed a strong shift in the conversation towards taking action, and also meant another $7,719,371.25 in new mental health funding from Bell. Combined with the results from 9 previous Bell Let’s Talk Days, Bell has now reached $108,415,135 in total mental health funding, including our $50-million anchor donation in 2010. In March 2020, Bell proudly announced its funding commitment for Bell Let’s Talk mental health programs would be at least $150 million. Bell Let’s Talk flags flew at Canadian Forces Station Alert near the North Pole and at the Amundsen-Scott South Pole Station, joining other Bell Let’s Talk Day flag raisings across the country and around the world. 22 BCE Inc. 2019 Annual Report The Bell Let’s Talk national campus campaign grew to more than 550 events at 231 universities and colleges in every province and territory, reaching a student population of more than 1.7 million. And from the North Pole to the South Pole and over 100 communities in between, the Bell Let’s Talk flag flew high, inviting people from everywhere to join the conversation on mental health. #BellLetsTalk – the most used Canadian Twitter hashtag of all time – once again soared to the top of Canadian and worldwide Twitter trends on Bell Let’s Talk Day. Across social media platforms, Canadian and international leaders highlighted the importance of the campaign’s call to action, including celebrities like Ellen DeGeneres, Ryan Reynolds and Céline Dion, political leaders, sports teams, educators, Canadian corporations and government departments, in addition to hundreds of Bell Let’s Talk partners throughout the country. All were united in their commitment to positive change for those living with mental illness. D O S S I E R MBLI20-019 P U B L I C AT I O N National Globe&Mail C L I E N T Bell C A M PA G N E Let’s Talk 2020 F O R M AT 8,97” x 10” C O U L E U R 4C Newspaper L I V R A I S O N 30 janvier V E R S I O N Merci PA R U T I O N 1 février S T U D I O / C O N S E I L FS / AT R É V I S I O N 0 Together we’re creating positive change in Canada. Thanks to your actions on Bell Let’s Talk Day, we will donate $7,719,371.25 in support of mental health initiatives. Bell Let’s Talk in action Bell Let’s Talk supports a wide range of programs throughout the year, having worked with over 1,000 partner organizations nationwide, supporting over 3.4 million Canadians to date. Every year, the $2 million Bell Let’s Talk Community Fund provides grants of up to $25,000 for grassroots mental health initiatives, with the program supporting more than 650 organizations since 2011. Leading up to Bell Let’s Talk Day 2020, Bell announced more than $1.3 million in new funding for mental health projects across the country. We teamed up with the Government of the Northwest Territories and Northwestel to provide services for youth and families in the North through the Strongest Families Institute, a longstanding Bell Let’s Talk partner, with a joint donation of $500,000. The William Osler Health Foundation will use a $420,000 donation to support a new repetitive Transcranial Magnetic Stimulation (rTMS) clinic at Osler’s Brampton Civic Hospital, while a $300,000 donation to Fondation de ma vie will help refurbish psychiatric departments at 3 hospitals in Saguenay–Lac-Saint-Jean. And building on its commitment to Indigenous mental health in Manitoba, Bell Let’s Talk provided $110,000 in funding for a land-based traditional wellness program for at-risk youth in Peguis First Nation. To learn more, please visit Bell.ca/LetsTalk. bell.ca/letstalk MBLI20-019 Ann_BLT-Merci_EN_NatGlobeMail.indd 1 2020-01-30 08:14 We announced our Bell Let’s Talk funding commitment will grow to at least $150 million. BCE Inc. 2019 Annual Report 23 BELL ARCHIVES 140 years of employee engagement and pride Charles Fleetford Sise, President from 1890 to 1915, recognized the Bell team’s extraordinary pride in our company and dedication to delivering for Canadians. When The Bell Telephone Company of Canada was incorporated on April 29, 1880, our workforce of 150 was poised to change how Canadians communicate. By the spring of 1881, they had already built a long-distance connection between Toronto and Hamilton, a first step in connecting our 2,100 customers and eventually all of Canada. Charles Fleetford Sise, President of Bell from 1890 to 1915, was as impressed by the pride and the loyalty of the company’s employees as he was with its early commercial success. Sise wrote that he took “pride in the answering loyalty of all our employees past and present, and also in the fact – or what I believe to be the fact – that the Company – or I personally – can at any time call upon any one of them for help in time of trouble.” His son Charles Fleetford Sise Jr, who would later serve as Vice President and General Manager, shared that sentiment in an open letter to the company in 1923, thanking operators for maintaining quality levels during an influenza outbreak that both reduced staffing and increased call volumes: “Probably never before has the operating staff been called upon to carry such heavy loads over such an extended period. That they did this willingly, in an endeavor to meet the crisis, shows a strong sense of loyalty to the community, the Company, and their fellow workers.” This inherent Bell pride has been a constant throughout the company’s history, with every cable repair and emergency service operation. From the start, Bell operators did so much more than connect subscribers. They were often the best sources for news or even the latest sports scores. Before the advent of innovations like 911 services and public safety radios, they also played important roles in tracking down local doctors or nurses and volunteer firefighters. They were even providing the earliest form of “tech support,” advising customers on how to maintain their phones. 24 BCE Inc. 2019 Annual Report C.F. Sise Jr. Over the years, that company pride has also continued to evolve through volunteering efforts of team members and the company’s ambassador programs – like the Bell teams who showcased the latest telephone innovations and recruited prospective employees at the Canadian National Exhibition and Expo ’67. Team members in Winnipeg packing food hampers at a local foodbank. Bell team members demonstrate the latest communications tech at the 1953 Canadian National Exhibition in Toronto. Today, our Bell Ambassadors continue to share pride with colleagues, supporting countless company events and initiatives, including Bell Let’s Talk Day, many work with college and university students to build the next generation of Bell leaders, while others volunteer in the community with charities of all kinds. At the same time, our employees share the service and innovation spirit of Bell’s first team members, leveraging today’s newest technologies to serve our customers better while advancing how they connect with each other and the world. From just 150 employees in 1880 to more than 52,000 today, the Bell team has always reflected a strong sense of responsibility to our communities – like these Montréal team members in 1932, who donated from their pay and helped raise funds to pack and deliver 150 Christmas hampers to families across the city, or today’s newest team members returning to their university campuses to support mental health programs on Bell Let’s Talk Day. Bell team members continue to share a strong commitment to the places where we live and work, supported by the company’s Giving Program that encourages donations and volunteering. Bell Ambassadors on a goodwill tour of local neighbourhoods meet young trick-or-treaters on Halloween 1990. BCE Inc. 2019 Annual Report 25 Today just got better 26 BCE Inc. 2019 Annual Report 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 2.1 Build the best networks 2.2 Drive growth with innovative services 2.3 Deliver the most compelling content 2.4 Champion customer experience 2.5 Operate with agility and cost efficiency Engage and invest in our people 2.6 3 Performance targets, outlook, assumptions and risks 3.1 BCE 2019 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 Reports on internal controls Management’s report on internal control over financial reporting 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 Intangible assets Investments in associates and joint ventures Inventory Notes to consolidated financial statements Corporate information Note 1 Significant accounting policies Note 2 Segmented information Note 3 Operating costs Note 4 Severance, acquisition and other costs Note 5 Interest expense Note 6 Other expense Note 7 Income taxes Note 8 Note 9 Earnings per share Note 10 Trade and other receivables Note 11 Note 12 Contract assets and liabilities Note 13 Contract costs Note 14 Property, plant and equipment Note 15 Leases 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 subsidiary Note 34 Business acquisitions and dispositions Note 35 Adoption of IFRS 16 Board of directors Executives Investor information s t n e t n o c f o l e b a T 109 109 110 111 111 112 114 114 115 116 117 118 118 118 127 129 129 129 130 131 132 133 133 133 133 134 135 136 137 138 138 139 139 140 142 142 145 146 150 151 154 155 156 156 157 158 159 160 161 162 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 100 100 105 108 BCE Inc. 2019 Annual Report 27 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. You will find additional information relating to BCE, including BCE’s audited consolidated financial statements for the year ended December 31, 2019, BCE’s annual information form for the year ended December 31, 2019, dated March 5, 2020 (BCE 2019 AIF) and recent financial reports, on BCE’s website at BCE.ca, on SEDAR at sedar.com and on EDGAR at sec.gov. 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 105 to 108 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, 2019 when reading this MD&A. In preparing this MD&A, we have taken into account information available to us up to March 5, 2020, the date of this MD&A, unless otherwise stated. A & D M Websites referred to Documents and other information contained in BCE’s website or in any other site referred to in BCE’s website or in this MD&A are not part of this MD&A and are not incorporated by reference herein. This MD&A comments on our business operations, performance, financial position and other matters for the two years ended December 31, 2019 and 2018. CAUTION REGARDING FORWARD-LOOKING STATEMENTS BCE’s 2019 annual report, including this MD&A and, in particular, but without limitation, section 1.3, Key corporate developments, 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 2020, BCE’s dividend growth objective, common share dividend payout policy and 2020 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 2020 cash requirements, our expected post- employment benefit plans funding, our network deployment and capital investment plans, the expected timing and completion of the proposed acquisition of conventional television (TV) network V and related digital assets, 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 2019 annual report, including in this MD&A, describe our expectations as at March 5, 2020 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 2019 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 2019 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 5, 2020. 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, regulatory, competitive, 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 2019 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. Forward-looking statements contained in BCE’s 2019 annual report, including in this MD&A, for periods beyond 2020 assume, unless otherwise indicated, that the relevant assumptions and risks described in this MD&A will remain substantially unchanged during such periods. 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 5, 2020. 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. 28 BCE Inc. 2019 Annual Report 1 Overview As required, we adopted International Financial Reporting Standard (IFRS) 16 – Leases effective January 1, 2019, as described in section 10.1, Our accounting policies. We adopted IFRS 16 using a modified retrospective approach whereby the financial statements of prior periods presented were not restated and continue to be reported under International Accounting Standard (IAS) 17 – Leases, as permitted by the specific transition provisions of IFRS 16. The cumulative effect of the initial adoption of IFRS 16 was reflected as an adjustment to the deficit at January 1, 2019. Under IFRS 16, most leases are recognized on the statement of financial position as right-of-use assets within property, plant and equipment, with a corresponding lease liability within debt. Under IFRS 16, expenses related to these leases are recorded in depreciation and interest expense, whereas under IAS 17, operating lease expenses were recorded in operating costs. Under IFRS 16, repayments of principal for these leases are recorded in repayment of long-term debt within cash flows from financing activities and the interest component is recorded in interest paid within cash flows from operating activities. The adoption of IFRS 16 did not have a significant impact on net earnings. Previously, under IAS 17, operating lease payments were recorded within cash flows from operating activities. To align with changes in how we manage our business and assess performance, the operating results of The Source (Bell) Electronics Inc. (The Source) are now entirely included within our Wireless segment effective January 1, 2019, with prior periods restated for comparative purposes. Previously, The Source’s results were included within our Wireless and Wireline segments. i w e v r e v O A & D M 1 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). BCE is Canada’s largest communications company BCE’s business segments At December 31, 2019 BCE Bell Wireless Bell Wireline Bell Media 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 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. 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 BCE Inc. 2019 Annual Report 29 BCE 2019 CONSOLIDATED RESULTS Operating revenues Net earnings $23,964 million +2.1% vs. 2018 $3,253 million +9.4% vs. 2018 Adjusted EBITDA (1) $10,106 million +6.0% vs. 2018 i w e v r e v O A & D M 1 Net earnings attributable to common shareholders Adjusted net earnings (1) $3,040 million +9.2% vs. 2018 $3,153 million +0.1% vs. 2018 Cash flows from operating activities $7,958 million +7.8% vs. 2018 Free cash flow (1) $3,818 million +7.0% vs. 2018 BCE CUSTOMER CONNECTIONS Wireless (2) (3) Total +3.6% 10 million subscribers at the end of 2019 Retail high-speed Internet (2) (4) +4.3% 3.6 million subscribers at the end of 2019 Retail TV (4) +0.2% 2.8 million subscribers at the end of 2019 Retail residential network access services (NAS) lines (4) (8.9%) 2.7 million subscribers at the end of 2019 OUR GOAL BCE’s goal is to advance how Canadians connect with each other and the world. Our strategic imperatives frame our longstanding strengths in networks, service innovation and content creation, and position the company for continued growth and innovation leadership in a fast- changing communications marketplace. Our primary business objectives are to grow our subscriber base 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. To help support every action in pursuit of our goal, we updated our six strategic imperatives on January 6, 2020 to align our efforts company-wide. 1 Build the best networks 4 Champion customer experience 2 Drive growth with innovative services 5 Operate with agility and cost efficiency 3 Deliver the most compelling content 6 Engage and invest in our people (1) Adjusted EBITDA, adjusted net earnings and free cash flow 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) – 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 2019, we adjusted our wireless subscriber base to remove 167,929 subscribers (72,231 postpaid and 95,698 prepaid) as follows: (A) 65,798 subscribers (19,195 postpaid and 46,603 prepaid), due to the completion of the shutdown of the code division multiple access (CDMA) network on April 30, 2019, (B) 49,095 prepaid subscribers as a result of a change to our deactivation policy, mainly from 120 days for Bell/Virgin Mobile Canada (Virgin Mobile) and 150 days for Lucky Mobile to 90 days, (C) 43,670 postpaid subscribers relating to Internet of Things (IoT) due to the further refinement of our subscriber definition as a result of technology evolution, and (D) 9,366 postpaid fixed wireless Internet subscribers which were transferred to our retail high-speed Internet subscriber base. (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 Manitoba Telecom Services Inc. (MTS) in 2017. (4) As of January 1, 2019, we are no longer reporting wholesale subscribers in our Internet, TV and residential NAS subscriber bases reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. 30 BCE Inc. 2019 Annual Report 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. 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 our national consumer electronics retailer, The Source OUR BRANDS INCLUDE i w e v r e v O A & D M 1 OUR NETWORKS AND REACH OUR PRODUCTS AND SERVICES • Data and voice plans: From plans focused on affordability to premium services, we have plans that cater to all customer segments, available on either postpaid or prepaid options, including unlimited data, shareable, Smartpay and Connect Everything plans. Our services provide 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, connected 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 196 outbound destinations, Roam Better feature and Travel Passes • Mobile business solutions: push-to-talk, field service management, worker safety and mobility management • IoT solutions: asset management, smart buildings, smart cities, fleet management and other IoT services We hold wireless spectrum licences, with holdings across various spectrum bands and regions across Canada, totalling more than 4.8 billion megahertz per population (MHz-Pop), corresponding to an average of approximately 137 Megahertz (MHz) of spectrum per Canadian. 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 over 99% of the Canadian population coast to coast, with LTE-A covering approximately 94% of the Canadian population at December 31, 2019 • 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 of up to 1.5 gigabit per second (Gbps) (1) (expected average download speeds of 25 to 245 megabits per second (Mbps)), while LTE offers speeds of up to 150 Mbps (expected average download speeds of 18 to 40 Mbps) (2) • Reverts to the high-speed packet access plus (HSPA+) network outside LTE coverage areas, with speeds of up to 42 Mbps (typical speeds of 3.5 to 14 Mbps) • Bell also operates a LTE-category M1 (LTE-M) network, which is a subset of our LTE network, supporting low-power IoT applications with enhanced coverage, longer battery life and lower costs for IoT devices connecting to Bell’s national network. Our LTE-M network is available in most Canadian provinces. We have more than 3,500 retail points of distribution across Canada, including approximately 1,300 Bell, Virgin Mobile, Lucky Mobile and The Source locations, as well as Glentel-operated locations (WIRELESSWAVE, Tbooth wireless and WIRELESS etc.) and other third-party dealer and retail locations. (1) Peak theoretical download speeds of up to 1.5 Gbps are currently offered in select markets like Kingston. (2) Network speeds vary with location, signal and customer device. Compatible device required. BCE Inc. 2019 Annual Report 31 OUR BRANDS INCLUDE 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. i w e v r e v O A & D M 1 • 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 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 9.7 million homes and businesses in Ontario, Québec, the Atlantic provinces and Manitoba. Our FTTP direct fibre footprint encompassed more than 5.1 million homes and commercial locations at the end of 2019, representing the largest FTTP footprint in Canada. • Wireless-to-the-premise (WTTP) footprint encompassing approximately 250,000 locations primarily in rural areas. WTTP is Fifth Generation (5G)-capable fixed wireless technology delivered over Bell’s LTE wireless network that provides broadband residential Internet access to smaller and underserved communities. • Largest Internet protocol (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 30 facilities in eight provinces, enabling us to offer co-location, cloud and managed services to business customers 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 live and on-demand programming on laptops, smartphones, tablets, Apple TV, Amazon Fire TV, Google Chromecast and other devices with no traditional TV set-top box (STB) required • Internet: high-speed Internet access through fibre optic broadband technology, 5G-capable WTTP 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 total download speeds of up to 1.5 Gbps with FTTP or 100 Mbps with FTTN, while our Wireless Home Internet fixed wireless service currently delivers broadband speeds of up to 25 Mbps. We also offer Internet service under the Virgin Mobile brand offering download speeds of up to 100 Mbps. • Home Phone: local telephone service, long distance and advanced • Approximately 800 Bell and Virgin Mobile locations calling features • Smart Home: home security, monitoring and automation services from Bell Smart Home • 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 BCE Inc. 2019 Annual Report 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 BRANDS INCLUDE i w e v r e v O A & D M 1 OUR ASSETS AND REACH VIDEO • 30 conventional TV stations, including CTV, Canada’s #1 TV network for 18 consecutive years • 29 specialty channels, including TSN, Canada’s most-watched specialty • STARZ: long-term agreement with Lionsgate to deliver U.S. premium pay TV platform STARZ in Canada • iHeartRadio: exclusive partnership for digital and streaming music services in Canada OTHER ASSETS TV channel and RDS, the top French-language sports network • Majority stake in Pinewood Toronto Studios, the largest purpose-built • 4 pay TV services and 3 direct-to-consumer (DTC) streaming services, production studio in Canada including Crave, the exclusive home of HBO in Canada • Partnership in Just for Laughs, the live comedy event and TV producer RADIO • 109 licensed radio stations in 58 markets across Canada OOH ADVERTISING • Equity interest in Dome Productions Partnership, one of North America’s leading providers of sports and other event production and broadcast facilities • Network of more than 50,000 advertising faces in key urban cities OUR PRODUCTS AND SERVICES across Canada 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 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, Fédération Internationale de Football Association (FIFA) World Cup events, Curling’s Season of Champions, Major League Baseball, Golf’s Majors, NASCAR Cup Series, Formula One, Grand Slam Tennis, Ultimate Fighting Championship, National Collegiate Athletic Association 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 • HBO Max: long-term exclusive agreement to bring original programming from upcoming U.S. streaming service HBO Max to Canada • SHOWTIME: long-term content licensing and trademark agreement for past, present and future SHOWTIME-owned programming • 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, 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 or single-day 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, offered on commercial terms to all Canadian wireless providers BCE Inc. 2019 Annual Report 33 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 i w e v r e v O A & D M 1 OUR PEOPLE EMPLOYEES At the end of 2019, our team comprised 52,100 employees, a decrease of 690 employees compared to the end of 2018, due primarily to natural attrition, retirements and workforce reductions, partly offset by call centre hiring. Approximately 41% of total BCE employees were represented by labour unions at December 31, 2019. BCE 2018 employees BCE 2019 employees 12% 20% 52,790 68% 20% Bell Wireless 68% Bell Wireline 12% Bell Media 12% 20% 52,100 68% 20% Bell Wireless 68% 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 PRESIDENT AND CHIEF EXECUTIVE OFFICER On January 6, 2020, Mirko Bibic became President and Chief Executive Officer (CEO) of BCE Inc. and Bell Canada following the retirement of George Cope on January 5, 2020. On the same day, Mr. Bibic was also appointed to the boards of directors of BCE and Bell Canada. A Bell executive since 2004, Mr. Bibic was most recently Bell’s Chief Operating Officer responsible for Bell Mobility, Bell Residential and Small Business, and Bell Business Markets (BBM). In his prior roles, Mr. Bibic served as Executive Vice-President, Corporate Development and Chief Legal and Regulatory Officer, guiding a wide range of Bell acquisition and investment initiatives, including multiple wireless spectrum auctions and the consolidation of regional communications companies such as MTS and Bell Aliant Inc. (Bell Aliant). NEW STRATEGIC IMPERATIVES AND EXECUTIVE PROMOTIONS 1. Build the best networks As new President and CEO, Mirko Bibic unveiled BCE’s updated strategic imperatives that support Bell’s goal to advance how Canadians connect with each other and the world. These strategic imperatives frame Bell’s longstanding strengths in networks, service innovation and content creation, and position the company for continued growth and innovation leadership in a fast-changing communications marketplace. 2. Drive growth with innovative services 3. Deliver the most compelling content 4. Champion customer experience 5. Operate with agility and cost efficiency 6. Engage and invest in our people 34 BCE Inc. 2019 Annual Report Mr. Bibic also announced a restructured Bell executive leadership team effective January 6, 2020: • Claire Gillies was promoted to President, Bell Mobility. Previously Senior Vice-President, Retail, and President of Bell subsidiary The Source, Ms. Gillies joined Bell in 2000 and served in progressively senior roles in marketing, sales and channel management. • Blaik Kirby became Group President, Mobility & Residential and Small Business. Previously President of Bell Mobility, Mr. Kirby held a range of senior marketing and executive positions since joining Bell in 2005 as Vice-President, Corporate Strategy. • Karine Moses was promoted to Vice Chair, Québec. Also continuing in her role as President, Bell Media Québec, Ms. Moses joined Bell in 1997 and held senior leadership positions across Bell’s Network, Field Services and Media groups. Ms. Moses succeeded retiring Vice Chair, Québec Martine Turcotte. • John Watson became Group President, Customer Experience, continuing to lead all customer service and support operations in the execution of Bell’s Champion Customer Experience imperative. Previously Executive Vice-President, Customer Operations, Mr. Watson joined Bell in 2010 as Senior Vice-President, Operations. ACQUISITION OF V NETWORK AND NOOVO.CA On July 24, 2019, Bell Media announced that it had entered into an agreement with the shareholders of Groupe V Média to acquire conventional TV network V along with related digital assets including the ad-supported video-on-demand (VOD) service Noovo.ca. The transaction will reinforce choice for French-language viewers and strengthen the Québec TV ecosystem, and highlights Bell Media’s commitment to providing engaging content in Québec on traditional and innovative platforms. With popular original programs such as Occupation double, L’amour est dans le pré, and Un souper presque parfait, Groupe V Média owns and operates TV stations in Montréal, Québec City, Saguenay, Sherbrooke and Trois-Rivières, and has affiliate stations in Gatineau, Rivière-du-Loup and Val-d’Or. In addition to V and Noovo.ca, Groupe V Média currently operates specialty channels ELLE Fictions and MAX, which are not subject to the transaction. The Canadian Radio-television and Telecommunications Commission (CRTC) held a hearing in February 2020 to consider the transaction and we are awaiting a decision. The transaction is subject to customary closing conditions, including the receipt of required regulatory and other approvals, and is expected to close in mid 2020. i w e v r e v O A & D M 1 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 +128% Since 2009 2020 dividend increase Dividend payout policy +5% 65%–75% to $3.33 per common share of free cash flow On February 6, 2020, we announced a 5%, or 16 cents, increase in the annualized dividend payable on BCE’s common shares for 2020 to $3.33 per share from $3.17 per share in 2019, starting with the quarterly dividend payable on April 15, 2020. This represents BCE’s 16th increase to its annual common share dividend since 2009, representing a total increase of 128%. This is BCE’s 12th 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. (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. BCE Inc. 2019 Annual Report 35 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. Best practices adopted by BCE for executive compensation i w e v r e v O A & D M 1 • 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 CEO and all Executive Vice-Presidents as well as all option holders • Caps on BCE supplemental executive retirement plans and annual bonus payouts, in addition to mid-term and long-term incentive grants • Vesting criteria fully aligned to shareholder interests USE OF LIQUIDITY 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 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: • Funding 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 2019, free cash flow, after payment of dividends on common shares, in the amount of $999 million, up from $888 million in 2018, was directed towards various small tuck-in acquisitions and strategic partnerships that support our strategic imperatives as well as the repayment of short-term debt. TOTAL SHAREHOLDER RETURN PERFORMANCE Five-year total shareholder return (1) +44.9% 2015–2019 One-year total shareholder return (1) +17.5% 2019 FIVE-YEAR CUMULATIVE TOTAL VALUE OF A $100 INVESTMENT (2) DECEMBER 31, 2014 – DECEMBER 31, 2019 $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, 2019, assuming an initial investment of $100 on December 31, 2014 and the quarterly reinvestment of all dividends. 2014 2015 2016 2017 2018 2019 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 BCE Inc. 2019 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 has an attractive long-term debt maturity profile with no maturities until the second quarter of 2021. 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. ATTRACTIVE LONG-TERM PUBLIC DEBT MATURITY PROFILE (1) • Average term of Bell Canada’s publicly issued debt securities: approximately 11.5 years • Average after-tax cost of publicly issued debt securities: 3.1% STRONG LIQUIDITY POSITION (1) • $2,049 million available under our $4.0 billion multi-year committed credit facilities • $400 million accounts receivable securitization available capacity • $145 million cash and cash equivalents INVESTMENT GRADE CREDIT PROFILE (1) (2) • Long-term debt credit rating of BBB (high) by DBRS Limited (DBRS), Baa 1 by Moody’s Investors Service, Inc. (Moody’s) and BBB+ S&P Global Ratings Canada (S&P), all with stable outlooks i w e v r e v O A & D M 1 • No publicly issued debt securities on hand maturing until Q2 2021 We monitor our capital structure by utilizing a number of measures, including net debt leverage ratio (3), adjusted EBITDA to net interest expense ratio (3), and dividend payout ratio. As a result of financing a number of strategic acquisitions made since 2010, including CTV Inc., Astral Media Inc. (Astral), MLSE, Bell Aliant, Q9 Networks Inc. (Q9) and MTS; voluntary pension plan funding contributions to reduce our pension solvency deficit; wireless spectrum purchases; as well as a one-time unfavourable impact in 2019 due to the adoption of IFRS 16 that added $2.3 billion of leases to net debt (3) on our balance sheet on January 1, 2019, our net debt leverage ratio has increased above the limit of our internal target range. At December 31, 2019, our net debt leverage ratio was 2.79 times adjusted EBITDA, which exceeded the limit of our internal target range by 0.29. This is not expected to affect our credit ratings or outlooks. Our net debt leverage ratio is expected to improve over time and return within the new 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 at 8.54, providing good predictability in our debt service costs and protection from interest rate volatility for the foreseeable future. BCE CREDIT RATIOS INTERNAL TARGET DECEMBER 31, 2019 Net debt leverage ratio Adjusted EBITDA to net interest expense ratio 2.0–2.5 >7.5 2.79 8.54 Bell Canada successfully accessed the debt capital markets in May 2019 and September 2019, raising a total of $1.15 billion in gross proceeds from the issuance in Canada of medium-term note (MTN) debentures, and $600 million in U.S. dollars ($808 million in Canadian dollars) in gross proceeds from the issuance of notes in the U.S. Both the Canadian-dollar and U.S.-dollar issuances contributed to maintaining our after-tax cost of outstanding publicly issued debt securities at approximately 3.1% (4.3% on a pre-tax basis), and increasing the average term to maturity to about 11.5 years. The net proceeds of the 2019 offerings were used to fund the early redemption of $1.4 billion of Bell Canada MTN debentures maturing in 2020 and to repay short-term debt. Subsequent to year end, on February 13, 2020, Bell Canada issued 3.50% Series M-51 MTN debentures under its 1997 trust indenture, with a principal amount of $750 million, which mature on September 30, 2050. The net proceeds of the offering are intended to be used to fund, on March 16, 2020, the redemption, prior to maturity, of Bell Canada’s 4.95% Series M-24 MTN debentures, with early debt redemption charges of $17 million. The M-24 MTN debentures have an outstanding principal amount of $500 million and were due on May 19, 2021. The net proceeds are further intended to be used for the repayment of short-term debt. In May 2019, Bell Canada renewed its short form base shelf prospectus, enabling Bell Canada to offer up to $5 billion of debt securities from time to time until June 29, 2021. 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. debt capital markets. As at March 5, 2020, Bell Canada had issued $1.3 billion principal amount of debt securities under its new short form base shelf prospectus. (1) As at December 31, 2019 (2) 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 agency. Ratings are determined by the rating agencies based on criteria established from time to time by them, and they do not comment on market price or suitability for a particular investor. Each credit rating should be evaluated independently of any other credit rating. (3) 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. BCE Inc. 2019 Annual Report 37 1.5 Corporate governance and risk management CORPORATE GOVERNANCE PHILOSOPHY The Board and management of BCE 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. The Board is responsible for the supervision of the business and affairs of the company. Below are our key Board information and governance best practices: Directors are All Independent (except CEO) 99% 2019 Board and Committee Director Attendance Record Board Committees’ Members are All Independent Board Interlocks Guidelines Directors’ Tenure Guidelines Share Ownership Guidelines for Directors and Executives Board Diversity Policy and Target for Gender Representation Code of Business Conduct and Ethics Program i w e v r e v O A & D M 1 Annual Election of All Directors Directors Elected Individually Majority Voting Policy for Directors Separate Chair and CEO Annual Advisory Vote on Executive Compensation Formal Board Evaluation Process Board Risk Oversight Practices Robust Succession Planning 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 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 and diligence, with reporting to the Board in the ordinary course. Board of Directors Audit Committee Compensation Committee Governance Committee Pension Committee 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 Management Resources and Compensation Committee (Compensation Committee) oversees risks relating to compensation, succession planning and 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) • The Corporate Governance Committee (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 pension funds 38 BCE Inc. 2019 Annual Report RISK MANAGEMENT CULTURE FIRST LINE OF DEFENCE – OPERATIONAL BUSINESS UNITS 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 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. i w e v r e v O A & D M 1 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 52,100 employees as at December 31, 2019, 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, Corporate Risk Management, Legal, 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. Corporate Support Functions 2nd line of defence BCE Inc. 2019 Annual Report 39 i w e v r e v O A & D M 1 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 in particular the complexity and scale of our business, network infrastructure, technology and information technology (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 (HSSEC Committee). A significant number of BCE’s most senior leaders are members of the HSSEC 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. The HSSEC Committee also mandates the company’s Energy Board, a working group composed of business unit employees at the vice-president and director levels, to ensure oversight of our overall energy consumption and costs with the objective of minimizing financial and reputational risks while maximizing business opportunities. 