Discussion and Reconciliation of Non-GAAP Measures

We believe the following measures are relevant and useful information to investors as they are part of AT&T's internal management reporting and planning processes and are important metrics that management uses to evaluate the operating performance of AT&T and its segments. Management also uses these measures as a method of comparing performance with that of many of our competitors.

Certain amounts have been conformed to the current period's presentation, including our change in accounting to capitalize customer set-up and installation costs and amortize them over the expected economic life of the customer relationship.

Free Cash Flow

Free cash flow is defined as cash from operations minus Capital expenditures. Free cash flow after dividends is defined as cash from operations minus Capital expenditures and dividends. Free cash flow dividend payout ratio is defined as the percentage of dividends paid to free cash flow. We believe these metrics provide useful information to our investors because management views free cash flow as an important indicator of how much cash is generated by routine business operations, including Capital expenditures, and makes decisions based on it. Management also views free cash flow as a measure of cash available to pay debt and return cash to shareowners.

Free Cash Flow and Free Cash Flow Dividend Payout Ratio
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Net cash provided by operating activities	$	10,142	$	9,185	$	39,344	$	35,880
Less: Capital expenditures		(6,456)		(6,093)		(22,408)		(20,015)
Free Cash Flow		3,686		3,092		16,936		15,865

Less: Dividends paid		(2,947)		(2,889)		(11,797)		(10,200)
Free Cash Flow after Dividends	$	739	$	203	$	5,139	$	5,665
Free Cash Flow Dividend Payout Ratio		80.0%		93.4%		69.7%		64.3%

Capital Investment

Capital Investment is a non-GAAP financial measure that adds to Capital expenditures the amount of vendor financing arrangements for capital improvements. These favorable payment terms are considered vendor financing arrangements and are reported as financing activities instead of Capital expenditures. Management believes that Capital Investment provides relevant and useful information to investors and other users of our financial data in evaluating long-term investment in our business.

Capital Investment
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Capital Expenditures	$	6,456	$	6,093	$	22,408	$	20,015
Vendor Financing		267		684		492		684
Capital Investment	$	6,723	$	6,777	$	22,900	$	20,699

EBITDA

Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies. For AT&T, EBITDA excludes other income (expense) – net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. Equity in net income (loss) of affiliates represents the proportionate share of the net income (loss) of affiliates in which we exercise significant influence, but do not control. Because we do not control these entities, management excludes these results when evaluating the performance of our primary operations. EBITDA also excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with our capital and tax structures. Finally, EBITDA excludes depreciation and amortization in order to eliminate the impact of capital investments. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with U.S. generally accepted accounting principles (GAAP).

EBITDA service margin is calculated as EBITDA divided by service revenues.

When discussing our segment results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from segment contribution. For our supplemental presentation of our combined domestic wireless operations (AT&T Mobility), EBITDA excludes depreciation and amortization from Operating Income.

These measures are used by management as a gauge of our success in acquiring, retaining and servicing subscribers because we believe these measures reflect AT&T's ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing segment performance with that of many of its competitors. The financial and operating metrics which affect EBITDA include the key revenue and expense drivers for which segment managers are responsible and upon which we evaluate their performance.

We believe EBITDA Service Margin (EBITDA as a percentage of service revenues) to be a more relevant measure than EBITDA Margin (EBITDA as a percentage of total revenue) for our Consumer Mobility segment operating margin and our supplemental AT&T Mobility operating margin. For the periods covered by this report, we subsidized a portion of some of our wireless handset sales, which are recognized in the period in which we sell the handset. Management views this equipment subsidy as a cost to acquire or retain a subscriber, which is recovered through the ongoing service revenue that is generated by the subscriber. We also use wireless service revenues to calculate margin to facilitate comparison, both internally and externally with our wireless competitors, as they calculate their margins using wireless service revenues as well.

There are material limitations to using these non-GAAP financial measures. EBITDA, EBITDA margin and EBITDA service margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates. Management compensates for these limitations by carefully analyzing how its competitors present performance measures that are similar in nature to EBITDA as we present it, and considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income as calculated in accordance with GAAP. EBITDA, EBITDA margin and EBITDA service margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions	Three Months Ended				Twelve Months Ended
	December 31,				December 31,
		2016		2015		2016		2015
Net Income	$	2,515	$	4,086	$	13,333	$	13,687
Additions:
Income Tax Expense		676		2,221		6,479		7,005
Interest Expense		1,221		1,143		4,910		4,120
Equity in Net (Income) of Affiliates		(41)		(31)		(98)		(79)
Other (Income) Expense - Net		(123)		113		(277)		52
Depreciation and amortization		6,129		6,477		25,847		22,016
EBITDA		10,377		14,009		50,194		46,801

Total Operating Revenues		41,841		42,119		163,786		146,801
Service Revenues		37,369		37,635		148,884		131,677

EBITDA Margin		24.8%		33.3%		30.6%		31.9%
EBITDA Service Margin		27.8%		37.2%		33.7%		35.5%


Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Business Solutions Segment
Segment Contribution	$	4,023	$	3,721	$	16,826	$	16,392
Additions:
Depreciation and amortization		2,264		2,513		9,832		9,789
EBITDA		6,287		6,234		26,658		26,181

Total Segment Operating Revenues		18,033		18,214		70,988		71,127

Segment Operating Income Margin		22.3%		20.4%		23.7%		23.0%
EBITDA Margin		34.9%		34.2%		37.6%		36.8%

Entertainment Group Segment
Segment Contribution	$	1,370	$	1,457	$	6,104	$	2,000
Additions:
Equity in Net (Income) of Affiliates		(8)		(12)		(9)		4
Depreciation and amortization		1,381		1,426		5,862		4,945
EBITDA		2,743		2,871		11,957		6,949

Total Segment Operating Revenues		13,206		12,994		51,295		35,294

Segment Operating Income Margin		10.3%		11.1%		11.9%		5.7%
EBITDA Margin		20.8%		22.1%		23.3%		19.7%

Consumer Mobility Segment
Segment Contribution	$	2,185	$	2,141	$	9,825	$	9,738
Additions:
Depreciation and amortization		918		939		3,716		3,851
EBITDA		3,103		3,080		13,541		13,589

Total Segment Operating Revenues		8,419		8,749		33,200		35,066
Service Revenues		6,731		7,131		27,536		29,150

Segment Operating Income Margin		26.0%		24.5%		29.6%		27.8%
EBITDA Margin		36.9%		35.2%		40.8%		38.8%
EBITDA Service Margin		46.1%		43.2%		49.2%		46.6%

International Segment
Segment Contribution	$	(240)	$	(260)	$	(661)	$	(488)
Additions:
Equity in Net (Income) of Affiliates		(28)		1		(52)		5
Depreciation and amortization		298		309		1,166		655
EBITDA		30		50		453		172

Total Segment Operating Revenues		1,909		1,849		7,283		4,102

Segment Operating Income Margin		-14.0%		-14.0%		-9.8%		-11.8%
EBITDA Margin		1.6%		2.7%		6.2%		4.2%

Supplemental AT&T Mobility EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
AT&T Mobility
Operating Contribution	$	4,638	$	4,376	$	20,643	$	19,803
Add: Depreciation and amortization		2,048		2,031		8,292		8,113
EBITDA		6,686		6,407		28,935		27,916

Total Segment Operating Revenues		18,750		18,886		72,821		73,705
Service Revenues		14,713		14,815		59,386		59,837

Segment Operating Income Margin		24.7%		23.2%		28.3%		26.9%
EBITDA Margin		35.7%		33.9%		39.7%		37.9%
EBITDA Service Margin		45.4%		43.2%		48.7%		46.7%

Adjusting Items

Adjusting items include revenues and costs we consider nonoperational in nature, such as items arising from asset acquisitions or dispositions. We also adjust for net actuarial gains or losses associated with our pension and postemployment benefit plans due to the often significant impact on our fourth-quarter results (we immediately recognize this gain or loss in the income statement, pursuant to our accounting policy for the recognition of actuarial gains and losses.) Consequently, our adjusted results reflect an expected return on plan assets rather than the actual return on plan assets, as included in the GAAP measure of income.

The tax impact of adjusting items is calculated using the effective tax rate during the quarter except for (1) adjustments related to Mexico operations, which are taxed at the 30% marginal rate for Mexico and (2) adjustments that, given their magnitude can drive a change in the effective tax rate, reflect the actual tax expense or combined marginal rate of approximately 38%.

Adjusting Items
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Operating Revenues
Merger related deferred revenue	$	-	$	-	$	-	$	85
Storm revenue credits		10		-		23		-
Adjustments to Operating Revenues		10		-		23		85
Operating Expenses
DIRECTV and other video merger integration costs		259		165		754		502
Mexico merger integration costs		78		84		309		167
Time Warner merger costs		47		-		47		-
Wireless merger integration costs		1		79		93		649
Leap network decommissioning		-		55		-		669
Asset abandonments and impairments		361		-		361		35
Storm costs		27		-		44		-
Employee separation costs		30		36		344		375
Actuarial (gain) loss		1,024		(2,152)		1,024		(2,152)
(Gain) loss on transfer of wireless spectrum		-		-		(714)		-
Adjustments to Operations and Support Expenses		1,827		(1,733)		2,262		245
Amortization of intangible assets		1,228		1,272		5,177		2,556
Impairments		29		-		29		-
Adjustments to Operating Expenses		3,084		(461)		7,468		2,801
Other
DIRECTV-related interest expense and exchange fees ¹		-		-		16		142
(Gain) loss on sale of investments and impairments		28		132		32		132
Adjustments to Income Before Income Taxes		3,122		(329)		7,539		3,160
Tax impact of adjustments		1,097		(206)		2,618		996
Tax-related benefits²		359		-		359		228
Adjustments to Net Income	$	1,666	$	(123)	$	4,562	$	1,936
¹Includes interest expense incurred on the debt issued prior to the close of the DIRECTV transaction and fees associated with the exchange of DIRECTV notes for AT&T notes.
²2016 includes merger-related restructuring of investment in Mexico.

