Selected Financial and Operating Data
Dollars in millions except per share amounts

At December 31 and for the year ended:	2016			2015			2014			2013			2012
Financial Data
Operating revenues	$	163,786		$	146,801		$	132,447		$	128,752		$	127,434
Operating expenses	$	139,439		$	122,016		$	120,235		$	98,000		$	114,380
Operating income	$	24,347		$	24,785		$	12,212		$	30,752		$	13,054
Interest expense	$	4,910		$	4,120		$	3,613		$	3,940		$	3,444
Equity in net income of affiliates	$	98		$	79		$	175		$	642		$	752
Other income (expense) - net	$	277		$	(52	)	$	1,581		$	596		$	134
Income tax expense	$	6,479		$	7,005		$	3,619		$	9,328		$	2,922
Net Income	$	13,333		$	13,687		$	6,736		$	18,722		$	7,574
Less: Net Income Attributable to Noncontrolling Interest	$	(357	)	$	(342	)	$	(294	)	$	(304	)	$	(275	)
Net Income Attributable to AT&T	$	12,976		$	13,345		$	6,442		$	18,418		$	7,299
Earnings Per Common Share:
Net Income Attributable to AT&T	$	2.10		$	2.37		$	1.24		$	3.42		$	1.26
Earnings Per Common Share - Assuming Dilution:
Net Income Attributable to AT&T	$	2.10		$	2.37		$	1.24		$	3.42		$	1.26
Cash and cash equivalents	$	5,788		$	5,121		$	8,603		$	3,339		$	4,868
Total assets	$	403,821		$	402,672		$	296,834		$	281,423		$	275,834
Long-term debt	$	113,681		$	118,515		$	75,778		$	69,091		$	66,152
Total debt	$	123,513		$	126,151		$	81,834		$	74,589		$	69,638
Capital expenditures	$	22,408		$	20,015		$	21,433		$	21,228		$	19,728
Dividends declared per common share	$	1.93		$	1.89		$	1.85		$	1.81		$	1.77
Book value per common share	$	20.22		$	20.12		$	17.40		$	18.10		$	17.14
Ratio of earnings to fixed charges		3.59			4.01			2.91			6.03			2.97
Debt ratio		49.9	%		50.5	%		47.5	%		44.1	%		42.1	%
Weighted-average common shares outstanding (000,000)		6,168			5,628			5,205			5,368			5,801
Weighted-average common shares outstanding with dilution (000,000)		6,189			5,646			5,221			5,385			5,821
End of period common shares outstanding (000,000)		6,139			6,145			5,187			5,226			5,581
Operating Data
Total wireless customers (000)		146,832			137,324			120,554			110,376			106,957
Video connections (000)		37,748			37,934			5,943			5,460			4,536
In-region network access lines in service (000)		13,986			16,670			19,896			24,639			29,279
Broadband connections (000)		15,605			15,778			16,028			16,425			16,390
Number of employees		268,540			281,450			243,620			243,360			241,810

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share and per subscriber amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico. The following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), our 2015 results include 160 days of DIRECTV-related operations compared with a full year in 2016. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period’s presentation.

Consolidated Results Our financial results are summarized in the table below. We then discuss factors affecting our overall results for the past three years. These factors are discussed in more detail in our “Segment Results” section. We also discuss our expected revenue and expense trends for 2017 in the “Operating Environment and Trends of the Business” section.


								Percent Change
	2016		2015			2014		2016 vs. 2015			2015 vs. 2014
	2016		2015			2014		2016 vs. 2015			2015 vs. 2014
Operating Revenues
Service	$	148,884	$	131,677		$	118,437		13.1	%		11.2	%
Equipment		14,902		15,124			14,010		(1.5	)		8.0
Total Operating Revenues		163,786		146,801			132,447		11.6			10.8
Operating expenses
Cost of services and sales
Equipment		18,757		19,268			18,946		(2.7	)		1.7
Broadcast, programming and operations		19,851		11,996			4,075		65.5			-
Other cost of services		38,276		35,782			37,124		7.0			(3.6	)
Selling, general and administrative		36,347		32,919			39,697		10.4			(17.1	)
Asset abandonments and impairments		361		35			2,120		-			(98.3	)
Depreciation and amortization		25,847		22,016			18,273		17.4			20.5
Total Operating Expenses		139,439		122,016			120,235		14.3			1.5
Operating Income		24,347		24,785			12,212		(1.8	)		-
Interest expense		4,910		4,120			3,613		19.2			14.0
Equity in net income of affiliates		98		79			175		24.1			(54.9	)
Other income (expense) – net		277		(52	)		1,581		-			-
Income Before Income Taxes		19,812		20,692			10,355		(4.3	)		99.8
Net Income		13,333		13,687			6,736		(2.6	)		-
Net Income Attributable to AT&T	$	12,976	$	13,345		$	6,442		(2.8	)%		-	%

OVERVIEW

Operating revenues increased $16,985, or 11.6%, in 2016 and $14,354, or 10.8%, in 2015.

Service revenues increased $17,207, or 13.1%, in 2016 and $13,240, or 11.2%, in 2015. The increase in 2016 was primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic service revenues. These were partially offset by continued declines in our legacy wireline voice and data products and lower wireless revenues from offerings that entitle customers to lower monthly service rates. The increase in 2015 was primarily due to our acquisition of DIRECTV, our new wireless operations in Mexico, and gains in fixed strategic services and our IP-based AT&T U-verse^®(U-verse) services.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Equipment revenues decreased $222, or 1.5%, in 2016 and increased $1,114, or 8.0%, in 2015. The decline in 2016 reflects fewer domestic wireless handset sales and additional promotional offers, partially offset by the sale of higher-priced devices. The increase in 2015 was also due to postpaid wireless subscribers choosing to purchase devices on installment payment agreements rather than the device subsidy models.

Operating expenses increased $17,423, or 14.3%, in 2016 and $1,781, or 1.5%, in 2015.

Equipment expenses decreased $511, or 2.7%, in 2016 and increased $322, or 1.7%, in 2015. Expense decreases in 2016 were primarily driven by lower domestic wireless handset sales, partially offset by increased sales volumes to our Mexico wireless customers. The increase in 2015 was primarily due to customers choosing higher-priced wireless devices.

Broadcast, programming and operations expenses increased $7,855, or 65.5%, in 2016 and $7,921 in 2015. Cost increases in both years were due to our acquisition of DIRECTV. Higher content costs in both years were slightly offset by fewer U-verse TV subscribers.

Other cost of services expenses increased $2,494, or 7.0%, in 2016 and decreased $1,342, or 3.6%, in 2015. The expense increase in 2016 was primarily due to our acquisition of DIRECTV and an increase in noncash financing-related costs associated with our pension and postretirement benefits. The expense increase also reflects a $1,185 change in our annual pension postemployment benefit actuarial adjustment, which consisted of a loss in 2016 and a gain in 2015. These increases were partially offset by prior year network rationalization charges, lower net expenses associated with our deferral and amortization of customer fulfillment costs and a decline in network and access charges.

The expense decrease in 2015 was primarily due to a $3,078 reduction resulting from the annual remeasurement of our benefit plans, which was a gain in 2015 and a loss in 2014. Also contributing to the 2015 decrease were higher Connect America and High Cost Funds’ receipts from the Universal Service Fund and the fourth-quarter 2014 sale of our Connecticut wireline operations, offset by the addition of DIRECTV, increased network rationalization charges related to Leap Wireless International, Inc. (Leap), merger and integration charges and wireless handset insurance costs.

Selling, general and administrative expenses increased $3,428, or 10.4%, in 2016 and decreased $6,778, or 17.1%, in 2015. The increase in 2016 was primarily due to our acquisitions in 2015 and increased advertising activity. Expenses also include an increase of $1,991 as a result of recording an actuarial loss in 2016 and an actuarial gain in 2015. These increases were offset by noncash gains of $714 on wireless spectrum transactions, lower wireless commissions expenses and fewer employee separation costs.

In 2015, expenses decreased $6,943 as a result of recording an actuarial gain in 2015 and an actuarial loss in 2014. The 2015 decrease was also due to lower employee-related charges resulting from workforce reductions, declines in wireless commissions and the fourth-quarter 2014 sale of our Connecticut wireline operations, offset by costs resulting from the acquisition of DIRECTV.

Asset abandonments and impairments During the fourth quarter of 2016, we recorded a noncash charge of $361 for the impairment of wireless and other assets. These assets primarily arose from capitalized costs for wireless sites that are no longer in our construction plans. In 2015, we recorded a noncash charge of $35 for the abandonment of certain wireless sites. In 2014, we recorded a noncash charge of $2,120 for the abandonment in place of certain network assets; we completed a study of our network assets and determined that specific copper assets would not be necessary to support future network activity, due to declining customer demand for our legacy voice and data products and the transition of our networks to next generation IP-based technology. (See Note 6)

Depreciation and amortization expense increased $3,831, or 17.4%, in 2016 and $3,743, or 20.5%, in 2015. The amortization expense increased $2,495, or 92.0%, in 2016 and $2,198 in 2015. The increases were due to the amortization of intangibles from recent acquisitions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Depreciation expense increased $1,336, or 6.9%, in 2016. The increase was primarily due to the acquisitions of DIRECTV and ongoing capital investment for network upgrades. The increases were partially offset by a $462 decrease associated with our change in the estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network (see Note 1). The 2015 depreciation expense increased $1,545, or 8.7%, primarily due to the acquisitions of DIRECTV and our wireless properties in Mexico, as well as ongoing capital spending for network upgrades. The increases were partially offset by the abandonment of certain wireline network assets, which occurred in 2014, and network assets becoming fully depreciated.