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 BCE Inc. 2019 Annual Report s e v i t a r e p m c g e t a r t S i i A & D M 2 2 Strategic imperatives Our success is built on the BCE team’s dedicated execution of the six strategic imperatives that support our goal to advance how Canadians connect with each other and the world. 2.1 Build the best networks Expand Bell’s next-generation network leadership with continued capital investment in all-fibre home and business connections in more places, enhanced rural connectivity with Wireless Home Internet and the upcoming launch of mobile 5G service. 2019 PROGRESS • Continued to expand our FTTP direct fibre footprint, reaching over 5.1 million homes and businesses in seven provinces. Approximately 53 percent of our long-term broadband fibre program was completed at the end of 2019. 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. • Expanded our innovative Wireless Home Internet service to approximately 250,000 locations in 226 rural communities at the end of 2019. Wireless Home Internet is currently available in many small communities in Ontario, including in the Niagara Peninsula and the Muskoka and Kawartha Lakes regions, and in Québec in the Eastern Townships and the Montérégie region. Fully funded by Bell, Wireless Home Internet is projected to ultimately reach 1 million rural households throughout Ontario, Québec, Atlantic Canada and Manitoba. Delivered over Bell’s advanced LTE wireless network in the 3.5 Gigahertz (GHz) spectrum band, Wireless Home Internet is 5G-capable fixed wireless technology specifically designed to extend broadband Internet access to smaller towns, rural locations and other unserved or underserved communities. • Expanded our LTE-A wireless network to reach 94% of the Canadian population with theoretical mobile data peak download speeds of up to 1.5 Gbps in select markets (expected average download speeds of 25 to 245 Mbps) • In its Canada: State of Mobile Networks report, network analysis firm Tutela found that Bell LTE delivers the fastest upload and download speeds of any major mobile network in Canada • Made LTE wireless broadband service available to all 25 communities in Nunavut, Canada’s northernmost territory, delivering mobile data speeds of up to 100 Mbps to residents and businesses across the territory as well as providing fixed wireless Internet access to 21 Nunavut communities • Concluded an expanded reciprocal roaming partnership with AT&T Inc. (AT&T) to provide Canadian business customers access to AT&T’s LTE-M network across the U.S. The reciprocal agreement enables AT&T customers to roam on Bell’s national LTE-M network in Canada. LTE-M supports low-power IoT applications with enhanced coverage, longer battery life and lower costs for IoT devices connecting to Bell’s national network. 2020 FOCUS • Further deployment of direct fibre to more homes and businesses within our wireline footprint and fixed WTTP technology in rural communities • FTTP footprint expansion focused on the Montréal and the Greater Toronto Area/905 geographic areas • In January 2020, Bell announced a $400 million investment in the City of Hamilton’s digital infrastructure that is planned to bring direct fibre connections to more than 200,000 residential and business locations throughout the city over the next five years. In addition, the project includes the expansion of high-speed Bell Wireless Home Internet service to 8,000 homes in rural Hamilton. • On March 2, 2020, we announced an investment of approximately $400 million to bring FTTP technology to Winnipeg, with direct fibre connections to approximately 275,000 homes and businesses throughout the city • Expansion of the LTE-A network coverage to approximately 96% of the Canadian population • Further increase LTE-A speeds • Launch of initial 5G service in urban centres across Canada as compatible smartphones become available • In January 2020, Bell announced its first 5G network equipment supplier agreement with long-time partner Nokia Corporation • Continue to deploy mobile small cells and equip more cell sites with high-speed fibre backhaul BCE Inc. 2019 Annual Report 41 s e v i t a r e p m c g e t a r t S i i A & D M 2 2.2 Drive growth with innovative services Leverage our network superiority to provide innovative, integrated communications services to Canadian consumers and businesses, including the fastest Internet and best Wi-Fi, the highest-quality mobile services and a growing range of next-generation IoT solutions, smart home products and business solutions like Virtual Network Services. 2019 PROGRESS • Maintained our Internet leadership with the most advanced products • Added 515,409 total net postpaid and prepaid customers, our best in the home • Launched the next generation of our Whole Home Wi-Fi pods, enabling double the speeds available on the previous model and more devices to run simultaneously and provide a larger indoor and outdoor coverage radius. Whole Home Wi-Fi learns how households use the Internet and continually optimizes the network to ensure all devices receive the strongest signal and fastest speed available. • Bell partnered with Google to introduce new hybrid cloud connectivity for business customers to connect to the Google Cloud Platform globally via direct fibre connections on Bell’s private network. The new service joined the Bell Cloud Connect portfolio of cloud and data centre solutions with partners including Amazon Web Services, IBM and Microsoft. • Bell strengthened its leadership in cloud solutions by adding managed database, application monitoring and security scanning to its extensive portfolio of Bell Cloud Managed Services for Microsoft Azure 2020 FOCUS • Maintain our market share of national operators’ wireless postpaid net additions • Higher prepaid customer net additions • Introduce more 4G LTE and LTE-A devices and 5G devices, as well as new data services • Improve subscriber acquisition and retention spending, enabled by increasing adoption of installment payment plans • Grow retail Internet subscribers • Enhance Internet product superiority through new service offerings and innovation to provide an enhanced 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 annual subscriber performance since 2005 • Grew prepaid market share with 113,454 net activations, driven by strong demand for our low-cost Lucky Mobile service • Expanded our device lineup with 43 new devices, including Apple’s iPhone 11, 11 Pro and 11 Pro Max and Apple Watch Series 5, the Samsung Galaxy S10 series and the Samsung Galaxy Note10 and Note10+, adding to our extensive selection of 4G LTE and LTE-A devices • Launched unlimited plans featuring unlimited data access with no overage charges. Customers can sign up for plans featuring 10 gigabits (GB) or 20 GB of data at maximum LTE speeds and unlimited data access at reduced speeds when these allotments are exceeded with no overage fees charged. • Launched Connect Everything plans that provide a way to link all of a customer’s Bell devices with a pool of data to share across smartphones, tablets, smartwatches and other devices, such as wireless trackers, security cameras and vehicles with Bell Connected Car • Introduced SmartPay device financing plans that let customers buy their new smartphones with 24 interest-free installments separate from their service plan • Partnered with Dollarama Inc. (Dollarama) to make Lucky Mobile and Virgin Mobile prepaid wireless service available at the value retailer’s more than 1,200 locations across Canada. The exclusive partnership enables budget-conscious Canadians to purchase a Lucky Mobile or Virgin Mobile prepaid SIM card at Dollarama and activate on their own mobile device with no activation fee. • Partnered with the City of Markham to launch the Smart City Accelerator Research Program, using 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 • Built on our position as the leading Internet service provider (ISP) in Canada with a retail high-speed Internet subscriber base of 3,555,601 at December 31, 2019, up 4.3% over 2018, including over 1.4 million FTTP customers at December 31, 2019 • Bell Canada and our operations in the Atlantic provinces, marketed under the Bell Aliant brand, were ranked the fastest Internet providers in the country in PCMag’s annual Fastest ISPs of 2019: Canada report. PCMag’s intensive testing found that our operations in the Atlantic provinces, marketed under the Bell Aliant brand, offer the fastest overall Internet in the country. Bell Canada, serving Ontario and Québec customers, topped the list for the second year in a row as the fastest major Internet provider. 42 BCE Inc. 2019 Annual Report s e v i t a r e p m c g e t a r t S i i A & D M 2 2.3 Deliver the most compelling content Inform and engage Canadian audiences with a unified approach to delivering our top TV, media and entertainment assets, leveraging our trusted media brands and content creation leadership to bring Canadians the content they want the most on any platform they choose. 2019 PROGRESS • Maintained our position as Canada’s largest TV provider with 2,772,464 retail subscribers at December 31, 2019, and increased our total number of IPTV subscribers by 5.5% to 1,767,182 • Maintained our TV leadership with the most advanced products in the home • Made the Fibe TV app available on Google Chromecast. Also available on Amazon Fire TV, Android TV and Apple TV, the Fibe TV app provides multiple options to bring Fibe TV and Alt TV to all screens. • Added the ability to pause and rewind live TV on the Fibe TV app, providing enhanced functionality on any device for Alt TV, Fibe TV and Satellite TV customers • Maintained CTV’s #1 ranking as the most-watched TV network in Canada for the 18th year in a row, and continued to lead with 12 of the top 20 programs nationally among total viewers • TSN remained Canada’s sports leader and most-watched specialty TV channel and RDS remained the top French-language sports network • Grew our Crave subscriber base to 2.6 million, up 14% over 2018 • Launched STARZ in Canada, delivering a slate of the bold, diverse, and genre-bending programming that has established the channel as one of the leading pay TV services in the U.S. STARZ is the Canadian home of all new STARZ original programming, select library titles, and classic films from all eras. STARZ is available across two linear TV channels, the SVOD platforms of participating TV providers, and via the STARZ streaming service which is available directly to all Canadians with access to the Internet as an add-on to Crave. • Concluded a long-term exclusive deal with Warner Bros. International Television Distribution (Warner Bros.) to bring original programming from Warner Bros.’ HBO Max to Canada, beginning in 2020. The agreement extends Bell Media’s programming relationship with Warner Bros., making original series from the new HBO Max service available to Canadians via its SVOD service, Crave, and Bell Media’s suite of CTV-branded platforms, reinforcing Bell Media’s focus on delivering premium content. The deal also extends Bell Media’s existing relationship with Warner Bros. on conventional and specialty TV rights as well as on pay TV rights for Warner Bros.’ first-run feature films. • TSN and RDS extended their long-term broadcast partnership with the CFL, which includes exclusive Canadian TV and digital media rights for all CFL games, including the playoffs and the Grey Cup • Launched four newly-branded specialty TV channels, each leveraging Canada’s powerful CTV brand. The Comedy Network, Space, Bravo, and Gusto became CTV Comedy Channel, CTV Sci-Fi Channel, CTV Drama Channel, and CTV Life Channel, respectively. • TSN and RDS launched Day Pass subscriptions to their TSN Direct and RDS Direct streaming services. The 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. • The Crave app became available on Android TV devices, delivering premium entertainment content like HBO, SHOWTIME, STARZ, Hollywood hit movies and more to Android TV users across Canada. With the addition of Android TV, Crave is now available directly to Canadians at Crave.ca, through participating TV providers, on iOS, Android, Apple TV, Samsung Smart TVs, Xbox and Amazon Fire TV, with additional platforms in development. • Partnered with Stingray Group Inc. (Stingray), a leading music, media, and technology company, to introduce AUDIO360, an advanced, multi-platform audio sales solution that brings together brands and consumers through the power of sound. AUDIO360 gives brands access to 22 million Canadian listeners weekly across a multi-platform audio offering. Designed to meet the needs of Canadian advertisers looking to connect with Canadian listeners, AUDIO360’s multi-platform approach connects brands with their target listeners on the right audio platform, across the right channels, at the right moment in time. 2020 FOCUS • Grow retail IPTV subscribers • Enhance TV product superiority through new service offerings and innovation to provide an enhanced customer experience in the home • Continue the scaling of Crave and launch Crave with French-language content • On January 28, 2020, Crave became a bilingual TV and streaming service offering more than 6,000 hours of exclusive new French- language content in addition to Crave’s exclusive English-language programming. As part of the change, Super Écran became available OTT for the first time as an add-on to Crave. The updated bilingual Crave is available through participating TV providers and streaming platforms. • Maintain strong audience levels and ratings across all TV and radio properties • Reinforce industry leadership in conventional TV, specialty TV, pay TV, streaming and sports services • In January 2020, TSN and RDS announced a long-term media rights extension with Hockey Canada through the 2033-34 season, ensuring that TSN and RDS will continue to hold the exclusive-multi-platform media rights to Hockey Canada events, including the annual IIHF World Junior Championship • Develop in-house production and content creation for distribution and use across all screens and platforms • Leverage cross-platform and integrated sales and sponsorship • Grow revenues through unique partnerships and strategic content investments • Build on our OOH leadership position in Canada BCE Inc. 2019 Annual Report 43 s e v i t a r e p m c g e t a r t S i i A & D M 2 2.4 Champion customer experience Deliver a positive customer experience for consumers and business customers by making it easier to do business with Bell at every level, from shopping to buying to installation to after-sale support. 2019 PROGRESS • Virgin Mobile was ranked highest in overall customer care satisfaction in the J.D. Power 2019 Canada Wireless Customer Care Study for the third year in a row, cited for its strong performance in self-serve, reflecting high levels of customer satisfaction with the brand’s website, mobile app and social media presence • Updated Virgin Mobile’s My Account app with a new design, enabling Virgin customers to easily access their accounts to pay bills, monitor data usage and manage add-ons from anywhere • Improved wireless postpaid churn by 0.03 pts over 2018, driven by Bell’s network quality and focus on subscriber base management • Launched the Lucky Mobile My Account app, providing customers quick access to key features such as topping up their accounts, registering for Automatic Top-Up, managing Add-Ons, monitoring usage, checking their balance and resetting voicemail passwords • Lucky Mobile’s My Account app was selected as the Best Telecommunications Mobile Application of 2019 at the annual MobileWebAwards • Updated our support pages on Bell.ca to make it easier for customers to get the information they need about Bell products and services • Enhanced our innovative Manage Your Appointment web service to provide customers with more precise estimates of technician arrival times based on traffic, driving conditions and work schedules • Reduced the number of customer calls to our call centres by 7% • Improved customer First Call Resolution by 5% for residential services and 3% for wireless services • Reduced FTTP installation time by 10%, driven by our investments in technician tools • Reduced FTTP Internet repair truck rolls per customer by 24% from improved greater network performance and improved troubleshooting and diagnostic capabilities • Offered residential installation appointments 16% earlier, and repair appointments the same day or next day 88% of the time • Continued to automate our dispatch and appointment management systems, leading to 23% fewer late appointments 2020 FOCUS • Further improve customer satisfaction scores • Deliver a more convenient and personalized self-serve experience for customers • Further evolve our self-serve tools • Further reduce the total number of customer calls to our call centres as well as the number of truck rolls • Reduce FTTP installation times and improve service quality • Continue to invest in artificial intelligence and machine learning to resolve customer issues faster • Simplify the technician in-field experience through simplification and innovation of technician tools • Further evolve customer device diagnostic capabilities to support increasing customer and device complexity 44 BCE Inc. 2019 Annual Report 2.5 Operate with agility and cost efficiency Enhance our operational excellence in a competitive marketplace and build on our industry-leading cost structure with a focus on efficiency and disciplined cost management across our business segments. 2019 PROGRESS 2020 FOCUS • Improved BCE consolidated adjusted EBITDA margin (1) by 1.6 pts • Realize cost savings from: over 2018 • Delivered 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 Bell Canada’s average after-tax cost of publicly issued debt securities at 3.1% • Realized operating cost savings from workforce reductions completed in 2018 • lower contracted rates from our suppliers • operating efficiencies enabled by a growing direct fibre footprint • changes in consumer behaviour and product innovation • new call centre technology that is enabling self-serve capabilities • other improvements to the customer service experience • management workforce reductions including attrition and retirements A & D M s e v i t a r e p m c g e t a r t S i i 2 2.6 Engage and invest in our people Recognize our team’s importance to Bell’s competitive success by strengthening our award-winning workplace culture with new technology and support resources and by offering enhanced development opportunities, enabling our diverse and dynamic team members to achieve their full potential. 2019 PROGRESS • Recognized as one of Canada’s Top 100 Employers for the fifth consecutive year in Mediacorp’s annual review of the best workplaces across the country, reflecting our outstanding learning and career development opportunities, family-friendly benefits and commitment to mental health • Named as one of Canada’s Top Employers for Young People for the second consecutive year by Mediacorp in recognition of our programs for students and team members just beginning their careers, including Bell’s Graduate Leadership Program • Named one of Canada’s Best Diversity Employers in Mediacorp’s 2019 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 programs to enable women, persons with disabilities, Indigenous Peoples, visible minorities and other groups in their career development, and also recognizes our workplace mental health leadership. • Bell’s support of gender equity in the workplace was recognized with Gold Parity Certification for the second year in a row by Women in Governance, a non-profit organization that evaluates Canadian companies for their gender parity strategies and presence of women in historically underrepresented roles • Enhanced maternity and parental leave options, making it easier for team members to balance work and family with a higher salary replacement amount over more weeks • Won two awards at the TalentEgg National Campus Recruitment Excellence Awards, selected by a panel of top students and recent graduates. The Campus Recruiting Program of the Year award recognizes Bell’s innovative strategy in recruiting top talent from Canadian universities, while the Special Award for Social Responsibility in Recruiting recognizes our commitment to socially responsible hiring practices and policies that encourage inclusion and diversity, community outreach and accessibility. 2020 FOCUS • In February 2020, we launched new initiatives that reflect Bell’s new strategic imperative to engage and invest in our people, recognizing how critically important our team is to Bell’s success • Introduced our Flexible Work Policy, offering Bell team members new ways to balance work, family and other life commitments • Launched a new online virtual health care program, providing team members and their families with free, confidential access to health care professionals through virtual consultation technology (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. BCE Inc. 2019 Annual Report 45 s k s i r d n a s n o i t p m u s s a , k o o l t u o , s t e g r a t e c n a m r o f r e P A & D M 3 3 Performance targets, outlook, assumptions and risks This section provides information pertaining to our performance against 2019 targets, our consolidated business outlook and operating assumptions for 2020 and our principal business risks. 3.1 BCE 2019 performance vs. guidance targets FINANCIAL GUIDANCE 2019 TARGET 2019 PERFORMANCE AND RESULTS ACHIEVED Revenue growth 1%–3% 2.1% BCE revenues grew by 2.1% in 2019 compared to last year, driven by growth across all three of our segments, and reflected both higher service and product revenues of 1.4% and 6.6%, respectively. Adjusted EBITDA growth 5%–7% 6.0% Capital intensity Approx. 16.5% 16.6% Adjusted net earnings per share (adjusted EPS) (1) $3.48–$3.58 $3.50 Free cash flow growth 7%–12% 7.0% BCE adjusted EBITDA increased by 6.0% in 2019, compared to 2018, reflecting favourable contributions from all three of our segments. The growth was driven by higher revenues together with lower operating expenses, primarily reflecting the favourable impact from the adoption of IFRS 16 in 2019 and effective cost containment. BCE capital investments totaled $3,988 million in 2019, up 0.4% compared to last year. This represented a capital intensity ratio of 16.6%, down from 16.9% achieved in 2018. We continued to focus our strategic investments on our networks with the ongoing roll-out of FTTP and fixed WTTP, the build-out of our LTE-A network, which reached 94% of the Canadian population at December 31, 2019, and the deployment of wireless small-cells to expand capacity to support subscriber growth and increase network speeds, coverage and signal quality, as well as to expand data fibre backhaul in preparation for 5G technology. Capital spending was also focused on the connection of fibre Internet and TV services to more homes and businesses, the execution of business customer contracts and investment in digital media platforms. Net earnings attributable to common shareholders in 2019 increased by $255 million, or $0.27 per common share, compared to 2018, due to higher adjusted EBITDA and lower other expense, partly offset by higher depreciation and amortization expense, income taxes and finance costs. The adoption of IFRS 16 did not have a significant impact on net earnings. Excluding the impact of severance, acquisition and other costs, net mark-to-market gains (losses) on derivatives used to economically hedge equity settled share-based compensation plans, net gains (losses) on investments, early debt redemption costs and impairment charges, adjusted net earnings in 2019 was $3,153 million, or $3.50 per common share, compared to $3,151 million, or $3.51 per common share, in 2018. Free cash flow increased by $251 million in 2019, compared to 2018, mainly due to higher cash flows from operating activities, excluding voluntary DB pension plan contributions and acquisition and other costs paid, partly offset by higher cash dividends paid by subsidiaries to non-controlling interest (NCI). Annualized common dividend per share $3.17 $3.17 Annualized BCE common dividend per share for 2019 increased by 15 cents, or 5.0%, to $3.17 compared to $3.02 per share in 2018. Dividend payout ratio 65%–75% of free cash flow 74% Dividend payout ratio decreased from 75% in 2018 to 74% in 2019. 3.2 Business outlook and assumptions OUTLOOK BCE’s 2020 outlook builds on the favourable financial results achieved in 2019 by all our operating segments highlighted by: higher wireless subscriber net additions and operating profitability; steady wireline adjusted EBITDA growth; retail broadband Internet and TV market share gains enabled by growth in our combined direct fibre and Wireless Home Internet footprint; industry-leading media operating performance; as well as disciplined cost management that together with the positive impact of IFRS 16 drove significant expansion in BCE’s adjusted EBITDA margin. Our projected financial performance for 2020 is underpinned by executing on our updated six strategic imperatives in a highly competitive and dynamic market. Wireless, retail Internet and TV subscriber base growth, together with pricing discipline and the flow-through of operating cost savings from a reduced workforce, fibre-related operating efficiencies and continued service improvement, is projected to drive revenue and adjusted EBITDA growth. This is expected to contribute to higher free cash flow, providing a strong foundation for the 5.0% increase in BCE’s common share dividend for 2020, as well as ongoing significant capital expenditures on broadband fibre and wireless network infrastructure to support future growth. The key 2020 operational priorities for BCE are: • Maintain our market share of national operators’ wireless postpaid net additions (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 BCE Inc. 2019 Annual Report • 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 • Expansion of the LTE-A network coverage to approximately 96% of the Canadian population, and launch of initial 5G service in urban centres across Canada as compatible smartphones become available • Improvement in subscriber acquisition and retention spending, enabled by increasing adoption of installment payment plans • Increased adoption of unlimited wireless data plans and installment payment plans • Continued growth in retail Internet and IPTV subscribers • Residential household average revenue per user (ARPU) growth from increased penetration of multi-product households • Further deployment of direct fibre to more homes and businesses within our wireline footprint and fixed WTTP technology in rural communities • Enhance Internet and TV product superiority through new service offerings and innovation to provide an enhanced 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 • 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, new call centre technology that is enabling self-serve capabilities, and other improvements to the customer service experience • Revenue generation from broadcasting distribution undertaking (BDU) rate increases, strategic pricing on advertising sales, monetization of content rights on Bell Media properties across all platforms and digital advertising platforms, as well as simultaneous substitution of Canadian advertising during the Super Bowl, while controlling TV programming and premium content cost escalation • Continued scaling of Crave and launch of Crave with French-language content Our projected financial performance for 2020 enabled us to increase the annualized BCE common share dividend for 2020 by 16 cents, or 5.0%, to $3.33 per share. s k s i r d n a s n o i t p m u s s a , k o o l t u o , s t e g r a t e c n a m r o f r e P A & D M 3 ASSUMPTIONS ASSUMPTIONS ABOUT THE CANADIAN ECONOMY • Slowing economic growth, given the Bank of Canada’s weaker outlook for the Canadian economy as compared to its previously estimated growth in Canadian gross domestic product of 1.6% in 2020 • Weaker employment growth, as the overall level of business investment is expected to soften • Higher, but slowing, wireless industry penetration • Increased adoption of unlimited data plans and Smartpay installment payment plans • A shrinking data and voice connectivity market as business customers migrate to lower-priced traditional telecommunications solutions or alternative OTT competitors • Interest rates expected to remain at or near current levels • Advertising market expected to be impacted by audience declines • Canadian dollar expected to remain at or 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. MARKET ASSUMPTIONS • A consistently high level of wireline and wireless competition in consumer, business and wholesale markets • Continued escalation of media content costs to secure quality programming • Declines in BDU subscribers and increasing competition from the entrance of more subscription video on demand (SVOD) streaming services in the OTT market • Retail TV subscriber net additions moderated by 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. REGULATORY ENVIRONMENT Although most of our retail services are not price-regulated, government agencies and departments such as the CRTC, Innovation, Science and Economic Development Canada (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 and spectrum licensing, foreign ownership requirements and control of copyright piracy. As with all regulated organizations, planned strategies are contingent upon regulatory decisions. Adverse decisions by governments or regulatory agencies, increased regulation or lack of effective anti-piracy remedies 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. BCE Inc. 2019 Annual Report 47 s k s i r d n a s n o i t p m u s s a , k o o l t u o , s t e g r a t e c n a m r o f r e P A & D M 3 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 service providers, IoT hardware and software providers, voice over IP (VoIP) providers and other web-based players that are penetrating the telecommunications space with significant resources and a large customer base over which to amortize costs. Certain of these competitors are changing the competitive landscape by 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 (smart cities), is expected to accelerate growth opportunities as well as competition in these areas. If we are unable to develop and deploy new solutions through a more agile service model in advance of or concurrently with our competitors, our business and financial results could be adversely affected. 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 regional facilities-based wireless service providers continue 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 their need to invest in building their own networks and impacting our network-based differentiation of our services. Such lower required investment challenges the monetization of our networks and our operating model. 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: • The acceleration of disruptions and disintermediation in each of our business segments could adversely affect our business and financial results • 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 • The convergence of wireline and wireless services is impacting product purchase choice by customers and could accelerate product substitution in favour of lower-margin products as well as accelerate churn • 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 48 BCE Inc. 2019 Annual Report wholesale subscribers and thus could negatively impact our capacity to invest in our networks at the same levels as we have in the past • Higher Canadian wireless penetration could slow opportunities for new customer acquisition • The continued OTT-based substitution and market expansion of lower-cost VoIP and software-defined networking in a wide area network (SD WAN) solutions offered by global competitors, such as 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 • Multinational business consumers’ desire to consolidate global network service supply with one supplier could accelerate the disruptions in our wireline segment • 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 • Subscriber and viewer growth is challenged by changing viewer habits, 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, as well as piracy, CRTC arbitration and a fragmentation of audience with an abundance of choices • 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 our ability to monetize products and services beyond our current expectations, while creating bandwidth pressure without corresponding revenue growth in the context of regulated wholesale high-speed Internet access rates • Traditional radio faces accelerated substitution from alternative streaming services such as those offered by global audio streaming players and those made available by new technologies, including smart car services • The timely rollout of 5G mobile service may be adversely impacted by government decisions, constraints on access to network equipment suppliers, the availability of 5G compatible handsets and potential operational challenges in delivering new technology • 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. SECURITY MANAGEMENT Our operations, service performance, reputation and business continuity depend on how well we protect our physical and non-physical assets, including networks, 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, wildfires, flooding, extended heat waves, 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. As our operations involve receiving, processing and storing such proprietary business and personal data, effective policies, procedures and controls must be implemented to protect information systems and underlying data. Information security breaches can result from deliberate or unintended actions by a growing number of sophisticated actors, including hackers, organized criminals, state-sponsored organizations and 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 ever evolving and changing means including, without limitation, the use of stolen credentials, social engineering, 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, sensitive or personal information, extortion and business disruptions. Information security policies, procedures and controls must continuously adapt and evolve in order to seek to mitigate risk and, consequently, require constant monitoring to ensure effectiveness. There is, however, no certainty that our information security policies, procedures and controls will be effective against all information security attacks. 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 increased digitization and the use of emerging technologies such as artificial intelligence and robotics, have significantly increased the threat surface of 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. s k s i r d n a s n o i t p m u s s a , k o o l t u o , s t e g r a t e c n a m r o f r e P A & D M 3 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 • Lost revenue resulting from the unauthorized use of proprietary information or the failure to retain or attract customers after an incident • Physical damage to network assets impacting service continuity • Litigation, investigations, fines and liability for failure to comply with privacy and information security laws, including via mandatory flow- through of privacy-related obligations by our customers, as well as increased audit and regulatory scrutiny that could divert resources from project delivery • Fines and sanctions from credit card providers for failing to comply with payment card industry data security standards for protection of cardholder data • Increased fraud as criminals leverage stolen information against us, our employees or our customers • 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 and monitoring employees, and engaging third-party security experts and auditors • 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. BCE Inc. 2019 Annual Report 49 4 Consolidated financial analysis This section provides detailed information and analysis about BCE’s performance in 2019 compared with 2018. 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 Operating revenues Service Product Total operating revenues Operating costs Adjusted EBITDA Adjusted EBITDA margin Severance, acquisition and other costs i s s y a n a l l i a c n a n fi d e t a d i l o s n o C A & D M 4 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 2019 2018 $ CHANGE % CHANGE 20,737 3,227 23,964 (13,858) 10,106 42.2% (114) (3,496) (902) (1,132) (63) (13) (1,133) 3,253 3,040 151 62 3,253 3,153 3.37 3.50 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 3.51 296 200 496 75 571 22 (351) (33) (132) 6 335 (138) 280 255 7 18 280 2 0.27 (0.01) 1.4% 6.6% 2.1% 0.5% 6.0% 1.6 pts 16.2% (11.2%) (3.8%) (13.2%) 8.7% 96.3% (13.9%) 9.4% 9.2% 4.9% 40.9% 9.4% 0.1% 8.7% (0.3%) BCE STATEMENTS OF CASH FLOWS – SELECTED INFORMATION Cash flows from operating activities Capital expenditures Free cash flow 2019 7,958 (3,988) 3,818 2018 $ CHANGE % CHANGE 7,384 (3,971) 3,567 574 (17) 251 7.8% (0.4%) 7.0% BCE delivered revenue growth of 2.1% in 2019, compared to last year, attributable to both higher service and product revenues of 1.4% and 6.6%, respectively, reflecting growth across all three of our segments. The year-over-year increase in service revenues was driven by the ongoing expansion of our postpaid and prepaid wireless, retail Internet, and IPTV subscriber bases, higher residential household ARPU, greater Bell Media subscriber and advertising revenues, as well as improved business market performance, including the contribution from the acquisition of Axia NetMedia Corporation (Axia) at the end of August 2018. This was moderated by the continued erosion in our voice, satellite TV and legacy data revenues. The growth in product revenues was driven by higher sales of premium wireless handsets and greater demand for equipment by large enterprise customers in our business markets. In 2019, net earnings increased by 9.4%, compared to 2018, mainly due to higher adjusted EBITDA and lower other expense, partly offset by higher depreciation and amortization expense, income taxes and finance costs. The adoption of IFRS 16 did not have a significant impact on net earnings. 