CHICAGO(BUSINESS WIRE)Aug. 12, 2004--Fitch Ratings has affirmed the senior unsecured debt ratings of BCE Inc. (BCE) and Bell Canada at ’A-’ and ’A’, respectively. The Rating Outlooks are Stable for both companies. Approximately C$11 billion of public debt securities are affected by these actions.

The affirmation recognizes the improvement in the BCE and Bell Canada credit profile through debt reduction over the past 18 months, solid free cash flow generation supplemented by several nonrecurring items and growth in Bell Canada’s consumer segment, balanced against the competitive pressures in the local, data, and long distance segments. While Fitch believes VoIP offerings will increase business risk and likely accelerate access line erosion in 2005, that effect can be potentially offset by diversified operations in growth areas, such as wireless, DSL, and video, as well as productivity improvements to maintain free cash flow levels. The ability of Bell Canada to drive new revenue growth will ultimately determine the sustainable long-term credit profile. Accordingly, Bell Canada’s new long distance bundle offering strongly reflects the company’s focus on the growth areas in the business.

During the past 18 months, BCE has made considerable progress in decreasing leverage, as the company reduced net debt at consolidated BCE by approximately $2.3 billion or 15% of net debt. As a result, debt-to-EBITDA has improved from 2.2 times (x) in 2002 to 1.9x at the end of the second quarter 2004. Fitch believes further debt reduction is necessary to offset increasing business risk associated with its wireline segment, and prospects remain good for further deleveraging. However, additional opportunities in 2004 are limited due to the $570 million in cash requirements associated with the Bell West put.

Further debt reduction in 2005 could be accomplished through expected free cash flow and possible asset divestitures. In light of the existing competitive pressures and future threats to its wireline revenues, the following longer term initiatives are critical to sustain Bell Canada’s free cash flow:

-- Expected cost savings in excess of $1 billion associated with productivity enhancements over the next two years;

-- Increased consumer growth connected with the new long distance bundle offer;

-- Successfully execute core migration to IP platform.

While Bell Canada is clearly responding to the secular decline within long distance revenues, the company must more than offset the reprice of long distance and increased cost of acquisition with reduced churn and greater bundled sales thereby resulting in increased lifetime cash flows. Additionally, the aggressive pricing for the long distance bundle reflects the challenges within the telecom industry. A failure to execute on these initiatives and/or greater than expected access line erosion from competitive entrants could place pressure on the rating.

In addition, noncore asset divestitures could play a role in improving the overall credit profile of Bell Canada and BCE while sharpening the focus on its core operations. The sale of BCE Emergis marks a key strategy shift in this direction. Future divestitures could include its stakes in Manitoba Telecom Services Inc., Bell Globemedia, and CGI Group Inc.

Bell Canada’s ratings also derive support from its strong diversified brand, solid liquidity, the regulatory environment, and its competitive position. While the Canadian incumbent operators have not been immune to regulatory decisions to stimulate competition, the Canadian regulatory environment is supportive of facilities-based carriers and is not as onerous as the U. S. Likewise, the competitive environment, while challenging, does not present near the level of business risk, particularly from the wireless segment, its key growth engine, facing U.S. operators as Bell Canada maintains a strong position as the incumbent operator in Ontario and Quebec.

Bell Canada and BCE’s liquidity is solid, largely from commercial paper availability of $2 billion and $1.8 billion, respectively. Intermediate-term liquidity needs are expected to be handled through its free cash flows and could be supplemented through asset sales.

A remaining challenge for Bell Canada includes reaching a collective bargaining agreement with its union, representing approximately 7,000 workers. Fitch believes that if a strike were to occur later this year, the cash effects associated with this event would be minimal in the short-term. Clearly, a longer term strike would not be positive for Bell Canada, its employees, or customers the company serves.

These ratings are based on existing public information and provided as a service to investors.