Operating income decreased $438, or 1.8%, in 2016 and increased $12,573 in 2015. Our operating margin was 14.9% in 2016, compared to 16.9% in 2015 and 9.2% in 2014. Contributing $3,176 to the decrease in operating income in 2016 was a noncash actuarial loss of $1,024 and an actuarial gain of $2,152 in 2015. This decrease was partially offset by continued efforts to reduce operating costs and achieve merger synergies. Contributing $10,021 to the increase in operating income in 2015 was a noncash actuarial gain of $2,152 compared to an actuarial loss of $7,869 in 2014, partially offset by higher acquisition-related charges and expenses relating to growth areas of our business.

Interest expense increased $790, or 19.2%, in 2016 and $507, or 14.0%, in 2015. The increases were primarily due to higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increase in 2016 was also driven by higher average interest rates, and in 2015 was partially offset by lower average interest rates and an increase in capitalized interest resulting from spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 5).

Equity in net income of affiliates increased $19, or 24.1%, in 2016 and decreased $96, or 54.9%, in 2015. Our results in 2016 and 2015 included income from our investments in Game Show Network and SKY Mexico, partially offset by losses from Otter Media Holdings. In 2014, results included earnings from América Móvil S.A. de C.V. (América Móvil) partially offset by our mobile wallet joint venture. (See Note 8)

Other income (expense) – net We had other income of $277 in 2016, other expense of $52 in 2015 and other income of $1,581 in 2014. Results for 2016 included net gains on the sale of non-strategic assets and investments of $184 and interest and dividend income of $118.

Other expense for 2015 included foreign exchange losses of $74, net losses on the sale of non-strategic assets and investments of $87 and interest and dividend income of $95. Results for 2014 included a combined net gain of $1,470 on the sale of América Móvil shares, our Connecticut wireline operations and other non-strategic assets and investments, and interest and dividend income of $68.

Income tax expense decreased $526, or 7.5%, in 2016 and increased $3,386 in 2015. The decrease in income tax expense in 2016 and increase in income tax expense in 2015 were primarily due to a change in income before income taxes. The decrease in 2016 also reflects a benefit resulting from our Mexico restructuring. Our effective tax rate was 32.7% in 2016, 33.9% in 2015 and 34.9% in 2014 (see Note 11).

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. Each segment’s percentage calculation of total segment operating revenue and income is derived from our segment results table in Note 4, and may total more than 100 percent due to losses in one or more segments. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. 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 margin is EBITDA divided by total revenues.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

The Business Solutions segment accounted for approximately 44% of our 2016 total segment operating revenues as compared to 49% in 2015 and 52% of our 2016 total Segment Contribution as compared to 59% in 2015. This segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as “wired” or “wireline”) to provide a complete integrated communications solution to our business customers.

The Entertainment Group segment accounted for approximately 32% of our 2016 total segment operating revenues as compared to 24% in 2015 and 19% of our 2016 total Segment Contribution as compared to 7% in 2015. This segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment accounted for approximately 20% of our 2016 total segment operating revenues as compared to 24% in 2015 and 31% of our 2016 total Segment Contribution as compared to 35% in 2015. This segment provides nationwide wireless service to consumers and wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

The International segment accounted for approximately 4% of our 2016 total segment operating revenues as compared to 3% in 2015. This segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

Business Solutions
Segment Results
							Percent Change
	2016		2015		2014		2016 vs. 2015			2015 vs. 2014
	2016		2015		2014		2016 vs. 2015			2015 vs. 2014
Segment operating revenues
Wireless service	$	31,850	$	30,687	$	30,182		3.8	%		1.7	%
Fixed strategic services		11,389		10,461		9,298		8.9			12.5
Legacy voice and data services		16,364		18,468		20,225		(11.4	)		(8.7	)
Other service and equipment		3,615		3,558		3,860		1.6			(7.8	)
Wireless equipment		7,770		7,953		7,041		(2.3	)		13.0
Total Segment Operating Revenues		70,988		71,127		70,606		(0.2	)		0.7

Segment operating expenses
Operations and support		44,330		44,946		45,826		(1.4	)		(1.9	)
Depreciation and amortization		9,832		9,789		9,355		0.4			4.6
Total Segment Operating Expenses		54,162		54,735		55,181		(1.0	)		(0.8	)
Segment Operating Income		16,826		16,392		15,425		2.6			6.3
Equity in Net Income of Affiliates		-		-		-		-			-
Segment Contribution	$	16,826	$	16,392	$	15,425		2.6	%		6.3	%

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

The following tables highlight other key measures of performance for the Business Solutions segment:

								Percent Change
	2016			2015		2014		2016 vs. 2015			2015 vs. 2014
At December 31 (in 000s)	2016			2015		2014		2016 vs. 2015			2015 vs. 2014
Business Wireless Subscribers
Postpaid		50,688			48,290		45,160		5.0	%		6.9	%
Reseller		65			85		11		(23.5	)		-
Connected devices¹		30,649			25,284		19,943		21.2			26.8
Total Business Wireless Subscribers		81,402			73,659		65,114		10.5			13.1

Business IP Broadband Connections		977			911		822		7.2	%		10.8	%


								Percent Change
		2016			2015		2014	2016 vs. 2015			2015 vs. 2014
(in 000s)		2016			2015		2014	2016 vs. 2015			2015 vs. 2014
Business Wireless Net Additions^2,4
Postpaid		759			1,203		2,064		(36.9	)%		(41.7	)%
Reseller		(33	)		13		6		-			-
Connected devices¹		5,330			5,315		3,439		0.3			54.6
Business Wireless Net Subscriber Additions		6,056			6,531		5,509		(7.3	)		18.6

Business Wireless Postpaid Churn^2,3,4		1.00%			0.99%		0.90%	1 BP			9 BP


Business IP Broadband Net Additions		66			89		191		(25.8	)%		(53.4	)%
¹ Includesdata-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
²Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
³Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the year is
equal to the average of the churn rate for each month of that period.
⁴Includes impacts of the year-end 2016 shutdown of our 2G network.

Operating revenues decreased $139, or 0.2%, in 2016 and increased $521, or 0.7%, in 2015. Revenue declines in 2016 were driven by continued declines in demand for our legacy voice and data services and lower wireless equipment revenues, partially offset by continued growth in fixed strategic and wireless services. The increase in 2015 was driven by wireless revenues and continued growth in fixed strategic services, partially offset by continued declines in demand for our legacy voice and data services and foreign exchange pressures.

Wireless service revenues increased $1,163, or 3.8%, in 2016 and $505, or 1.7%, in 2015. The revenue increases reflect smartphone and tablet gains, handset insurance sales, as well as customer migrations from our Consumer Mobility segment.

Business wireless subscribers increased 10.5%, to 81.4 million subscribers at December 31, 2016 compared to 13.1%, to 73.7 million subscribers at December 31, 2015. Postpaid subscribers increased 5.0% in 2016 compared to 6.9% in 2015 reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and lower churn, increased 21.2% in 2016 compared to 26.8% in 2015 primarily reflecting growth in our connected car business.

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Business wireless postpaid churn increased to 1.00% in 2016 from 0.99% in 2015 and 0.90% in 2014.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Fixed strategic services revenues increased $928, or 8.9%, in 2016 and $1,163, or 12.5%, in 2015. Our revenues increased in 2016 and 2015 due to Ethernet increases of $224 and $389, U-verse services increases of $172 and $247, Dedicated Internet services increases of $230 and $190 and VPN increases of $89 and $116, respectively.

Due to advances in technology, our most advanced business solutions are subject to change periodically. We review and evaluate our fixed strategic service offerings annually, which may result in an updated definition and the recast of our historical financial information to conform to the current period presentation. Any modifications will be reflected in the first quarter.

Legacy voice and data service revenues decreased $2,104, or 11.4%, in 2016 and $1,757, or 8.7%, in 2015. Traditional data revenues in 2016 and 2015 decreased $1,255 and $958 and long-distance and local voice revenues decreased $823 and $797. The decreases were primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.

Other service and equipment revenues increased $57, or 1.6%, in 2016 and decreased $302, or 7.8%, in 2015. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and customer premises equipment. The increase in 2016 was primarily due to nonrecurring customer premises equipment contracts. The decline in 2015 is primarily due to lower project-based and equipment revenues, as well as impacts from foreign exchange rates.

Wireless equipment revenues decreased $183, or 2.3%, in 2016 and increased $912, or 13.0%, in 2015. The decrease in 2016 was primarily due to a decrease in handsets sold and increased promotional offers, partially offset by an increase in sales under our equipment installment agreements, including our AT&T Next^SM (AT&T Next) program. The increase in 2015 was primarily due to the increase in purchases of devices on installment agreements rather than the device subsidy model and increased sales of higher-priced smartphones. We expect wireless equipment revenues to be pressured in 2017 as customers are retaining their handsets for longer periods of time and more new subscribers are bringing their own devices.

Operations and support expenses decreased $616, or 1.4%, in 2016 and $880, or 1.9%, in 2015. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

Expense decreases in 2016 were primarily due to:

·	Lower network costs of $283 resulting from workforce reductions and other cost initiative actions.

·	Declines in wireless commission expenses of $225 due to lower sales volumes and lower average commission rates, including those paid under the AT&T Next program, combined with fewer handset upgrade transactions.

·	Lower net expenses of $219 associated with fulfillment cost deferrals (see Note 1).

·	Reductions of $186 in equipment costs, driven by lower wireless handset volumes partially offset by the sale of higher-priced wireless devices and higher-priced customer premises equipment.

Partially offsetting the decreases in 2016 were higher wireless handset insurance cost of $195 and the impact of Connect America and High Cost Funds’ receipts.

Expense decreases in 2015 were primarily due to:

·	Lower commission costs of $995 resulting from lower average commission rates and fewer upgrade transactions.