50 BCE Inc. 2019 Annual Report BCE’s adjusted EBITDA grew by 6.0% in 2019, compared to 2018, with contributions from all three of our segments. Higher revenues coupled with reduced operating expenses, reflecting the benefit from the adoption of IFRS 16 in 2019, and effective cost containment drove the year-over-year growth in adjusted EBITDA. This resulted in an adjusted EBITDA margin of 42.2% in 2019, up 1.6 pts compared to the 40.6% achieved last year. In 2019, BCE’s cash flows from operating activities increased by $574 million, compared to 2018, mainly due to higher adjusted EBITDA, which reflects the favourable impact from the adoption of IFRS 16, and a voluntary DB pension plan contribution of nil in 2019 compared to $240 million paid in 2018. This was partly offset by a decrease in operating assets and liabilities, higher interest paid which reflects the unfavourable impact from the adoption of IFRS 16 and higher income taxes paid. Free cash flow increased by $251 million in 2019, compared to 2018, mainly due to higher cash flows from operating activities, excluding voluntary DB pension plan contributions and acquisition and other costs paid, partly offset by higher cash dividends paid by subsidiaries to NCI. 4.2 Customer connections BCE NET ACTIVATIONS (LOSSES) Wireless subscribers net activations Postpaid Prepaid Retail high-speed Internet subscribers net activations (1) Retail TV subscribers net activations (losses) (1) IPTV Satellite Total growth services net activations Wireline retail residential NAS lines net losses (1) Total services net activations 2019 515,409 401,955 113,454 135,861 6,053 91,476 (85,423) 479,811 447,682 32,129 116,599 21,559 110,790 (89,231) 657,323 617,969 (263,325) (258,881) 393,998 359,088 2018 % CHANGE i s s y a n a l l i a c n a n fi d e t a d i l o s n o C A & D M 4 7.4% (10.2%) 253.1% 16.5% (71.9%) (17.4%) 4.3% 6.4% (1.7%) 9.7% (1) As of January 1, 2019, we are no longer reporting wholesale subscribers in our Internet, TV and residential NAS subscriber bases reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. TOTAL BCE CUSTOMER CONNECTIONS Wireless subscribers (1) (2) Postpaid (1) (2) Prepaid (1) Retail high-speed Internet subscribers (1) (3) Retail TV subscribers (3) IPTV Satellite Total growth services subscribers Wireline retail residential NAS lines (3) Total services subscribers 2019 2018 % CHANGE 9,957,962 9,159,940 798,022 3,555,601 2,772,464 1,767,182 1,005,282 9,610,482 8,830,216 780,266 3,410,374 2,766,411 1,675,706 1,090,705 16,286,027 15,787,267 2,697,483 2,960,808 18,983,510 18,748,075 3.6% 3.7% 2.3% 4.3% 0.2% 5.5% (7.8%) 3.2% (8.9%) 1.3% (1) At the beginning of Q1 2019, we adjusted our wireless subscriber base to remove 167,929 subscribers (72,231 postpaid and 95,698 prepaid) as follows: (A) 65,798 subscribers (19,195 postpaid and 46,603 prepaid), due to the completion of the shutdown of the CDMA network on April 30, 2019, (B) 49,095 prepaid subscribers as a result of a change to our deactivation policy, mainly from 120 days for Bell/Virgin Mobile and 150 days for Lucky Mobile to 90 days, (C) 43,670 postpaid subscribers relating to IoT due to the further refinement of our subscriber definition as a result of technology evolution, and (D) 9,366 postpaid fixed wireless Internet subscribers which were transferred to our retail high-speed Internet subscriber base. (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 in 2017. (3) As of January 1, 2019, we are no longer reporting wholesale subscribers in our Internet, TV and residential NAS subscriber bases reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. BCE added 657,323 net new retail customer connections to its retail growth services in 2019, representing a 6.4% increase over 2018. This consisted of: • 401,955 postpaid wireless customers, and 113,454 prepaid wireless customers • 135,861 retail high-speed Internet customers Retail residential NAS net losses were 263,325 in 2019, increasing by 1.7% over 2018. Total BCE retail customer connections across all retail services grew by 1.3% in 2019, compared to last year, driven by an increase in our retail growth services customer base, offset in part by continued erosion in traditional retail residential NAS lines. • 6,053 retail TV customers comprised of 91,476 retail IPTV net customer additions and 85,423 retail satellite TV net customer losses BCE Inc. 2019 Annual Report 51 At the end of 2019, BCE retail customer connections totaled 18,983,510, and were comprised of the following: • 9,957,962 wireless subscribers, up 3.6% compared to 2018, comprised of 9,159,940 postpaid subscribers, an increase of 3.7% over last year, and 798,022 prepaid subscribers, up 2.3% year over year • 3,555,601 retail high-speed Internet subscribers, 4.3% higher than last year • 2,772,464 total retail TV subscribers, up 0.2% compared to 2018, comprised of 1,767,182 retail IPTV customers, up 5.5% year over year, and 1,005,282 retail satellite TV subscribers, down 7.8% year over year • 2,697,483 retail residential NAS lines, a decline of 8.9% compared to 2018 4.3 Operating revenues BCE Revenues (in $ millions) $23,468 $23,964 2019 2018 $ CHANGE % CHANGE Bell Wireless Bell Wireline Bell Media Inter-segment eliminations 9,142 12,356 3,217 8,818 12,267 3,121 (751) (738) Total BCE operating revenues 23,964 23,468 324 89 96 (13) 496 3.7% 0.7% 3.1% (1.8%) 2.1% +2.1% i s s y a n a l l i a c n a n fi d e t a d i l o s n o C A & D M 4 18 19 BCE BCE operating revenues grew by 2.1% in 2019, compared to last year, driven by growth across all three of our segments. Total operating revenues consisted of service revenues of $20,737 million and product revenues of $3,227 million in 2019, up 1.4% and 6.6%, respectively, year over year. Wireless operating revenues grew by 3.7% in 2019, driven by product revenue growth of 6.6% and service revenue growth of 2.5%. Wireline operating revenues grew by 0.7% in 2019 attributable to service revenue growth of 0.4% from higher data revenue, moderated by lower voice revenue, and also reflected higher product revenue of 7.2%. Bell Media revenues increased by 3.1% in 2019 reflecting both higher subscriber and advertising revenues. 4.4 Operating costs BCE Operating costs (in $ millions) $13,933 in 2018 $13,858 in 2019 Bell Wireless Bell Wireline Bell Media Inter-segment eliminations Total BCE operating costs BCE Operating cost profile 2018 BCE Operating cost profile 2019 15% 14% 53% 32% 33% 53% 53% Cost of revenues (1) 32% Labour (2) 15% Other (3) 53% Cost of revenues (1) 33% Labour (2) 14% Other (3) 2018 $ CHANGE % CHANGE 2019 (5,300) (6,942) (2,367) 751 (5,297) (6,946) (2,428) 738 (13,858) (13,933) (3) 4 61 13 75 (0.1%) 0.1% 2.5% 1.8% 0.5% (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. 52 BCE Inc. 2019 Annual Report BCE Total BCE operating costs declined by 0.5% in 2019, compared to last year, driven by reduced costs in Bell Media of 2.5%, while costs in Bell Wireless and Bell Wireline remained relatively stable year over year. These results reflected the benefit from the adoption of IFRS 16 in 2019. 4.5 Net earnings BCE Net earnings (in $ millions) $3,253 $2,973 +9.4% 18 19 4.6 Adjusted EBITDA BCE Adjusted EBITDA (in $ millions) $9,535 $10,106 $3,521 $3,842 $5,321 $5,414 $693 $850 18 19 Bell Wireless Bell Wireline Bell Media Bell Wireless Bell Wireline Bell Media Total BCE adjusted EBITDA BCE In 2019, net earnings increased by 9.4%, compared to 2018, mainly due to higher adjusted EBITDA and lower other expense, partly offset by higher depreciation and amortization expense, income taxes and finance costs. The adoption of IFRS 16 did not have a significant impact on net earnings. A & D M i s s y a n a l l i a c n a n fi d e t a d i l o s n o C 4 BCE Adjusted EBITDA (in $ millions) (% adjusted EBITDA margin) $9,535 in 2018 40.6% $10,106 in 2019 42.2% +6.0% 2019 3,842 5,414 850 10,106 2018 3,521 5,321 693 9,535 $ CHANGE % CHANGE 321 93 157 571 9.1% 1.7% 22.7% 6.0% BCE’s adjusted EBITDA grew by 6.0% in 2019, compared to 2018, attributable to growth from all three of our segments. Higher revenues coupled with reduced operating expenses drove the year-over-year growth in adjusted EBITDA. This corresponded to an adjusted EBITDA margin of 42.2% in 2019, up 1.6 pts over last year, mainly driven by the favourable impact from the adoption of IFRS 16 in 2019, and greater service revenue flow-through, moderated by greater low-margin product sales in our total revenue base. BCE Inc. 2019 Annual Report 53 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. This includes severance costs consisting of charges related to involuntary and voluntary employee terminations, as well as 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. BCE Severance, acquisition and other costs (in $ millions) 2019 Severance, acquisition and other costs included: • Severance costs of $63 million for workforce reduction initiatives • Acquisition and other costs of $51 million 2018 Severance, acquisition and other costs included: $136 in 2018 $114 in 2019 • 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 4.8 Depreciation and amortization The amount of our depreciation and amortization in any year is affected by: BCE Depreciation (in $ millions) $3,496 $3,145 • 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 Amortization (in $ millions) $869 $902 i s s y a n a l l i a c n a n fi d e t a d i l o s n o C A & D M 4 18 19 18 19 DEPRECIATION AMORTIZATION Depreciation in 2019 increased by $351 million, compared to 2018, mainly due to the adoption of IFRS 16 and a higher asset base as we continued to invest in our broadband and wireless networks as well as our IPTV services. Amortization in 2019 increased by $33 million, compared to 2018, mainly due to a higher asset base. 54 BCE Inc. 2019 Annual Report 4.9 Finance costs BCE Interest expense (in $ millions) $1,132 $1,000 BCE Interest on post-employment benefit obligations (in $ millions) $69 $63 18 19 18 19 4.10 Other expense Other expense includes income and expense items, such as: • Impairment of assets • Equity income or losses from investments in associates and joint ventures • Early debt redemption costs • Gains or losses on disposal and retirement of property, plant and equipment and intangible assets • Net mark-to-market gains or losses on derivatives used to economically hedge equity settled share-based compensation plans • Net gains or losses on investments, including gains or losses when we dispose of, write down or reduce our ownership in investments 2019 Other expense of $13 million included impairment charges of $102 million mainly related to broadcast licences and certain assets for various radio markets within our Bell Media segment. Other expense also included losses from our equity investments of $72 million, which included BCE’s obligation to repurchase at fair value the minority interest in one of BCE’s joint ventures, and early debt redemption costs of $18 million, partly offset by net mark-to-market gains on derivatives used to economically hedge equity settled share-based compensation plans of $138 million and gains on investments of $13 million which included BCE’s obligation to repurchase at fair value the minority interest in one of BCE’s subsidiaries. INTEREST EXPENSE Interest expense in 2019 increased by $132 million, compared to 2018, mainly due to the adoption of IFRS 16, higher average debt levels and higher 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, 2019, the discount rate was 3.8% compared to 3.6% on January 1, 2018. In 2019, interest expense on post-employment benefit obligations decreased by $6 million, compared to last year, due to a lower post- employment benefit obligation at the beginning of the year, partly offset by a higher discount rate. The impacts of changes in market conditions during the year are recognized in other comprehensive income (OCI). A & D M i s s y a n a l l i a c n a n fi d e t a d i l o s n o C 4 BCE Other expense (in $ millions) 18 19 ($13) ($348) 2018 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. BCE Inc. 2019 Annual Report 55 4.11 Income taxes BCE Income taxes (in $ millions) $995 in 2018 $1,133 in 2019 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% for both 2019 and 2018. FOR THE YEAR ENDED DECEMBER 31 Net earnings Add back income taxes Earnings before income taxes Applicable statutory tax rate 2019 3,253 1,133 4,386 2018 2,973 995 3,968 27.0% 27.0% Income taxes computed at applicable statutory rates (1,184) (1,071) Non-taxable portion of gains (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 Previously unrecognized tax benefits Other Total income taxes Average effective tax rate 4 15 27 14 (20) 9 2 (1,133) 25.8% (9) 68 – 20 (10) – 7 (995) 25.1% Income taxes in 2019 increased by $138 million, compared to 2018, mainly due to higher taxable income and a lower value of uncertain tax positions favourably resolved in 2019 compared to 2018, partly offset by a favourable change in the corporate income tax rate in Alberta in Q2 2019. i s s y a n a l l i a c n a n fi d e t a d i l o s n o C A & D M 4 4.12 Net earnings attributable to common shareholders and EPS BCE Net earnings attributable to common shareholders (in $ millions) BCE Adjusted net earnings (in $ millions) BCE Adjusted EPS (in $) BCE EPS (in $) $3,040 $2,785 $3.37 $3.10 $3,151 $3,153 $3.51 $3.50 18 19 18 19 18 19 18 19 Net earnings attributable to common shareholders in 2019 increased by $255 million, or $0.27 per common share, compared to 2018, due to higher adjusted EBITDA and lower other expense, partly offset by higher depreciation and amortization expense, income taxes and finance costs. The adoption of IFRS 16 did not have a significant impact on net earnings. Excluding the impact of severance, acquisition and other costs, net mark-to-market gains (losses) on derivatives used to economically hedge equity settled share-based compensation plans, net gains (losses) on investments, early debt redemption costs and impairment charges, adjusted net earnings in 2019 was $3,153 million, or $3.50 per common share, compared to $3,151 million, or $3.51 per common share, in 2018. 56 BCE Inc. 2019 Annual Report 4.13 Capital expenditures BCE Capital expenditures (in $ millions) Capital intensity (%) $3,971 16.9% $3,988 16.6% $664 7.5% $697 7.6% $3,193 26.0% $3,183 25.8% Bell Wireless Bell Wireline Bell Media $114 3.7% $108 3.4% 18 19 4.14 Cash flows In 2019, BCE’s cash flows from operating activities increased by $574 million, compared to 2018, mainly due to higher adjusted EBITDA, which reflects the favourable impact from the adoption of IFRS 16, and a voluntary DB pension plan contribution of nil in 2019 compared to $240 million paid in 2018. This was partly offset by a decrease in operating assets and liabilities, higher interest paid which reflects the unfavourable impact from the adoption of IFRS 16 and higher income taxes paid. Free cash flow increased by $251 million in 2019, compared to 2018, mainly due to higher cash flows from operating activities, excluding voluntary DB pension plan contributions and acquisition and other costs paid, partly offset by higher cash dividends paid by subsidiaries to NCI. BCE capital expenditures totalled $3,988 million in 2019, up 0.4% compared to last year, mainly driven by higher spending in Bell Wireless, moderated by reduced spending in Bell Wireline and Bell Media. This represented a capital intensity ratio of 16.6%, down from 16.9% in 2018. We continued to focus our strategic investments on our networks with the ongoing roll-out of FTTP and fixed WTTP, the build-out of our LTE-A network and the continued deployment of wireless small-cells to expand capacity to support subscriber growth and increase network speeds, coverage and signal quality, as well as to expand data fibre backhaul in preparation for 5G technology. Capital spending was also focused on the connection of fibre Internet and TV services to more homes and businesses, the execution of business customer contracts and investment in digital media platforms. i s s y a n a l l i a c n a n fi d e t a d i l o s n o C A & D M BCE Cash flows from operating activities (in $ millions) $7,958 $7,384 BCE Free cash flow (in $ millions) $3,567 $3,818 18 19 18 19 4 BCE Inc. 2019 Annual Report 57 5 Business segment analysis 5.1 Bell Wireless We gained more net new wireless subscribers in 2019 than in any year since 2005, while maintaining a sharp focus on operating profitability as wireless adjusted EBITDA grew by a strong 9.1%. FINANCIAL PERFORMANCE ANALYSIS 2019 PERFORMANCE HIGHLIGHTS Bell Wireless Revenues (in $ millions) $8,818 $9,142 72% 71% 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 28% 29% 18 19 Bell Wireless Adjusted EBITDA (in $ millions) (% adjusted EBITDA margin) $3,521 in 2018 39.9% $3,842 in 2019 42.0% Service Product +3.7% +9.1% Total subscriber growth (1) (2) +3.6% in 2019 Postpaid net activations in 2019 Prepaid net activations in 2019 Postpaid churn in 2019 401,955 113,454 Declined 10.2% vs. 2018 Improved 253.1% vs. 2018 1.13% Improved 0.03 pts vs. 2018 Blended billing per user (ABPU) (3) per month +0.8% 2019: $68.32 2018: $67.76 (1) At the beginning of Q1 2019, we adjusted our wireless subscriber base to remove 167,929 subscribers (72,231 postpaid and 95,698 prepaid) as follows: (A) 65,798 subscribers (19,195 postpaid and 46,603 prepaid), due to the completion of the shutdown of the CDMA network on April 30, 2019, (B) 49,095 prepaid subscribers as a result of a change to our deactivation policy, mainly from 120 days for Bell/Virgin Mobile and 150 days for Lucky Mobile to 90 days, (C) 43,670 postpaid subscribers relating to IoT due to the further refinement of our subscriber definition as a result of technology evolution, and (D) 9,366 postpaid fixed wireless Internet subscribers which were transferred to our retail high-speed Internet subscriber base. (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 in 2017. (3) Our Q1 2018 blended ABPU was adjusted to exclude the unfavourable retroactive impact of the CRTC decision on wireless domestic wholesale 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 BCE Inc. 2019 Annual Report 2019 6,427 49 6,476 2,660 6 2,666 9,142 2018 6,269 48 6,317 2,497 4 2,501 8,818 $ CHANGE % CHANGE 158 1 159 163 2 165 324 2.5% 2.1% 2.5% 6.5% 50.0% 6.6% 3.7% 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 Bell Wireless operating revenues increased by 3.7% in 2019, compared to 2018, driven by greater postpaid and prepaid service revenues and higher product revenues. Service revenues increased by 2.5% in 2019, compared to last year, driven by: • Continued growth in our postpaid and prepaid subscriber base coupled with rate increases • A greater mix of customers subscribing to higher-value monthly plans including unlimited data plans launched in June 2019 • The favourable year-over-year impact from the 2018 CRTC retroactive decision on wireless domestic wholesale roaming rates These factors were partly offset by: • Greater sales of premium handsets and more customers subscribing to higher-value monthly plans • Lower data and voice overages driven by increased customer adoption of monthly plans with higher data allotments and richer voice plans Product revenues increased by 6.6% in 2019, compared to last year, driven by greater sales of premium handsets and the impact of higher- value rate plans in our sales mix. OPERATING COSTS AND ADJUSTED EBITDA Operating costs Adjusted EBITDA Total adjusted EBITDA margin 2019 (5,300) 3,842 42.0% 2018 $ CHANGE % CHANGE (5,297) 3,521 39.9% (3) 321 (0.1%) 9.1% 2.1 pts Bell Wireless operating costs were relatively stable in 2019, increasing by 0.1%, compared to 2018, due to: These factors were partly offset by: • The favourable impact from the adoption of IFRS 16 in 2019 • Higher product cost of goods sold driven by increased handset costs • Continued effective cost containment and greater mix of premium devices • Increased network operating costs relating to greater cell site builds and the expansion of network capacity to support growth in subscribers and data consumption • Higher bad debt expense driven by the revenue growth Bell Wireless adjusted EBITDA increased by 9.1% in 2019, compared to last year, driven by the growth in revenues. Adjusted EBITDA margin, based on wireless operating revenues, increased by 2.1 pts to 42.0% in 2019, from 39.9% in 2018, due to the favourable impact from the adoption of IFRS 16 in 2019 and higher flow-through of the service revenue growth, moderated by an increased proportion of low-margin product sales in our total revenue base. BELL WIRELESS OPERATING METRICS Blended ABPU ($/month) (1) Gross activations Postpaid Prepaid Net activations (losses) Postpaid Prepaid Blended churn % (average per month) Postpaid Prepaid Subscribers (2) (3) Postpaid (2) (3) Prepaid (2) 2019 68.32 2,117,517 1,568,729 548,788 515,409 401,955 113,454 1.39% 1.13% 4.44% 9,957,962 9,159,940 798,022 2018 67.76 1,954,792 1,615,764 339,028 479,811 447,682 32,129 1.32% 1.16% 3.17% 9,610,482 8,830,216 780,266 CHANGE % CHANGE 0.56 162,725 (47,035) 209,760 35,598 (45,727) 81,325 347,480 329,724 17,756 0.8% 8.3% (2.9%) 61.9% 7.4% (10.2%) 253.1% (0.07) pts 0.03 pts (1.27) pts 3.6% 3.7% 2.3% (1) Our Q1 2018 blended ABPU was adjusted to exclude the unfavourable retroactive impact of the CRTC decision on wireless domestic wholesale roaming rates of $14 million. (2) At the beginning of Q1 2019, we adjusted our wireless subscriber base to remove 167,929 subscribers (72,231 postpaid and 95,698 prepaid) as follows: (A) 65,798 subscribers (19,195 postpaid and 46,603 prepaid), due to the completion of the shutdown of the CDMA network on April 30, 2019, (B) 49,095 prepaid subscribers as a result of a change to our deactivation policy, mainly from 120 days for Bell/Virgin Mobile and 150 days for Lucky Mobile to 90 days, (C) 43,670 postpaid subscribers relating to IoT due to the further refinement of our subscriber definition as a result of technology evolution, and (D) 9,366 postpaid fixed wireless Internet subscribers which were transferred to our retail high-speed Internet subscriber base. (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 in 2017. Blended ABPU of $68.32 increased by 0.8% in 2019, compared to 2018, driven by: • A greater mix of customers subscribing to higher-value monthly plans including unlimited data plans • The flow-through of rate increases These factors were partly offset by: • Lower data and voice overages driven by increased customer adoption of monthly plans with higher data allotments and richer voice plans • Lower ABPU generated from our long-term mobile services contract with Shared Services Canada (SSC) • The favourable impact from the subscriber base adjustments performed • The dilutive impact from the continued growth in prepaid customers in Q1 2019 driven by Lucky Mobile, our low-cost prepaid mobile service BCE Inc. 2019 Annual Report 59 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 gross wireless activations increased by 8.3% in 2019, compared to last year, due to higher prepaid gross activations, offset in part by lower postpaid gross activations. • Postpaid gross activations decreased by 2.9% in 2019, compared to 2018, mainly due to fewer year-over-year customer additions from our contract with SSC as the migration process is essentially complete. Excluding the impact of the SSC contract, postpaid gross activations were higher year over year, driven by our mobile network quality, strong sales execution and focus on subscriber base management. • Prepaid gross activations increased by 61.9% in 2019, compared to last year, driven by the continued growth from Lucky Mobile along with the benefit from the national retail distribution of Lucky Mobile and Virgin Mobile prepaid services at Dollarama stores Blended wireless churn of 1.39% increased by 0.07 pts in 2019, compared to 2018. • Postpaid churn of 1.13% improved by 0.03 pts in 2019, compared to last year, driven by the favourable impact from our ongoing investments in customer retention and network speeds • Prepaid churn of 4.44% increased by 1.27 pts in 2019, compared to the prior year, due to greater competitive intensity in the discount mobile market and the impact from the harmonization of our prepaid deactivation policy across all Bell Wireless brands from 120 days for Bell and Virgin Mobile and 150 days for Lucky Mobile to 90 days Net activations grew by 7.4% in 2019, compared to 2018, due to higher prepaid net activations, moderated by lower postpaid net activations. • Postpaid net activations decreased by 10.2% in 2019, compared to 2018, driven by lower gross activations • Prepaid net activations increased by 81,325 in 2019, compared to last year, due to higher gross activations, offset in part by greater customer deactivations Wireless subscribers at December 31, 2019 totaled 9,957,962, an increase of 3.6% from 9,610,482 subscribers reported at the end of 2018. This was comprised of 9,159,940 postpaid subscribers and 798,022 prepaid subscribers, an increase of 3.7% and 2.3%, respectively, year over year. At the end of 2019, the proportion of Bell Wireless customers subscribing to our postpaid service was stable at 92%, compared to last year. At the beginning of Q1 2019, we adjusted our wireless subscriber base to remove 167,929 subscribers (72,231 postpaid and 95,698 prepaid) as follows: • 65,798 subscribers (19,195 postpaid and 46,603 prepaid), due to the completion of the shutdown of the CDMA network on April 30, 2019 • 49,095 prepaid subscribers as a result of a change to our deactivation policy, mainly from 120 days for Bell/Virgin Mobile and 150 days for Lucky Mobile to 90 days • 43,670 postpaid subscribers relating to IoT due to the further refinement of our subscriber definition as a result of the technology evolution • 9,366 postpaid fixed wireless Internet subscribers which were transferred to our retail high-speed Internet subscriber base COMPETITIVE LANDSCAPE AND INDUSTRY TRENDS COMPETITIVE LANDSCAPE 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 the adoption of mobile devices and services by both younger and older generations. The wireless penetration rate increased to approximately 92% in Canada in 2019, with further increases in penetration expected in 2020. By comparison, the wireless penetration rate in the U.S. is well over 100%, and even higher in Europe and Asia. The Canadian wireless market continues to be characterized by high levels of acquisition and retention activities and the associated high costs of device subsidies on two-year contracts, heightened competitive intensity, and the continued adoption of higher-value, data-centric smartphones. Growth in ABPU has moderated, due to declines in chargeable usage and larger allotments of data driven by competitive pressures, in addition to other moderating factors, such as the launch of unlimited wireless data plans and device financing options, the popularity of data sharing plans, and an evolving shift in the customer mix towards non-traditional wireless devices. These factors are being partly offset by continuing robust customer growth and growing overall data usage, including customers selecting plans with larger data buckets on high-value smartphones, and a larger proportion of postpaid customers in the subscriber mix. The Canadian wireless industry continues to be highly competitive and capital-intensive, with carriers continuing to expand and enhance their broadband wireless networks, including material investments in spectrum. Competitors • Large facilities-based national wireless service providers Rogers Communications Inc. (Rogers) and the Telus Corporation group of companies (Telus) • 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 Ltée (Vidéotron), which provides service in Montréal and other parts of Québec; Saskatchewan Telecommunications Holding Corporation, which provides service in Saskatchewan; Eastlink, which provides service in Nova Scotia and Prince Edward Island; and Xplornet, which provides service in Manitoba 60 BCE Inc. 2019 Annual Report INDUSTRY TRENDS ADOPTION OF UNLIMITED DATA PLANS AND EQUIPMENT INSTALLMENT PLANS The introduction of unlimited wireless data plans and new device financing options is a natural evolution of competition in the wireless market that is expected to have a near-term unfavourable financial impact, due to potential revenue and ABPU pressure as customers with high overage charges or higher priced plans look to optimize their bills. Longer term, these new customer options are expected to encourage greater data consumption, particularly as the industry shifts to 5G over the next several years; drive lower costs as a result of lower device discounting compared to traditional subsidy plans, e-billing and reduced call centre activity. In addition, unlimited data plans and equipment financing options address the need to make wireless data and the latest smartphone devices more affordable to Canadians. ACCELERATING DATA CONSUMPTION 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; increasing adoption of shared plans with multiple devices by families; and the introduction of unlimited data plans. 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 the demand for data services. 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. Data overage revenue will continue to be negatively impacted as customers continue to migrate to unlimited data plans. BUSINESS OUTLOOK AND ASSUMPTIONS 2020 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 Lucky Mobile prepaid customer growth. We will seek to achieve higher revenues from the flow-through of pricing changes, 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. 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 600 MHz, 700 MHz, advanced wireless services-3 (AWS-3), and 2500 MHz spectrum auctions that occurred since 2014 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 and will also pave the way for mobile 5G service. Early 5G wireless networks are expected to be deployed by the national operators in 2020 utilizing low-band and mid-band spectrum. Early 5G speeds are anticipated to be similar to peak speeds enabled by LTE-A mobile networks. The real benefit of 5G will come from the ability to offer consumers higher speeds, lower latency and the ability to support the massive deployment of devices connected to the Internet as well as the faster delivery of data services. To bring Canada into this true 5G world will require higher band spectrum, including in the 3.5 GHz band, which is expected to become available by the end of 2020 through the federal government’s spectrum auction process. We expect 5G technology to provide a significant opportunity for future growth in the industry. We also remain focused on sustaining our market share of national operators’ 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 2020 from flow-through of higher revenue, which should be partly offset by increased operating costs reflecting increased customer support costs due to growth in the subscriber base and increased network operating expenses. 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 BCE Inc. 2019 Annual Report 61 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 ASSUMPTIONS • Maintain our market share of national operators’ wireless postpaid • Improvement in subscriber acquisition and retention spending, enabled 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 • Expansion of the LTE-A network coverage to approximately 96% of the Canadian population, and launch of initial 5G service in urban centres across Canada as compatible smartphones become available by increasing adoption of installment payment plans • Unfavourable impact on blended ABPU, driven by reduced data overage revenue due to the introduction of unlimited plans in 2019, and the impact of a higher prepaid mix in our overall subscriber base • Increased adoption of unlimited data plans and installment payment plans • No material financial, operational or competitive consequences of changes in regulations affecting our wireless business KEY GROWTH DRIVERS • Increasing Canadian wireless industry penetration • A higher market share of prepaid customers • A greater number of customers on our 4G LTE, LTE-A and 5G networks • Customer adoption and 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. REGULATORY ENVIRONMENT AGGRESSIVE COMPETITION RISK RISK MARKET MATURITY AND INCREASED DEVICE COSTS • Greater regulation of wireless services, • The intensity of competitive activity from RISK pricing and infrastructure (e.g., additional mandated access to wireless networks and limitations placed on future spectrum bidding) national wireless operators, regional facilities-based wireless service providers, non-traditional players and resellers POTENTIAL IMPACT POTENTIAL IMPACT • Greater regulation could influence • Pressure on our revenue, adjusted network investment and the market structure, limit our flexibility, improve the business position of our competitors, limit network-based differentiation of our services, and negatively impact the financial performance of our wireless business EBITDA, ABPU and churn would likely result if competitors continue to aggressively pursue new types of price plans, such as the recently launched unlimited data plans with no data overage and handset installment plans, increase discounts, offer shared plans based on sophisticated pricing requirements or offer other incentives, such as multi-product bundles, to attract new customers • 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 62 BCE Inc. 2019 Annual Report 5.2 Bell Wireline Our rapidly expanding FTTP and WTTP service footprints, leading Internet and TV products and large business-to-business franchise, together with focused execution and disciplined cost management, delivered positive financial results in 2019 in a highly competitive marketplace. FINANCIAL PERFORMANCE ANALYSIS 2019 PERFORMANCE HIGHLIGHTS Bell Wireline Revenues (in $ millions) $12,267 $12,356 62% 64% Bell Wireline Adjusted EBITDA (in $ millions) (% adjusted EBITDA margin) Data services Voice Product Other services $5,321 in 2018 43.4% $5,414 in 2019 43.8% 32% 4% 2% 29% 5% 2% +0.7% 18 19 e n i l e r i 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 +1.7% A & D M 5 Retail high-speed Internet (1) (2) Retail high-speed Internet (1) Fibre and WTTP footprint +4.3% Subscriber growth in 2019 Retail TV (1) +0.2% Subscriber growth in 2019 135,861 Total net subscriber activations in 2019 10 million Homes and businesses at the end of 2019 Retail IPTV 91,476 Total net subscriber activations in 2019 Retail residential NAS lines (1) (8.9%) Subscriber decline in 2019 (1) As of January 1, 2019, we are no longer reporting wholesale subscribers in our Internet, TV and residential NAS subscriber bases reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. (2) At the beginning of Q1 2019, our retail high-speed Internet subscriber base was increased by 9,366 subscribers due to the transfer of fixed wireless Internet subscribers from our wireless segment. BCE Inc. 2019 Annual Report 63 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 e n i l e r i W l l e B Total operating product revenues Total Bell Wireline revenues n.m.: not meaningful 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 2019 7,684 3,564 251 11,499 289 11,788 519 48 567 1 568 2018 7,466 3,782 247 11,495 242 11,737 466 64 530 – 530 12,356 12,267 $ CHANGE % CHANGE 218 (218) 4 4 47 51 53 (16) 37 1 38 89 2.9% (5.8%) 1.6% – 19.4% 0.4% 11.4% (25.0%) 7.0% n.m. 7.2% 0.7% Bell Wireline operating revenues increased by 0.7% in 2019, compared to last year, driven by higher data services and product revenues, offset in part by the ongoing erosion in voice revenues. Bell Wireline operating service revenues grew by 0.4% in 2019, compared to 2018. • The contribution from the G7 summit and the Ontario general election in Q2 2018 • Voice revenues declined by 5.8% in the year, compared to 2018, resulting from: • Continued NAS line erosion from technological substitution to wireless • Data revenues up 2.9% in 2019, compared to last year, attributable and Internet-based services to: • Large business customer conversions to IP-based data services • Growth in retail Internet and IPTV subscribers combined with the • Reduced usage of traditional long distance services by residential flow-through of 2018 and 2019 pricing changes and business customers • Higher IP connectivity and business solutions services sales to enterprise customers including the contribution from the acquisition of Axia at the end of August 2018 These factors were partly offset by: • Higher acquisition, retention and bundle discounts on residential services • The ongoing decline in our satellite TV subscriber base • Continued legacy data erosion due in part to migrations to IP-based services • Competitive pricing pressures within our business markets These factors were partly offset by: • The flow-through of 2018 and 2019 pricing changes • Higher sales of international wholesale long distance minutes • Contribution from the Federal general election in Q4 2019 Bell Wireline operating product revenues grew by 7.2% in 2019, compared to 2018, driven by greater demand for equipment by large enterprise business customers in the first half of the year, mainly in the government, banking and retail sectors. OPERATING COSTS AND ADJUSTED EBITDA Operating costs Adjusted EBITDA Adjusted EBITDA margin Bell Wireline operating costs were essentially stable year over year, decreasing by 0.1% in 2019, compared to 2018, resulting from: • The favourable impact from the adoption of IFRS 16 in 2019 • Continued effective cost containment • Lower pension expenses reflecting reduced DB costs These factors were partly offset by: • Higher cost of goods sold related to the growth in product sales • Increased costs from the acquisition of Axia • Greater payments to other carriers from increased sales of international wholesale long distance minutes 64 BCE Inc. 2019 Annual Report 2019 (6,942) 5,414 43.8% 2018 $ CHANGE % CHANGE (6,946) 5,321 43.4% 4 93 0.1% 1.7% 0.4 pts Bell Wireline adjusted EBITDA grew by 1.7% in 2019, compared to last year, reflecting the growth in revenues as operating expenses were relatively stable year over year. Adjusted EBITDA margin increased to 43.8% in 2019, compared to the 43.4% achieved last year, resulting from the favourable impact of the adoption of IFRS 16 in 2019 and the flow-through of the service revenue growth, offset in part by higher low-margin product sales in our total revenue base. e n i l e r i 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 BELL WIRELINE OPERATING METRICS DATA Retail high-speed Internet Retail net activations (1) Retail subscribers (1) (2) 2019 2018 CHANGE % CHANGE 135,861 3,555,601 116,599 3,410,374 19,262 145,227 16.5% 4.3% (1) As of January 1, 2019, we are no longer reporting wholesale subscribers in our Internet subscriber base reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. (2) At the beginning of Q1 2019, our retail high-speed Internet subscriber base was increased by 9,366 subscribers due to the transfer of fixed wireless Internet subscribers from our wireless segment. Retail high-speed Internet subscriber net activations grew by 16.5% in 2019, compared to last year, due to greater activations in our expanding fixed WTTP and FTTP footprints, combined with higher pull- through from Alt TV, our application-based live TV service. This was offset in part by increased deactivations resulting from aggressive offers from cable competitors, coupled with a higher number of customers coming off promotional offers. Retail high-speed Internet subscribers totaled 3,555,601 at December 31, 2019, up 4.3% from the end of 2018. At the beginning of Q1 2019, our retail high-speed Internet subscriber base was increased by 9,366 subscribers due to the transfer of fixed wireless Internet subscribers from our wireless segment. Retail TV Retail net subscriber activations (losses) (1) IPTV Satellite Total retail subscribers (1) IPTV Satellite 2019 6,053 91,476 (85,423) 2,772,464 1,767,182 1,005,282 2018 CHANGE % CHANGE 21,559 110,790 (89,231) 2,766,411 1,675,706 1,090,705 (15,506) (19,314) 3,808 6,053 91,476 (85,423) (71.9%) (17.4%) 4.3% 0.2% 5.5% (7.8%) (1) As of January 1, 2019, we are no longer reporting wholesale subscribers in our TV subscriber base reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. Retail IPTV net subscriber activations decreased by 17.4% in 2019, compared to last year, resulting from the impact of a maturing Fibe TV market, slower new service footprint growth and greater substitution of traditional TV services with OTT services, partly offset by higher Alt TV activations. Total retail TV net subscriber activations (IPTV and satellite TV combined) decreased by 71.9% in 2019, compared to last year, due to lower IPTV net activations, moderated by fewer satellite TV net losses. Retail IPTV subscribers at December 31, 2019 totaled 1,767,182, up 5.5% from 1,675,706 subscribers reported at the end of 2018. Retail satellite TV net customer losses improved by 4.3% compared to 2018, attributable to lower deactivations, reflecting a more mature subscriber base geographically better-suited for satellite TV service. VOICE Retail residential NAS lines net losses (1) Retail residential NAS lines (1) Retail satellite TV subscribers at December 31, 2019 totaled 1,005,282, down 7.8% from 1,090,705 subscribers at the end of last year. Total retail TV subscribers (IPTV and satellite TV combined) at December 31, 2019 were 2,772,464, representing a 0.2% increase since the end of 2018. 