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and Adjusted diluted EPS are non-GAAP financial measures calculated by excluding from operating revenues, operating expenses and income tax expense certain significant items that are non-operational or non-recurring in nature, including dispositions and merger integration and transaction costs. Management believes that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and Adjusted diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. AT&T's calculation of Adjusted items, as presented, may differ from similarly titled measures reported by other companies.

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA Service Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Operating Income	$	4,248	$	7,532	$	24,347	$	24,785
Adjustments to Operating Revenues		10		-		23		85
Adjustments to Operating Expenses		3,084		(461)		7,468		2,801
Adjusted Operating Income¹		7,342		7,071		31,838		27,671

EBITDA		10,377		14,009		50,194		46,801
Adjustments to Operating Revenues		10		-		23		85
Adjustments to Operations and Support Expenses		1,827		(1,733)		2,262		245
Adjusted EBITDA¹		12,214		12,276		52,479		47,131

Total Operating Revenues		41,841		42,119		163,786		146,801
Adjustments to Operating Revenues		10		-		23		85
Total Adjusted Operating Revenue		41,851		42,119		163,809		146,886
Service Revenues		37,369		37,635		148,884		131,677
Adjustments to Operating Revenues		10		-		23		85
Adjusted Service Revenues		37,379		37,635		148,907		131,762

Operating Income Margin		10.2%		17.9%		14.9%		16.9%
Adjusted Operating Income Margin¹		17.5%		16.8%		19.4%		18.8%
Adjusted EBITDA Margin¹		29.2%		29.1%		32.0%		32.1%
Adjusted EBITDA Service Margin¹		32.7%		32.6%		35.2%		35.8%
¹Adjusted Operating Income, Adjusted EBITDA and associated margins exclude all actuarial gains or losses ($1.0 billion loss in 2016) associated with our pension and postemployment benefit plans, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. As a result, Adjusted Operating Income and Margin reflect an expected return on plan assets of $3.5 billion (based on an average expected return on plan assets of 7.75% for our pension trust and 5.75% for our VEBA trusts), rather than the actual return on plan assets of $3.5 billion (actual pension return of 7.8% and VEBA return of 6.7%), as included in the GAAP measure of income.

Adjusted Diluted EPS
		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Diluted Earnings Per Share (EPS)	$	0.39	$	0.65	$	2.10	$	2.37
Amortization of intangible assets		0.13		0.14		0.55		0.30
Merger integration and other items¹		0.04		0.06		0.13		0.28
Employee separation costs		-		-		0.04		0.04
Asset abandonments and impairments		0.05		-		0.04		-
Actuarial (gain) loss		0.10		(0.22)		0.10		(0.24)
Storm related and other items		0.01		-		0.01		-
Gain (loss) on transfer of wireless spectrum		-		-		(0.07)		-
Tax-related benefits		(0.06)		-		(0.06)		(0.04)
Adjusted EPS	$	0.66	$	0.63	$	2.84	$	2.71
Year-over-year growth - Adjusted		4.8%				4.8%
Weighted Average Common Shares Outstanding with Dilution (000,000)		6,181		6,187		6,189		5,646
¹Includes combined merger integration items, Leap network decommissioning, and DIRECTV-related interest expense and exchange fees.

Net Debt to Adjusted EBITDA
Dollars in millions
		Three Months Ended
		Mar. 31,		Jun. 30		Sep. 30		Dec. 31		YTD 2016
		2016		2016		2016		2016		YTD 2016
Adjusted EBITDA	$	13,279	$	13,397	$	13,589	$	12,214	$	52,479
Add back severance		(25)		(29)		(260)		(30)		(344)
Net Debt Adjusted EBITDA		13,254		13,368		13,329		12,184		52,135
Annualized Net Debt Adjusted EBITDA										52,135
End-of-period current debt										9,832
End-of-period long-term debt										113,681
Total End-of-Period Debt										123,513
Less: Cash and Cash Equivalents										5,788
Net Debt Balance										117,725
Annualized Net Debt to Adjusted EBITDA Ratio										2.26

Entertainment Group Adjusted Operating Revenues
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Segment Operating Revenues	$	13,206	$	12,994	$	51,295	$	35,294
DIRECTV Operating Revenues¹				-				14,864
Adjustments:
Other DIRECTV operations				-				182
Revenue recognition				-				229
Intercompany eliminations				-				(40)
Adjusted Segment Operating Revenues	$	13,206	$	12,994	$	51,295	$	50,529
Year-over-year growth - Adjusted		1.6%				1.5%
¹Includes results from July 1, 2015 through July 24, 2015 acquisition date.