·	Declines in employee-related charges of $508 resulting from workforce reductions and other cost initiatives.

·	Reductions of $269 in access costs due to lower interconnect, roaming and traffic compensation costs.

·	Lower customer service costs of $146 largely resulting from our simplified offerings and increased efforts to resolve customer inquiries on their first call.

Partially offsetting the decreases in 2015 were:

·	Higher wireless handset insurance cost of $370.

·	Increased equipment expense of $304 due to the continuing trend of customers choosing higher-cost devices.

·	Higher bad debt expense of $173 resulting from growth in our AT&T Next subscriber base.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Depreciation expense increased $43, or 0.4%, in 2016 and $434, or 4.6%, in 2015. The increases were primarily due to ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the shutdown of our U.S. 2G network, partially offset by fully depreciated assets. The increase in 2016 was largely offset by the change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network (see Note 1).

Operating income increased $434, or 2.6%, in 2016 and $967, or 6.3%, in 2015. Our Business Solutions segment operating income margin was 23.7% in 2016, compared to 23.0% in 2015 and 21.8% in 2014. Our Business Solutions EBITDA margin was 37.6% in 2016, compared to 36.8% in 2015 and 35.1% in 2014.

Entertainment Group
Segment Results
									Percent Change
	2016		2015			2014			2016 vs. 2015			2015 vs. 2014
	2016		2015			2014			2016 vs. 2015			2015 vs. 2014
Segment operating revenues
Video entertainment	$	36,460	$	20,271		$	6,826			79.9	%		-	%
High-speed internet		7,472		6,601			5,522			13.2			19.5
Legacy voice and data services		4,829		5,914			7,592			(18.3	)		(22.1	)
Other service and equipment		2,534		2,508			2,293			1.0			9.4
Total Segment Operating Revenues		51,295		35,294			22,233			45.3			58.7

Segment operating expenses
Operations and support		39,338		28,345			18,992			38.8			49.2
Depreciation and amortization		5,862		4,945			4,473			18.5			10.6
Total Segment Operating Expenses		45,200		33,290			23,465			35.8			41.9
Segment Operating Income (Loss)		6,095		2,004			(1,232	)		-			-
Equity in Net Income (Loss) of Affiliates		9		(4	)		(2	)		-			-
Segment Contribution	$	6,104	$	2,000		$	(1,234	)		-	%		-	%

The following tables highlight other key measures of performance for the Entertainment Group segment:


							Percent Change
At December 31 (in 000s)	2016		2015		2014		2016 vs. 2015			2015 vs. 2014
Linear Video Connections¹
Satellite		21,012		19,784		-		6.2	%		-	%
U-verse		4,253		5,614		5,920		(24.2	)		(5.2	)
Total Linear Video Connections		25,265		25,398		5,920		(0.5	)		-

Broadband Connections
IP		12,888		12,356		11,383		4.3			8.5
DSL		1,291		1,930		3,061		(33.1	)		(36.9	)
Total Broadband Connections		14,179		14,286		14,444		(0.7	)		(1.1	)

Retail Consumer Switched Access Lines		5,853		7,286		9,243		(19.7	)		(21.2	)
U-verse Consumer VoIP Connections		5,425		5,212		4,759		4.1			9.5
Total Retail Consumer Voice Connections		11,278		12,498		14,002		(9.8	)%		(10.7	)%
¹Includes the impact of customers that migrated to DIRECTV NOW. At December 31, 2016, we had more than 200 DIRECTV NOW subscribers.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

										Percent Change
(in 000s)	2016			2015			2014			2016 vs. 2015			2015 vs. 2014
Linear Video Net Additions ^1,2
Satellite		1,228			240			-			-	%		-	%
U-verse		(1,361	)		(306	)		663			-			-
Linear Net Video Additions		(133	)		(66	)		663			-			-

Broadband Net Additions
IP		532			973			1,899			(45.3	)		(48.8	)
DSL		(639	)		(1,130	)		(1,768	)		43.5			36.1
Net Broadband Additions		(107	)		(157	)		131			31.8	%		-	%
¹Excludes acquisition-related additions during the period.
²Includes disconnections for customers that migrated to DIRECTV NOW. Net DIRECTV NOW additions were more than 200.

Operating revenues increased $16,001, or 45.3%, in 2016 and $13,061, or 58.7%, in 2015, largely due to our acquisition of DIRECTV in July 2015. Also contributing to the increases was continued growth in consumer IP broadband, which offset lower revenues from legacy voice and data products. U-verse video revenue also contributed to higher results in 2015.

As consumers continue to demand more mobile access to video, we have launched streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).

Video entertainment revenues increased $16,189, or 79.9%, in 2016 and $13,445 in 2015, primarily related to our acquisition of DIRECTV. We are now focusing our sales efforts on satellite service as there are lower marginal content costs for satellite subscribers. U-verse video revenues were $900 lower in 2016, primarily due to a 24.2% decrease in U-verse video connections, when compared to 2015, and $932 higher in 2015 when compared to 2014. As of December 31, 2016, more than 80% of our linear video subscribers were on the DIRECTV platform.

High-speed internet revenues increased $871, or 13.2%, in 2016 and $1,079, or 19.5%, in 2015. When compared to 2015, IP broadband subscribers increased 4.3%, to 12.9 million subscribers at December 31, 2016. When compared to 2014, IP broadband subscribers increased 8.5%, to 12.4 million subscribers at December 31, 2015. While IP broadband subscribers increased in 2016 and 2015, net additions declined in both years due to fewer U-verse sales promotions in each year and competitive pressures. The churn of video customers also contributed to lower net additions, as a portion of these video subscribers also chose to disconnect their IP broadband service. To compete more effectively against other broadband providers, in 2016 we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates.

Legacy voice and data service revenues decreased $1,085, or 18.3%, in 2016 and $1,678, or 22.1%, in 2015. For 2016, legacy voice and data services represented approximately 9% of our total Entertainment Group revenue compared to 17% for 2015 and 34% for 2014 and reflect decreases of $663 and $1,083 in local voice and long-distance, and $422 and $593 in traditional data revenues. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At December 31, 2016, approximately 9% of our broadband connections were DSL compared to 14% at December 31, 2015.

Operations and support expenses increased $10,993, or 38.8%, in 2016 and $9,353, or 49.2%, in 2015. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content, as well as personnel costs, such as compensation and benefits.

Increased expenses in both periods were primarily due to our acquisition of DIRECTV, which increased our Entertainment Group expenses by $11,748 in 2016 and $9,683 in 2015. The DIRECTV related increases were primarily due to higher content costs, customer support and service related charges, and advertising expenses. The increase in 2016 also reflects pressure from annual content cost increases, including the NFL SUNDAY TICKET^®.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Partially offsetting the increased expenses in both years were lower employee charges resulting from ongoing workforce reductions and our focus on cost initiatives. Lower equipment costs also partially offset increased expenses in 2015.

Depreciation expenses increased $917, or 18.5%, in 2016 and $472, or 10.6%, in 2015. The increases were primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets. The increase in 2016 was partially offset by the change in estimated useful lives and salvage value of certain assets associated with our transition to an IP-based network (see Note 1).

Operating income increased $4,091 in 2016 and $3,236 in 2015. Our Entertainment Group segment operating income margin was 11.9% in 2016, 5.7% in 2015, and (5.5)% in 2014. Our Entertainment Group EBITDA margin was 23.3% in 2016, 19.7% in 2015, and 14.6% in 2014.

Consumer Mobility
Segment Results
								Percent Change
	2016		2015		2014			2016 vs. 2015			2015 vs. 2014
	2016		2015		2014			2016 vs. 2015			2015 vs. 2014
Segment operating revenues
Service	$	27,536	$	29,150	$	30,850			(5.5	)%		(5.5	)%
Equipment		5,664		5,916		5,919			(4.3	)		(0.1	)
Total Segment Operating Revenues		33,200		35,066		36,769			(5.3	)		(4.6	)

Segment operating expenses
Operations and support		19,659		21,477		23,891			(8.5	)		(10.1	)
Depreciation and amortization		3,716		3,851		3,827			(3.5	)		0.6
Total Segment Operating Expenses		23,375		25,328		27,718			(7.7	)		(8.6	)
Segment Operating Income		9,825		9,738		9,051			0.9			7.6
Equity in Net Income (Loss) of Affiliates		-		-		(1	)		-			-
Segment Contribution	$	9,825	$	9,738	$	9,050			0.9	%		7.6	%

The following tables highlight other key measures of performance for the Consumer Mobility segment:

							Percent Change
	2016		2015		2014		2016 vs. 2015			2015 vs. 2014
At December 31 (in 000s)	2016		2015		2014		2016 vs. 2015			2015 vs. 2014
Consumer Mobility Subscribers
Postpaid		27,095		28,814		30,610		(6.0	)%		(5.9	)%
Prepaid		13,536		11,548		9,965		17.2			15.9
Branded		40,631		40,362		40,575		0.7			(0.5	)
Reseller		11,884		13,690		13,844		(13.2	)		(1.1	)
Connected devices¹		942		929		1,021		1.4			(9.0	)
Total Consumer Mobility Subscribers		53,457		54,981		55,440		(2.8	)%		(0.8	)%
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

										Percent Change
	2016			2015			2014			2016 vs. 2015			2015 vs. 2014
(in 000s)	2016			2015			2014			2016 vs. 2015			2015 vs. 2014
Consumer Mobility Net Additions^1,4
Postpaid		359			463			1,226			(22.5	)%		(62.2	)%
Prepaid		1,575			1,364			(311	)		15.5			-
Branded Net Additions		1,934			1,827			915			5.9			99.7
Reseller		(1,813	)		(168	)		(351	)		-			52.1
Connected devices²		19			(131	)		(465	)		-			71.8
Consumer Mobility Net Subscriber Additions		140			1,528			99			(90.8	)%		-	%

Total Churn^1,3,4		2.15	%		1.94	%		2.06	%	21 BP			(12) BP
Postpaid Churn^1,3,4		1.19	%		1.25	%		1.22	%	(6) BP			3 BP
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the year is
equal to the average of the churn rate for each month of that period.
⁴ Includes the impacts of the year-end 2016 shutdown of our U.S. 2G network.