2019 2018 (263,325) 2,697,483 (258,881) 2,960,808 CHANGE (4,444) (263,325) % CHANGE (1.7%) (8.9%) (1) As of January 1, 2019, we are no longer reporting wholesale subscribers in our residential NAS subscriber base reflecting our focus on the retail market. Consequently, we restated previously reported 2018 subscribers for comparability. Retail residential NAS net losses increased by 1.7% in 2019, compared to 2018, resulting from lower activations, driven by a market shift from three-product to two-product Internet and TV service bundles, which moderated in the second half of 2019, as well as ongoing substitution to wireless and Internet-based technologies. This was partially offset by fewer customer deactivations, reflecting a reduced number of customers coming off promotional offers. Retail residential NAS subscribers at December 31, 2019 of 2,697,483 declined by 8.9%, compared to the end of 2018. This represented an increase compared to the 7.4% rate of erosion experienced in 2018, driven mainly by higher wireless and Internet- based technological substitution. BCE Inc. 2019 Annual Report 65 e n i l e r i 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 COMPETITIVE LANDSCAPE AND INDUSTRY TRENDS COMPETITIVE LANDSCAPE Although the residential high-speed Internet market is maturing, with a penetration rate of approximately 87% across Canada, subscriber growth is expected to continue over the coming years. An estimated 7.2 million Internet subscribers received their service over the networks of the four largest cable companies at the end of 2019, up 3% from approximately 7.0 million at the end of 2018. An estimated 6.3 million Internet subscribers received their service over the networks of incumbent local exchange carriers (ILECs) like Bell at the end of 2019, up 4% from approximately 6.1 million at the end of 2018. Bell continues to make gains in market share as a result of the expansion of our FTTP direct fibre network and our build-out of Wireless Home Internet in rural markets. While Canadians still watch traditional TV, digital platforms are playing an increasingly important role in the broadcasting industry and in respect of content. Popular online video services are providing Canadians with more choice about what, where, when and how to access their video content. In 2019, ILECs offering IPTV service grew their subscriber base by an estimated 5% to reach 3.0 million customers, driven by expanded network coverage, enhanced differentiated service offerings, and marketing and promotions focused on IPTV. Despite this IPTV growth, the combined cable TV and satellite TV subscriber penetration rate declined. Canada’s four largest cable companies have an estimated 5.3 million TV subscribers, or a 53% market share, a decrease from 54% at the end of 2018. The balance of industry subscribers were served by satellite TV and regional providers. In recent years, including in 2019, three of the largest Canadian cable TV companies have launched new TV services based on the Comcast X1 video platform, including Shaw Communications Inc. (Shaw), Rogers and most recently Quebecor’s Vidéotron brand. Our IPTV platform (Fibe TV and Alt TV) continues to offer numerous service advantages over this cable platform. The financial performance of the overall Canadian wireline telecom- munications 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 is also continuing to erode traditional telephone providers’ market share of residential local telephony. Canada’s four largest cable companies had approximately 3.6 million telephony subscribers at the end of 2019, representing a national residential market share of approximately 46%. Other non-facilities-based competitors also offer local and long distance VoIP services and resell high-speed Internet services. Competitors • Cable TV providers offering cable TV, Internet and cable telephony services, including: • Rogers in Ontario, New Brunswick, Newfoundland and Labrador • Vidéotron in Québec • Cogeco Cable Inc. (a subsidiary of Cogeco Inc.) (Cogeco) in Ontario and Québec • 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 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/or video services, such as Skype, Netflix, Amazon Prime Video, Disney+, CBS All Access 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 • Customized managed outsourcing solutions competitors, such as systems integrators CGI, IBM and EDS (a division of HP Enterprise Services) • 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 Telus, Rogers, Chubb-Edwards, Stanley Security and Brinks Home Security 66 BCE Inc. 2019 Annual Report 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 rollout of the DOCSIS 3.1 platform. Although this platform increases download speeds in the near term and is cost-efficient, it does not offer the same advanced capabilities as FTTP over the longer term in terms of reduced latency or upload speed potential. FTTP delivers broadband speeds of up to 1.5 Gbps currently, with faster speeds expected in the future as network and in-home equipment evolves to support these higher speeds. Increasing speeds beyond 1.5 Gbps in the home would not require any changes to the fibre. 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 Disney+, 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 users with the ability to consume live and on-demand content on laptops, smartphones, tablets, Apple TV, Chromecast and Firestick 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 51% of households in our wireline footprint at the end of 2019, compared to approximately 46% at the end of 2018, 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 telecommunications services. BUSINESS OUTLOOK AND ASSUMPTIONS 2020 OUTLOOK We expect to generate positive revenue and adjusted EBITDA growth in 2020. This is predicated on continued expansion of our retail broadband Internet and TV subscriber bases supported by a broader FTTP service footprint; further deployment of fixed wireless WTTP technology in more rural communities; scaling of Alt TV; the introduction of new TV products and features; improving year-over-year organic business markets operating profitability; and cost reductions to offset competitive pricing pressures and the ongoing decline in voice revenue. Retail TV subscriber growth within our wireline footprint is expected to be driven by increasing Fibe TV penetration of existing IPTV-enabled neighbourhoods. We also intend to seek greater penetration within the multiple-dwelling units market and to combat the competitive impact of OTT video streaming services and a growing cord-cutter market with our Alt TV service. Although retail satellite TV net customer losses are expected to continue in 2020, due mainly to aggressive residential promotional offers from cable competitors, they are expected to moderate as a result of fewer residential customer deactivations and migrations to IPTV reflecting a more mature and stable subscriber base that is geographically better-suited for satellite TV service. e n i l e r i 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 BCE Inc. 2019 Annual Report 67 e n i l e r i 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 ASSUMPTIONS • Positive full-year adjusted EBITDA growth • Continued growth in retail IPTV subscribers • Increasing wireless and Internet-based technological substitution • Residential household ARPU growth from increased penetration of multi-product households • Continued aggressive residential service bundle offers from cable TV competitors in our local wireline areas • Moderating level of promotional activity to acquire new subscribers • 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 fixed WTTP technology in rural communities • 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 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, new call centre technology that is enabling self-serve capabilities, and other improvements to the customer service experience • No material financial, operational or competitive consequences of changes in regulations affecting our wireline business Retail Internet subscriber base growth in 2020 is expected to be driven by a growing FTTP service footprint together with higher household penetration; the ongoing rollout of 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 leveraging Bell’s Smart Home automation leadership with services such as Whole Home Wi-Fi and home security. In business wireline, even when 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. 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 2020. We intend on seeking to minimize the overall revenue decline from traditional legacy telecommunications services by developing 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 small and mid-sized business markets as cable operators and other telecom competitors look to these customer segments as potential growth opportunities. We also intend to introduce service offerings that help drive innovative solutions and value for our small 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 factors including a growing FTTP footprint and changes in consumer behaviour driven by product and customer service innovation, is expected to support our objective of maintaining our adjusted EBITDA margin relatively stable year over year. KEY GROWTH DRIVERS • Expansion of FTTP and WTTP footprints • Increasing FTTP and WTTP customer penetration • Increased business customer spending on connectivity services and managed and professional services solutions • Higher market share of industry retail Internet and IPTV subscribers • Expansion of our business customer relationships to drive higher revenue per customer • Ongoing service innovation and product value enhancements 68 BCE Inc. 2019 Annual Report 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. REGULATORY ENVIRONMENT AGGRESSIVE COMPETITION RISK RISK • The intensity of competitive activity coupled with new product launches for retail customers (e.g., IoT, smart home systems and devices, innovative TV platforms, etc.) and business customers (e.g., OTT VoIP and SD WAN) from national operators, non-traditional players and wholesalers POTENTIAL IMPACT • An increase in the intensity level of competitive activity could result in lost revenue, higher churn and increased acquisition and retention expenses, all of which would put pressure on Bell Wireline’s adjusted EBITDA • 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 • None of the Federal Court of Appeal, Federal Cabinet or CRTC agrees to materially revise the rates for aggregated wholesale high-speed access service (available on FTTN facilities and the cable facilities of large cable carriers), which rates the CRTC substantially reduced in August 2019 although this reduction is currently stayed by the Federal Court of Appeal POTENTIAL IMPACT • The mandating of rates for the new disaggregated wholesale high-speed access service available on FTTP facilities that are materially different from the rates we proposed, or the implementation of the rates reduced by the CRTC in August 2019 for aggregated wholesale high-speed access services, could change our investment strategy, especially in relation to investment in next-generation wireline networks in smaller communities and rural areas, improve the business position of our competitors, further accelerate penetration and disintermediation by OTT players, and negatively impact the financial performance of our wireline business TECHNOLOGICAL ADVANCEMENT AND CHANGING CUSTOMER BEHAVIOUR RISK • With technological advancement, 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 • The proliferation of network technologies impacts business customers’ decision to migrate to OTT, VoIP and/or leverage SD WAN architecture • Changing customer habits further contribute to the erosion of NAS lines A & D M e n i l e r i 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 POTENTIAL IMPACT 5 • Our market penetration and number of TV subscribers could decline as a result of offerings by BDUs and 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 TV content and OTT software offerings directly to consumers, may accelerate the disconnection of TV services or the reduction of TV spending, as well as the reduction in business IT investments by customers • The ongoing loss of NAS lines from technological substitution challenges our traditional voice revenues and compel us to develop other service offerings BCE Inc. 2019 Annual Report 69 5.3 Bell Media Our market-leading brands, content and streaming services, together with a sharp focus on cost control, delivered industry-leading financial performance in 2019 with cash flow generation that we redirected to capital investment in our leading wireless and wireline broadband networks. FINANCIAL PERFORMANCE ANALYSIS 2019 PERFORMANCE HIGHLIGHTS Bell Media Revenues (in $ millions) $3,121 $3,217 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 A & D M 5 18 19 Bell Media Revenue mix (product) 3% 2018 33% Bell Media Adjusted EBITDA (in $ millions) $850 $693 CTV is the most-watched Canadian TV network 12 of top 20 programs Nationally among total viewers 2018–2019 broadcast year +3.1% 18 19 3% 35% 2019 64% 62% +22.7% Bell Media Revenue mix (line of business) 8% 14% 2018 78% 9% 12% 2019 79% 64% Advertising 33% Subscriber 3% Other 62% Advertising 35% Subscriber 3% Other 78% TV 14% Radio 8% OOH 79% TV 12% Radio 9% OOH 2019 2,811 406 3,217 2018 2,677 444 3,121 $ CHANGE % CHANGE 134 (38) 96 5.0% (8.6%) 3.1% BELL MEDIA RESULTS REVENUES Total external revenues Inter-segment revenues Total Bell Media revenues 70 BCE Inc. 2019 Annual Report 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 A & D M 5 Bell Media operating revenues increased by 3.1% in 2019, compared to last year, driven by growth in both subscriber and advertising revenues. • Subscriber revenues were up in 2019, compared to last year, mainly due to continued growth in Crave, our pay TV and streaming service, driven by higher subscribers, partly due to the broadcast of the Game of Thrones final season, combined with rate increases following the launch of our enhanced Crave service in November 2018. The favourable impact from contract renewals with BDUs also contributed to the growth in subscriber revenues. • Advertising revenues increased in 2019, compared to 2018, mainly due to: • Continued growth in OOH advertising revenues • The broadcast of the Toronto Raptors in the NBA playoffs and finals • The recapture of advertising dollars following the shift last year to the principal broadcaster of the PyeongChang 2018 Winter Olympics These factors were partly offset by: • Lower conventional TV advertising revenues from reduced audience levels and the ongoing shift in customer spending to OTT and digital platforms • Continued softness in the radio advertising market • The benefit to specialty TV advertising revenues in 2018 from the • Higher advertising revenues from specialty TV due to strong audience broadcast of the 2018 men’s FIFA World Cup levels, greater demand and rate increases OPERATING COSTS AND ADJUSTED EBITDA Operating costs Adjusted EBITDA Adjusted EBITDA margin 2019 (2,367) 850 26.4% 2018 $ CHANGE % CHANGE (2,428) 693 22.2% 61 157 2.5% 22.7% 4.2 pts Bell Media operating costs decreased by 2.5% in 2019, compared to last year, mainly driven by: • The favourable impact from the adoption of IFRS 16 in 2019 • Higher 2018 costs for the men’s FIFA World Cup broadcast rights These factors were partly offset by: • Greater costs for sports broadcast rights and continued investment in content for our Crave services • Higher labour costs to support the growth in revenues 83% of all Canadian English specialty and pay TV viewers and with its French specialty and pay TV properties reaching 82% of Québec French specialty and pay TV viewers in an average week • Bell Media continued to rank first in unique visitors, total page views and total page minutes in digital media among Canadian broadcast and video network competitors. Bell Media also ranked sixth among online properties in the country in terms of unique visitors and reach, with 22.2 million unique visitors per month, reaching 70% of the digital audience. Bell Media adjusted EBITDA increased by 22.7% in 2019, compared to last year, driven by higher operating revenues coupled with lower operating costs. • Bell Media remained Canada’s top radio broadcaster, reaching 16.8 million listeners who spent approximately 77 million hours tuned in each week during Fall 2019 BELL MEDIA OPERATING METRICS • CTV maintained its #1 ranking as the most-watched network in Canada for the 18th year in a row among total viewers in primetime, with 12 of the top 20 programs nationally among total viewers • Bell Media maintained its leadership position in the specialty and pay TV market, with its English specialty and pay TV properties reaching • Astral is one of Canada’s leading OOH advertising providers, reaching 18 million consumers weekly, with an offering of six innovative product lines (comprised of outdoor advertising, street furniture, airport, digital large format, transit and lifestyle) and owning more than 50,000 advertising faces, 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 content is increasingly being controlled by a small number of global 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. BCE Inc. 2019 Annual Report 71 Competitors TV • Conventional Canadian TV stations (local and distant signals) and specialty and pay channels, such as those owned by Corus Entertainment Inc. (Corus), Rogers, Québecor, Canadian Broadcasting Corporation (CBC)/Société Radio-Canada and Groupe V • U.S. conventional TV stations and specialty channels • OTT streaming providers such as Netflix, Amazon Prime Video, Disney+, CBS All Access and DAZN • Video-sharing websites such as YouTube RADIO • Large radio operators, such as Rogers, Corus, Cogeco and Stingray that also own and operate radio station clusters in various local markets • Radio stations in specific local markets • Satellite radio provider SiriusXM 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 A & D M 5 • Music streaming services such as Spotify and Apple 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 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, Amazon Prime Video and Disney+, to complement linear TV consumption, an increasing number are using these services as alternatives to a traditional linear package. 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 DTC products such as Bell Media’s bilingual Crave service, Super Écran, TSN and RDS, as well as authenticated TV Everywhere services featuring a series of apps including CTV, Discovery and CTV Drama. 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. 72 BCE Inc. 2019 Annual Report BUSINESS OUTLOOK AND ASSUMPTIONS 2020 OUTLOOK Subscriber revenue performance is projected to reflect the benefits from BDU carriage renewals, and continued scaling of DTC products, including Crave. However, the effects of shifting media consumption towards competing OTT and digital platforms, further TV cord-shaving and cord-cutting, as well as higher content costs for video, are expected to impact adjusted EBITDA negatively in 2020. While we anticipate the advertising market to continue to be negatively impacted by audience declines, we expect that successful completion of the acquisition of conventional French-language TV network V, as well as our pricing and strategic initiatives, should more than offset this financial pressure. We also intend to continue controlling costs by 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. Across our media properties, particularly in video, 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 leveraging Bell Media’s smart data Strategic Audience Management tool with the addition of new features and functionalities such as best-in-class proprietary data, an improved user experience and a larger pool of available inventory. Our sports video offerings are expected to continue to deliver premium content and exceptional viewing experiences to our TV and DTC audiences. Our NFL and NHL offerings, including the return of simultaneous substitution of Canadian advertising during the Super Bowl, 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 Crave, which recently evolved into a bilingual TV and streaming service, we will continue to leverage our investments in premium content (including HBO, HBO Max, SHOWTIME and STARZ) in order to attract pay TV and DTC subscribers. In our French-language TV services, we will continue to optimize our programming with a view to increasing our appeal to audiences, supported in particular by the pending acquisition of V as well as Super Écran, which is now available as a Crave add-on. 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. 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. ASSUMPTIONS • Revenue performance expected to reflect BDU rate increases, strategic pricing on advertising sales and simultaneous substitution of Canadian advertising during the Super Bowl allowed by the Supreme Court ruling of December 2019 that overturned the CRTC’s 2016 decision • Operating cost growth driven by higher programming costs, mainly due to continued investment in Crave content and sports broadcast rights • Continued scaling of Crave and launch of Crave with French-language content • 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 • Growth in OTT viewing expected to result in lower subscriber levels for many Bell Media video properties • Acquisition of conventional network V along with related digital assets, including the ad-supported VOD service Noovo.ca, subject to regulatory approvals • No material financial, operational or competitive consequences of changes in regulations affecting our media business 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 A & D M 5 BCE Inc. 2019 Annual Report 73 KEY GROWTH DRIVERS • Strategic pricing on advertising sales • Further integrate the use of our data across our media properties to better inform media planning, activation, and measurement, combined with an improved buying experience for advertisers • Ongoing growth in BDU rates • Optimizing unique partnerships and strategic content investments • Enhancing digital strategy, including scaling of DTC products • Converting premium OOH structures to digital and adding new boards 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. i a d e M l l e B AGGRESSIVE COMPETITION AND REGULATORY CONSTRAINTS ADVERTISING AND SUBSCRIPTION REVENUE UNCERTAINTY RISING CONTENT COSTS AND ABILITY TO SECURE KEY CONTENT RISK RISK RISK 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 • The intensity of competitive activity from traditional TV services, as well as from new technologies and alternative distribution platforms such as unregulated OTT content offerings, VOD, personal video platforms and pirated content, in combination with regulations that require all BDUs to make TV services available à la carte • Acceleration among non-traditional global players developing more aggressive product and sales strategies in creating and distributing video and the increase in DTC sales 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 • Advertising is heavily dependent on • Rising content costs, as an increasing number of domestic and global competitors seek to acquire the same content, and the ability to acquire or develop 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 or develop popular programming content could adversely affect Bell Media’s viewership and subscription levels and, consequently, advertising and subscription revenues 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. • Bell Media has contracts with a variety 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 74 BCE Inc. 2019 Annual Report 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. 6.1 Net debt Debt due within one year Long-term debt Preferred shares (1) Cash and cash equivalents Net debt 2019 3,881 22,415 2,002 (145) 28,153 2018 $ CHANGE % CHANGE 4,645 19,760 2,002 (425) 25,982 (764) 2,655 – 280 2,171 (16.4%) 13.4% – 65.9% 8.4% (1) 50% of outstanding preferred shares of $4,004 million in 2019 and 2018 are classified as debt consistent with the treatment by some credit rating agencies. The increase of $1,891 million in total debt, comprised of debt due within one year and long-term debt, was due to: • a decrease in our notes payable (net of issuances) of $1,073 million • a net decrease of $29 million in our lease liabilities and other debt • an increase in our lease liabilities of $2,304 million as a result of the adoption of IFRS 16 on January 1, 2019 • the issuance by Bell Canada of Series M-49 and Series M-50 MTN debentures with total principal amounts of $600 million and $550 million in Canadian dollars, respectively, and Series US-2 Notes with a total principal amount of $600 million in U.S. dollars ($808 million in Canadian dollars) • an increase in our securitized trade receivables of $131 million The decrease in cash and cash equivalents of $280 million was due mainly to: • $2,819 million of dividends paid on BCE common shares • $1,216 million of debt repayments (net of issuances) • $142 million paid for the purchase on the open market of BCE common shares for the settlement of share-based payments • $60 million acquisition and other costs paid Partly offset by: • the early redemption of Series M-27 MTN debentures and Series M-37 debentures with total principal amounts of $1 billion and $400 million, respectively Partly offset by: • $3,818 million of free cash flow • $240 million issuance of common shares from the exercise of stock options t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 6.2 Outstanding share data COMMON SHARES OUTSTANDING Outstanding, January 1, 2019 Shares issued under employee stock option plan Shares issued under employee savings plan (ESP) 4,459,559 1,231,479 Granted Exercised (1) Shares issued under deferred share plan (DSP) 16,729 Forfeited NUMBER OF SHARES STOCK OPTIONS OUTSTANDING NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE ($) 898,200,415 Outstanding, January 1, 2019 Outstanding, December 31, 2019 903,908,182 Outstanding, December 31, 2019 12,825,541 Exercisable, December 31, 2019 2,786,043 (1) The weighted average market share price for options exercised in 2019 was $62. 14,072,332 3,357,303 (4,459,559) (144,535) 56 58 54 58 57 56 At March 5, 2020, 904,327,728 common shares and 15,803,075 stock options were outstanding. BCE Inc. 2019 Annual Report 75 6.3 Cash flows 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 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 (repayment) 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 2019 7,958 (3,988) (147) (65) 60 – 3,818 (51) (60) – – – 3 (1,216) 240 – (142) (2,819) – (53) (280) 2018 $ CHANGE % CHANGE 7,384 (3,971) (149) (16) 79 240 3,567 (395) (79) (240) (56) 68 (32) 158 11 (175) (222) (2,679) (51) (75) (200) 574 (17) 2 (49) (19) (240) 251 344 19 240 56 (68) 35 (1,374) 229 175 80 (140) 51 22 (80) 7.8% (0.4%) 1.3% n.m. (24.1%) (100.0%) 7.0% 87.1% 24.1% 100.0% 100.0% (100.0%) n.m. n.m. n.m. 100.0% 36.0% (5.2%) 100.0% 29.3% (40.0%) t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 CASH FLOWS FROM OPERATING ACTIVITIES AND FREE CASH FLOW In 2019, BCE’s cash flows from operating activities increased by $574 million, compared to 2018, mainly due to higher adjusted EBITDA, which reflects the favourable impact from the adoption of IFRS 16, and a voluntary DB pension plan contribution of nil in 2019 compared to $240 million paid in 2018. This was partly offset by a decrease in operating assets and liabilities, higher interest paid which reflects the unfavourable impact from the adoption of IFRS 16 and higher income taxes paid. Free cash flow increased by $251 million in 2019, compared to 2018, mainly due to higher cash flows from operating activities, excluding voluntary DB pension plan contributions and acquisition and other costs paid, partly offset by higher cash dividends paid by subsidiaries to NCI. CAPITAL EXPENDITURES Bell Wireless Capital intensity ratio Bell Wireline Capital intensity ratio Bell Media Capital intensity ratio BCE Capital intensity ratio 2019 697 7.6% 3,183 25.8% 108 3.4% 3,988 16.6% 2018 664 7.5% 3,193 26.0% 114 3.7% 3,971 16.9% $ CHANGE % CHANGE (33) 10 6 (17) (5.0%) (0.1) pts 0.3% 0.2 pts 5.3% 0.3 pts (0.4%) 0.3 pts BCE capital expenditures totaled $3,988 million for the year, up $17 million over 2018. This corresponded to a capital intensity ratio of 16.6%, down 0.3 pts compared to last year. Capital spending in the year reflected the following: • Greater capital investments in our wireless segment of $33 million in 2019, compared to 2018, as we advanced the build-out of our LTE-A network, continued to deploy wireless small-cells to expand capacity to support subscriber growth and increase network speeds, coverage and signal quality, as well as to expand data fibre backhaul in preparation for 5G technology 76 BCE Inc. 2019 Annual Report • A modest reduction in capital spending in our wireline segment of $10 million in 2019, compared to last year, as we continued to focus our investments on the ongoing deployment of FTTP to more homes and businesses, the roll-out of fixed WTTP to rural locations in Ontario and Québec, the connection of fibre Internet and TV services to more homes and businesses and the execution of business customer contracts • Lower capital expenditures at Bell Media of $6 million in 2019, compared to 2018, mainly due to production equipment and IT upgrades in 2018 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 $154 million. On January 5, 2018, BCE acquired all of the issued and outstanding shares of AlarmForce Industries Inc. (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. VOLUNTARY DB PENSION PLAN CONTRIBUTION In 2018, we made a voluntary contribution of $240 million to fund our post-employment benefit obligation. The voluntary contribution was funded from cash on hand at the end of 2018. This reduced 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. t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 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, 2019, all of our debt was denominated in Canadian dollars with the exception of our commercial paper, and Series US-1 and Series US-2 Notes, which are denominated in U.S. dollars and have been hedged for foreign currency fluctuations through forward currency contracts and cross currency interest rate swaps. 2019 2018 We repaid $1,216 million of debt, net of issuances. This included the early redemption of Series M-27 MTN debentures and Series M-37 debentures in the principal amounts of $1 billion and $400 million, respectively, the repayments (net of issuances) of $1,073 million of notes payable, and net payments of lease liabilities and other debt of $832 million. These repayments were partly offset by the issuances of Series M-49 and Series M-50 MTN debentures with total principal amounts of $600 million and $550 million in Canadian dollars, respectively, Series US-2 Notes with a total principal amount of $600 million in U.S. dollars ($808 million in Canadian dollars), and an increase in securitized trade receivables of $131 million. We issued $158 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 $1,150 million in U.S. dollars ($1,493 million in Canadian dollars). 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 $612 million and net repayments of $123 million of notes payable. ISSUANCE OF COMMON SHARES The issuance of common shares in 2019 increased by $229 million, compared to 2018, due to a higher number of exercised stock options. REPURCHASE OF COMMON SHARES In Q1 2018, BCE repurchased and cancelled 3,085,697 common shares for a total cost of $175 million through a NCIB. Of the total cost, $69 million represented stated capital and $3 million represented the reduction of the contributed surplus attributable to these common shares. The remaining $103 million was charged to the deficit. BCE Inc. 2019 Annual Report 77 t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 CASH DIVIDENDS PAID ON COMMON SHARES In 2019, cash dividends paid on common shares of $2,819 million increased by $140 million, compared to 2018, due to a higher dividend paid in 2019 of $3.1325 per common share compared to $2.9825 per common share in 2018. 6.4 Post-employment benefit plans For the year ended December 31, 2019, we recorded a decrease in our post-employment benefit obligations and a gain, before taxes, in OCI of $191 million. This was due to a higher-than-expected return on plan assets, partly offset by a lower actual discount rate of 3.1% at December 31, 2019, compared to 3.8% at December 31, 2018. 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. 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 7, Other expense, Note 24, Post-employment benefit plans and Note 26, Financial and capital management in BCE’s 2019 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, 2019 were $2,981 million and $62 million, respectively • Our contract assets and allowance for doubtful accounts balances at December 31, 2019 were $1,712 million and $68 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 gain (loss) of $13 million ($27 million) recognized in net earnings at December 31, 2019 and a gain (loss) of $189 million ($178 million) recognized in OCI at December 31, 2019, with all other variables held constant. A 10% depreciation (appreciation) in the value of the Canadian dollar relative to the Philippine peso would result in a gain (loss) of $4 million recognized in OCI at December 31, 2019, 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 and options on our anticipated transactions and commercial paper maturing in 2020 to 2021 of $3.3 billion in U.S. dollars ($4.3 billion in Canadian dollars) and $1.9 billion in Philippine pesos ($49 million in Canadian dollars) at December 31, 2019, to manage foreign currency risk related to anticipated transactions and certain 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 • At December 31, 2019, we had outstanding cross currency interest rate swaps with notional amounts of $1,150 million and $600 million in U.S. dollars ($1,493 million and $808 million in Canadian dollars, respectively). These cross currency interest rate swaps are used to hedge the U.S. currency exposure of our Series US-1 Notes maturing in 2048 and Series US-2 Notes maturing in 2049, respectively. • For cross currency interest rate 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 BCE Inc. 2019 Annual Report FINANCIAL RISK Interest rate risk Equity price risk DESCRIPTION OF RISK MANAGEMENT OF RISK AND FINANCIAL STATEMENT CLASSIFICATION 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 $29 million in net earnings at December 31, 2019. Refer to the following Fair value section for details on our derivative financial instruments. • We use interest rate swaps to economically hedge dividend rate resets on preferred shares. We also use interest rate locks to hedge the interest rates on future debt issuances. • In 2019, we entered into interest rate swaps with a notional amount of $275 million to hedge the dividend rate reset on BCE preferred shares in 2020. • For interest rate swaps, changes in the fair value of these derivatives are recognized immediately in Other expense in the income statements • There were no interest rate locks outstanding as of December 31, 2019 • 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 $40 million at December 31, 2019 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 of these derivatives 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 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, 2019 would result in a gain (loss) of $38 million recognized in net earnings for 2019, with all other variables held constant. Refer to the following Fair value section for details on our derivative financial instruments. t n e m e g a n a m a t i p a c d n a l Longevity risk We are exposed to life expectancy risk on our post-employment benefit plans. • The Bell Canada pension plan has an investment arrangement to hedge part of its exposure to potential increases in longevity which covers approximately $4 billion of post-employment benefit obligations A & D M l i a c n a n F i 6 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. DECEMBER 31, 2019 DECEMBER 31, 2018 CLASSIFICATION FAIR VALUE METHODOLOGY CARRYING VALUE FAIR VALUE CARRYING VALUE CRTC tangible benefits obligation CRTC deferral account obligation Trade payables and other liabilities and other non-current liabilities Trade payables and other liabilities and other non-current liabilities Debt securities 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 29 82 29 85 FAIR VALUE 61 61 108 112 Quoted market price of debt 18,653 20,905 18,188 19,178 Finance leases (1) Debt due within one year and long-term debt Present value of future cash flows discounted using observable market interest rates – – 2,097 2,304 (1) Upon adoption of IFRS 16 on January 1, 2019, fair value disclosures are no longer required for leases. BCE Inc. 2019 Annual Report 79 The following table provides the fair value details of financial instruments measured at fair value in the statements of financial position. December 31, 2019 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 Other non-current assets and liabilities December 31, 2018 Publicly-traded and privately-held investments (3) Derivative financial instruments 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) 129 165 (135) 71 110 181 (135) 43 2 – – 1 1 – – – – 165 – 128 – 181 – 114 127 – (135) (58) 109 – (135) (71) (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 our assigned 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 5, 2020 from DBRS, Moody’s and S&P. t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 KEY CREDIT RATINGS MARCH 5, 2020 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, and they may be revised or withdrawn at any time by the assigning rating agency. Ratings are determined by the rating agencies based on criteria established from time to time by them, and they do not comment on market price or suitability for a particular investor. Each credit rating should be evaluated independently of any other credit rating. As of March 5, 2020, BCE and Bell Canada’s credit ratings have stable outlooks from DBRS, Moody’s and S&P. 80 BCE Inc. 2019 Annual Report 6.7 Liquidity SOURCES OF LIQUIDITY Our cash and cash equivalents balance at the end of 2019 was $145 million. We expect that this balance, our 2020 estimated cash flows from operations and capital markets financing, including commercial paper, will permit us to meet our cash requirements in 2020 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 2020 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 2020, 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 and spectrum auctions, as well as for the payment of contingencies. Subsequent to year end, on February 13, 2020, Bell Canada issued 3.50% Series M-51 MTN debentures under its 1997 trust indenture, with a principal amount of $750 million, which mature on September 30, 2050. The net proceeds of the offering are intended to be used to fund, on March 16, 2020, the redemption, prior to maturity, of Bell Canada’s 4.95% Series M-24 MTN debentures, with early debt redemption charges of $17 million. The M-24 MTN debentures have an outstanding principal amount of $500 million and were due on May 19, 2021. The net proceeds are further intended to be used for the repayment of short-term debt. The table below is a summary of our total bank credit facilities at December 31, 2019. DECEMBER 31, 2019 Committed credit facilities Unsecured revolving 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 4,000 106 4,106 1,939 6,045 – – – – – – 106 106 1,059 1,165 1,951 – 1,951 – 1,951 2,049 – 2,049 880 2,929 (1) Bell Canada’s $2.5 billion and additional $500 million committed revolving credit facilities expire in November 2024 and November 2020, respectively, and its $1 billion committed expansion credit facility expires in November 2022. 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, 2019, Bell Canada’s outstanding commercial paper included $1,502 million in U.S. dollars ($1,951 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, 2019. The total amount of the net available committed 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 2020, 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 2020 is detailed in the following table and is subject to actuarial valuations that will be completed in mid-2020. Actuarial valuations were last performed for our significant post-employment benefit plans as at December 31, 2018. 2020 EXPECTED FUNDING DB pension plans DC pension plans OPEBs Total net post-employment benefit plans TOTAL 170 120 75 365 t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 BCE Inc. 2019 Annual Report 81 t n e m e g a n a m a t i p a c d n a l l i a c n a n F i A & D M 6 DIVIDEND PAYMENTS In 2020, the cash dividends to be paid on BCE’s common shares are expected to be higher than in 2019 as BCE’s annual common share dividend increased by 5.0% to $3.33 per common share from $3.17 per common share effective with the dividend payable on April 15, 2020. 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. CONTRACTUAL OBLIGATIONS The following table is a summary of our contractual obligations at December 31, 2019 that are due in each of the next five years and thereafter. Recognized financial liabilities Long-term debt Notes payable Lease liabilities 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 Commitments (off-balance sheet) Commitments for property, plant and equipment and intangible assets Purchase obligations Leases committed not yet commenced 2020 2021 2022 2023 2024 THERE- AFTER TOTAL 62 1,994 960 1,050 862 (3) (135) 1,050 593 10 2,302 1,762 1,637 1,250 11,688 18,701 – 858 – 772 (2) – 796 510 4 – 629 – 711 (2) – 656 460 3 – 530 – 643 (2) – 521 297 3 – 418 – 580 (2) – 381 180 2 – 2,338 – 1,994 5,733 1,050 6,869 10,437 (57) – 589 370 5 (68) (135) 3,993 2,410 27 Total 6,443 5,240 4,219 3,629 2,809 21,802 44,142 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. Our commitments for leases not yet commenced include OOH advertising spaces and real estate with lease terms ranging from 4 to 20 years. These leases are non-cancellable. 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 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. LITIGATION 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 5, 2020, 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. For a description of important legal proceedings pending at March 5, 2020, please see the section entitled Legal proceedings contained in the BCE 2019 AIF. 82 BCE Inc. 2019 Annual Report 7 Selected annual and quarterly information 7.1 Annual financial information The following table shows selected consolidated financial data of BCE for 2019, 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. As required, we adopted IFRS 16 – Leases effective January 1, 2019, as described in section 10.1, Our accounting policies. We adopted IFRS 16 using a modified retrospective approach whereby the financial statements of prior periods presented were not restated and continue to be reported under IAS 17 – Leases, as permitted by the specific transition provisions of IFRS 16. The cumulative effect of the initial adoption of IFRS 16 was reflected as an adjustment to the deficit at January 1, 2019. Effective January 1, 2018, we applied IFRS 15 – Revenue from Contracts with Customers, retrospectively to each period in 2017 previously reported. In 2018, we also reclassified some 2017 amounts to make them consistent with the 2018 presentation. 2019 2018 2017 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) 20,737 3,227 23,964 (13,858) 10,106 (114) (3,496) (902) (1,132) (63) (13) (1,133) 3,253 3,040 151 62 3,253 20,441 3,027 23,468 (13,933) 9,535 (136) (3,145) (869) (1,000) (69) (348) (995) 2,973 2,785 144 44 2,973 20,095 2,662 22,757 (13,475) 9,282 (190) (3,034) (810) (955) (72) (102) (1,069) 3,050 2,866 128 56 3,050 3.37 3.10 3.20 42.2% 18.2% 40.6% 17.1% 40.8% 18.6% (1) Net earnings attributable to common shareholders divided by total average equity attributable to BCE shareholders excluding preferred shares. n o i t a m r o f n i y l r e t r a u q d n a l a u n n a d e t c e e S l A & D M 7 BCE Inc. 2019 Annual Report 83 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 (repayment) 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) n o i t a m r o f n i y l r e t r a u q d n a l a u n n a d e t c e e S l A & D M 7 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) 2019 2018 2017 60,146 145 3,881 22,415 28,961 21,074 21,408 7,958 (4,036) (3,988) (51) – (4,202) 240 (1,216) (2,819) (147) (65) 3,818 900.8 903.9 54,379 3.17 (2,857) (151) 60.16 57,100 425 4,645 19,760 25,982 20,363 20,689 7,384 (4,386) (3,971) (395) 68 (3,198) 11 158 (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 17.5% (5.6%) 8.9% 16.6% 17.85 16.9% 17.40 17.7% 18.87 52 53 52 (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 BCE Inc. 2019 Annual Report 7.2 Quarterly financial information The following table shows selected BCE consolidated financial data by quarter for 2019 and 2018. 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 Interest expense Interest on post-employment benefit obligations Other (expense) income Income taxes Net earnings Net earnings attributable to common shareholders Net earnings per common share Basic and diluted Average number of common shares outstanding – basic (millions) OTHER INFORMATION Cash flows from operating activities Free cash flow Capital expenditures 2019 2018 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 5,276 1,040 6,316 2,508 (28) (865) (228) 5,185 799 5,984 2,594 (23) (861) (230) 5,231 699 5,930 2,595 (39) (888) (223) 5,045 689 5,734 2,409 (24) (882) (221) 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) (286) (282) (281) (283) (259) (255) (246) (240) (16) (119) (243) 723 672 (16) 61 (321) 922 867 (15) (56) (276) 817 761 (16) 101 (293) 791 740 (18) (158) (244) 642 606 (17) (41) (224) 867 814 (17) (88) (292) 755 704 (17) (61) (235) 709 661 0.74 0.96 0.85 0.82 0.68 0.90 0.79 0.73 903.8 901.4 899.5 898.4 898.1 898.0 898.0 900.2 2,091 894 2,258 1,189 (1,153) (1,013) 2,093 1,093 (972) 1,516 642 (850) 1,788 1,022 2,043 1,014 2,057 994 (974) (1,010) (1,056) 1,496 537 (931) n o i t a m r o f n i y l r e t r a u q d n a l a u n n a d e t c e e S l A & D M 7 BCE Inc. 2019 Annual Report 85 n o i t a m r o f n i y l r e t r a u q d n a l a u n n a d e t c e e S l A & D M 7 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 2019 2,493 3,138 879 (194) 6,316 Q4 2019 944 1,359 205 2,508 Q4 2018 2,407 3,137 850 (179) 6,215 Q4 2018 879 1,339 176 2,394 $ CHANGE % CHANGE 86 1 29 (15) 101 3.6% – 3.4% (8.4%) 1.6% $ CHANGE % CHANGE 65 20 29 114 7.4% 1.5% 16.5% 4.8% BCE operating revenues grew by 1.6% in Q4 2019, compared to Q4 2018, driven by growth in Bell Wireless and Bell Media, while Bell Wireline remained stable year over year. The year-over-year increase reflected both higher service and product revenues of 0.9% and 5.7%, respectively. BCE net earnings increased by 12.6% in Q4 2019, compared to Q4 2018, mainly due to higher adjusted EBITDA, lower other expense and lower severance, acquisition and other costs. This was partly offset by higher depreciation and amortization expense and finance costs. The adoption of IFRS 16 did not have a significant impact on net earnings. BCE adjusted EBITDA increased by 4.8% in Q4 2019, compared to Q4 2018, driven by growth across all three of our segments. This resulted in an adjusted EBITDA margin of 39.7% in the quarter, up 1.2 pts over Q4 2018, primarily due to the favourable impact from the adoption of IFRS 16 in 2019. Bell Wireless operating revenues increased by 3.6% in Q4 2019, compared to Q4 2018, driven by higher service and product revenues. Service revenues grew by 1.6% year over year due to continued growth in both our postpaid and prepaid subscriber base along with rate increases and a greater mix of customers subscribing to higher-value monthly plans including unlimited data plans. This was moderated by greater sales of premium handsets along with the impact of higher- value monthly plans, and lower data overage driven by increased customer adoption of unlimited data plans. Product revenues grew by 7.4% year over year, driven by increased sales of premium handsets and the impact of higher-value monthly plans in our sales mix. Bell Wireless adjusted EBITDA increased by 7.4% in Q4 2019, compared to the same period last year, mainly driven by the flow-through of higher revenues, partially offset by higher operating expenses of 1.4% year over year. The increase in operating expenses was primarily due to higher product cost of goods sold from greater mix of premium handsets and increased handset costs, higher network operating costs to support the growth in our subscriber base and data consumption and higher bad debt expense driven by the growth in revenues. This was offset in part by the favourable impact from the adoption of IFRS 16 in 2019. Adjusted EBITDA margin, based on wireless operating revenues, of 37.9% increased by 1.4 pts over Q4 2018, mainly due to the impact from the adoption of IFRS 16, greater service revenue flow-through and promotional spending discipline during the holiday season, moderated by higher low-margin product sales in our total revenue base. Bell Wireline operating revenues remained unchanged in Q4 2019, compared to Q4 2018, resulting from stable year-over-year service revenue which increased 0.1%, as the continued expansion of our retail Internet and IPTV subscriber bases, residential rate increases, contribution from the federal election and higher business solution services revenue were offset by ongoing subscriber erosion in voice and satellite TV, greater acquisition, retention and bundle discounts on residential services to match competitor promotions, lower TV pay-per-view revenues and a decline in IP connectivity revenues due in part to migration to Internet based services. Product revenues were relatively stable year over year, declining 0.6% or $1 million. Bell Wireline adjusted EBITDA grew by 1.5% in Q4 2019, compared to Q4 2018, mainly due to lower operating costs of 1.1%, driven by the favourable impact from the adoption of IFRS 16 in 2019 and continued effective cost containment. Adjusted EBITDA margin increased 0.6 pts to 43.3% in Q4 2019, compared to Q4 2018, mainly due to the favourable impact from the adoption of IFRS 16 in 2019. Bell Media operating revenues increased by 3.4% in Q4 2019, compared to the same period last year, driven by increased subscriber revenues from the continued growth in Crave due to higher subscribers along with rate increases following the launch of our enhanced Crave service in November 2018 and also reflected the favourability from BDU contract renewals. Advertising revenues declined modestly in Q4 2019, compared to Q4 2018, from lower conventional TV advertising revenues and ongoing market softness in radio, partially offset by continued growth in specialty TV and OOH advertising revenues. Bell Media adjusted EBITDA increased by 16.5% in Q4 2019, compared to the same period last year, driven by higher operating revenues coupled with stable operating expenses as the favourable impact from the adoption of IFRS 16 in 2019 was offset by the growth in programming and content costs related to higher sports broadcast rights costs and ongoing Crave content expansion. BCE capital expenditures of $1,153 million in Q4 2019 increased by $179 million over Q4 2018 and corresponded to a capital intensity ratio of 18.3% compared to 15.7% last year. The growth in capital investments was driven by increases across all three of our segments. Wireline capital spending was $96 million higher year over year, mainly due to the timing of our spending, driven by the roll-out of fixed WTTP to rural locations in Ontario and Québec. Capital spending at Bell Wireless was 86 BCE Inc. 2019 Annual Report up $78 million in Q4 2019 over Q4 2018, due to the timing of our spending compared to Q4 2018 as we continue to invest in wireless small cells to expand capacity to support subscriber growth, and increase speeds, coverage and signal quality, as well as to expand data fibre backhaul in preparation for 5G technology. Bell Media capital investments increased $5 million compared to Q4 2018 mainly related to continued investment in digital platforms. BCE severance, acquisition and other costs of $28 million in Q4 2019 decreased by $30 million, compared to Q4 2018, mainly due to lower acquisition and other costs. BCE depreciation of $865 million in Q4 2019 increased by $66 million, year over year, mainly due to the adoption of IFRS 16. BCE amortization was $228 million in Q4 2019, up from $216 million in Q4 2018, mainly due to a higher asset base. BCE interest expense was $286 million in Q4 2019, up from $259 million in Q4 2018, mainly as a result of the adoption of IFRS 16 and higher average debt levels. BCE other expense of $119 million in Q4 2019 decreased by $39 million, year over year, mainly due to lower impairment charges at our Bell Media segment and higher gains on investments which included BCE’s obligation to repurchase at fair value the minority interest in one of BCE’s subsidiaries, partly offset by higher net mark-to-market losses on derivatives used to economically hedge equity settled share-based compensation plans. BCE income taxes of $243 million in Q4 2019 decreased by $1 million, compared to Q4 2018, mainly as a result of a higher value of uncertain tax positions favourably resolved in Q4 2019, partly offset by higher taxable income. BCE net earnings attributable to common shareholders of $672 million in Q4 2019, or $0.74 per share, were higher than the $606 million, or $0.68 per share, reported in Q4 2018. The year-over-year increase was mainly due to higher adjusted EBITDA, lower other expense and lower severance, acquisition and other costs. This was partly offset by higher depreciation and amortization expense and finance costs. The adoption of IFRS 16 did not have a significant impact on net earnings. Adjusted net earnings remained stable at $794 million in Q4 2019, compared to Q4 2018, and adjusted EPS decreased to $0.88, from $0.89 in Q4 2018. BCE cash flows from operating activities was $2,091 million in Q4 2019 compared to $1,788 million in Q4 2018. The increase is mainly attributable to higher adjusted EBITDA, which reflects the favourable impact from the adoption of IFRS 16, a voluntary DB pension plan contribution of nil in 2019 compared to $240 million paid in 2018, an increase in operating assets and liabilities, and lower interest paid, partly offset by higher income taxes paid. BCE free cash flow generated in Q4 2019 was $894 million, compared to $1,022 million in Q4 2018. The decrease was mainly attributable to higher capital expenditures, partly offset by higher cash flows from operating activities, excluding voluntary DB pension plan contributions and acquisition and other costs paid. 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. Because 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 and data options have become more prevalent, resulting in less variability in chargeable data usage. Bell Wireline revenue tends to be higher in the fourth quarter because of historically higher data and equipment product sales to business customers. 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 revenue 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 and NBA playoffs and World Cup soccer, as well as fluctuations in consumer retail activity during the year. n o i t a m r o f n i y l r e t r a u q d n a l a u n n a d e t c e e S l A & D M 7 BCE Inc. 2019 Annual Report 87 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 (ExpressVu), Bell Media, NorthernTel, Limited Partnership (NorthernTel), Télébec, Limited Partnership (Télébec) and 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, as well as by prime minister mandate letters such as the mandate letters issued on December 13, 2019, announcing the government’s intention to reduce the average cost of cellular phone bills in Canada by 25 percent. 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 undermine our incentives to invest in network improvements and extensions, limit our flexibility, influence the market structure, improve the business position of our competitors, limit network-based differentiation of our services 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. t n e m n o r i v n e y r o t a u g e R l A & D M 8 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 and spectrum licensing, foreign ownership requirements, and control of copyright piracy. Adverse decisions by governments or regulatory agencies, increasing regulation or a lack of effective anti-piracy remedies could have negative financial, operational, reputational or competitive consequences for our business. REVIEW OF KEY LEGISLATION On June 5, 2018, the Minister of Innovation, Science and Industry 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 was led by a panel of external experts tasked with consulting industry members and Canadian consumers. On January 29, 2020, the review panel issued a report that included 97 recommendations. Reforms of these key pieces of legislation could have material impacts for our broadcasting, telecommunications and wireless businesses. It is unclear which of the panel’s recommendations, if any, may be adopted by the government, and when any adopted reforms would come into force. Therefore, the impact, if any, of these recommendations on our business and financial results is unclear at this time. 88 BCE Inc. 2019 Annual Report 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. 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 held a public hearing in February 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. However, a decision by the CRTC mandating MVNO access will negatively impact our capacity to make investments at the same levels as we have in the past and, accordingly, it will put at risk our ability to invest in next-generation networks. MANDATED DISAGGREGATED 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. 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 August 29, 2017, in Telecom Order CRTC 2017-312, the CRTC set interim rates for the new disaggregated wholesale high-speed access service. The final rates remain to be determined. The mandating of final rates that are materially different from the rates we proposed could further impact our investment strategy, improve the business position of our competitors and adversely impact our financial results. 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 disaggregated 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, improve the business position of our competitors and adversely impact our financial results. 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 third-party Internet resellers to FTTN or cable networks, as applicable. On August 15, 2019, the CRTC further reduced the wholesale rates that Internet resellers pay to access network infrastructure built by facilities-based providers like Bell Canada, with retroactive effect back to March 2016 (the Decision). The estimated cost impact to Bell Canada of the Decision could be in excess of $100 million, if not overturned or otherwise modified, and will reduce the scope of Bell Canada’s broadband wireless Internet build-out plan for smaller towns and rural communities by approximately 200,000 households, to a total revised plan of 1 million households. Bell Canada and five major cable carriers (Cogeco Communications Inc., Bragg Communications Incorporated (Eastlink), Rogers, Shaw and Vidéotron) (together, the Applicants) have obtained leave to appeal the Decision from the Federal Court of Appeal. The Federal Court of Appeal has also granted a stay of the Decision until it makes its final ruling. The Applicants and TELUS Communications Inc. further appealed the Decision to the Federal Cabinet and have filed review and vary applications of the Decision with the CRTC. t n e m n o r i v n e y r o t a u g e R l A & D M 8 BCE Inc. 2019 Annual Report 89 REVIEW OF BASIC TELECOMMUNICATIONS SERVICES On December 21, 2016, the CRTC issued Telecom Regulatory Policy CRTC 2016-496, in which it created a $750 million new fund to expand access to broadband Internet as well as access to the latest generally deployed wireless technology across Canada (Fund). The Fund will collect and distribute $750 million over five years to support the CRTC’s universal service objective that all Canadians have access to Internet speeds of at least 50 Mbps download and access to the latest generally deployed mobile wireless technology. Contributions to the Fund will be collected from telecommunications service providers, like those of the BCE group, and distributed through a competitive bidding process. The Fund will 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. On June 3, 2019, the CRTC launched a first call for applications to receive funds from the Fund, that was due October 3, 2019, for projects in the North and for satellite-dependent communities. On November 13, 2019, the CRTC launched its second call for applications, due March 27, 2020, for all eligible projects to improve broadband access across Canada, including in areas covered by the first call. While we will be required to contribute to the Fund based on our percentage of industry revenues for voice, data and Internet services, the extent of the impact of the 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. 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 national 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 (the Consultation) to review certain elements of the local service regime, including whether additional pricing flexibility or some form of compensation is required for national telephone providers, given that the local service subsidy will be eliminated. The Consultation also reviewed the existing forbearance regimes for local residential and business services. In its decision resulting from this Consultation issued on February 4, 2020 (Telecom Regulatory Policy 2020-40), the CRTC did not provide any additional pricing flexibility or other form of compensation to the national telephone providers for the elimination of the local service subsidy, maintained the obligation to serve and did not provide additional technological flexibility to the national telephone providers to meet that obligation in regulated 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. 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. t n e m n o r i v n e y r o t a u g e R l A & D M 8 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. 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 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. 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 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. 90 BCE Inc. 2019 Annual Report 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 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. In a decision issued on December 20, 2019, the Supreme Court of Canada overturned the Federal Court of Appeal’s decision and concluded that the CRTC could not use the Broadcasting Act provision in question to ban simultaneous substitution for the Super Bowl program. As a result, starting with the 2020 Super Bowl, the simultaneous substitution regime applies again to the Super Bowl, as it does now with other programs whose rights have been acquired by Canadian conventional TV stations. 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. With simultaneous substitution now being reinstated, advertisements sold by Bell Media can again be substituted over those sold by U.S. stations for their U.S. signals during the Super Bowl program, thereby maximizing advertising revenues for the total Canadian audience watching the Super Bowl program. 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. ISED DECISION AND CONSULTATION ON 3500 MHZ AND OTHER SPECTRUM On June 5, 2019, ISED released its Decision on Revisions to the 3500 MHz Band to Accommodate Flexible Use and Preliminary Decisions on Changes to the 3800 MHz Band. ISED decided that it will allow flexible use (which allows spectrum to be used for both fixed and mobile services) in the 3450–3650 MHz band. This allows ISED to issue flexible use licences in this frequency range. ISED will require existing licensees, 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. t n e m n o r i v n e y r o t a u g e R l A & D M 8 such as Inukshuk Wireless Partnership (a Bell Canada and Rogers Communications Inc. partnership), to return a portion of their existing licences in return for a flexible use licence following the auction. Existing licensees that currently hold 75 MHz of spectrum or more of fixed use licences in a given area will be eligible to apply for a new flexible use licence of 60 MHz in the related area; those with 50 MHz of spectrum will be eligible to apply for 50 MHz; and all other licensees will be eligible to apply for 20 MHz. Existing licensees will be allowed to continue operating where they do not prevent the deployment of new licences. If they are required to transition, they will be subject to a protection period of six months to three years, depending on the size of the population centre in the service area in which they operate. ISED will launch a future consultation to determine the amount of spectrum that will be assigned for flexible use in the 3700–4200 MHz band. It is unclear what impact the results of this decision and future related processes could have on our business and financial results. BCE Inc. 2019 Annual Report 91 3500 MHZ SPECTRUM AUCTION On March 5, 2020, ISED released its Policy and Licensing Framework for Spectrum in the 3500 MHz Band, which will govern the auction of spectrum licences in the 3500 MHz band. ISED will set aside 50 MHz of spectrum for regional service providers in all areas where at least 50 MHz will be available for auction or all available spectrum in areas with a large population centre where less than 50 MHz is available. The auctioned licences will have a 20-year term and set-aside licences will not be transferable to set-aside ineligible entities for the first 5 to 7 years of the licence term. In addition, licensees will need to meet general network coverage targets in each licence area at 5, 10 and 20 years following licence issuance. Licensees with existing LTE networks will be subject to additional deployment requirements based on their existing LTE coverage. While the adoption of set-aside provisions limits the amount of spectrum that Bell Mobility can bid on, ISED will not apply a spectrum cap on licensees. Bidding in the auction will begin on December 15, 2020. DECISION ON RELEASING MILLIMETRE WAVE SPECTRUM TO SUPPORT 5G On June 5, 2019, ISED issued its Decision on Releasing Millimetre Wave Spectrum to Support 5G. In this decision, ISED announced that spectrum in the 26 GHz, 28 GHz, and 37–40 GHz bands will transition from satellite use to flexible use (i.e., mobile or fixed use). ISED will designate the 64–71 GHz band for licence-exempt operations on a no-interference, no-protection basis. ISED indicated that the licensing of this spectrum will occur in 2021 and it will establish the details and specific rules through one or more future consultations. It is unclear what impact the results of this decision and future related processes could have on our business and financial results. 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 t n e m n o r i v n e y r o t a u g e R l A & D M 8 8.6 Other 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, led the process, which began in February 2018. The Standing Committee on Canadian Heritage released 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. its report on May 15, 2019 and the Standing Committee on Industry, Science and Technology released its report on June 3, 2019. Each Committee made a series of recommendations in respect of the rights of Canadian copyright holders and users and the effectiveness of Canadian copyright law. At this time, it is not known whether these reports will lead to amendments to the Copyright Act and the impact of any potential amendments on our business and financial results is unknown. 92 BCE Inc. 2019 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 Regulatory environment Competitive environment SECTION REFERENCES Section 3.3, Principal business risks Section 8, Regulatory environment Section 3.3, Principal business risks Section 5, Business segment analysis (Competitive landscape and industry trends section for each segment) Security management 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 transform our operations, enabling a truly customer- centric service experience across a constantly evolving profile of world-class products and services at all points of interaction, while lowering our cost structure, 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 infrastructure. The failure 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 use new as well as evolving and developing technologies, including network functions virtualization, software-defined networks, cloud technologies, artificial intelligence and machine learning. They also seek to transform our network and systems through consolidation, virtualization and automation to achieve our objectives of becoming more agile in our service delivery and operations as well as providing omni-channel 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. Failure to transform our operations, enabling a truly customer- centric service experience across a constantly evolving profile of world-class products and services at all points of interaction, while lowering our cost structure, could hinder our ability to compete on footprint, service experience and cost structure and have an adverse impact on our business and financial results. s k s i r s s e n s u B i A & D M 9 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 maximize adaptable infrastructures, processes and technologies to quickly and efficiently respond to evolving customer patterns and behaviours and 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 lowering of rates by the CRTC of mandated wholesale services over FTTN or FTTP, the BCE Inc. 2019 Annual Report 93 potential for additional mandated access to our networks or the imposition of wholesale obligations on wireless networks will undermine the incentives for facilities-based digital infrastructure providers to invest in next-generation wireline and wireless networks. 