Operating revenues decreased $1,866, or 5.3%, in 2016 and $1,703, or 4.6%, in 2015. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing Mobile Share plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth. The shutdown of our 2G network also resulted in higher overall churn as subscribers in our reseller and connected device categories upgraded their devices at lower rates than postpaid and prepaid subscribers.

Service revenue decreased $1,614, or 5.5%, in 2016 and $1,700, or 5.5%, in 2015. The decreases were largely due to the migration of of subscribers to Business Solutions and postpaid customers continuing to shift to no-device-subsidy plans that allow for discounted monthly service charges under our Mobile Share plans. Revenues from postpaid customers declined $2,285, or 10.4%, in 2016 and $2,252, or 9.3%, in 2015. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 5.6% in 2016 and 4.0% for 2015. The decreases were partially offset by higher prepaid service revenues of $953, or 20.4%, in 2016 and $457, or 10.9%, in 2015.

Equipment revenue decreased $252, or 4.3%, in 2016 and $3, or 0.1%, in 2015. The decreases in equipment revenues resulted from lower handset sales and upgrades and increased promotional activities, partially offset by the sale of higher-priced devices and increases in devices purchased on installment payment agreements. In 2016, we had fewer customers upgrading their handsets and more new customers bringing their own devices. We expect these customer trends to continue in 2017.

Operations and support expenses decreased $1,818, or 8.5%, in 2016 and $2,414, or 10.1%, in 2015. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Expense decreases in 2016 were primarily due to:

·	Declines in equipment costs of $554 due to lower handset volumes partially offset by higher prices.

·	Reduced selling and commission expenses of $302 resulting from fewer upgrade transactions and lower average commission rates.

·	Lower network costs of $246 driven by a decline in interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

·	Declines of $204 associated with bad debt expense.

·	Lower customer service costs of $145 due to cost efficiencies including lower vendor and professional services from reduced call center volumes.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Expense decreases in 2015 were primarily due to:

·	Reduced selling and commission expenses of $861 from lower average commission rates and fewer upgrade transactions.

·	Lower network costs of $434 driven by a decline in interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

·	Reductions of $406 for equipment costs, reflecting lower handset volumes partially offset by the sale of higher-priced devices.

·	Lower customer service costs of $275 primarily due to cost efficiencies including lower vendor and professional services from reduced call center volumes.

·	Declines of $209 primarily due to incollect roaming fee rate declines, partially offset by increased data volume.

Depreciation expense decreased $135, or 3.5%, in 2016 and increased $24, or 0.6%, in 2015. The decrease in 2016 was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the shutdown of our U.S. 2G network. The increase in 2015 was primarily due to ongoing capital spending for network upgrades and expansion that was largely offset by fully depreciated assets.

Operating income increased $87, or 0.9%, in 2016 and $687, or 7.6%, in 2015. Our Consumer Mobility segment operating income margin increased to 29.6% in 2016, compared to 27.8% in 2015 and 24.6% in 2014. Our Consumer Mobility EBITDA margin increased to 40.8% in 2016, compared to 38.8% in 2015 and 35.0% in 2014.

International
Segment Results
									Percent Change
	2016			2015			2014		2016 vs. 2015			2015 vs. 2014
Segment operating revenues
Video entertainment	$	4,910		$	2,151		$	-		-	%		-	%
Wireless service		1,905			1,647			-		15.7			-
Equipment		468			304			-		53.9			-
Total Segment Operating Revenues		7,283			4,102			-		77.5			-

Segment operating expenses
Operations and support		6,830			3,930			-		73.8			-
Depreciation and amortization		1,166			655			-		78.0			-
Total Segment Operating Expenses		7,996			4,585			-		74.4			-
Segment Operating Income (Loss)		(713	)		(483	)		-		(47.6	)		-
Equity in Net Income (Loss) of Affiliates		52			(5	)		153		-			-
Segment Contribution	$	(661	)	$	(488	)	$	153		(35.5	)%		-	%

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

The following tables highlight other key measures of performance for the International segment:


							Percent Change
At December 31 (in 000s)	2016		2015		2014		2016 vs. 2015			2015 vs. 2014
Mexico Wireless Subscribers
Postpaid		4,965		4,289		-		15.8	%		-	%
Prepaid		6,727		3,995		-		68.4			-
Branded		11,692		8,284		-		41.1			-
Reseller		281		400		-		(29.8	)		-
Total Mexico Wireless Subscribers		11,973		8,684		-		37.9			-

Latin America Satellite Subscribers
PanAmericana		7,206		7,066		-		2.0			-
SKY Brazil¹		5,249		5,444		-		(3.6	)		-
Total Latin America Satellite Subscribers		12,455		12,510		-		(0.4	)%		-	%
¹ Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.9 million subscribers at September 30, 2016 and 7.3 million subscribers at December 31, 2015.

									Percent Change
(in 000s)	2016			2015			2014		2016 vs. 2015			2015 vs. 2014
Mexico Wireless Net Additions
Postpaid		677			177			-		-	%		-	%
Prepaid		2,732			(169	)		-		-			-
Branded Net Additions		3,409			8			-		-			-
Reseller		(120	)		(104	)		-		(15.4	)		-
Mexico Wireless Net Subscriber Additions		3,289			(96	)		-		-			-

Latin America Satellite Net Additions
PanAmericana		140			76			-		84.2			-
SKY Brazil¹		(195	)		(223	)		-		12.6			-
Latin America Satellite Net Subscriber Additions		(55	)		(147	)		-		62.6	%		-	%
¹Excludes SKY Mexico net subscriber additions of 643,000 for the nine months ended September 30, 2016 and 646,000 for the year ended December 31, 2015.

Operating Results

Our International segment consists of the Latin American operations acquired in our July 2015 acquisition of DIRECTV as well as the Mexican wireless operations acquired earlier in 2015 (see Note 5). Video entertainment services are provided to primarily residential customers using satellite technology in various countries in Latin America, including Brazil, Argentina and Colombia. Our International segment is subject to foreign currency fluctuations, with most of our international subsidiaries conducting business in their local currency. Operating results are converted to U.S. dollars using official exchange rates.

Operating revenues increased $3,181, or 77.5%, in 2016. Revenue growth in 2016 includes increases of $2,759 from video services in Latin America and $422, or 21.6%, in Mexico, primarily due to an increase in our wireless subscriber base offset by lower ARPU.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Operations and support expenses increased $2,900, or 73.8%, in 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits. The increase in the 2016 expenses was largely attributable to operations in Latin America reflecting our mid-2015 DIRECTV acquisition.

Depreciation expense increased $511, or 78.0%, in 2016. The increase was primarily due to the acquisition of DIRECTV operations and our wireless network upgrade in Mexico.

Operating income decreased $230, or 47.6%, in 2016. Our International segment operating income margin was (9.8)% in 2016 and (11.8)% in 2015. Our International EBITDA margin was 6.2% in 2016 and 4.2% in 2015.

Supplemental Operating Information

As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility).

AT&T Mobility Results
								Percent Change
	2016		2015		2014			2016 vs. 2015			2015 vs. 2014
	2016		2015		2014			2016 vs. 2015			2015 vs. 2014
Operating revenues
Service	$	59,386	$	59,837	$	61,032			(0.8	)%		(2.0	)%
Equipment		13,435		13,868		12,960			(3.1	)		7.0
Total Operating Revenues		72,821		73,705		73,992			(1.2	)		(0.4	)

Operating expenses
Operations and support		43,886		45,789		48,348			(4.2	)		(5.3	)
EBITDA		28,935		27,916		25,644			3.7			8.9
Depreciation and amortization		8,292		8,113		7,744			2.2			4.8
Total Operating Expenses		52,178		53,902		56,092			(3.2	)		(3.9	)
Operating Income		20,643		19,803		17,900			4.2			10.6
Equity in Net Income (Loss) of Affiliates		-		-		(1	)		-			-
Operating Contribution	$	20,643	$	19,803	$	17,899			4.2	%		10.6	%

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

The following tables highlight other key measures of performance for AT&T Mobility:

				Percent Change
	2016	2015	2014	2016 vs. 2015		2015 vs. 2014
At December 31 (in 000s)	2016	2015	2014	2016 vs. 2015		2015 vs. 2014
Wireless Subscribers¹
Postpaid smartphones	59,096	58,073	56,644	1.8	%	2.5	%
Postpaid feature phones and data-centric devices	18,687	19,032	19,126	(1.8)		(0.5)
Postpaid	77,783	77,105	75,770	0.9		1.8
Prepaid	13,536	11,548	9,965	17.2		15.9
Branded	91,319	88,653	85,735	3.0		3.4
Reseller	11,949	13,774	13,855	(13.2)		(0.6)
Connected devices²	31,591	26,213	20,964	20.5		25.0
Total Wireless Subscribers	134,859	128,640	120,554	4.8		6.7

Branded smartphones	70,817	67,200	62,443	5.4		7.6
Mobile Share connections	57,028	61,275	52,370	(6.9)		17.0
Smartphones under our installment programs at end of period	30,688	26,670	15,308	15.1	%	74.2	%
¹Represents 100% of AT&T Mobility wireless subscribers.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