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. Other examples of risks affecting the achievement of our desired technology/infrastructure transformation include the following: • We, and other telecommunications carriers we rely on to provide services, 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 below for more details) • 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 • Suboptimal capital deployment in network build, infrastructure and process upgrade, and customer service improvement, could hinder our ability to compete effectively • The successful deployment of WTTP and 5G mobile services could be impacted by various factors, including environmental factors, affecting coverage and costs • 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 • 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 take advantage of 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. s k s i r s s e n s u B i A & D M 9 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 expec- tations 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 plat- forms, 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 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 develop true omni-channel capabilities and embrace these new media in a positive way could adversely affect our business, financial results, reputation and brand value. Understanding the customer relationship as a whole and delivering a simple, seamless experience at a fair price is increasingly central to an evolving competitive dynamic. Failure to improve our customer expe- rience by digitizing and developing a consistent, fast and on-demand experience before, during and after sales using new technologies such as artificial intelligence and machine learning, in parallel to our network evolution, could also adversely affect our business, financial results, reputation and brand value. OPERATIONAL PERFORMANCE 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. 94 BCE Inc. 2019 Annual Report 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. Furthermore, as we move to more software-defined networks, we will need to manage the possibility of some instability during the transition. 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 hinder 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 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 results • 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, replace and upgrade 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, as well as other telecommunications carriers on which we rely to provide services, protect 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, wildfires, flooding, extended heat waves, hurricanes, tornadoes and tsunamis), power loss, building cooling loss, acts of war or terrorism, sabotage, vandalism, actions of neighbours and other events. As discussed in more detail in Environmental and health concerns – Climate change and other environmental concerns could have an adverse effect on our business below, climate change, especially in areas of greater environmental sensitivity, could heighten the occurrence of the above-mentioned environmental risks. 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 by us, or by other telecommunications carriers on which we rely to provide services, to complete planned and sufficient testing, maintenance, replacement or upgrade of our or their networks, equipment and other facilities, which is, amongst others, dependent on our or their 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 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. s k s i r s s e n s u B i A & D M 9 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 BCE Inc. 2019 Annual Report 95 • 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 • Renewal of collective agreements could result in higher labour costs and be challenging in the context of a declining workload due to transformation, a maturing footprint and improved efficiencies. During the bargaining 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. 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 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 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. 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. Difficulties in implementing remedial strategies in respect of professional consulting services provided by third parties that are not s k s i r s s e n s u B i A & D M 9 96 BCE Inc. 2019 Annual Report • Ensuring the safety of our workforce operating in different environ- ments, 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 performed in a proper or timely fashion could result in an adverse effect on our ability to comply with various obligations, including applicable legal and accounting requirements. 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. • 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 • The insolvency of one or more of our suppliers could cause a break- down in supply and have an adverse effect on our operations, including our ability to make sales or service customers, as well as on our financial results • If products and services important to our operations have manufac- turing 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, which may include a recall of products. To the extent that a supplier does not actively participate 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. 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. • We rely on other telecommunications carriers from time to time to deliver services. Should these carriers fail to roll out new networks or fail to upgrade existing networks, or should their networks be affected by operational failures or service interruptions, such issues could adversely affect our ability to provide services using such carriers’ networks and could, consequently, have an adverse effect on our business, financial results and reputation. • 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. 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 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 2019 consolidated financial statements. Our failure to identify and manage our exposure to changes in interest rates, foreign exchange rates, 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. s k s i r s s e n s u B i A & D M 9 BCE Inc. 2019 Annual Report 97 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, require us to increase contributions to our post-employment benefit plans in the future and, therefore, 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. 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. Examples of risks to our ability to reduce costs or limit potential cost increases include the following: • 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 s k s i r s s e n s u B i A & D M 9 • 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 consid- erations 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 such as carbon pricing 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 • Fraudulent (unauthorized) access and manipulation of customer accounts, including through sim-swap and port out fraud • 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 • Ongoing efforts to steal the services of TV distributors, including Bell Canada and ExpressVu, 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. In addition, the increase in laws and regulations around customer interactions and the technological evolution of our business create an environment of complex compliance requirements which must be adequately managed. 98 BCE Inc. 2019 Annual Report 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 legislation • Privacy legislation, such as Canada’s anti-spam legislation (CASL) and the Personal Information Protection and Electronic Documents Act, as well as other privacy legislation we may become subject to via mandatory flow-through of privacy-related obligations by our customers • 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 important legal proceedings involving us, please see the section entitled Legal proceedings contained in the BCE 2019 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. ENVIRONMENTAL AND HEALTH CONCERNS Climate change and other environmental concerns could have an adverse effect on our business 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, replace and upgrade our networks, IT systems, equipment and other facilities in this section 9. Given that some of our third-party suppliers and outsourcers are located in foreign countries, localized natural disasters in such countries could further negatively impact our business. In addition, rising mean temperatures and extended heat waves could increase the need for cooling capacity in our data centres and network infrastructure, thus increasing our energy consumption and associated costs. Several areas of our operations also 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. Health concerns about radiofrequency emissions from wireless communication devices and equipment, as well as pandemics, epidemics and other health risks, could have an adverse effect on our business 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. 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 may face 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 potential lawsuits would be unpredictable and could change over time • Changes in scientific evidence and/or public perceptions could lead to additional government regulations and costs for retrofitting infrastructure and handsets to achieve compliance s k s i r s s e n s u B i A & D M 9 • 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, pandemics, epidemics and other health risks could occur, which could adversely affect our ability to maintain operational networks and provide products and services to our customers, as well as the ability of our suppliers to provide us with products and services we need to operate our business. Pandemics, epidemics and other health risks could also have an adverse effect on the economy and financial markets resulting in a declining level of retail and commercial activity, which could have a negative impact on the demand for, and prices of, our products and services. Any of these events could have an adverse effect on our business and financial performance. BCE Inc. 2019 Annual Report 99 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 2019 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: 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. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 0 1 • 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. 100 BCE Inc. 2019 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 2019 – INCREASE/(DECREASE) IMPACT ON POST-EMPLOYMENT BENEFIT OBLIGATIONS AT DECEMBER 31, 2019 – INCREASE/(DECREASE) CHANGE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION 0.5% 1 year (75) 38 69 (39) (1,728) 945 1,944 (972) 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 2019 included $85 million allocated to indefinite- life intangible assets, and $8 million allocated primarily to property, plant and equipment. These impairment charges relate to broadcast licences and certain assets for various radio markets within our Bell Media segment. The impairment charges were a result of continued advertising demand and ratings pressures in the industry resulting from audience declines, as well as competitive pressure from streaming services. The charges were determined by comparing the carrying value of the cash generating units (CGUs) to their fair value less cost 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, 2020 to December 31, 2024, using a discount rate of 7.5% 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 $464 million at December 31, 2019. 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. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 0 1 BCE Inc. 2019 Annual Report 101 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. 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 3, Segmented information, in BCE’s 2019 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 (1.1%) in the perpetuity growth rate or an increase of 0.8% in the discount rate would have resulted in its recoverable amount being equal to its carrying value. 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. LEASES The application of IFRS 16 requires us to make estimates that affect the measurement of right-of-use assets and liabilities, including determining the appropriate discount rate used to measure lease liabilities. Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using our incremental borrowing rate, unless the rate implicit in the lease is readily determinable. Our incremental borrowing rate is derived from publicly available risk-free interest rates, adjusted for applicable credit spreads and lease terms. We apply a single incremental borrowing rate to a portfolio of leases with similar characteristics. 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. There were no goodwill impairment charges in 2019 or 2018. ONEROUS CONTRACTS 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. 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. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 0 1 102 BCE Inc. 2019 Annual Report JUDGMENTS POST-EMPLOYMENT BENEFIT PLANS REVENUE FROM CONTRACTS WITH CUSTOMERS 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 long-term, 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. LEASES The application of IFRS 16 requires us to make judgments that affect the measurement of right-of-use assets and liabilities. A lease contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At inception of the contract, we assess whether the contract contains an identified asset, whether we have the right to obtain substantially all of the economic benefits from use of the asset and whether we have the right to direct how and for what purpose the asset is used. In determining the lease term, we include periods covered by renewal options when we are reasonably certain to exercise those options. Similarly, we include periods covered by termination options when we are reasonably certain not to exercise those options. To assess if we are reasonably certain to exercise an option, we consider all facts and circumstances that create an economic incentive to exercise renewal options (or not exercise termination options). Economic incentives include the costs related to the termination of the lease, the significance of any leasehold improvements and the importance of the underlying assets to our operations. 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. 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. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 0 1 BCE Inc. 2019 Annual Report 103 ADOPTION OF NEW OR AMENDED ACCOUNTING STANDARDS As required, effective January 1, 2019, we adopted the following new or amended accounting standards. STANDARD DESCRIPTION IMPACT We adopted IFRS 16 using a modified retrospective approach whereby the financial statements of prior periods presented were not restated and continue to be reported under IAS 17 – Leases, as permitted by the specific transition provisions of IFRS 16. The cumulative effect of the initial adoption of IFRS 16 was reflected as an adjustment to the deficit at January 1, 2019. Further details on the impacts of adopting IFRS 16 on our January 1, 2019 consolidated statement of financial position are provided in Note 35, Adoption of IFRS 16, in BCE’s 2019 consolidated financial statements. We are currently assessing the impacts of the International Financial Reporting Interpretations Committee (IFRIC) agenda decision published in December 2019 in regards to determination of the lease term for cancellable or renewable leases under IFRS 16. As permitted by the IASB, implementation of the decision is expected in the first quarter of 2020. Under IAS 17, leases of property, plant and equipment were recognized as finance leases when we obtained substantially all the risks and rewards of ownership of the underlying assets. All other leases were classified as operating leases. IFRS 16 eliminates the distinction between operating and finance leases for lessees, requiring instead that we recognize a right-of-use asset and a lease liability at lease commencement for all leases, with certain exceptions permitted through elections and practical expedients. Accounting for leases previously classified as finance leases and lessor accounting remains largely unchanged under IFRS 16. We recognized lease liabilities at January 1, 2019 for leases previously classified as operating leases, measured at the present value of lease payments using our incremental borrowing rate at that date. Property, plant and equipment includes the corresponding right-of-use assets also recognized at January 1, 2019. The right-of-use assets were generally measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as at December 31, 2018. In certain cases, the right-of-use assets were measured as though IFRS 16 had been applied since the lease commencement date. A depreciation charge for right-of-use assets is recorded in Depreciation and an interest expense on lease liabilities is recorded in Finance costs in the income statement. As permitted by IFRS 16, we elected not to recognize lease liabilities and right-of-use assets for short-term leases and leases of low value assets, which will continue to be expensed on a straight-line basis over the lease term. We have also applied certain practical expedients to facilitate the initial adoption and ongoing application of IFRS 16: • We generally do not separate non-lease components from related lease components. Each lease component and any associated non-lease components are accounted for as a single lease component • We apply a single incremental borrowing rate to a portfolio of leases with similar characteristics • As an alternative to performing an impairment review, we adjusted right-of-use assets for any onerous lease provisions recognized in the balance sheet at December 31, 2018 • We applied the exemption not to recognize right-of-use assets and liabilities for certain leases with a remaining term of 12 months or less as of January 1, 2019 • We used hindsight when determining the lease term when the lease contracts contain options to extend or terminate the lease IFRIC 23 did not have a significant impact on our financial statements. 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. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 0 1 IFRIC 23 – Uncertainty over Income Tax Treatments Provides guidance on the application of 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 examination of tax treatments by taxation authorities, the recognition and measurement of the effect of tax uncertainties and how an entity considers changes in facts and circumstances. 104 BCE Inc. 2019 Annual Report ADOPTION OF IFRS 16 Upon adoption of IFRS 16 on January 1, 2019, we recognized right-of-use assets of $2,257 million within property, plant and equipment, and lease liabilities of $2,304 million within debt, with an increase to our deficit of $19 million. These amounts were recognized in addition to assets under finance leases of $1,947 million and the corresponding finance lease liabilities of $2,097 million at December 31, 2018 under IAS 17. As a result, on January 1, 2019, our total right-of-use assets and lease liabilities amounted to $4,204 million and $4,401 million, respectively. The table below shows the impacts of adopting IFRS 16 on our January 1, 2019 consolidated statement of financial position. Prepaid expenses Other current assets Property, plant and equipment Other non-current assets Trade payables and other liabilities Debt due within one year Long-term debt Deferred tax liabilities Other non-current liabilities Deficit Non-controlling interest DECEMBER 31, 2018 AS REPORTED 244 329 24,844 847 3,941 4,645 19,760 3,163 997 (4,937) 326 IFRS 16 IMPACTS (55) 9 2,257 17 (10) 293 2,011 (7) (39) (19) (1) JANUARY 1, 2019 UPON ADOPTION OF IFRS 16 189 338 27,101 864 3,931 4,938 21,771 3,156 958 (4,956) 325 BCE’s operating lease commitments at December 31, 2018 were $1,612 million. The difference between operating lease commitments at December 31, 2018 and lease liabilities of $2,304 million upon adoption of IFRS 16 at January 1, 2019, is due mainly to an increase of $1,122 million related to renewal options reasonably certain to be exercised, an increase of $112 million mainly related to non-monetary transactions and a decrease of ($542) million as a result of discounting applied to future lease payments, which was determined using a weighted average incremental borrowing rate of 3.49% at January 1, 2019. FUTURE CHANGES TO ACCOUNTING STANDARDS The following amended standard issued by the IASB has an effective date after December 31, 2019 and has not yet been adopted by BCE. STANDARD DESCRIPTION IMPACT Amendments to IFRS 3 – Business Combinations 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. EFFECTIVE DATE Prospectively for acquisitions occurring on or after January 1, 2020. A & D M l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i 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. 0 1 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 3, Segmented information, in BCE’s 2019 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 compensation for all management employees. BCE Inc. 2019 Annual Report 105 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 2019 3,253 114 3,496 902 1,132 63 13 1,133 10,106 23,964 42.2% 2018 2,973 136 3,145 869 1,000 69 348 995 9,535 23,468 40.6% 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 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. The most comparable IFRS financial measures are net earnings attributable to common shareholders and EPS. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 2019 2018 TOTAL 3,040 83 (101) 44 13 74 3,153 PER SHARE 3.37 0.10 (0.11) 0.05 0.01 0.08 3.50 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 0 1 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 (gains) losses on investments Early debt redemption costs Impairment charges Adjusted net earnings 106 BCE Inc. 2019 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 performance. 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. NET DEBT 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 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. 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 2019 7,958 (3,988) (147) (65) 60 – 2018 7,384 (3,971) (149) (16) 79 240 Free cash flow 3,818 3,567 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 2019 3,881 22,415 2,002 (145) 28,153 2018 4,645 19,760 2,002 (425) 25,982 A & D M l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i 0 1 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. 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. BCE Inc. 2019 Annual Report 107 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 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. 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. 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 90 days (previously 120 to 150 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 retail 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. • Retail Internet, IPTV and satellite TV subscribers have access to stand-alone services, and are primarily represented by a dwelling unit • Retail 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, 2019, 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, 2019. 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 participation of the CEO and the CFO, the effectiveness of our internal control over financial reporting as at December 31, 2019, 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, 2019. l s o r t n o c d n a s e c i i l o p g n i t n u o c c a , s e r u s a e m a c n a n F l i i A & D M 0 1 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No changes were made in our internal control over financial reporting during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The adoption of IFRS 16 – Leases, effective January 1, 2019, required the implementation of new accounting systems, processes and controls, which changed the company’s internal controls over lease accounting. No significant changes were made to our internal control over financial reporting due to the adoption of the new standard in 2019. 108 BCE Inc. 2019 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). 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, 2019. There were no material weaknesses that have been identified by BCE’s management in internal control over financial reporting as at December 31, 2019. Our internal control over financial reporting as at December 31, 2019 has been audited by Deloitte LLP, independent registered public accounting firm, who also audited our consolidated financial statements for the year ended December 31, 2019. Deloitte LLP issued an unqualified opinion on the effectiveness of our internal control over financial reporting as at December 31, 2019. 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, 2019, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). (signed) Mirko Bibic President and Chief Executive Officer (signed) Glen LeBlanc Executive Vice-President and Chief Financial Officer (signed) Thierry Chaumont Senior Vice-President, Controller and Tax March 5, 2020 n o s t r o p e R l s o r t n o c l a n r e t n i BCE Inc. 2019 Annual Report 109 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 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 5, 2020 1 CPA auditor, CA, public accountancy permit No. A124391 We have audited the internal control over financial reporting of BCE Inc. and subsidiaries (the “Company”) as of December 31, 2019, 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, 2019, 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, 2019, of the Company and our report dated March 5, 2020, expressed an unqualified opinion on those financial statements, and included an explanatory paragraph regarding the Company’s change in the method of accounting for leases due to the adoption of IFRS 16 - Leases. 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. 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 110 BCE Inc. 2019 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. 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. 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 160 of this annual report. The internal auditors and the shareholders’ auditors have free and independent access to the Audit Committee. (signed) Mirko Bibic President and Chief Executive Officer (signed) Glen LeBlanc Executive Vice-President and Chief Financial Officer (signed) Thierry Chaumont Senior Vice-President, Controller and Tax March 5, 2020 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 BCE Inc. 2019 Annual Report 111 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, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, changes in equity, and cash flows for each of the two years in the period ended December 31, 2019, 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, 2019 and 2018, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2019, in conformity 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, 2019, 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 5, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting. 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. CHANGE IN ACCOUNTING PRINCIPLE As discussed in Note 2 to the financial statements, effective January 1, 2019, the Company has changed its method of accounting for leases due to adoption of IFRS 16 - Leases. 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 112 BCE Inc. 2019 Annual Report CRITICAL AUDIT MATTER The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill and Intangible Assets – Bell Media Group – Refer to Notes 7, 16 and 19 to the financial statements CRITICAL AUDIT MATTER DESCRIPTION The Company performs an annual assessment of impairment for goodwill and indefinite lived intangible assets (specifically broadcast licenses) for the Bell Media group of cash generating units (“Bell Media”). As a result of the annual assessment of impairment of goodwill and intangible assets for Bell Media, management has determined that there is no impairment of goodwill and there is an impairment for intangible assets. While there are several assumptions that are required to determine the recoverable amounts of Bell Media, the judgments with the highest degree of subjectivity and impact on the recoverable amounts for the testing of goodwill are forecasts of future operating performance, discount rates and terminal growth rates. The judgments with the highest degree of subjectivity and impact on the recoverable amounts for the testing of intangible assets are forecasts of future operating performance, determination of EBITDA multiples, discount rates and terminal growth rates. Changes in these assumptions could have a significant impact on the recoverable amount of Bell Media, resulting in an impairment charge to goodwill or intangible assets as required. Given the significant judgments made by management, regarding the forecasts of future operating performance, determination of EBITDA multiples, discount rates and terminal growth rates, a high degree of auditor judgment was required and resulted in an increased extent of audit effort, which included the need to involve fair value specialists. HOW THE CRITICAL AUDIT MATTER WAS ADDRESSED IN THE AUDIT Our audit procedures related to forecasts of future operating performance, determination of EBITDA multiples, discount rates, and terminal growth rates used by management to determine the recoverable amounts for Bell Media included the following, among others: • Evaluated the effectiveness of controls over goodwill and intangible assets, including those over the forecasts of future operating performance, and the determination of the EBITDA multiples, discount rates and terminal growth rates. • Evaluated management’s ability to accurately forecast future operating performance by comparing actual results to management’s historical forecasts. • Evaluated the reasonableness of management’s forecasts of future operating performance by comparing the forecasts to: • Analyst and industry reports for the Company and certain of its peer companies, and other relevant publicly available information; • Known changes in Bell Media’s operations or the industry in which they operate, which are expected to impact future operating performance; • Historical operating performance; • Internal communications to management and the Board of Directors. • With the assistance of fair value specialists, we evaluated the reasonableness of the (1) EBITDA multiples, (2) discount rates, and (3) terminal growth rates by: • Testing the source information underlying the determination of the discount rates; • Reviewing relevant internal and external information, including analyst and industry reports, to assess the reasonability of the selected EBITDA multiples, discount rates, and terminal growth rates; • Developing a range of independent estimates and comparing those to the EBITDA multiples, discount rates, and terminal growth rates selected by management. /s/ Deloitte LLP 1 Chartered Professional Accountants Montréal, Canada March 5, 2020 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 BCE Inc. 2019 Annual Report 113 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, 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 2019 and 2018 Net change in value of derivatives designated as cash flow hedges, net of income taxes of ($45) million and ($15) million for 2019 and 2018, respectively Items that will not be reclassified to net earnings Actuarial gains on post-employment benefit plans, net of income taxes of ($51) million and ($25) million for 2019 and 2018, respectively Net change in value of derivatives designated as cash flow hedges, net of income taxes of $9 million and ($23) million for 2019 and 2018, respectively Other comprehensive income Total comprehensive income Total comprehensive income attributable to: Common shareholders Preferred shareholders Non-controlling interest Total comprehensive income 114 BCE Inc. 2019 Annual Report NOTE 3 3, 4 5 14 16 6 24 7 8 33 9 2019 23,964 (13,858) (114) (3,496) (902) (1,132) (63) (13) (1,133) 3,253 3,040 151 62 3,253 3.37 900.8 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 NOTE 2019 3,253 2018 2,973 6 112 140 (25) 233 3,486 3,277 151 58 3,486 6 43 67 61 177 3,150 2,957 144 49 3,150 24 33 Consolidated financial statements CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN MILLIONS OF CANADIAN DOLLARS) NOTE DECEMBER 31, 2019 DECEMBER 31, 2018 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 Deficit Total equity attributable to BCE shareholders Non-controlling interest Total equity Total liabilities and equity 10 11 12 13 12 13 14, 35 16 8 17 18 19 20 12 21 12 22 8 24 25 31 27 27 27 33 141 4 3,038 427 1,111 415 194 190 5,520 533 368 27,636 13,352 98 698 1,274 10,667 54,626 60,146 425 – 3,006 432 987 370 244 329 5,793 506 337 24,844 13,205 112 798 847 10,658 51,307 57,100 3,954 3,941 683 227 729 303 3,881 9,777 207 22,415 3,561 1,907 871 28,961 38,738 4,004 20,363 1,178 161 (4,632) 21,074 334 21,408 60,146 703 196 691 253 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 BCE Inc. 2019 Annual Report 115 Consolidated financial statements CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2019 (IN MILLIONS OF CANADIAN DOLLARS) NOTE PREFERRED SHARES COMMON SHARES ATTRIBUTABLE TO BCE SHAREHOLDERS ACCUM- ULATED OTHER COMPRE- HENSIVE INCOME CONTRI- BUTED SURPLUS Balance at December 31, 2018 4,004 20,036 1,170 Adoption of IFRS 16 2, 35 – – – Balance at January 1, 2019 4,004 20,036 1,170 Net earnings Other comprehensive income (loss) Total comprehensive income Common shares issued under employee stock option plan Common shares issued under employee savings plan (ESP) Other share-based compensation 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 Other 27 27 27 – – – – – – – – – – – – – 251 75 1 – – – – – – – (11) – 19 – – – – 90 – 90 – 97 97 – – – – – (26) – DEFICIT TOTAL (4,937) 20,363 (19) (19) (4,956) 20,344 3,191 140 3,331 – – 1 3,191 237 3,428 240 75 21 (3,008) (3,008) NON- CONTROL- LING INTEREST 326 (1) 325 62 (4) 58 – – – – TOTAL EQUITY 20,689 (20) 20,669 3,253 233 3,486 240 75 21 (3,008) – – – – (64) (64) (26) – – 15 (26) 15 Balance at December 31, 2019 4,004 20,363 1,178 161 (4,632) 21,074 334 21,408 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 Adoption of IFRS 9 4,004 20,091 1,162 – – – Balance at January 1, 2018 4,004 20,091 1,162 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 27 27 34, 27 – – – – – – – – – – – – – – – 13 – (69) 1 – – – – – – – – (1) 12 (3) – – – – – – ACCUM- ULATED OTHER COMPRE- HENSIVE 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 20,689 116 BCE Inc. 2019 Annual Report 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 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 licences Other investing activities Cash flows used in investing activities Cash flows used in financing activities Decrease in notes payable Increase (decrease) in securitized trade receivables 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 increase (decrease) in cash equivalents Cash equivalents at beginning of year Cash equivalents at end of year NOTE 2019 2018 5 14, 16 24 7 8 24 24 3 34 34 22 22 27 28 27 3,253 114 4,398 310 1,108 (13) 1,133 (290) (72) (168) (1,087) (725) (60) 57 7,958 (3,988) (51) – – 3 2,973 136 4,014 335 987 34 995 (539) (75) (138) (990) (650) (79) 381 7,384 (3,971) (395) 68 (56) (32) (4,036) (4,386) (1,073) 131 1,954 (2,228) 240 (142) – (2,819) (147) (65) – (53) (123) (2) 2,996 (2,713) 11 (222) (175) (2,679) (149) (16) (51) (75) (4,202) (3,198) (284) 425 141 4 – 4 (17) 442 425 (183) 183 – BCE Inc. 2019 Annual Report 117 Consolidated financial statements 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. 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 in 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 in Canada. The consolidated financial statements (financial statements) were approved by BCE’s board of directors on March 5, 2020. 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. As required, we adopted IFRS 16 – Leases effective January 1, 2019. We adopted IFRS 16 using a modified retrospective approach whereby the financial statements of prior periods presented were not restated and continue to be reported under IAS 17 – Leases, as permitted by the specific transition provisions of IFRS 16. The cumulative effect of the 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, initial adoption of IFRS 16 was reflected as an adjustment to the deficit at January 1, 2019. Further details on the impacts of adopting IFRS 16 on our January 1, 2019 consolidated statement of financial position are provided below under T) Adoption of new or amended accounting standards and in Note 35, Adoption of IFRS 16. 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. 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. 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. 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 118 BCE Inc. 2019 Annual Report 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. 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. 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. 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 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 for 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. 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. DSUs 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. BCE Inc. 2019 Annual Report 119 Notes to consolidated financial statements ESP DSP 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. 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. 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 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. 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) C ASH 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 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. 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. 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. 120 BCE Inc. 2019 Annual Report Notes to consolidated financial statements LEASES We enter into leases for network infrastructure and equipment, land and buildings in the normal course of business. Lease contracts are typically made for fixed periods but may include purchase, renewal or termination options. Leases are negotiated on an individual basis and contain a wide range of different terms and conditions. We adopted IFRS 16 as of January 1, 2019. For periods prior to January 1, 2019, we continue to apply IAS 17, as permitted by the specific transition provisions of IFRS 16. We are currently assessing the impacts of the International Financial Reporting Interpretations Committee (IFRIC) agenda decision published in December 2019 in regards to determination of the lease term for cancellable or renewable leases under IFRS 16. As permitted by the IASB, implementation of the decision is expected in the first quarter of 2020. IFRS 16 We assess whether a contract contains a lease at inception of the contract. A lease contract conveys the right to control the use of an identified asset for a period in exchange for consideration. We recognize lease liabilities with corresponding right-of-use assets for all lease agreements, except for short-term leases and leases of low value assets, which are expensed on a straight-line basis over the lease term. Consideration in a contract is allocated to lease and non-lease components on a relative stand-alone value basis. We generally account for lease components and any associated non-lease components as a single lease component. Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using our incremental borrowing rate, unless the rate implicit in the lease is readily determinable. We apply a single incremental borrowing rate to a portfolio of leases with similar characteristics. Lease payments included in the measurement of the lease liability comprise: • fixed (and in-substance fixed) lease payments, less any lease incentives • variable lease payments that depend on an index or rate • payments expected under residual value guarantees and payments relating to purchase options and renewal option periods that are reasonably certain to be exercised (or periods subject to termination options that are not reasonably certain to be exercised) Lease liabilities are subsequently measured at amortized cost using the effective interest method. Lease liabilities are remeasured, with a corresponding adjustment to the related right-of-use assets, when there is a change in variable lease payments arising from a change in an index or rate, or when we change our assessment of whether purchase, renewal or termination options will be exercised. Right-of-use assets are measured at cost, and are comprised of the initial measurement of the corresponding lease liabilities, lease payments made at or before the commencement date and any initial direct costs. They are subsequently depreciated on a straight-line basis and reduced by impairment losses, if any. Right-of-use assets may also be adjusted to reflect the remeasurement of related lease liabilities. If we obtain ownership of the leased asset by the end of the lease term or the cost of the right-of-use asset reflects the exercise of a purchase option, we depreciate the right-of-use asset from the lease commencement date to the end of the useful life of the underlying asset. Otherwise, we depreciate the right-of-use asset from the commencement date to the earlier of the end of the useful life of the underlying asset or the end of the lease term. Variable lease payments that do not depend on an index or rate are not included in the measurement of lease liabilities and right-of-use assets. The related payments are expensed in Operating costs in the period in which the event or condition that triggers those payments occurs. IAS 17 Under IAS 17, 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 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. 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 • it is probable that economic benefits will be generated • 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 at acquisition cost less accumulated amortization, and accumulated BCE Inc. 2019 Annual Report 121 Notes to consolidated financial statements 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. INDEFINITE-LIFE INTANGIBLE ASSETS 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 50 years 5 to 50 years 2 to 12 years 2 to 26 years Up to 5 years 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 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. 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. 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. 122 BCE Inc. 2019 Annual Report Notes to consolidated financial statements 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 3, 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 in the consolidated statements of comprehensive income (statements of comprehensive income) and are reclassified from Accumulated other comprehensive 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. 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 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 foreign currency forward contracts and cross currency interest rate swaps 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, equity price risk related to a cash-settled share-based payment plan and interest rate risk related to preferred share dividend rate resets. 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. BCE Inc. 2019 Annual Report 123 Notes to consolidated financial statements Q) P OST-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 and retirees. 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. Most of these OPEB plans are unfunded and benefits are paid when incurred. • 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 plan 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 beginning of the year. Actuarial gains and losses for all post-employment benefit plans are recorded in Other comprehensive income 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 plans and OPEB obligations. The most recent actuarial valuation of our significant pension plans was as at December 31, 2018. 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 only participate 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) E STIMATES 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. 124 BCE Inc. 2019 Annual Report 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. Notes to consolidated financial statements POST-EMPLOYMENT BENEFIT PLANS CONTINGENCIES 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. LEASES The application of IFRS 16 requires us to make estimates that affect the measurement of right-of-use assets and liabilities, including determining the appropriate discount rate used to measure lease liabilities. Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using our incremental borrowing rate, unless the rate implicit in the lease is readily determinable. Our incremental borrowing rate is derived from publicly available risk-free interest rates, adjusted for applicable credit spreads and lease terms. We apply a single incremental borrowing rate to a portfolio of leases with similar characteristics. 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. 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. 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 long-term, 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. LEASES The application of IFRS 16 requires us to make judgments that affect the measurement of right-of-use assets and liabilities. A lease contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At inception of the contract, we assess whether the contract contains an identified asset, whether we have the right to obtain substantially all of the economic benefits from use of the asset and whether we have the right to direct how and for what purpose the asset is used. In determining the lease term, we include periods covered by renewal options when we are reasonably certain to exercise those options. Similarly, we include periods covered by termination options when we are reasonably certain not to exercise those options. To assess if we are reasonably certain to exercise an option, we consider all facts and circumstances that create an economic incentive to exercise renewal options (or not exercise termination options). Economic incentives include the costs related to the termination of the lease, the significance of any leasehold improvements and the importance of the underlying assets to our operations. BCE Inc. 2019 Annual Report 125 Notes to consolidated financial statements REVENUE FROM CONTRACTS WITH CUSTOMERS CGUs 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. 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, 2019, we adopted the following new or amended accounting standards. STANDARD DESCRIPTION IMPACT We adopted IFRS 16 using a modified retrospective approach whereby the financial statements of prior periods presented were not restated and continue to be reported under IAS 17 – Leases, as permitted by the specific transition provisions of IFRS 16. The cumulative effect of the initial adoption of IFRS 16 was reflected as an adjustment to the deficit at January 1, 2019. Further details on the impacts of adopting IFRS 16 on our January 1, 2019 consolidated statement of financial position are provided in Note 35, Adoption of IFRS 16. We are currently assessing the impacts of the IFRIC agenda decision published in December 2019 in regards to determination of the lease term for cancellable or renewable leases under IFRS 16. As permitted by the IASB, implementation of the decision is expected in the first quarter of 2020. Under IAS 17, leases of property, plant and equipment were recognized as finance leases when we obtained substantially all the risks and rewards of ownership of the underlying assets. All other leases were classified as operating leases. IFRS 16 eliminates the distinction between operating and finance leases for lessees, requiring instead that we recognize a right-of-use asset and a lease liability at lease commencement for all leases, with certain exceptions permitted through elections and practical expedients. Accounting for leases previously classified as finance leases and lessor accounting remains largely unchanged under IFRS 16. We recognized lease liabilities at January 1, 2019 for leases previously classified as operating leases, measured at the present value of lease payments using our incremental borrowing rate at that date. Property, plant and equipment includes the corresponding right-of-use assets also recognized at January 1, 2019. The right-of-use assets were generally measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as at December 31, 2018. In certain cases, the right-of-use assets were measured as though IFRS 16 had been applied since the lease commencement date. A depreciation charge for right-of-use assets is recorded in Depreciation and an interest expense on lease liabilities is recorded in Finance costs in the income statement. As permitted by IFRS 16, we elected not to recognize lease liabilities and right-of-use assets for short-term leases and leases of low value assets, which will continue to be expensed on a straight-line basis over the lease term. We have also applied certain practical expedients to facilitate the initial adoption and ongoing application of IFRS 16: • We generally do not separate non-lease components from related lease components. Each lease component and any associated non-lease components are accounted for as a single lease component • We apply a single incremental borrowing rate to a portfolio of leases with similar characteristics • As an alternative to performing an impairment review, we adjusted right-of-use assets for any onerous lease provisions recognized in the balance sheet at December 31, 2018 • We applied the exemption not to recognize right-of-use assets and liabilities for certain leases with a remaining term of 12 months or less as of January 1, 2019 • We used hindsight when determining the lease term when the lease contracts contain options to extend or terminate the lease IFRIC 23 did not have a significant impact on our financial statements. 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. IFRIC 23 – Uncertainty over Income Tax Treatments Provides guidance on the application of 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 examination of tax treatments by taxation authorities, the recognition and measurement of the effect of tax uncertainties and how an entity considers changes in facts and circumstances. 126 BCE Inc. 2019 Annual Report Notes to consolidated financial statements U) FUTURE CHANGES TO ACCOUNTING STANDARDS The following amended standard issued by the IASB has an effective date after December 31, 2019 and has not yet been adopted by BCE. STANDARD DESCRIPTION IMPACT Amendments to IFRS 3 – Business Combinations 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. EFFECTIVE DATE Prospectively for acquisitions occurring on or after January 1, 2020. Note 3 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. To align with changes in how we manage our business and assess performance, the operating results of The Source (Bell) Electronics Inc. (The Source) are now entirely included within our Wireless segment effective January 1, 2019, with prior periods restated for comparative purposes. Previously, The Source’s results were included within our Wireless and Wireline segments. 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. 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. SEGMENTED INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2019 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 4 5 14, 16 6 24 7 8 19 16 9,087 55 9,142 (5,300) 3,842 12,066 290 12,356 (6,942) 5,414 2,811 406 3,217 (2,367) 850 – (751) (751) 751 – 3,048 3,948 697 4,673 1,692 3,183 2,946 2,381 108 – – – BCE 23,964 – 23,964 (13,858) 10,106 (114) (4,398) (1,132) (63) (13) (1,133) 3,253 10,667 8,021 3,988 (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 Inc. 2019 Annual Report 127 Notes to consolidated financial statements 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 4 5 14, 16 6 24 7 8 19 16 8,766 52 8,818 (5,297) 3,521 12,025 242 12,267 (6,946) 5,321 2,677 444 3,121 (2,428) 693 – (738) (738) 738 – 3,048 3,948 664 4,679 1,692 3,193 2,931 2,467 114 – – – 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 (1) The chief operating decision maker uses primarily one measure of profit to make decisions and assess performance, being operating revenues less operating costs. REVENUES BY SERVICES AND PRODUCTS The following table presents our revenues disaggregated by type of services and products. FOR THE YEAR ENDED DECEMBER 31 2019 2018 6,427 7,684 3,564 2,811 251 6,269 7,466 3,782 2,677 247 20,737 20,441 2,660 519 48 3,227 2,497 466 64 3,027 23,964 23,468 Services (1) Wireless Wireline data Wireline voice Media Other wireline services Total services Products (2) Wireless Wireline data Wireline 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. 128 BCE Inc. 2019 Annual Report Notes to consolidated financial statements Note 4 Operating costs FOR THE YEAR ENDED DECEMBER 31 Labour costs Wages, salaries and related taxes and benefits (1) Post-employment benefit plans service cost (net of capitalized amounts) 24 Other labour costs (1) (2) Less: Capitalized labour (1) Total labour costs Cost of revenues (1) (3) Other operating costs (1) (4) Total operating costs NOTE 2019 2018 (4,303) (247) (1,005) 1,032 (4,523) (7,380) (1,955) (4,284) (266) (1,042) 1,052 (4,540) (7,349) (2,044) (13,858) (13,933) (1) We have reclassified amounts from the previous period to make them consistent with the presentation for the current period. (2) Other labour costs include contractor and outsourcing costs. (3) Cost of revenues includes costs of wireless devices and other equipment sold, network and content costs, and payments to other carriers. (4) Other operating costs include marketing, advertising and sales commission costs, bad debt expense, taxes other than income taxes, information technology costs, professional service fees and rent. Research and development expenses of $109 million and $106 million are included in operating costs for 2019 and 2018, respectively. Note 5 Severance, acquisition and other costs FOR THE YEAR ENDED DECEMBER 31 Severance Acquisition and other Total severance, acquisition and other costs 2019 (63) (51) (114) 2018 (92) (44) (136) SEVERANCE COSTS Severance costs consist of charges related to involuntary and voluntary employee terminations. In 2018, severance costs include a 4% reduction in management workforce across BCE. 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. Note 6 Interest expense FOR THE YEAR ENDED DECEMBER 31 Interest expense on long-term debt Interest expense on other debt Capitalized interest Total interest expense 2019 (1,024) (153) 45 (1,132) 2018 (918) (133) 51 (1,000) Included in interest expense on long-term debt is interest on lease liabilities of $220 million for 2019 and interest on finance leases of $142 million for 2018. Capitalized interest was calculated using an average rate of 3.96% and 3.88% for 2019 and 2018, respectively, which represents the weighted average interest rate on our outstanding long-term debt. BCE Inc. 2019 Annual Report 129 Notes to consolidated financial statements Note 7 Other expense FOR THE YEAR ENDED DECEMBER 31 Impairment of assets Equity losses from investments in associates and joint ventures Losses on investments Operations Early debt redemption costs (Losses) gains on retirements and disposals of property, plant and equipment and intangible assets Net mark-to-market gains (losses) on derivatives used to economically hedge equity settled share-based compensation plans Gains (losses) on investments Other Total other expense NOTE 14, 16 17 22 2019 (102) (53) (19) (18) (9) 138 13 37 (13) 2018 (200) (20) (15) (20) 11 (80) (34) 10 (348) IMPAIRMENT OF ASSETS 2019 2018 Impairment charges in 2019 included $85 million allocated to indefinite-life intangible assets, and $8 million allocated primarily to property, plant and equipment. These impairment charges relate to broadcast licences and certain assets for various radio markets within our Bell Media segment. The impairment charges were a result of continued advertising demand and ratings pressures in the industry resulting from audience declines, as well as competitive pressure from streaming services. The charges were determined by comparing the carrying value of the CGUs to their fair value less cost 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, 2020 to December 31, 2024, using a discount rate of 7.5% 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 $464 million at December 31, 2019. 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. EQUITY LOSSES FROM INVESTMENTS IN ASSOCIATES AND JOINT VENTURES We recorded a loss on investment of $53 million and $20 million in 2019 and 2018, respectively, 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. GAINS (LOSSES) ON INVESTMENTS In 2019 we recorded gains of $13 million which included a gain on an obligation to repurchase at fair value the minority interest in one of our subsidiaries. In 2018, we recorded losses of $34 million which included a loss on an obligation to repurchase at fair value the minority interest in one of our subsidiaries. 130 BCE Inc. 2019 Annual Report Notes to consolidated financial statements Note 8 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 Uncertain tax positions Total income taxes 2019 2018 (761) 6 22 (322) (8) (106) 27 9 (775) 8 12 (352) 8 44 – 60 (1,133) (995) 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% for both 2019 and 2018. 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 gains (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 Previously unrecognized tax benefits Other Total income taxes Average effective tax rate 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 2019 2018 OTHER COMPREHENSIVE INCOME 3 (90) (87) DEFICIT 4 13 17 OTHER COMPREHENSIVE INCOME 41 (104) (63) 2019 3,253 1,133 4,386 2018 2,973 995 3,968 27.0% 27.0% (1,184) (1,071) 4 15 27 14 (20) 9 2 (1,133) 25.8% (9) 68 – 20 (10) – 7 (995) 25.1% DEFICIT 5 (11) (6) BCE Inc. 2019 Annual Report 131 Notes to consolidated financial statements 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 January 1, 2018 Income statement Business acquisitions Other comprehensive income Deficit Other December 31, 2018 Adoption of IFRS 16 January 1, 2019 Income statement Business acquisitions Other comprehensive income Deficit Other NON- CAPITAL LOSS CARRY- FORWARDS POST- EMPLOYMENT BENEFIT PLANS INDEFINITE- LIFE INTANGIBLE ASSETS PROPERTY PLANT AND EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS CRTC TANGIBLE BENEFITS 17 109 3 – – – 129 – 129 (105) 5 – – 2 494 (1,761) (1,400) (14) – (65) – – (2) – – – – (248) (16) – – 15 415 (1,763) (1,649) – – 7 415 (1,763) (1,642) 3 – (54) – – – – – – – (177) (6) – – 46 30 (14) – – – – 16 – 16 (9) – – – – 7 OTHER (106) TOTAL (2,726) (71) 1 (39) (11) 27 (240) (12) (104) (11) 42 (199) (3,051) – (199) (112) (1) (36) 13 12 7 (3,044) (400) (2) (90) 13 60 (323) (3,463) December 31, 2019 31 364 (1,763) (1,779) At December 31, 2019, BCE had $215 million of non-capital loss carryforwards. We: At December 31, 2018, BCE had $645 million of non-capital loss carryforwards. We: • recognized a deferred tax asset of $31 million for $122 million of the non-capital loss carryforwards. These non-capital loss carryforwards expire in varying annual amounts from 2024 to 2039. • 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. • did not recognize a deferred tax asset for $93 million of non-capital loss carryforwards. This balance expires in varying annual amounts from 2023 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. At December 31, 2019, BCE had $734 million of unrecognized capital loss carryforwards which can be carried forward indefinitely. At December 31, 2018, BCE had $806 million of unrecognized capital loss carryforwards which can be carried forward indefinitely. Note 9 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) 2019 3,040 3.17 900.8 0.6 901.4 2018 2,785 3.02 898.6 0.3 898.9 (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 61,170 in 2019 and 12,252,594 in 2018. 132 BCE Inc. 2019 Annual Report Notes to consolidated financial statements Note 10 Trade and other receivables FOR THE YEAR ENDED DECEMBER 31 Trade receivables (1) Allowance for revenue adjustments Allowance for doubtful accounts 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. Note 11 Inventory FOR THE YEAR ENDED DECEMBER 31 Wireless devices and accessories Merchandise and other Total inventory NOTE 26 2019 2,981 (104) (62) 23 200 3,038 2019 199 228 427 2018 3,026 (106) (51) 14 123 3,006 2018 202 230 432 The total amount of inventory subsequently recognized as an expense in cost of revenues was $3,141 million and $2,971 million for 2019 and 2018, respectively. Note 12 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 2019 1,493 – 131 – (175) 1,915 (1,461) – (205) (54) 1,644 2018 1,263 – 154 – (168) 1,770 (1,321) – (219) 14 1,493 2019 899 (666) – 644 – – 47 (4) 24 (54) 890 2018 894 (625) – 628 – – – 13 (4) (7) 899 (1) Net of allowance for doubtful accounts of $68 million and $73 million at December 31, 2019 and December 31, 2018, respectively. We have updated amounts for the prior year to make them consistent with the presentation for the current year. See Note 26, Financial and capital management, for additional details. Note 13 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. 2019 707 602 (523) (3) 783 2018 636 567 (477) (19) 707 BCE Inc. 2019 Annual Report 133 Notes to consolidated financial statements Note 14 Property, plant and equipment NETWORK INFRASTRUCTURE NOTE AND EQUIPMENT (1) LAND AND BUILDINGS (1) ASSETS UNDER CONSTRUCTION 2, 35 64,248 800 65,048 2,510 3 1,132 (1,085) (11) 6,071 1,457 7,528 569 38 (9) (43) (4) 1,764 – 1,764 1,705 – (1,782) – – TOTAL 72,083 2,257 74,340 4,784 41 (659) (1,128) (15) 67,597 8,079 1,687 77,363 43,834 3,030 (1,003) 53 45,914 21,214 21,683 3,405 466 (27) (31) 3,813 4,123 4,266 – – – – – 1,764 1,687 47,239 3,496 (1,030) 22 49,727 27,101 27,636 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) 43,834 19,535 20,414 3,241 222 (52) (6) 3,405 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 Impairment losses recognized in earnings 7 FOR THE YEAR ENDED DECEMBER 31, 2019 COST December 31, 2018 Adoption of IFRS 16 January 1, 2019 Additions Acquired through business combinations Transfers Retirements and disposals December 31, 2019 ACCUMULATED DEPRECIATION January 1, 2019 Depreciation Retirements and disposals Other December 31, 2019 NET CARRYING AMOUNT January 1, 2019 December 31, 2019 (1) Includes right-of-use assets. See Note 15, Leases, for additional details. 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 7 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 lease. See Note 15, Leases, for additional details 134 BCE Inc. 2019 Annual Report Notes to consolidated financial statements Note 15 Leases RIGHT-OF-USE ASSETS BCE’s significant right-of-use assets under leases are satellites, office premises, land, cellular tower sites, retail outlets and OOH advertising spaces. Right-of-use assets are presented in Property, plant and equipment in the statement of financial position. FOR THE YEAR ENDED DECEMBER 31, 2019 COST January 1, 2019 Additions Transfers Acquired through business combinations Lease terminations Impairment losses recognized in earnings December 31, 2019 ACCUMULATED DEPRECIATION January 1, 2019 Depreciation Transfers Lease terminations December 31, 2019 NET CARRYING AMOUNT January 1, 2019 December 31, 2019 LEASES IN THE INCOME STATEMENT The following table provides the expenses related to leases recognized in the income statement. FOR THE YEAR ENDED DECEMBER 31 Interest expense on lease liabilities Variable lease payment expenses not included in the measurement of lease liabilities Expenses for leases of low value assets Expenses for short-term leases Rental expense relating to operating leases was $352 million in 2018. LEASES IN THE STATEMENT OF CASH FLOWS Total cash outflow related to leases was $1,239 million for the period ended December 31, 2019. NETWORK INFRASTRUCTURE AND EQUIPMENT LAND AND BUILDINGS 3,329 527 (233) – (12) (2) 2,453 513 – 8 (38) (3) TOTAL 5,782 1,040 (233) 8 (50) (5) 3,609 2,933 6,542 1,042 373 (111) (3) 1,301 2,287 2,308 536 303 – (22) 817 1,917 2,116 1,578 676 (111) (25) 2,118 4,204 4,424 2019 220 161 58 30 BCE Inc. 2019 Annual Report 135 Notes to consolidated financial statements FINANCE LEASES UNDER IAS 17 The following table shows the net carrying amount and additions to assets under finance leases for the year ended December 31, 2018. FOR THE YEAR ENDED DECEMBER 31, 2018 Network infrastructure and equipment Land and buildings Total ADDITIONS NET CARRYING AMOUNT 405 1 406 1,487 460 1,947 ADDITIONAL DISCLOSURES See Note 2, Significant accounting policies, and Note 35, Adoption of IFRS 16, for the impacts upon adoption of IFRS 16 as at January 1, 2019. See Note 26, Financial and capital management, for a maturity analysis of lease liabilities. See Note 21, Debt due within one year, and Note 22, Long-term debt, for lease liabilities balances included in the statement of financial position. See Note 31, Commitments and contingencies, for leases committed but not yet commenced as at December 31, 2019. Note 16 Intangible assets FINITE-LIFE CUSTOMER RELATION- SHIPS PROGRAM AND FEATURE FILM RIGHTS NOTE SOFTWARE OTHER TOTAL BRANDS INDEFINITE-LIFE SPECTRUM AND OTHER LICENCES BROADCAST LICENCES TOTAL INTANGIBLE ASSETS TOTAL FOR THE YEAR ENDED DECEMBER 31, 2019 COST January 1, 2019 Additions Acquired through business combinations Transfers Retirements and disposals Impairment losses recognized in earnings 7 Amortization included in operating costs 9,525 389 – 660 (52) – – 2,014 – 6 – (3) – – December 31, 2019 10,522 2,017 ACCUMULATED AMORTIZATION January 1, 2019 Amortization Retirements and disposals Other 6,720 745 (51) (69) 727 112 – – December 31, 2019 7,345 839 704 1,004 – – – – (992) 716 – – – – – 500 12,743 2,409 3,587 2,111 8,107 20,850 4 – – (14) (1) – 1,397 6 660 (69) (1) (992) – – – – – – – – – – (1) – – – – – – – – – 1,397 6 660 (69) (85) (86) (87) – – (992) 489 13,744 2,409 3,586 2,026 8,021 21,765 198 45 (14) – 7,645 902 (65) (69) 229 8,413 – – – – – – – – – – – – – – – – – – – – 7,645 902 (65) (69) 8,413 NET CARRYING AMOUNT January 1, 2019 December 31, 2019 2,805 3,177 1,287 1,178 704 716 302 260 5,098 5,331 2,409 2,409 3,587 3,586 2,111 2,026 8,107 8,021 13,205 13,352 136 BCE Inc. 2019 Annual Report Notes to consolidated financial statements FOR THE YEAR ENDED DECEMBER 31, 2018 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, 2018 Additions Acquired through business combinations Transfers Retirements and disposals Impairment losses recognized in earnings 7 Amortization included in operating costs 8,689 362 9 506 (41) – – 1,950 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 – – – – – 2,443 3,534 2,251 8,228 20,001 – 1 (4) – 393 106 11,773 1,448 61 510 (45) 1 4 (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 8,107 13,258 13,205 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 FOR THE YEAR ENDED DECEMBER 31 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 2019 4,045 (2,689) 1,356 698 2019 2,398 (2,545) (147) (72) 2018 3,819 (2,253) 1,566 798 2018 2,128 (2,191) (63) (35) NOTE 7 BCE Inc. 2019 Annual Report 137 Notes to consolidated financial statements Note 18 Other non-current assets FOR THE YEAR ENDED DECEMBER 31 Net assets of post-employment benefit plans Long-term notes and other receivables Derivative assets Publicly-traded and privately-held investments Investments (1) Other Total other non-current assets NOTE 24 26 26 2019 558 142 200 129 128 117 1,274 2018 331 89 68 110 114 135 847 (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, 2019 and 2018. BCE’s groups of CGUs correspond to our reporting segments. Balance at January 1, 2018 Acquisitions and other Balance at December 31, 2018 Acquisitions and other Balance at December 31, 2019 BELL WIRELESS BELL WIRELINE 3,032 16 3,048 – 3,048 4,497 182 4,679 (6) 4,673 BELL MEDIA 2,899 32 2,931 15 2,946 BCE 10,428 230 10,658 9 10,667 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% 8.0% 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 (1.1%) in the perpetuity growth rate or an increase of 0.8% in the discount rate would have resulted in its recoverable amount being equal to its carrying value. 138 BCE Inc. 2019 Annual Report Notes to consolidated financial statements Note 20 Trade payables and other liabilities FOR THE YEAR ENDED DECEMBER 31 Trade payables and accruals Compensation payable Maple Leaf Sports and Entertainment Ltd. (MLSE) financial liability (1) Taxes payable Derivative liabilities Severance and other costs payable Provisions CRTC tangible benefits obligation CRTC deferral account obligation Other current liabilities Total trade payables and other liabilities NOTE 26 26 23 26 26 2019 2,604 589 135 101 49 35 33 28 13 367 3,954 2018 2,535 589 135 129 27 63 66 38 16 343 3,941 (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 FOR THE YEAR ENDED DECEMBER 31 Notes payable (1) Loans secured by trade receivables Long-term debt due within one year (2) Total debt due within one year WEIGHTED AVERAGE INTEREST RATE AT DECEMBER 31, 2019 2.03% 2.71% 4.77% NOTE 26 26 22 2019 1,994 1,050 837 3,881 2018 3,201 919 525 4,645 (1) Includes commercial paper of $1,502 million in U.S. dollars ($1,951 million in Canadian dollars) and $2,314 million in U.S. dollars ($3,156 million in Canadian dollars) as at December 31, 2019 and December 31, 2018, 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 lease liabilities of $775 million as at December 31, 2019 and the current portion of finance leases of $466 million as at December 31, 2018. 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, 2020 and December 1, 2022. The following table provides further details on our securitized trade receivables programs. FOR THE YEAR ENDED DECEMBER 31 2019 2018 Average interest rate throughout the year Securitized trade receivables 2.79% 2,185 2.41% 1,998 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. BCE Inc. 2019 Annual Report 139 Notes to consolidated financial statements 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, 2019. The total amount of the net available committed 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, 2019. Committed credit facilities Unsecured revolving and expansion credit 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 4,000 106 4,106 1,939 6,045 – – – – – – 106 106 1,059 1,165 1,951 – 1,951 – 1,951 2,049 – 2,049 880 2,929 (1) Bell Canada’s $2.5 billion and additional $500 million committed revolving credit facilities expire in November 2024 and November 2020, respectively, and its $1 billion committed expansion credit facility expires in November 2022. 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, 2019, Bell Canada’s outstanding commercial paper included $1,502 million in U.S. dollars ($1,951 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. Note 22 Long-term debt FOR THE YEAR ENDED DECEMBER 31 Debt securities 1997 trust indenture 1976 trust indenture 2011 trust indenture 2016 U.S. trust indenture (1) 1996 trust indenture (subordinated) Lease liabilities Finance leases Other Total debt Net unamortized premium Unamortized debt issuance costs Less: WEIGHTED AVERAGE INTEREST RATE AT DECEMBER 31, 2019 NOTE MATURITY 2019 2018 3.82% 9.54% 4.00% 4.41% 8.21% 5.11% 2021–2047 2021–2054 2024 2048–2049 2026–2031 2020–2065 2019–2047 14,500 14,750 1,100 225 2,273 275 4,599 – 328 1,100 225 1,569 275 – 2,097 308 23,300 20,324 15 (63) 21 (60) (837) (525) 22,415 19,760 Amount due within one year 21 Total long-term debt (1) At December 31, 2019 and 2018, notes issued under the 2016 U.S. trust indenture totaled $1,750 million and $1,150 million in U.S. dollars, respectively, and have been hedged for foreign currency fluctuations through cross currency interest rate swaps. 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. 140 BCE Inc. 2019 Annual Report Notes to consolidated financial statements 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. 2019 On September 10, 2019, Bell Canada issued 2.90% Series M-50 medium term note (MTN) debentures under its 1997 trust indenture, with a principal amount of $550 million, which mature on September 10, 2029. On June 13, 2019, Bell Canada redeemed, prior to maturity, its 3.25% Series M-27 MTN debentures, having an outstanding principal amount of $1 billion, which were due June 17, 2020. On May 24, 2019, Bell Canada redeemed, prior to maturity, its 3.54% Series M-37 debentures, having an outstanding principal amount of $400 million, which were due on June 12, 2020. On May 13, 2019, Bell Canada issued 2.75% Series M-49 MTN debentures under its 1997 trust indenture, with a principal amount of $600 million, which mature on January 29, 2025. In addition, on the same date, Bell Canada issued 4.30% Series US-2 Notes under its 2016 trust indenture, with a principal amount of $600 million in U.S. dollars ($808 million in Canadian dollars), which mature on July 29, 2049. For the year ended December 31, 2019, we incurred early debt redemption charges of $18 million which were recorded in Other expense in the income statement. Subsequent to year end, on February 13, 2020, Bell Canada issued 3.50% Series M-51 MTN debentures under its 1997 trust indenture, with a principal amount of $750 million, which mature on September 30, 2050. The net proceeds of the offering are intended to be used to fund, on March 16, 2020, the redemption, prior to maturity, of Bell Canada’s 4.95% Series M-24 MTN debentures, with early debt redemption charges of $17 million. The M-24 MTN debentures have an outstanding principal amount of $500 million and were due on May 19, 2021. The net proceeds are further intended to be used for the repayment of short-term debt. 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 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 September 21, 2018, Bell Canada redeemed, prior to maturity, its 3.35% Series M-25 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 $400 million in U.S. dollars ($526 million in Canadian dollars) and $750 million in U.S. dollars ($967 million in Canadian dollars), 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. 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. 