				Percent Change
	2016	2015	2014	2016 vs. 2015		2015 vs. 2014
(in 000s)	2016	2015	2014	2016 vs. 2015		2015 vs. 2014
Wireless Net Additions^1,4
Postpaid	1,118	1,666	3,290	(32.9)	%	(49.4)	%
Prepaid	1,575	1,364	(311)	15.5		-
Branded Net Additions	2,693	3,030	2,979	(11.1)		1.7
Reseller	(1,846)	(155)	(346)	-		55.2
Connected devices²	5,349	5,184	2,975	3.2		74.3
Wireless Net Subscriber Additions	6,196	8,059	5,608	(23.1)		43.7

Smartphones sold under our installment programs during period	17,871	17,320	15,268	3.2	%	13.4	%

Total Churn^3,4	1.48%	1.39%	1.45%	9 BP		(6) BP
Branded Churn^3,4	1.62%	1.63%	1.69%	(1) BP		(6) BP
Postpaid Churn^3,4	1.07%	1.09%	1.04%	(2) BP		5 BP
Postpaid Phone Only Churn^3,4	0.92%	0.99%	0.97%	(7) BP		2 BP
¹Excludes acquisition-related additions during the period.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the year is equal to the average of the churn rate for each month of that period.
⁴Includes the impacts of the year-end 2016 shutdown of our U.S. 2G network.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Operating income increased $840, or 4.2%, in 2016 and $1,903, or 10.6%, in 2015. The operating income margin of AT&T Mobility increased to 28.3% in 2016, compared to 26.9% in 2015 and 24.2% in 2014. AT&T Mobility’s EBITDA margin increased to 39.7% in 2016, compared to 37.9% in 2015 and 34.7% in 2014. AT&T Mobility’s EBITDA service margin increased to 48.7% in 2016, compared to 46.7% in 2015 and 42.0% in 2014. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)

Subscriber Relationships

As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including Mobile Share and AT&T Next. Additionally, beginning in 2016, we introduced an integrated offer that allows for unlimited wireless data when combined with our video services, ending the year with more than 7.9 million subscribers on this offer.

The year-end 2016 shutdown of our U.S. 2G network contributed to higher disconnections and churn of subscribers, particularly in the fourth quarter 2016. Although many 2G subscribers, especially in our postpaid and prepaid categories, chose to upgrade to newer devices before the end of the year, a portion did not. We discontinued service on virtually all of our 2G cell sites in early 2017, and as of February 1, 2017, had 766,000 subscribers that remain on 2G devices. Our 2G subscribers at December 31 are as follows:

(in 000s)	2016	2015	Percent Change
Postpaid (primarily phones)	89	928	(90.4)	%
Prepaid	77	387	(80.1)
Reseller¹	337	2,796	(87.9)
Connected devices²	1,813	5,635	(67.8)
Total 2G Subscribers	2,316	9,746	(76.2)	%
¹Primarily included in our Consumer Mobility segment.
²Primarily included in our Business Solutions segment.

ARPU

Postpaid phone only ARPU was $59.45 and postpaid phone only ARPU plus AT&T Next subscriber installment billings was $69.76 in 2016, compared to $60.45 and $68.03 in 2015 and $62.99 and $65.80 in 2014, respectively.

Churn

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was higher in 2016 and was negatively impacted by the loss of 2G subscribers, which contributed more than 20 basis points of pressure to total churn throughout the year. Postpaid churn and postpaid phone only churn were lower in 2016 despite competitive pressure in the industry.

Branded Subscribers

Branded subscribers increased 3.0% in 2016 and 3.4% in 2015. These increases reflect growth of 17.2% and 15.9% in prepaid subscribers and 0.9% and 1.8% in postpaid subscribers, respectively. At December 31, 2016, 91% of our postpaid phone subscriber base used smartphones, compared to 87% at December 31, 2015. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share and unlimited wireless data integrated offer plans now represent 84% of our postpaid customer base compared to 79% at December 31, 2015. During 2016, approximately 10% of our postpaid customer base, or 7.9 million subscribers chose this new integrated offer. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and minimize subscriber churn.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

During the first quarter of 2016, we discontinued offering subsidized smartphones to most of our customers. Under this no-subsidy model, subscribers must purchase a device on installments under an equipment installment program or choose to bring their own device (BYOD), with no annual service contract. At December 31, 2016, about 52% of the postpaid smartphone base is on an installment program compared to nearly 46% at December 31, 2015. Of the postpaid smartphone gross adds and upgrades during 2016, 93% were either equipment installment plans or BYOD, compared to 77% in 2015. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins. During 2016, we added approximately 2.3 million BYOD customers, compared to 1.8 million in 2015. BYOD sales represented 11% of total postpaid smartphone sales in 2016 compared to 7% in 2015.

Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers.

Connected Devices

Connected devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 20.5% during 2016 and 25.0% in 2015. During 2016, we added approximately 4.9 million “connected” cars through agreements with various carmakers. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS

2017 Revenue Trends We expect our operating environment in 2017 to be highly competitive, as companies and consumers continue to demand instant connectivity, higher speeds and an integrated experience across their devices for both video and data. Our recent regulatory environment has been unfriendly to investment in broadband services but we are hopeful that the results of the 2016 Federal election will begin to create a regulatory environment that is more predictable and more conducive to long-term investment planning. We are also hopeful that U.S. corporate tax reform will be enacted which should stimulate the economy and increase business investment overall. In 2017, we expect the following:

·	Consolidated operating revenue growth, driven by our ability to offer integrated wireless, video and wireline services, as well as continuing growth in fixed strategic services.

·	Robust competition in wireless and video will continue to pressure service revenue and ARPU for those products.

·	Major customer categories will continue to increase their use of internet-based broadband/data services and video services.

·	Traditional voice and data service revenue declines.

·	Our 2015 acquisitions of DIRECTV and wireless properties in Mexico will increase revenues, although we expect to incur significant integration costs in the same period.

2017 Expense Trends We expect consolidated operating income margins to expand in 2017 as growth in AT&T Next is reducing subsidized handset costs over time and we lower our marginal cost of providing video services and operating our network. We intend to continue our focus on cost reductions, driving savings through automation, supply chain, benefit design, digitizing transactions and optimizing network costs. In addition, the ongoing transition of our network to a more efficient software-based technology is expected to continue driving favorable expense trends over the next several years. However, expenses related to growth areas of our business along with the integration of our newly acquired operations, will place offsetting pressure on our operating income margin.

Market Conditions During 2016, the ongoing slow recovery in the general U.S. economy continued to negatively affect our customers. Certain industries, such as energy and retail businesses, are being especially cautious. Residential customers continue to be price sensitive in selecting offerings, and continue to focus on products that give them efficient access to video and broadcast services. We expect continued pressure on pricing during 2017 as we respond to this intense competition, especially in the wireless and video services.

Included on our consolidated balance sheets are assets held by benefit plans for the payment of future benefits. Our pension plans are subject to funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In September 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC to the trust used to pay pension benefits. We also agreed to make a cash contribution to the trust of $175 no later than the due date of our

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

federal income tax return for 2014, 2015 and 2016. During 2016, we accelerated the final contribution and completed our obligation with a $350 cash payment. The trust is entitled to receive cumulative annual cash distributions of $560, which will result in a $560 contribution during 2017. We expect only minimal ERISA contribution requirements to our pension plans for 2017. However, a weakness in the equity, fixed income and real asset markets could require us in future years to make contributions to the pension plans in order to maintain minimum funding requirements as established by ERISA. Investment returns on these assets depend largely on trends in the U.S. securities markets and the U.S. economy. In addition, our policy of recognizing actuarial gains and losses related to our pension and other postretirement plans in the period in which they arise subjects us to earnings volatility caused by changes in market conditions. Changes in our discount rate, which are tied to changes in the bond market, and changes in the performance of equity markets, may have significant impacts on the valuation of our pension and other postretirement obligations at the end of 2017 (see “Accounting Policies and Estimates”).

OPERATING ENVIRONMENT OVERVIEW

AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. However, based on their public statements and written opinions, we expect the new leadership at the FCC to chart a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC’s decision significantly expands its existing authority to regulate the provision of fixed and mobile broadband internet access services. AT&T and other providers of broadband internet access services challenged the FCC’s decision before the U.S. Court of Appeals for the D.C. Circuit. On June 14, 2016, a panel of the Court of Appeals upheld the FCC’s rules by a 2-1 vote. In July 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court of Appeals. Those petitions remain pending.

In October 2016 a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules are more restrictive in certain respects than those governing other participants in the internet economy, including so-called “edge” providers such as Google and Facebook. Several petitions for reconsideration of the new rules have been filed, as well as a request for stay. The current Chairman of the FCC opposed the new rules when they were adopted, and we expect the FCC will rule on these petitions promptly.

In January 2017, the FCC removed from its list of active proceedings proposed rules on cable set-top boxes and the bulk data connections that telecom companies provide to businesses.

We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

We provide wireless services in robustly competitive markets, but are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers’ prices and offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the “AWS-3 Auction”) and also authorized the FCC to conduct an “incentive auction,” to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the “600 MHz Auction”). We participated in the AWS-3 Auction. The 600 MHz Auction (Auction 1000) began on March 29, 2016, and after multiple phases, this auction is expected to conclude in the first half of 2017.

We have also submitted a bid to provide a nationwide mobile broadband network for the First Responder Network Authority (FirstNet). Should our bid be accepted, the actual reach of the network will depend on participation by the individual states.

In May 2014, in a separate proceeding, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation “screen” that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of “low band” spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers’ needs, but because AT&T uses more “low band” spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T’s ability to expand capacity in these bands (low band spectrum has better propagation characteristics than “high band” spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.

As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, in 2015 we submitted winning bids for 251 AWS spectrum licenses for a near-nationwide contiguous block of high-quality AWS spectrum in the AWS-3 Auction (FCC Auction 97). Our strategy also includes redeploying spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks. We have bid on FirstNet, which if awarded will provide access to a nationwide low band 20 MHz of spectrum, assuming all states “opt in,” and we are participating in the current FCC 600 MHz Auction (Auction 1000). We will continue to invest in our wireless network as we look to provide future service offerings and participate in technologies such as 5G and millimeter-wave bands.

Expected Growth Areas

Over the next few years, we expect our growth to come from IP-based broadband services, video entertainment and wireless services from our expanded North American footprint. With our 2015 acquisitions of DIRECTV and wireless properties in Mexico, our revenue mix is much more diversified. We can now provide integrated services to diverse groups of customers in the United States on different technological platforms, including wireless, satellite and wireline. In 2017, we expect our largest revenue stream to come from business customers, followed by U.S. consumer video and broadband, U.S. consumer mobility and then international video and mobility.

Integration of Data/Broadband and Entertainment Services As the communications industry continues to move toward internet-based technologies that are capable of blending wireline, satellite and wireless services, we plan to offer services that take advantage of these new and more sophisticated technologies. In particular, we intend to continue to focus on expanding our high-speed internet and video offerings and on developing IP-based services that allow customers to integrate their home or business fixed services with their mobile service. During 2017, we will continue to develop and provide unique integrated video, mobile and broadband solutions. In late 2016, we began offering an over-the-top video service (DIRECTV NOW); data usage from streaming entertainment content will not count toward data limits for customers who also purchase our wireless service. We believe this offering will facilitate our customers’ desire to view video anywhere on demand and encourage customer retention.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Wireless We expect to deliver revenue growth in the coming years. We are in a period of rapid growth in wireless video usage and believe that there are substantial opportunities available for next-generation converged services that combine technologies and services. For example, we entered into agreements with many automobile manufacturers and began providing vehicle-embedded security and entertainment services.

As of December 31, 2016, we served 146.8 million wireless subscribers in North America, with nearly 135 million in the United States. Our LTE technology covers almost 400 million people in North America. In the United States, we cover all major metropolitan areas and almost 320 million people. We also provide 4G coverage using another technology (HSPA+), and when combined with our upgraded backhaul network, we are able to enhance our network capabilities and provide superior mobile broadband speeds for data and video services. Our wireless network also relies on other GSM digital transmission technologies for 3G data communications. We have shut down virtually all 2G cell sites, which enables us to position that spectrum to provide the more advanced services demanded by our customers.

Our acquisition of two Mexican wireless providers in 2015 brought a GSM network covering both the United States and Mexico and enabled our customers to use wireless services without roaming on other companies’ networks. We believe this seamless access will prove attractive to customers and provide a significant growth opportunity. We also announced in 2015 our plan to invest $3,000 to upgrade our network in Mexico to provide LTE coverage to 100 million people and businesses by year-end 2018. As of year-end 2016, this LTE network covered approximately 78 million people and businesses in Mexico.

REGULATORY DEVELOPMENTS

Set forth below is a summary of the most significant regulatory proceedings that directly affected our operations during 2016. Industry-wide regulatory developments are discussed above in Operating Environment Overview. While these issues may apply only to certain subsidiaries, the words “we,” “AT&T” and “our” are used to simplify the discussion. The following discussions are intended as a condensed summary of the issues rather than as a comprehensive legal analysis and description of all of these specific issues.

International Regulation Our subsidiaries operating outside the United States are subject to the jurisdiction of regulatory authorities in the market where service is provided. Our licensing, compliance and advocacy initiatives in foreign countries primarily enable the provision of enterprise (i.e., large business), wireless and satellite television services. AT&T is engaged in multiple efforts with foreign regulators to open markets to competition, foster conditions favorable to investment, and increase our scope of fully authorized services and products.

Federal Regulation In February 2015, the FCC released an order in response to the D.C. Circuit’s January 2014 decision adopting new rules, and classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC’s decision significantly expands the FCC’s existing authority to regulate the provision of fixed and mobile broadband internet access services. The FCC also asserted jurisdiction over internet interconnection arrangements, which until now have been unregulated. These actions could have an adverse impact on our fixed and mobile broadband services and operating results. AT&T and several other parties, including US Telecom and CTIA trade groups, have appealed the FCC’s order. On June 14, 2016, a panel of the Court of Appeals upheld the FCC’s rules by a 2-1 vote. On July 29, 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court. Those petitions remain pending.

COMPETITION

Competition continues to increase for communications and digital entertainment services. Technological advances have expanded the types and uses of services and products available. In addition, lack of or a reduced level of regulation of comparable legacy services has lowered costs for these alternative communications service providers. As a result, we face heightened competition as well as some new opportunities in significant portions of our business.

We face substantial and increasing competition in our wireless businesses. Under current FCC rules, multiple licensees, who provide wireless services on the cellular, PCS, Advanced Wireless Services, 700 MHz and other spectrum bands, may operate in each of our U.S. service areas, which results in the potential presence of multiple competitors. Our competitors include brands such as Verizon Wireless, Sprint, T-Mobile/Metro PCS, a larger number of regional providers of cellular, PCS and other wireless communications services and resellers of those services. In addition, we face competition from providers who offer voice, text messaging and other services as applications on data networks. More than 98% of the U.S. population

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

lives in areas with at least three mobile telephone operators, and almost 94% of the population lives in areas with at least four competing carriers. We are one of three providers in Mexico, with the most significant market share controlled by América Móvil. We may experience significant competition from companies that provide similar services using other communications technologies and services. While some of these technologies and services are now operational, others are being developed or may be developed. We compete for customers based principally on service/device offerings, price, network quality, coverage area and customer service.

Our subsidiaries providing communications and digital entertainment services will face continued competitive pressure in 2017 from multiple providers, including wireless, satellite, cable and other VoIP providers, online video providers, and interexchange carriers and resellers. In addition, the desire for high-speed data on demand, including video, are continuing to lead customers to terminate their traditional wired services and use our or competitors’ wireless, satellite and internet-based services. In most U.S. markets, we compete for customers, often on pricing of bundled services, with large cable companies, such as Comcast Corporation, Cox Communications Inc. and Charter Communications (marketed as Spectrum), for high-speed internet, video and voice services and other smaller telecommunications companies for both long-distance and local services. In addition, in Latin American countries served by our DIRECTV subsidiary, we also face competition from other video providers, including América Móvil and Telefónica.

Our Entertainment Group and Business Solutions segments generally remain subject to regulation for certain legacy wireline wholesale services by state regulatory commissions for intrastate services and by the FCC for interstate services. Under the Telecom Act, companies seeking to interconnect to our wireline subsidiaries’ networks and exchange local calls enter into interconnection agreements with us. Many unresolved issues in negotiating those agreements are subject to arbitration before the appropriate state commission. These agreements (whether fully agreed-upon or arbitrated) are often then subject to review and approval by the appropriate state commission.

Our Entertainment Group and Business Solutions segments operate portions of their business under state-specific forms of regulation for retail services that were either legislatively enacted or authorized by the appropriate state regulatory commission. Some states regulate prices of retail services, while others adopt a regulatory framework that incorporates deregulation and price restrictions on a subset of our services. Some states may impose minimum customer service standards with required payments if we fail to meet the standards.

We continue to lose legacy voice and data subscribers due to competitors (e.g., wireless, cable and VoIP providers) who can provide comparable services at lower prices because they are not subject to traditional telephone industry regulation (or the extent of regulation is in dispute), utilize different technologies, or promote a different business model (such as advertising based). In response to these competitive pressures, for a number of years we have used a bundling strategy that rewards customers who consolidate their services (e.g., telephone, high-speed internet, wireless and video) with us. We continue to focus on bundling services, including combined packages of wireless data and voice and video service through our satellite and IP-based services. We will continue to develop innovative and integrated services that capitalize on our wireless and IP-based network and satellites.

Additionally, we provide local and interstate telephone and switched services to other service providers, primarily large Internet Service Providers using the largest class of nationwide internet networks (internet backbone), wireless carriers, other telephone companies, cable companies and systems integrators. These services are subject to additional competitive pressures from the development of new technologies, the introduction of innovative offerings and increasing satellite, wireless, fiber-optic and cable transmission capacity for services. We face a number of international competitors, including Orange Business Services, BT, Singapore Telecommunications Limited and Verizon Communications Inc., as well as competition from a number of large systems integrators.

ACCOUNTING POLICIES AND STANDARDS

Critical Accounting Policies and Estimates Because of the size of the financial statement line items they relate to or the extent of judgment required by our management, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. The following policies are presented in the order in which the topics appear in our consolidated statements of income.

Allowance for Doubtful Accounts We record expense to maintain an allowance for doubtful accounts for estimated losses that result from the failure or inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability based on past experience, taking into account current collection trends as well as general economic factors, including bankruptcy rates. Credit risks are assessed based on historical

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

write-offs, net of recoveries, as well as an analysis of the aged accounts and installment receivable balances with reserves generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly, and the allowances for doubtful accounts are adjusted through expense accordingly. A 10% change in the amounts estimated to be uncollectible would result in a change in the provision for uncollectible accounts of approximately $147.

Pension and Postretirement Benefits Our actuarial estimates of retiree benefit expense and the associated significant weighted-average assumptions are discussed in Note 12. Our assumed weighted-average discount rate for pension and postretirement benefits of 4.40% and 4.30%, respectively, at December 31, 2016, reflects the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants. We determined our discount rate based on a range of factors, including a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date and corresponding to the related expected durations of future cash outflows for the obligations. These bonds were all rated at least Aa3 or AA- by one of the nationally recognized statistical rating organizations, denominated in U.S. dollars, and neither callable, convertible nor index linked. For the year ended December 31, 2016, when compared to the year ended December 31, 2015, we decreased our pension discount rate by 0.20%, resulting in an increase in our pension plan benefit obligation of $2,189 and decreased our postretirement discount rate by 0.20%, resulting in an increase in our postretirement benefit obligation of $906. For the year ended December 31, 2015, we increased our pension discount rate by 0.30%, resulting in a decrease in our pension plan benefit obligation of $1,977 and increased our postretirement discount rate by 0.30%, resulting in a decrease in our postretirement benefit obligation of $854.