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. 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. BCE Inc. 2019 Annual Report 141 Notes to consolidated financial statements Note 23 Provisions FOR THE YEAR ENDED DECEMBER 31 January 1, 2019 Additions Usage Reversals Adoption of IFRS 16 December 31, 2019 Current Non-current December 31, 2019 NOTE 20 25 AROs 199 21 (4) (17) – 199 16 183 199 OTHER (1) 172 24 (52) (1) (11) 132 17 115 132 TOTAL 371 45 (56) (18) (11) 331 33 298 331 (1) Other includes environmental, vacant space and legal 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. 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. 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 options offered to plan participants, lies with the Pension Fund Committee, a committee of our board of directors. 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 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 2019 (193) (110) (3) 59 (247) – (247) 2019 (19) (44) (63) 2018 (213) (106) (3) 56 (266) (4) (270) 2018 (23) (46) (69) 142 BCE Inc. 2019 Annual Report Notes to consolidated financial statements The statements of comprehensive income include the following amounts before income taxes. Cumulative losses recognized directly in equity, January 1 Actuarial gains in other comprehensive income (1) Decrease in the effect of the asset limit (2) Cumulative losses recognized directly in equity, December 31 2019 (2,892) 191 – (2,701) 2018 (2,984) 79 13 (2,892) (1) The cumulative actuarial losses recognized in the statements of comprehensive income are $2,947 million in 2019. (2) The cumulative decrease in the effect of the asset limit recognized in the statements of comprehensive income is $246 million in 2019. 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 (23,404) (24,404) (1,469) (1,653) (24,873) (26,057) DB PENSION PLANS OPEB PLANS TOTAL 2019 2018 2019 2018 2019 2018 Current service cost Interest on obligations Actuarial (losses) gains (1) Net curtailment losses Benefit payments Employee contributions Other (193) (872) (2,498) – (213) (864) 750 (4) 1,326 1,342 (10) 1 (11) – (3) (55) (80) – 77 – 1 (3) (56) 163 – 80 – – (196) (927) (2,578) – (216) (920) 913 (4) 1,403 1,422 (10) 2 (11) – Post-employment benefit obligations, December 31 (25,650) (23,404) (1,529) (1,469) (27,179) (24,873) Fair value of plan assets, January 1 Expected return on plan assets (2) Actuarial gains (losses) (1) Benefit payments Employer contributions Employee contributions Fair value of plan assets, December 31 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 23,071 23,945 853 2,742 841 (817) (1,326) (1,342) 180 10 433 11 25,530 23,071 287 11 27 (77) 72 – 320 299 23,358 24,244 10 (17) (80) 75 – 864 2,769 851 (834) (1,403) (1,422) 252 10 508 11 287 25,850 23,358 (120) (20) (140) 558 (698) (333) (20) (353) 331 (684) (1,209) (1,182) (1,329) (1,515) – – (20) (20) (1,209) (1,182) (1,349) (1,535) – – 558 331 (1,209) (1,182) (1,907) (1,866) (1) Actuarial gains (losses) include experience gains (losses) of $2,525 million in 2019 and ($693 million) in 2018. (2) The actual return on plan assets was $3,633 million or 16.0% in 2019 and $17 million or 0.2% in 2018. FUNDED STATUS OF POST-EMPLOYMENT BENEFIT PLANS COST The following table shows the funded status of our post-employment benefit obligations. FOR THE YEAR ENDED DECEMBER 31 2019 2018 2019 2018 2019 2018 2019 2018 FUNDED PARTIALLY FUNDED (1) UNFUNDED (2) TOTAL Present value of post-employment benefit obligations Fair value of plan assets Plan surplus (deficit) (24,961) (22,765) (1,918) (1,816) 25,474 23,018 376 340 513 253 (1,542) (1,476) (300) – (300) (292) (27,179) (24,873) – 25,850 23,358 (292) (1,329) (1,515) (1) The partially funded plans consist of supplementary executive retirement plans (SERPs) for eligible employees and certain 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 certain OPEBs, which are paid as claims are incurred. BCE Inc. 2019 Annual Report 143 Notes to consolidated financial statements 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. FOR THE YEAR ENDED DECEMBER 31 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 2019 2018 3.1% 2.25% 1.6% 23.2 3.8% 2.25% 1.6% 23.1 DB PENSION PLANS AND OPEB PLANS 2019 2018 4.0% 2.25% 1.6% 23.1 3.7% 2.25% 1.6% 23.2 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 6.5% for 2019 decreasing The following table shows the effect of a 1% change in the assumed trend rates in healthcare costs. to 4.0% 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 3.7% • an annual increase in the cost of other covered healthcare EFFECT ON POST-EMPLOYMENT BENEFITS – INCREASE/(DECREASE) 1% INCREASE 1% DECREASE Total service and interest cost Post-employment benefit obligations 4 110 (3) (95) benefits of 4% 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 2019 – INCREASE/(DECREASE) IMPACT ON POST-EMPLOYMENT BENEFIT OBLIGATIONS AT DECEMBER 31, 2019 – INCREASE/(DECREASE) CHANGE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION INCREASE IN ASSUMPTION DECREASE IN ASSUMPTION 0.5% 1 year (75) 38 69 (39) (1,728) 945 1,944 (972) 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 benefits. The following table shows the target allocations for 2019 and the allocation of our post-employment benefit plan assets at December 31, 2019 and 2018. ASSET CATEGORY Equity securities Debt securities Alternative investments Total 144 BCE Inc. 2019 Annual Report WEIGHTED AVERAGE TARGET ALLOCATION TOTAL PLAN ASSETS FAIR VALUE 2019 DECEMBER 31, 2019 DECEMBER 31, 2018 0%–40% 60%–100% 0%–50% 22% 62% 16% 100% 20% 64% 16% 100% Notes to consolidated financial statements The following table shows the fair value of the DB pension plan assets for each category. FOR THE YEAR ENDED DECEMBER 31 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 2019 2018 1,017 4,534 13,216 2,385 219 2,119 1,001 948 91 844 3,770 12,457 2,004 327 1,804 1,014 758 93 25,530 23,071 Equity securities included approximately $15 million of BCE common shares, or 0.06% of total plan assets, at December 31, 2019 and approximately $8 million of BCE common shares, or 0.03% of total plan assets, at December 31, 2018. Debt securities included approximately $53 million of Bell Canada debentures, or 0.21% of total plan assets, at December 31, 2019 and approximately $68 million of Bell Canada debentures, or 0.30% of total plan assets, at December 31, 2018. Alternative investments included an investment in MLSE of $135 million, or 0.53% of total plan assets, at December 31, 2019 and $135 million, or 0.59% of total plan assets, at December 31, 2018. The Bell Canada pension plan has an investment arrangement which hedges part of its exposure to potential increases in longevity, which covers approximately $4 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 authorities. 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/payments 2019 (180) 2018 (433) 2019 (110) 2018 (106) 2019 (72) 2018 (75) DB PLANS (1) DC PLANS OPEB PLANS (1) Includes voluntary contributions of nil in 2019 and $240 million in 2018. We expect to contribute approximately $170 million to our DB pension plans in 2020, subject to actuarial valuations being completed. We expect to contribute approximately $120 million to the DC pension plans and to pay approximately $75 million to beneficiaries under OPEB plans in 2020. Note 25 Other non-current liabilities FOR THE YEAR ENDED DECEMBER 31 Long-term disability benefits obligation Provisions CRTC deferral account obligation CRTC tangible benefits obligation Other Total other non-current liabilities NOTE 23 26 26 2019 305 298 69 1 198 871 2018 288 305 92 23 289 997 BCE Inc. 2019 Annual Report 145 Notes to consolidated financial statements 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 2019 and/ or 2018: • foreign currency forward contracts and options that manage the foreign currency risk of certain anticipated purchases and sales and U.S. commercial paper • cross currency interest rate 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 and equity price risk related to share-based payment plans • interest rate swaps that hedge future dividend rate resets on preferred shares 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. DECEMBER 31, 2019 DECEMBER 31, 2018 NOTE 20, 25 CARRYING VALUE 29 FAIR VALUE 29 CARRYING VALUE 61 FAIR VALUE 61 20, 25 82 85 108 112 Quoted market price of debt 21, 22 18,653 20,905 18,188 19,178 Present value of future cash flows discounted using observable market interest rates 22 – – 2,097 2,304 CLASSIFICATION FAIR VALUE METHODOLOGY CRTC tangible benefits obligation CRTC deferral account obligation Debt securities and other debt Finance leases (1) Trade payables and other liabilities and other non-current liabilities Trade payables and other liabilities and other non-current liabilities Debt due within one year and long-term 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 (1) Upon adoption of IFRS 16 on January 1, 2019, fair value disclosures are no longer required for leases. 146 BCE Inc. 2019 Annual Report 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 December 31, 2019 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, 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 129 165 (135) 71 110 181 (135) 43 2 – – 1 1 – – – – 165 – 128 – 181 – 114 127 – (135) (58) 109 – (135) (71) (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, 2019 and 2018. 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 Additions Usage Balance, December 31 10 2019 (51) – (114) 103 (62) 2018 (54) (4) (84) 91 (51) In many instances, trade receivables are written off directly to bad debt expense if the account has not been collected after a predetermined period of time. The following table provides further details on trade receivables, net of allowance for doubtful accounts. AT DECEMBER 31 Trade receivables not past due Trade receivables past due, net of allowance for doubtful accounts Under 60 days 60 to 120 days Over 120 days 2019 2,082 541 232 64 2018 2,091 508 304 72 Trade receivables, net of allowance for doubtful accounts 2,919 2,975 BCE Inc. 2019 Annual Report 147 Notes to consolidated financial statements The following table provides the change in allowance for doubtful accounts for contract assets. Balance, January 1 Additions Usage and reversals Balance, December 31 Current Non-current Balance, December 31 NOTE 12 2019 (73) (28) 33 (68) (32) (36) (68) 2018 (1) (90) (19) 36 (73) (35) (38) (73) (1) We have updated amounts for the prior year to make them consistent with the presentation for the current year. LIQUIDITY RISK Our cash and cash equivalents, cash flows from operations and possible capital markets financing are expected to be sufficient to fund our operations and fulfill our obligations as they become due. Should our cash requirements exceed the above sources of cash, we would expect to cover such a shortfall by drawing on existing committed bank facilities and new ones, to the extent available. The following table is a maturity analysis for recognized financial liabilities at December 31, 2019 for each of the next five years and thereafter. AT DECEMBER 31, 2019 Long-term debt Notes payable Lease liabilities 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 21 20 2020 62 1,994 960 1,050 862 (3) (135) 2021 2,302 – 858 – 772 (2) – 2022 1,762 – 629 – 711 (2) – 2023 1,637 – 530 – 643 (2) – 2024 THERE- AFTER TOTAL 1,250 11,688 18,701 – 418 – 580 (2) – – 2,338 – 1,994 5,733 1,050 6,869 10,437 (57) – (68) (135) 4,790 3,930 3,100 2,808 2,246 20,838 37,712 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 interest rate swaps to manage foreign currency risk related to anticipated purchases and sales and certain foreign currency debt. In 2019, we entered into a cross currency interest rate swap with a notional amount of $600 million in U.S. dollars ($808 million in Canadian dollars), to hedge the U.S. currency exposure of our Series US-2 Notes maturing in 2049. See Note 22, Long-term debt, for additional details. In 2018, we entered into cross currency interest rate swaps with a notional amount of $1,150 million in U.S. dollars ($1,493 million in Canadian dollars), 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 gain (loss) of $13 million ($27 million) recognized in net earnings at December 31, 2019 and a gain (loss) of $189 million ($178 million) recognized in Other comprehensive income at December 31, 2019, with all other variables held constant. A 10% depreciation (appreciation) in the value of the Canadian dollar relative to the Philippine peso would result in a gain (loss) of $4 million recognized in Other comprehensive income at December 31, 2019, with all other variables held constant. 148 BCE Inc. 2019 Annual Report Notes to consolidated financial statements The following table provides further details on our outstanding foreign currency forward contracts and options as at December 31, 2019. TYPE OF HEDGE Cash flow Cash flow Cash flow Cash flow Economic – put options Economic – call options Economic – options (1) BUY CURRENCY AMOUNT TO RECEIVE SELL CURRENCY USD USD PHP USD USD USD USD 1,512 704 1,944 491 261 228 120 CAD CAD CAD CAD CAD CAD CAD AMOUNT TO PAY 1,999 915 49 637 340 299 154 MATURITY HEDGED ITEM 2020 2020 2020 2021 2020 2020 2021 Commercial paper Anticipated transactions Anticipated transactions Anticipated transactions Anticipated transactions Anticipated transactions Anticipated transactions (1) In 2019, we entered into a series of foreign currency options having a leverage provision and a profit cap limitation. INTEREST RATE EXPOSURES A 1% increase (decrease) in interest rates would result in a decrease (increase) of $29 million in net earnings at December 31, 2019. In 2019, we entered into interest rate swaps with a notional amount of $275 million to hedge the dividend rate reset on BCE preferred shares in 2020. 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, 2019 was an asset of $40 million (December 31, 2018 – a liability of $73 million). A 5% increase (decrease) in the market price of BCE’s common shares at December 31, 2019 would result in a gain (loss) of $38 million recognized in net earnings for 2019, 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 2019, we increased our net debt leverage ratio target range to 2.00 to 2.50 times adjusted EBITDA from 1.75 to 2.25 times adjusted EBITDA in 2018. This increase reflects the one-time impact from the adoption of IFRS 16 which increased net debt by $2,304 million on January 1, 2019. See Note 35, Adoption of IFRS 16, for further details on the impacts of adopting IFRS 16 on our January 1, 2019 consolidated statement of financial position. At December 31, 2019, we had exceeded the limit of our internal net debt leverage ratio target range by 0.29. In 2019 and 2018, our adjusted EBITDA to net interest expense ratio target was greater than 7.5 times. The adoption of IFRS 16 did not have an impact on our adjusted EBITDA to net interest expense ratio target. 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 2019 2.79 8.54 2018 2.72 9.00 On February 5, 2020 the board of directors of BCE approved an increase of 5.0% in the annual dividend on BCE’s common shares, from $3.17 to $3.33 per common share. In addition, the board of directors of BCE declared a quarterly dividend of $0.8325 per common share payable on April 15, 2020 to the shareholders of record at March 16, 2020. 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 Q1 2018, BCE completed a normal course issuer bid program (NCIB). See Note 27, Share capital, for additional details. (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 plus 50% of declared preferred share dividends as shown in our income statements. BCE Inc. 2019 Annual Report 149 Notes to consolidated financial statements 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, 2019. There were no Second Preferred Shares issued and outstanding at December 31, 2019. BCE’s articles of amalgamation, as amended, describe the terms and conditions of these shares in detail. CONVERSION DATE REDEMPTION DATE REDEMPTION PRICE ISSUED AND OUTSTANDING DECEMBER 31, 2019 DECEMBER 31, 2018 NUMBER OF SHARES STATED CAPITAL SERIES 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) AM (1) AN (2) AO (1) AP (3) AQ (1) AR (3) ANNUAL DIVIDEND RATE floating 4.13% floating 3.019% floating 3.904% CONVERTIBLE INTO Series R Series Q Series T Series S Series Z Series Y December 1, 2025 December 1, 2020 December 1, 2020 November 1, 2021 At any time November 1, 2021 November 1, 2021 December 1, 2022 At any time December 1, 2022 December 1, 2022 3.61% Series AB September 1, 2022 September 1, 2022 floating Series AA September 1, 2022 At any time 4.38% Series AD March 1, 2023 March 1, 2023 floating floating 3.11% 2.80% Series AC Series AF Series AE Series AH floating Series AG March 1, 2023 February 1, 2020 At any time At any time February 1, 2020 February 1, 2020 May 1, 2021 May 1, 2021 May 1, 2021 At any time 2.75% Series AJ August 1, 2021 August 1, 2021 Series AI August 1, 2021 At any time Series AL December 31, 2021 December 31, 2021 Series AK December 31, 2021 At any time floating 2.954% floating 2.764% floating $25.50 $25.00 $25.50 $25.00 $25.50 $25.00 $25.00 $25.50 $25.00 $25.50 $25.50 $25.00 $25.00 $25.50 $25.00 $25.50 $25.00 AUTHORIZED 8,000,000 – 8,000,000 8,000,000 8,000,000 3,513,448 8,000,000 4,486,552 10,000,000 8,081,491 10,000,000 1,918,509 20,000,000 11,398,396 20,000,000 8,601,604 20,000,000 10,029,691 20,000,000 9,970,309 24,000,000 9,292,133 24,000,000 6,707,867 22,000,000 4,985,351 22,000,000 9,014,649 22,000,000 5,949,884 22,000,000 8,050,116 25,000,000 22,745,921 25,000,000 2,254,079 Series AN Series AM March 31, 2021 March 31, 2021 $25.00 30,000,000 9,546,615 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 4.812% floating Series AO March 31, 2027 30,000,000 – Series AR September 30, 2023 September 30, 2023 $25.00 30,000,000 9,200,000 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 48 291 219 256 254 232 168 125 225 149 201 569 56 218 45 118 – 228 – 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, 2019 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. 150 BCE Inc. 2019 Annual Report 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, 2019 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. CONVERSION AND DIVIDEND RATE RESET OF FIRST PREFERRED SHARES Subsequent to year end, on February 1, 2020 3,283,795 of BCE’s 9,292,133 floating rate Cumulative Redeemable First Preferred Shares, Series AE (Series AE Preferred Shares) were converted, on a one-for-one basis, into fixed-rate Cumulative Redeemable First Preferred Shares, Series AF (Series AF Preferred Shares). In addition, on February 1, 2020, 506,975 of BCE’s 6,707,867 Series AF Preferred Shares were converted, on a one-for-one basis, into Series AE Preferred Shares. The annual fixed dividend rate on BCE’s Series AF Preferred Shares was reset for the next five years, effective February 1, 2020, at 3.865%. The Series AE Preferred Shares continue to pay a monthly 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, 2019 and 2018. The following table provides details about the outstanding common shares of BCE. Outstanding, January 1 Shares issued for the acquisition of AlarmForce Shares issued under employee stock option plan Repurchase of common shares Shares issued under ESP Shares issued under DSP Outstanding, December 31 NOTE 34 28 2019 2018 NUMBER OF SHARES STATED CAPITAL NUMBER OF SHARES 898,200,415 20,036 900,996,640 – 4,459,559 – 1,231,479 16,729 – 251 – 75 1 22,531 266,941 (3,085,697) – – STATED CAPITAL 20,091 1 13 (69) – – 903,908,182 20,363 898,200,415 20,036 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 2019 and 2018 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. 2019 (29) (54) (10) (93) 2018 (29) (50) (10) (89) BCE Inc. 2019 Annual Report 151 Notes to consolidated financial statements 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, 2019, 4,360,087 common shares were authorized for issuance from treasury under the ESP. The following table summarizes the status of unvested employer contributions at December 31, 2019 and 2018. NUMBER OF ESP SHARES Unvested contributions, January 1 Contributions (1) Dividends credited Vested Forfeited Unvested contributions, December 31 2019 2018 1,120,426 1,039,030 623,705 57,083 (523,359) (153,657) 671,911 56,926 (501,089) (146,352) 1,124,198 1,120,426 (1) The weighted average fair value of the shares contributed was $60 in 2019 and $55 in 2018. 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, 2019 and 2018. NUMBER OF RSUs/PSUs Outstanding, January 1 Granted (1) Dividends credited Settled Forfeited Outstanding, December 31 Vested, December 31 (2) (1) The weighted average fair value of the RSUs/PSUs granted was $58 in 2019 and $57 in 2018. (2) The RSUs/PSUs vested on December 31, 2019 were fully settled in February 2020 with BCE common shares and/or DSUs. 2019 2018 2,812,697 975,348 149,648 (932,133) (90,442) 2,740,392 1,006,586 149,258 (1,027,321) (56,218) 2,915,118 2,812,697 904,266 880,903 152 BCE Inc. 2019 Annual Report Notes to consolidated financial statements 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 $22 million and $26 million at December 31, 2019 and 2018, respectively. 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. The following table summarizes the status of outstanding DSUs at December 31, 2019 and 2018. NUMBER OF DSUs Outstanding, January 1 Issued (1) Settlement of RSUs/PSUs Dividends credited Settled Outstanding, December 31 2019 2018 4,391,997 4,309,528 84,588 146,960 236,079 94,580 112,675 240,879 (236,525) (365,665) 4,623,099 4,391,997 (1) The weighted average fair value of the DSUs issued was $59 in 2019 and $55 in 2018. STOCK OPTIONS Under BCE’s long-term incentive plans, BCE may grant options to executives to buy BCE common shares. The subscription price of a grant is based on the higher of: • the volume-weighted average of the trading price on the trading day immediately prior to the effective date of the grant • the volume-weighted average of the trading price for the last five consecutive trading days ending on the trading day immediately prior to the effective date of the grant At December 31, 2019, 7,524,891 common shares were authorized for issuance under these plans. Options vest fully after three years of continuous employment from the date of grant. All options become exercisable when they vest and can be exercised for a period of seven years from the date of grant for options granted prior to 2019 and ten years from the date of grant for options granted in 2019. The following table summarizes BCE’s outstanding stock options at December 31, 2019 and 2018. Outstanding, January 1 Granted Exercised (1) Forfeited Outstanding, December 31 Exercisable, December 31 NOTE NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE ($) NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE ($) 2019 2018 27 14,072,332 3,357,303 (4,459,559) (144,535) 12,825,541 2,786,043 56 58 54 58 57 56 10,490,249 3,888,693 (266,941) (39,669) 14,072,332 4,399,588 55 56 42 58 56 52 (1) The weighted average market share price for options exercised was $62 in 2019 and $55 in 2018. The following table provides additional information about BCE’s stock option plans at December 31, 2019 and 2018. RANGE OF EXERCISE PRICES $40–$49 $50–$59 $60 & above STOCK OPTIONS OUTSTANDING 2019 WEIGHTED AVERAGE REMAINING LIFE (YEARS) WEIGHTED AVERAGE EXERCISE PRICE ($) 1 6 4 5 47 58 61 57 NUMBER 449,216 12,271,003 105,322 12,825,541 NUMBER 1,747,042 12,232,011 93,279 14,072,332 2018 WEIGHTED AVERAGE REMAINING LIFE (YEARS) WEIGHTED AVERAGE EXERCISE PRICE ($) 2 5 5 4 46 57 61 56 BCE Inc. 2019 Annual Report 153 Notes to consolidated financial statements 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 Expected dividend growth Expected volatility Risk-free interest rate Expected life (years) 2019 $2.34 $58 $58 5% 14% 2% 4 2018 $2.13 $57 $56 5% 12% 2% 4 Expected dividend growth is commensurate with BCE’s dividend growth strategy. Expected volatility is 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. Note 29 Additional cash flow information The following table provides a reconciliation of changes in liabilities arising from financing activities. DEBT DUE WITHIN ONE YEAR AND LONG-TERM DEBT NOTE DERIVATIVE TO HEDGE FOREIGN CURRENCY ON DEBT (1) DIVIDENDS PAYABLE OTHER LIABILITIES December 31, 2018 Adoption of IFRS 16 January 1, 2019 Cash flows from (used in) financing activities Decrease in notes payable Issue of long-term debt Repayment of long-term debt Increase in securitized trade receivables Cash dividends paid on common and preferred shares Cash dividends paid by subsidiaries to non-controlling interests Other financing activities Total cash flows used in financing activities excluding equity Non-cash changes arising from Increase in lease liabilities Dividends declared on common and preferred shares Dividends declared by subsidiaries to non-controlling interests Effect of changes in foreign exchange rates Other Total non-cash changes December 31, 2019 24,405 2,304 26,709 (1,045) 1,954 (2,228) 131 – – (33) 33 (169) – (169) (28) – – – – – – 691 – 691 – – – – (2,966) (65) – (1,221) (28) (3,031) 1,006 – – (261) 63 808 26,296 – – – 261 (8) 253 56 – 3,008 64 – (3) 3,069 729 (1) Included in Other current assets, Other non-current assets and Trade payables and other liabilities in the statements of financial position. – – – – – – – – – (20) (20) – – – – 20 20 – TOTAL 24,927 2,304 27,231 (1,073) 1,954 (2,228) 131 (2,966) (65) (53) (4,300) 1,006 3,008 64 – 72 4,150 27,081 154 BCE Inc. 2019 Annual Report Notes to consolidated financial statements January 1, 2018 Cash flows from (used in) financing activities Decrease in notes payable Issue of long-term debt Repayment of long-term debt Decrease in securitized trade receivables 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) (2) – – (40) – 414 – – 341 96 161 1,012 24,405 DERIVATIVE TO HEDGE FOREIGN CURRENCY ON DEBT (1) 54 118 – – – – – – DIVIDENDS PAYABLE 678 – – – – (2,828) (16) – 118 (2,844) – – – (341) – – (341) (169) – 2,856 5 – – (4) 2,857 691 OTHER LIABILITIES – – – – – – – (35) (35) – – – – – 35 35 – (1) Included in Other current assets and Other non-current assets in the statements of financial position. TOTAL 24,125 (123) 2,996 (2,713) (2) (2,828) (16) (75) (2,761) 414 2,856 5 – 96 192 3,563 24,927 Note 30 Remaining performance obligations The following table shows revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as at December 31, 2019. Wireline Wireless Total 2020 1,213 1,907 3,120 2021 789 1,060 1,849 2022 473 389 862 2023 253 113 366 2024 114 80 194 THERE- AFTER 59 563 622 TOTAL 2,901 4,112 7,013 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. BCE Inc. 2019 Annual Report 155 Notes to consolidated financial statements Note 31 Commitments and contingencies COMMITMENTS The following table is a summary of our contractual obligations at December 31, 2019 that are due in each of the next five years and thereafter. Commitments for property, plant and equipment and intangible assets Purchase obligations Leases committed not yet commenced Total 2020 2021 2022 2023 2024 1,050 593 10 796 510 4 656 460 3 1,653 1,310 1,119 521 297 3 821 381 180 2 563 THERE- AFTER 589 370 5 964 TOTAL 3,993 2,410 27 6,430 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. Our commitments for leases not yet commenced include OOH advertising spaces and real estate with lease terms ranging from 4 to 20 years. These leases are non-cancellable. Purchase obligations consist of contractual obligations under service and product contracts for operating expenditures and other purchase obligations. CONTINGENCIES 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 third-party Internet resellers to fibre-to-the-node (FTTN) or cable networks, as applicable. On August 15, 2019, the CRTC further reduced the wholesale rates that Internet resellers pay to access network infrastructure built by facilities-based providers like Bell Canada, with retroactive effect back to March 2016 (the Decision). The estimated cost impact to Bell Canada of the Decision could be in excess of $100 million, if not overturned or otherwise modified. Bell Canada and five major cable carriers (the Applicants) have obtained leave to appeal the Decision from the Federal Court of Appeal. The Federal Court of Appeal has also granted stay of the Decision until it makes its final ruling. The Applicants and TELUS Communications Inc. (Telus) further appealed the Decision to the Federal Cabinet and have filed review and vary applications of the Decision with the CRTC. As a result of the stay, the impact of the Decision has not been recorded in our 2019 financial statements. Note 32 Related party transactions 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 5, 2020, 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. SUBSIDIARIES The following table shows BCE’s significant subsidiaries at December 31, 2019. 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 156 BCE Inc. 2019 Annual Report OWNERSHIP PERCENTAGE 2019 100% 100% 100% 2018 100% 100% 100% Notes to consolidated financial statements TRANSACTIONS WITH JOINT ARRANGEMENTS AND ASSOCIATES During 2019 and 2018, 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 2019, BCE recognized revenues and incurred expenses with our joint arrangements and associates of $17 million (2018 – $17 million) and $200 million (2018 – $187 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 $12 million from the Master Trust Fund for 2019 and $11 million for 2018. 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, 2019 and 2018 included in our income statements. Key management personnel included the company’s Chief Executive Officer, Chief Operating Officer, Group President and the executives who reported 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 2019 (24) (3) (29) (56) 2018 (27) (4) (23) (54) Note 33 Significant partly-owned subsidiary The following tables show summarized financial information for our subsidiary with significant non-controlling interest (NCI). SUMMARIZED STATEMENTS OF FINANCIAL POSITION FOR THE YEAR ENDED DECEMBER 31 Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity attributable to BCE shareholders NCI CTV SPECIALTY (1) (2) 2019 314 994 2018 337 993 1,308 1,330 151 192 343 671 294 142 201 343 685 302 (1) At December 31, 2019 and 2018, 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, 2019 and 2018 include $8 million and $10 million, respectively, directly attributable to NCI. BCE Inc. 2019 Annual Report 157 Notes to consolidated financial statements 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 $5 million directly attributable to NCI for 2019 and $4 million for 2018. Note 34 Business acquisitions and dispositions 2018 CTV SPECIALTY (1) 2019 878 193 61 181 58 65 2018 857 131 42 149 47 16 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 $154 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 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 154 154 5 (13) 64 20 (5) 71 3 74 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. 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 for total proceeds of approximately $68 million. 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. AlarmForce is included in our Bell Wireline segment in our consolidated financial statements. 158 BCE Inc. 2019 Annual Report 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. 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. For the year ended December 31, 2018, 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. Note 35 Adoption of IFRS 16 Upon adoption of IFRS 16 on January 1, 2019, we recognized right-of-use assets of $2,257 million within property, plant and equipment, and lease liabilities of $2,304 million within debt, with an increase to our deficit of $19 million. These amounts were recognized in addition to assets under finance leases of $1,947 million and the corresponding finance lease liabilities of $2,097 million at December 31, 2018 under IAS 17. As a result, on January 1, 2019, our total right-of-use assets and lease liabilities amounted to $4,204 million and $4,401 million, respectively. The table below shows the impacts of adopting IFRS 16 on our January 1, 2019 consolidated statement of financial position. Prepaid expenses Other current assets Property, plant and equipment Other non-current assets Trade payables and other liabilities Debt due within one year Long-term debt Deferred tax liabilities Other non-current liabilities Deficit Non-controlling interest DECEMBER 31, 2018 AS REPORTED 244 329 24,844 847 3,941 4,645 19,760 3,163 997 (4,937) 326 IFRS 16 IMPACTS (55) 9 2,257 17 (10) 293 2,011 (7) (39) (19) (1) JANUARY 1, 2019 UPON ADOPTION OF IFRS 16 189 338 27,101 864 3,931 4,938 21,771 3,156 958 (4,956) 325 BCE’s operating lease commitments at December 31, 2018 were $1,612 million. The difference between operating lease commitments at December 31, 2018 and lease liabilities of $2,304 million upon adoption of IFRS 16 at January 1, 2019, is due mainly to an increase of $1,122 million related to renewal options reasonably certain to be exercised, an increase of $112 million mainly related to non-monetary transactions and a decrease of ($542) million as a result of discounting applied to future lease payments, which was determined using a weighted average incremental borrowing rate of 3.49% at January 1, 2019. BCE Inc. 2019 Annual Report 159 Notes to consolidated financial statements Board of directors AS OF MARCH 5, 2020 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 Mirko Bibic ONTARIO, CANADA President and Chief Executive Officer, BCE Inc. and Bell Canada Director since January 2020 Sophie Brochu QUÉBEC, CANADA Corporate Director Director since May 2010 Robert E. Brown QUÉBEC, CANADA Corporate Director Director since May 2009 David F. Denison, FCPA, FCA ONTARIO, CANADA Corporate Director Director since October 2012 Robert P. Dexter NOVA SCOTIA, CANADA Chair and Chief Executive Officer, Maritime Travel Inc. Director since November 2014 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. 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 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 CORPORATE GOVERNANCE COMMITTEE B.K. Allen (Chair), S. Brochu, R.E. Brown, M.F. Leroux, R.C. Simmonds PENSION FUND COMMITTEE D.F. Denison (Chair), R.P. Dexter, K. Lee, C. Rovinescu, K. Sheriff, P.R. Weiss The CGC assists the board to: • develop and implement 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. BCE Inc.’s corporate governance policies and guidelines • identify individuals qualified to become members of the board • determine the composition of the board and its committees • determine the directors’ remuneration for board and committee service • develop and oversee a process to assess the Chair of the board, the board, committees of the board, Chairs of committees and individual directors • review and recommend for board approval BCE Inc.’s policies concerning business conduct, ethics, public disclosure of material information and other matters. 160 BCE Inc. 2019 Annual Report Board of directors / Executives Executives AS OF MARCH 5, 2020 Mirko Bibic President and Chief Executive Officer, 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 Claire Gillies President, Bell Mobility, Bell Canada Blaik Kirby Group President, Bell Mobility and Bell Residential & Small Business, Bell Canada Glen LeBlanc Executive Vice-President and Chief Financial Officer, BCE Inc. and Bell Canada Bernard le Duc Chief Human Resources Officer and Executive Vice-President, Corporate Services, BCE Inc. and Bell Canada Randy Lennox President, Bell Media, Bell Canada Thomas Little President, Bell Business Markets, Bell Canada Karine Moses Vice Chair, Québec and President, Bell Media Québec, Bell Canada Wade Oosterman Vice Chair and Group President, BCE Inc. and Bell Canada John Watson Group President, Customer Experience, Bell Canada BCE Inc. 2019 Annual Report 161 Board of directors / Executives Investor information SHARE FACTS SYMBOL BCE LISTINGS 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 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. 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. COMMON SHARES OUTSTANDING December 31, 2019 – 903,908,182 QUARTERLY DIVIDEND* $0.8325 per common share 2020 DIVIDEND SCHEDULE* Record date March 16, 2020 June 15, 2020 September 15, 2020 December 15, 2020 Payment date** April 15, 2020 July 15, 2020 October 15, 2020 January 15, 2021 * 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 2020 QUARTERLY EARNINGS RELEASE DATES First quarter Second quarter Third quarter Fourth quarter May 7, 2020 August 6, 2020 November 5, 2020 February 4, 2021 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. 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. 162 BCE Inc. 2019 Annual Report 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. For information on shareholder services or any other inquiries regarding your account (including stock transfer, address change, lost certificates and tax forms), contact: 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. 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 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. Trademarks in this annual report which are owned or used under license by BCE Inc., Bell Canada or their subsidiaries include, without limitation, BCE, BELL Design, BELL MOBILITY and BELL MEDIA. This annual report also includes trademarks of other parties. The trademarks referred to in this annual report may be listed without the ® and ™ symbols. © BCE Inc., 2020. All rights reserved. bce.ca