Our expected long-term rate of return on pension plan assets is 7.75% for 2017 and 2016. Our expected long-term rate of return on postretirement plan assets is 5.75% for 2017 and 2016. Our expected return on plan assets is calculated using the actual fair value of plan assets. If all other factors were to remain unchanged, we expect that a 0.50% decrease in the expected long-term rate of return would cause 2017 combined pension and postretirement cost to increase $230, which under our accounting policy would be adjusted to actual returns in the current year as part of our fourth-quarter remeasurement of our retiree benefit plans. In 2016, the actual return on our combined pension and postretirement plan assets was 7.5%, resulting in an actuarial gain of $59.

We recognize gains and losses on pension and postretirement plan assets and obligations immediately in our operating results. These gains and losses are generally measured annually as of December 31 and accordingly will normally be recorded during the fourth quarter, unless an earlier remeasurement is required. Should actual experience differ from actuarial assumptions, the projected pension benefit obligation and net pension cost and accumulated postretirement benefit obligation and postretirement benefit cost would be affected in future years. Note 12 also discusses the effects of certain changes in assumptions related to medical trend rates on retiree healthcare costs.

Depreciation Our depreciation of assets, including use of composite group depreciation and estimates of useful lives, is described in Notes 1 and 6. During 2016, we aligned the estimated useful lives and salvage values for certain network assets that are impacted by our IP strategy with our updated business cases and engineering studies. During 2014, we completed studies evaluating the periods over which we were utilizing our software assets, which resulted in our extending our estimated useful lives for certain capitalized software to five years to better reflect the estimated periods during which these assets will remain in service. Prior to 2014, all capitalized software costs were primarily amortized over a three-year period.

If all other factors were to remain unchanged, we expect that a one-year increase in the useful lives of our plant in service would have resulted in a decrease of approximately $3,273 in our 2016 depreciation expense and that a one-year decrease would have resulted in an increase of approximately $4,834 in our 2016 depreciation expense.

Asset Valuations and Impairments We record assets acquired in business combinations at fair value. For impairment testing, we estimate fair values using models that predominantly rely on the expected cash flows to be derived from the use of the asset. Goodwill, wireless licenses and orbital slots are significant assets on our consolidated balance sheets, where impairment testing is performed.

Goodwill and other indefinite lived intangible assets are not amortized but tested at least annually for impairment. We test goodwill on a reporting unit basis by comparing the estimated fair value of each reporting unit to its book value. If the fair value exceeds the book value, then no impairment is measured. We estimate fair values using an income approach (also known as a discounted cash flow) and a market multiple approach. The income approach utilizes our 10-year cash flow projections with a perpetuity value discounted at an appropriate weighted average cost of capital.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

The market multiple approach uses the multiples of publicly traded companies whose services are comparable to those offered by the reporting units. In 2016, the calculated fair value of the reporting units exceeded book value in all circumstances, and no additional testing was necessary. In the event of a 10% drop in the fair values of the reporting units, the fair values would have still exceeded the book values of the reporting units.

We assess fair value for wireless licenses using a discounted cash flow model (the Greenfield Approach) and a corroborative market approach based on auction prices. The Greenfield Approach assumes a company initially owns only the wireless licenses and makes investments required to build an operation comparable to current use. Inputs to the model include subscriber growth, churn, revenue per user, capital investment and acquisition costs per subscriber, ongoing operating costs, and resulting EBITDA margins. We based our assumptions on a combination of average marketplace participant data and our historical results, trends and business plans. These licenses are tested annually for impairment on an aggregated basis, consistent with their use on a national scope for the United States and Mexico. For impairment testing, we assume subscriber and revenue growth will trend up to projected levels, with a long-term growth rate reflecting expected long-term inflation trends. We assume churn rates will initially exceed our current experience, but decline to rates that are in line with industry-leading churn. For the U.S. licenses, EBITDA margins are assumed to trend toward 37% annually. We used a discount rate of 8.50% for the United States and 11.0% for Mexico, based on the optimal long-term capital structure of a market participant and its associated cost of debt and equity, to calculate the present value of the projected cash flows. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values of the wireless licenses would still be higher than the book value of the licenses. The fair value of the wireless licenses in the United States and Mexico each exceeded the book value by more than 10%.

Orbital slots are also valued using the Greenfield Approach. The projected cash flows are based on various factors, including satellite cost, other capital investment per subscriber, acquisition costs per subscriber and usage per subscriber, as well as revenue growth, subscriber growth and churn rates. For impairment testing purposes, we assumed sustainable long-term growth assumptions consistent with the business plan and industry counterparts in the United States. We used a discount rate of 10.50% to calculate the present value of the projected cash flows. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values of the orbital slots would still be higher than the book value of the orbital slots. The fair value of the orbital slots exceeded the book value by more than 10%.

We review customer relationships and other finite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over their remaining life. For this analysis, we compare the expected undiscounted future cash flows attributable to the asset to its book value.

We review our investments to determine whether market declines are temporary and accordingly reflected in accumulated other comprehensive income, or other-than-temporary and recorded as an expense in “Other income (expense) – net” in the consolidated statements of income. This evaluation is based on the length of time and the severity of decline in the investment’s value.

Income Taxes Our estimates of income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 11 and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or the final review of our tax returns by federal, state or foreign tax authorities.

We use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, the amount of benefit to initially recognize within our financial statements. We regularly review our uncertain tax positions and adjust our unrecognized tax benefits (UTBs) in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. These adjustments to our UTBs may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash.

New Accounting Standards

See Note 1 for a discussion of recently issued or adopted accounting standards.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

OTHER BUSINESS MATTERS

Time Warner Inc. Acquisition On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner’s net debt at September 30, 2016, the total transaction value is approximately $108,700. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash. See “Liquidity” for a discussion of our financing arrangements.

Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution; one of the world’s largest pay-TV subscriber bases; and leading scale in TV, mobile and broadband distribution.

The Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and remains subject to review by the U.S. Department of Justice. While subject to change, we expect that Time Warner will not need to transfer any of its FCC licenses to AT&T in order to conduct its business operations after the closing of the transaction. It is also a condition to closing that necessary consents from certain foreign governmental entities must be obtained. The transaction is expected to close before year-end 2017. Under certain circumstances relating to a competing transaction, Time Warner may be required to pay a $1,725 termination fee to us in connection with or following a termination of the agreement. Under certain circumstances relating to the inability to obtain the necessary regulatory approvals, we may be required to pay Time Warner $500 following a termination of the agreement.

Litigation Challenging DIRECTV’s NFL SUNDAY TICKET More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have “pooled” their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge “supra-competitive” prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys’ fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. A hearing on both motions is currently scheduled in February 2017.

SportsNet LA Litigation On November 2, 2016, the U.S. Department of Justice filed a civil antitrust complaint in federal court (Central District of California) against DIRECTV Group Holdings, LLC and AT&T Inc., as successor in interest to DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection with negotiations with SportsNet LA about carrying the Los Angeles Dodgers games. The complaint alleges that DIRECTV’s conduct violated Section 1 of the Sherman Act. The complaint seeks a declaration that DIRECTV’s conduct unlawfully restrained trade and seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&T to monitor relevant communications between their executives and competitors and to periodically report to the Department of Justice, and (3) requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded its litigation costs. We vigorously dispute these allegations. On January 10, 2017, we filed a motion to dismiss the complaint. The motion remains pending.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers’ Confidence Act. The FTC’s allegations concern DIRECTV’s advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We are disputing these allegations vigorously. A trial on the matter is expected to begin in early 2017.

Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC’s allegations concern the application of AT&T’s Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer’s billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court of Appeals to reconsider the decision but the Court has not ruled on that request. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.

In June 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC’s Open Internet Transparency Rule by using the term “unlimited” in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.

Labor Contracts As of January 31, 2017, we employed approximately 268,000 persons. Approximately 48% of our employees are represented by the Communications Workers of America, the International Brotherhood of Electrical Workers or other unions. Contracts covering approximately 20,000 mobility employees across the country and approximately 25,000 traditional wireline employees in our Southwest and Midwest regions have expired or will expire in 2017. Additionally, negotiations continue with approximately 15,000 traditional wireline employees in our West region where the contract expired in April 2016. Approximately 11,000 former DIRECTV employees were eligible for and chose union representation. Bargaining has resulted in approximately 70% of these employees now being covered under ratified contracts that expire between 2017 and 2020. After expiration of the current agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

Environmental We are subject from time to time to judicial and administrative proceedings brought by various governmental authorities under federal, state or local environmental laws. We reference in our Forms 10-Q and 10-K certain environmental proceedings that could result in monetary sanctions (exclusive of interest and costs) of one hundred thousand dollars or more. However, we do not believe that any of those currently pending will have a material adverse effect on our results of operations.

LIQUIDITY AND CAPITAL RESOURCES

We had $5,788 in cash and cash equivalents available at December 31, 2016. Cash and cash equivalents included cash of $1,803 and money market funds and other cash equivalents of $3,985. Approximately $776 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation. Cash and cash equivalents increased $667 since December 31, 2015. In 2016, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties, and long-term debt

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

issuances. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, debt repayments, dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities

During 2016, cash provided by operating activities was $39,344 compared to $35,880 in 2015. Higher operating cash flows in 2016 were primarily due to our acquisition of DIRECTV and the timing of working capital payments.

During 2015, cash provided by operating activities was $35,880 compared to $31,338 in 2014. Higher operating cash flows in 2015 were primarily due to improved operating results, our acquisition of DIRECTV and working capital improvements.

Cash Used in or Provided by Investing Activities

During 2016, cash used in investing activities consisted primarily of $21,516 for capital expenditures, excluding interest during construction and $2,959 for the acquisition of wireless spectrum, Quickplay Media, Inc. and other operations. These expenditures were partially offset by net cash receipts of $646 from the disposition of various assets and $506 from the sale of securities.

The majority of our capital expenditures are spent on our wireless and wireline networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $2,298 in 2016. The increase was primarily due to DIRECTV operations, fiber buildout, and wireless network expansion in Mexico. In connection with capital improvements, we have negotiated favorable payment terms (referred to as vendor financing). In 2016, vendor financing related to capital investments was $492. We do not report capital expenditures at the segment level.

We expect our 2017 capital expenditures to be in the $22,000 range, and we expect our capital expenditures to be in the 15% range of service revenues or lower for each of the years 2017 through 2019. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on ensuring DIRECTV merger commitments are met. To that end, as of December 31, 2016, we have built out our fiber-to-the-premises network to 3.8 million customer locations of the 12.5 million locations we committed to reach by mid-2019.

Cash Used in or Provided by Financing Activities

We paid dividends of $11,797 in 2016, $10,200 in 2015, and $9,552 in 2014. The increases in 2016 and 2015 were primarily due to the increase in shares outstanding resulting from our acquisition of DIRECTV and the increase in the quarterly dividend approved by our Board of Directors in the fourth quarter of each year. In October 2016, our Board of Directors approved a 2.1% increase in the quarterly dividend from $0.48 to $0.49 per share. This follows a 2.1% dividend increase approved by our Board in December 2015. Dividends declared by our Board of Directors totaled $1.93 per share in 2016, $1.89 per share in 2015, and $1.85 per share in 2014. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

During 2016, we received net proceeds of $10,140 from the issuance of $10,013 in long-term debt in various markets, with an average weighted maturity of approximately 12 years and a weighted average coupon of 3.8%. Debt issued included:

·	February issuance of $1,250 of 2.800% global notes due 2021.

·	February issuance of $1,500 of 3.600% global notes due 2023.

·	February issuance of $1,750 of 4.125% global notes due 2026.

·	February issuance of $1,500 of 5.650% global notes due 2047.

·	May issuance of $750 of 2.300% global notes due 2019.

·	May issuance of $750 of 2.800% global notes due 2021.

·	May issuance of $1,100 of 3.600% global notes due 2023.

·	May issuance of $900 of 4.125% global notes due 2026.

·	May issuance of $500 of 4.800% global notes due 2044.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

During 2016, we redeemed $10,823 in debt, primarily consisting of the following repayments:

·	February redemption of $1,250 of AT&T floating rate notes due 2016.

·	March prepayment of the remaining $1,000 outstanding under a $2,000 18-month credit agreement by and between AT&T and Mizuho.

·	May redemption of $1,750 of 2.950% global notes due 2016.

·	June prepayment of $5,000 of outstanding advances under our $9,155 Syndicated Credit Agreement (See “Credit Facilities” below).

·	August redemption of $1,500 of 2.400% global notes due 2016.

In March 2016, we completed a debt exchange in which $16,049 of DIRECTV notes with stated rates of 1.750% to 6.375% were tendered and accepted in exchange for $16,049 of new AT&T Inc. global notes with stated rates of 1.750% to 6.375% plus a $16 cash payment.

In September 2016, we completed a debt exchange in which $5,615 of notes of AT&T or one or more of its subsidiaries with stated rates of 5.350% to 8.250% were tendered and accepted in exchange for $4,500 of new AT&T Inc. global notes with a stated rate of 4.500% and $2,500 of new AT&T Inc. global notes with a stated rate of 4.550%.

In February 2017, aggregate bids exceeded the level required to clear Auction 1000. This auction, including the assignment phase, is expected to conclude in the first half of 2017. Our commitment to purchase 600 MHz spectrum licenses for which we submitted bids is expected to be more than satisfied by the deposits made to the FCC in the third quarter of 2016.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.2% at December 31, 2016 and 4.0% at December 31, 2015. We had $122,381 of total notes and debentures outstanding (see Note 9) at December 31, 2016, which included Euro, British pound sterling, Swiss franc, Brazilian real and Canadian dollar denominated debt of approximately $24,292.

On February 9, 2017, we completed the following long-term debt issuances:

·	$1,250 of 3.200% global notes due 2022.

·	$750 of 3.800% global notes due 2024.

·	$2,000 of 4.250% global notes due 2027.

·	$3,000 of 5.250% global notes due 2037.

·	$2,000 of 5.450% global notes due 2047.

·	$1,000 of 5.700% global notes due 2057.

At December 31, 2016, we had $9,832 of debt maturing within one year, substantially all of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

·	$1,000 of annual put reset securities issued by BellSouth Corporation that may be put back to us each April until maturity in 2021.

·	An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.

Our Board of Directors has approved repurchase authorizations of 300 million shares each in 2013 and 2014 (see Note 14). For the year ended December 31, 2015, we repurchased approximately eight million shares totaling $269 under these authorizations and for the year ended December 31, 2016, we repurchased approximately 11 million shares totaling $444 under these authorizations. At December 31, 2016, we had approximately 396 million shares remaining from the 2013 and 2014 authorizations.

Excluding the impact of acquisitions or anticipated tax reform, the emphasis of our 2017 financing activities will be the issuance of debt and the payment of dividends, subject to approval by our Board of Directors, and the repayment of debt. We plan to fund our financing uses of cash through a combination of cash from operations, debt issuances and asset sales. We have obtained bridge loan and term loan financing to be used upon closing of our acquisition of Time Warner. The timing and mix of debt issuance will be guided by credit market conditions and interest rate trends.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Credit Facilities

The following is a summary of certain terms of our various credit and loan agreements and does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

General

In December 2015, we entered into a five-year, $12,000 revolving credit agreement (the “Revolving Credit Agreement”) with certain banks. As of December 31, 2016, we have no amounts outstanding under this agreement.

In January 2015, we entered into a $9,155 credit agreement (the “Syndicated Credit Agreement”) containing (i) a $6,286 term loan (“Loan A”) and (ii) a $2,869 term loan (“Loan B”), with certain banks. In March 2015, we borrowed all amounts available under the agreement. Loan A will be due on March 2, 2018. Amounts borrowed under Loan B will be subject to amortization from March 2, 2018, with 25% of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due on March 2, 2020. In June 2016, we repaid $4,000 of the outstanding amount under Loan A and $1,000 of the outstanding amount under Loan B. After repayment, the amortization in Loan B has been satisfied. As of December 31, 2016, we have $2,286 outstanding under Loan A and $1,869 outstanding under Loan B.

On October 22, 2016, in connection with entering into the Time Warner merger agreement, AT&T entered into a $40,000 bridge loan with JPMorgan Chase Bank and Bank of America, as lenders (the “Bridge Loan”).

On November 15, 2016, we entered into a $10,000 term loan credit agreement (the “Term Loan”) with a syndicate of 20 lenders. In connection with this Term Loan, the “Tranche B Commitments” totaling $10,000 under the Bridge Loan were reduced to zero. The “Tranche A Commitments” under the Bridge Loan totaling $30,000 remain in effect.

No amounts will be borrowed under either the Bridge Loan or the Term Loan prior to the closing of the Time Warner merger. Borrowings under either agreement will be used solely to finance a portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related expenses. Prior to the closing date of the Merger, only a payment or bankruptcy event of default would permit the lenders to terminate their commitments under either the Bridge Loan or the Term Loan.

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in each agreement) financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. The events of default are customary for agreements of this type and such events would result in the acceleration of, or would permit the lenders to accelerate, as applicable, required payments and would increase each agreement’s relevant Applicable Margin by 2.00% per annum.

Revolving Credit Agreement

The obligations of the lenders to advance funds under the Revolving Credit Agreement will end on December 11, 2020, unless prior to that date either: (i) AT&T reduces to $0 the commitments of the lenders, or (ii) certain events of default occur. We and lenders representing more than 50% of the facility amount may agree to extend their commitments for two one-year periods beyond the December 11, 2020 end date, under certain circumstances.

Advances under this agreement would bear interest, at AT&T’s option, either:

at a variable annual rate equal to (1) the highest of: (a) the base rate of the bank affiliate of Citibank, N.A., (b) 0.50% per annum above the Federal funds rate, and (c) the London Interbank Offered Rate (LIBOR) applicable to U.S. dollars for a period of one month plus 1.00% per annum, plus (2) an applicable margin (as set forth in this agreement); or

·	at a rate equal to: (i) LIBOR for a period of one, two, three or six months, as applicable, plus (ii) an applicable margin (as set forth in this agreement).

The Syndicated Credit Agreement

Advances bear interest at a rate equal to: (i) the LIBOR for deposits in dollars (adjusted upwards to reflect any bank reserve costs) for a period of three or six months, as applicable, plus (ii) the applicable margin, as set forth in this agreement. The applicable margin under Loan A equals 1.000%, 1.125% or 1.250% per annum depending on AT&T’s credit ratings. The applicable margin under Loan B equals 1.125%, 1.250% or 1.375% per annum, depending on AT&T’s credit ratings.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dollars in millions except per share and per subscriber amounts

Bridge Loan

The obligations of the lenders under the Bridge Loan to provide advances will terminate on the earliest of (i) October 23, 2017, subject to extension in certain cases to April 23, 2018, (ii) the closing of the Time Warner merger without the borrowing of advances under the Bridge Loan and (iii) the termination of the Merger Agreement.

Advances would bear interest, at AT&T’s option, either: