REG - AT & T Inc. - 3Q16 10-Q <Origin Href="QuoteRef">T.N</Origin> - Part 5

AT&TAnnouncement

17/11/2016 17:40

- Part 5: For the preceding part double click  ID:nRSQ5061Pd 

to mature, we believe that future wireless growth will increasingly depend 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 the
first quarter of 2016, we introduced an integrated offer that allows for unlimited wireless data when combined with our
video services, ending the third quarter with more than 6.7 million subscribers on these packages. 
 
The expected year-end 2016 shutdown of our U.S. 2G network is beginning to contribute to higher disconnections and churn of
subscribers. We expect that fourth-quarter 2016 churn and net additions could be negatively impacted by the shutdown of
this network if these subscribers do not choose to migrate to another device. Our 2G subscribers and connections at
September 30 are as follows: 
 
                                                            September 30,           Percent    
 (in 000s)                                                  2016                    2015               Change    
 Postpaid (primarily phones)                                               335                 1,077               (68.9  )%  
 Prepaid                                                                   210                 442                 (52.5  )   
 Reseller1                                                                 673                 3,317               (79.7  )   
 Connected devices 2                                                       2,794               6,575               (57.5  )   
 Total 2G Subscribers and Connections                                      4,012               11,411              (64.8  )%  
 1 Primarily included in our Consumer Mobility segment.     
 2 Primarily included in our Business Solutions segment.    
 
 
ARPU 
 
Postpaid phone-only ARPU was $59.64 for the third quarter and $59.66 for the first nine months of 2016, compared to $60.81
and $60.68 in 2015. Postpaid phone-only ARPU plus AT&T Next subscriber installment billings increased 1.7% compared to the
third quarter of 2015 and 3.1% compared to the first nine months of 2015 due to the continuing growth of the AT&T Next
program. 
 
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 for the third quarter and first nine months of 2016 and could be negatively
impacted in the fourth quarter by the loss of 2G reseller subscribers and connected devices on our 2G network. Loss of 2G
subscribers contributed more than 20 basis points of pressure to total churn and 2 basis points to postpaid churn during
the quarter. Postpaid churn was lower for the third quarter and first nine months of 2016. 
 
Branded Subscribers 
 
Branded subscribers increased 0.6% when compared to June 30, 2016 and 3.2% when compared to September 30, 2015. These
increases included a 3.2% and 18.6% increase in prepaid subscribers and a 0.1% and 0.9% increase in postpaid subscribers,
respectively. At September 30, 2016, 90% of our postpaid phone subscriber base used smartphones, compared to 87% at
September 30, 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 plans now represent 74% of our postpaid customer base. 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. 
 
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, with no annual service contract. At September 30, 2016, about 50% of the postpaid smartphone base
is on an installment program compared to nearly 41% at September 30, 2015. Of the postpaid smartphone gross adds and
upgrades during the third quarter and first nine months of 2016, 94% and 93% were either equipment installment plans or
BYOD, compared to 80% and 75% in 2015. While BYOD customers do not generate equipment revenue or expense, the service
revenue helps improve our margins. During the third quarter and first nine months of 2016, we added approximately 595,000
and 1,628,000 BYOD customers, compared to 510,000 and 1,157,000 in 2015. 
 
39 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
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 4.6% during the third quarter when compared to June 30, 2016 and 21.1% when compared
to September 30, 2015. During the third quarter and first nine months of 2016, we added approximately 1.1 million and 3.5
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. 
 
OTHER BUSINESS MATTERS 
 
Time Warner Inc. Acquisition  On October 22, 2016, we 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 (exchange ratio) of AT&T common stock based on the average stock price at the time
of closing the Merger. If the average stock price 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. We have an 18-month commitment for an unsecured bridge term facility (Bridge Loan) for $40,000. 
 
Time Warner is a leading media and entertainment company whose major businesses encompass an array 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 that connects with audiences around the world, with our extensive customer relationships, world's largest pay TV
subscriber base and leading scale in TV, mobile and broadband distribution. 
 
The Merger Agreement must be adopted by Time Warner shareholders and is subject to review by the U.S. Department of Justice
and if certain FCC licenses remain with Time Warner at closing, those are subject to FCC review and approval. It is also a
condition to closing that necessary consents from certain public utility commissions and foreign governmental entities must
be obtained. The transaction is expected to close before year end 2017. If the Merger is terminated as a result of reaching
the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been
satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications
laws, utilities laws or foreign regulatory laws, then under certain circumstances we would be obligated to pay Time Warner
$500. 
 
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. On June 24, 2016, the plaintiffs filed a consolidated amended
complaint. We vigorously dispute the allegations the complaints have asserted. On August 8, 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 for December 12, 2016. 
 
40 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
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 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. 
 
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. 
 
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.
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 Federal Communications Commission (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. 
 
41 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
San Diego County Inquiry Involving Cricket Communications, Inc.  In February 2014, the San Diego County Air Pollution
Control District began inquiring into alleged violations of California regulations governing removal, handling and disposal
of asbestos containing materials arising from an independent dealer's demolition and construction activity in preparation
to install upgraded point of purchase and fixtures in accordance with Cricket dealer guidelines. While the independent
dealer was in sole control of contractors performing the work at issue, the County has focused on Cricket Communications
dealer agreement terms and interactions with the independent dealer as a basis for asserting direct liability against
Cricket Communications, Inc. After discussions, in November 2015, the County issued a penalty demand in excess of one
hundred thousand dollars. In October 2016, we reached a monetary settlement with the County of this matter for an
immaterial amount. 
 
Labor Contracts  A contract covering nearly 16,000 traditional wireline employees in our West region expired in April 2016
and employees are working under the terms of the prior contract, including benefits, while negotiations continue. After
expiration of the current agreements, work stoppages or labor disruptions may occur in the absence of new contracts or
other agreements being reached. 
 
On August 30, 2016, our U.S. mobility employees ratified a separate national contract that primarily covers medical
benefits for approximately 40,000 employees. 
 
COMPETITIVE AND REGULATORY 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.
However, since the Telecom Act was passed, the 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. 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 reclassifying 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. 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. 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. 
 
The FCC is expected to release an order adopting new rules that restrict our use of customer information in marketing and
advertising. The FCC also is considering proposals that could adversely affect our provision of video services and that
would increase regulation and lower prices of certain data services used by businesses, beginning July 2017. We expect to
appeal any new requirements that we believe unlawfully restrain our business. 
 
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 U-verse 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. 
 
42 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
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
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 the multiple phases
of Auction 1000 are expected to progress over the next several months. 
 
We have also submitted a bid to provide a nationwide mobile broadband network for first responders (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 new 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, we believe that future wireless growth will increasingly depend 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 face spectrum and capacity constraints on our wireless network in certain
markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are
continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the
quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we
are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make additional spectrum
available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address
spectrum and capacity constraints on a market-by-market basis. 
 
LIQUIDITY AND CAPITAL RESOURCES 
 
We had $5,895 in cash and cash equivalents available at September 30, 2016. Cash and cash equivalents included cash of
$2,460 and money market funds and other cash equivalents of $3,435. Approximately $813 of our cash and cash equivalents
resided in foreign jurisdictions, some of which are subject to restrictions on repatriation. Cash and cash equivalents
increased $774 since December 31, 2015. In the first nine months of 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 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. 
 
43 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
Cash Provided by or Used in Operating Activities 
 
During the first nine months of 2016, cash provided by operating activities was $29,202, compared to $26,695 for the first
nine months of 2015. Higher operating cash flows in 2016 were primarily due to our acquisition of DIRECTV offset by the
timing of working capital payments. 
 
Cash Used in or Provided by Investing Activities 
 
For the first nine months of 2016, cash used in investing activities totaled $18,189 and consisted primarily of $15,283 for
capital expenditures, excluding interest during construction, and $2,922 for the acquisition of wireless spectrum,
Quickplay Media, Inc. and other operations. These expenditures were partially offset by net cash receipts of $501 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 $1,927 in the first nine months.
The increase was primarily due to DIRECTV operations, our wireless network expansion in Mexico, and continued fiber
buildout. In connection with capital improvements to our wireless network in Mexico, we also negotiated favorable payment
terms (referred to as vendor financing). For the first nine months of 2016, we excluded $225 of vendor financing related to
capital investments. We do not report capital expenditures at the segment level. 
 
We continue to expect our 2016 capital investment, which includes our capital expenditures plus vendor financing payments
related to our Mexico network, for our existing businesses to be in the $22,000 range, and we expect our capital investment
to be in the 15 percent range of service revenues or lower for each of the years 2016 through 2018. The amount of capital
investment is influenced by demand for services and products, capacity needs and network enhancements. We are also focused
on ensuring merger commitments are met. 
 
Cash Provided by or Used in Financing Activities 
 
For the first nine months of 2016, cash used in financing activities totaled $10,239 and included net proceeds of $10,140
primarily from the following long-term debt issuances: 
 
 ·  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.  
 
 
During the first nine months of 2016, we redeemed $10,688 of debt, primarily consisting of the following: 
 
 ·  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.  
 
 
44 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
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. 
 
On September 7, 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 July 2016, we made a refundable deposit with the FCC for Auction 1000. 
 
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was
approximately 4.2% as of September 30, 2016, compared to 4.2% as of June 30, 2016, and 4.0% as of December 31, 2015. We had
$123,963 of total notes and debentures outstanding at September 30, 2016, which included Euro, British pound sterling,
Swiss franc, Brazilian real and Canadian dollar denominated debt of approximately $25,789. 
 
As of September 30, 2016, we had approximately 396 million shares remaining from 2013 and 2014 authorizations from our
Board of Directors to repurchase shares of our common stock. During the first nine months of 2016, we repurchased
approximately 11 million shares for $444. In 2016, we intend to use free cash flow (operating cash flows less construction
and capital expenditures) after dividends primarily to pay down debt. 
 
We paid dividends of $8,850 during the first nine months of 2016, compared with $7,311 for the first nine months of 2015,
primarily reflecting the increase in shares outstanding resulting from our acquisition of DIRECTV. Dividends declared by
our Board of Directors totaled $0.48 per share in the third quarter and $1.44 per share for the first nine months of 2016
and $0.47 per share in the third quarter and $1.41 per share for the first nine months of 2015. 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. On October 22, 2016, our Board of Directors approved a 2.1% increase in the quarterly dividend
from $0.48 to $0.49 per share. 
 
At September 30, 2016, we had $7,982 of debt maturing within one year, $7,468 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 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.  
 
 
Credit Facilities 
 
On December 11, 2015, we entered into a five-year, $12,000 credit agreement (the "Revolving Credit Agreement") with
Citibank, N.A. (Citibank), as administrative agent. 
 
In January 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term
loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain
investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent. In March 2015, AT&T borrowed all
amounts available under the Tranche A Facility and the Tranche B Facility. Amounts borrowed under the Tranche A Facility
will be due on March 2, 2018. Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2,
2018, with 25 percent 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 debt under the Tranche A Facility
and $1,000 of the outstanding debt under the Tranche B Facility. After repayment, the amortization in the Tranche B
Facility has been satisfied. As of September 30, 2016, we have $2,286 outstanding under the Tranche A Facility and $1,869
outstanding under the Tranche B Facility and we have complied with all covenants. 
 
45 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
On October 22, 2016, in connection with entering into Merger Agreement, AT&T entered into the $40,000 Bridge Loan with
JPMorgan Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A. and Bank of America, N.A., as lenders. No amounts will
be drawn under the Bridge Loan prior to the consummation of the Merger. In the event advances are made under the Bridge
Loan, those advances would be used solely to finance a portion of the cash consideration to be paid in the Merger, the
refinancing of debt of Time Warner and its subsidiaries and the payment of related fees and expenses. 
 
Revolving Credit Agreement 
 
In the event advances are made under the Revolving Credit Agreement, those advances would be used for general corporate
purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later
than the date on which lenders are no longer obligated to make any advances under the agreement. We can terminate, in whole
or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such
terminated commitments. We also may request that the total amount of the lender's commitments be increased by an integral
multiple of $25 effective on a date that is at least 90 days prior to the scheduled termination date then in effect,
provided that no event of default has occurred and in no event shall the total amount of the lender's commitments at any
time exceed $14,000. At September 30, 2016, we had no advances outstanding under the Revolving Credit Agreement and we have
complied with all covenants. 
 
The obligations of the lenders to provide advances will terminate 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 termination date, under certain circumstances. 
 
Advances under the Revolving Credit Agreement would bear interest, at AT&T's option, either: 
 
 ·  at a variable annual rate equal to (i) the highest of: (a) the base rate of the bank affiliate of Citibank, N.A. which is serving as administrative agent under the Agreement, (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 (ii) an applicable margin, as set forth in the Revolving Credit Agreement ("Applicable Margin for Base Advances"); or  
 
 
 ·  at a rate equal to: (i) LIBOR for a period of one, two, three or six months, as applicable, plus (ii) the Applicable Margin ("Applicable Margin for Eurocurrency Rate Advances").  
 
 
The Applicable Margin for Eurocurrency Rate Advances will equal 0.680%, 0.910%, 1.025% or 1.125% per annum, depending on
AT&T's credit rating. The Applicable Margin for Base Rate Advances will be equal to the greater of 0.00% and the relevant
Applicable Margin for Eurocurrency Rate Advances minus 1.00% per annum depending on AT&T's credit rating. 
 
We will pay a facility fee of 0.070%, 0.090%, 0.100% or 0.125% per annum, depending on AT&T's credit rating, of the amount
of lender commitments. 
 
The Revolving Credit Agreement 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 the Revolving Credit Agreement) financial ratio covenant that AT&T will maintain, as of the last
day of each fiscal quarter of not more than 3.5-to-1. 
 
The events of default contained in the Revolving Credit Agreement are customary for an agreement 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 the Applicable Margin by 2.00% per annum. 
 
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 (each such Advance, a
Eurodollar Rate Advance). The Applicable Margin under the Tranche A Facility will equal 1.000%, 1.125% or 1.250% per annum
depending on AT&T's credit rating. The Applicable Margin under the Tranche B Facility will equal 1.125%, 1.250% or 1.375%
per annum, depending on AT&T's credit rating. 
 
46 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
The Syndicated Credit Agreement 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 the Syndicated Credit Agreement) financial ratio covenant that AT&T will maintain, as of the
last day of each fiscal quarter of not more than 3.5-to-1. 
 
The events of default contained in the Syndicated Credit Agreement are customary for an agreement 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 the Applicable Margin by 2.00% per annum. 
 
Bridge Loan 
 
The obligations of the lenders under the Bridge Loan to provide advances will terminate on the earliest of (i) the
Termination Date (as defined in the Merger Agreement), (ii) the consummation of the transactions contemplated by the Merger
Agreement without the borrowing of advances under the Bridge Loan and (iii) the termination of the Merger Agreement. 
 
Advances would bear interest, at the Company's option, either: 
 
 ·  at a variable annual rate equal to: (1) the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) 0.5% per annum above the federal funds rate, and (c) the LIBOR rate applicable to dollars for a period of one month plus 1.00%, plus (2) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Base Advances"); or  
 
 
 ·  at a rate equal to: (i) LIBOR (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Eurodollar Rate Advances").  
 
 
The Applicable Margin for Eurodollar Rate Advances will be equal to 0.750%, 1.000%, 1.125%, 1.250% or 1.500% per annum
depending on the Company's unsecured long-term debt ratings. The Applicable Margin for Base Advances will be equal to the
greater of (x) 0.00% and (y) the relevant Applicable Margin for Eurodollar Rate Advances minus 1.00% per annum, depending
on the Company's unsecured long-term debt ratings. 
 
The Applicable Margin for Eurodollar Rate Advances and the Applicable Margin for Base Advances are scheduled to increase by
an additional 0.25% on the 90th day after the closing of the Merger and another 0.25% every 90 days thereafter. 
 
The Company will also pay a commitment fee (Commitment Fee) of 0.070%, 0.090%, 0.100%, 0.125% or 0.175% of the commitment
amount per annum, depending on the Company's unsecured long-term debt ratings. 
 
The Company is scheduled to pay a duration fee of 0.50%, 0.75% and 1.00% on the amount of advances outstanding as of the
90th, 180th and 270th day after advances are made. 
 
The Bridge Loan contains provisions requiring the reduction of the commitments of the lenders and the prepayment of
outstanding advances by the amount of net cash proceeds resulting from the incurrence of certain indebtedness by the
Company or its subsidiaries, the issuance of certain capital stock by the Company or its subsidiaries and non-ordinary
course sales or dispositions of assets by the Company or its subsidiaries, in each case subject to exceptions set forth in
the Bridge Loan. 
 
Advances under the Bridge Loan are conditioned on the absence of a material adverse effect on Time Warner and certain
customary events, and repayment of all advances must be made no later than 364 days after the date on which the advances
are made. 
 
The Bridge Loan 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 the Bridge Loan) financial ratio covenant that the Company will maintain, as of the last day of each fiscal
quarter of not more than 3.5-to-1. 
 
47 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 
 
Dollars in millions except per share and per subscriber amounts 
 
The events of default contained in the Bridge Loan are customary for an agreement 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 the
Applicable Margin by 2.00% per annum. 
 
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 the Bridge Loan. 
 
Collateral Arrangements 
 
During the first nine months of 2016, we posted $141 of additional cash collateral, on a net basis, to banks and other
participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and
netting agreements. (See Note 6) 
 
Other 
 
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our equity method investments. At September 30, 2016, our debt ratio was 50.1%,
compared to 50.8% at September 30, 2015, and 50.5% at December 31, 2015. Our net debt ratio was 47.8% at September 30,
2016, compared to 48.3% at September 30, 2015, and 48.5% at December 31, 2015. The debt ratio is affected by the same
factors that affect total capital, and reflects our recent debt issuances and repayments. 
 
During the first nine months of 2016, we received $3,757 from the monetization of various assets, primarily the sale of
certain equipment installment receivables. We plan to continue to explore similar opportunities. 
 
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding
company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The
preferred equity interest had a value of $8,630 as of September 30, 2016, and $8,714 as of December 31, 2015, does not have
any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of
$560 per annum, which are distributed quarterly in equal amounts. We distributed $420 to the trust during the first nine
months of 2016. So long as we make the distributions, the terms of the preferred equity interest will not impose any
limitations on our ability to declare a dividend or repurchase shares. At the time of the contribution of the preferred
equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal
income tax return for each of 2015 and 2016. Both such contributions, totaling $350, were made in the third quarter of
2016. 
 
48 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk 
 
Dollars in millions except per share amounts 
 
At September 30, 2016, we had interest rate swaps with a notional value of $7,050 and a fair value of $145. 
 
We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a
U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These
derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(3,109) at
September 30, 2016. 
 
Item 4. Controls and Procedures 
 
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including
its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and
reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive
officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the
registrant's disclosure controls and procedures as of September 30, 2016. Based on that evaluation, the chief executive
officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of
September 30, 2016. 
 
49 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS 
 
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and
actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section.
We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995. 
 
The following factors could cause our future results to differ materially from those expressed in the forward-looking
statements: 
 
 ·  Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.  
 
 
 ·  Changes in available technology and the effects of such changes, including product substitutions and deployment costs.  
 
 
 ·  Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends, and unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.  
 
 
 ·  The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, special access and      
    business data services, intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure including the withdrawal of legacy TDM-based services; universal      
    service; broadband deployment; E911 services; competition policy; net neutrality; including the FCC's order reclassifying broadband as Title II services subject to much more fulsome regulation; unbundled network elements and other wholesale obligations;   
    multi-channel video programming distributor services and equipment; availability of new spectrum, on fair and balanced terms, and wireless and satellite license awards and renewals.                                                                           
 
 
 ·  The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services.  
 
 
 ·  Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.  
 
 
 ·  Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and Over The Top Video service) and our ability to maintain capital expenditures.  
 
 
 ·  The extent of competition including from governmental networks and other providers and the resulting pressure on customer and access line totals and segment operating margins.  
 
 
 ·  Our ability to develop attractive and profitable product/service offerings to offset increasing competition.  
 
 
 ·  The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).  
 
 
 ·  The continued development and delivery of attractive and profitable video offerings through satellite and U-verse; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.  
 
 
 ·  Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless service and devices and device financing plans.  
 
 
 ·  The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.  
 
 
 ·  Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.  
 
 
 ·  The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.  
 
 
 ·  The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or        
    terrorist attacks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
 
 
 ·  The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.  
 
 
 ·  Our ability to integrate our acquisition of DIRECTV.  
 
 
 ·  Our pending acquisition of Time Warner Inc.  
 
 
 ·  Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.  
 
 
 ·  Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well as regulatory and political uncertainty in Latin America.  
 
 
 ·  Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.  
 
 
 ·  The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.  
 
 
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially
affect our future earnings. 
 
50 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
PART II - OTHER INFORMATION 
 
Dollars in millions except per share amounts 
 
Item 1A. Risk Factors 
 
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to
update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below
reflects our pending acquisition of Time Warner (See "Other Business Matters"). 
 
The impact of our pending acquisition of Time Warner, including our ability to obtain governmental approvals on favorable
terms including any required divestitures; the risk that the businesses will not be integrated successfully; the risk that
the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than
expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due
to the issuance of additional shares; the addition of Time Warner's existing debt to our balance sheet; disruption from the
acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and
its effect on pricing, spending, third party relationships and revenues. 
 
As discussed in Other Business Matters, on October 22, 2016, we agreed to acquire Time Warner for a total transaction value
of approximately $108,700 (including Time Warner's net debt). We believe that the acquisition will give us the scale,
resources and ability to deploy video content more efficiently to more customers than otherwise possible and to provide
very attractive integrated offerings of video, broadband and wireless services. Providing more flexible and integrated
services to customers will enable us to compete more effectively against other video providers as well as other technology,
media and communications companies. In addition, we believe that the acquisition will result in cost savings, especially in
the area of video content costs, and other potential synergies enabling us to expand and enhance our broadband and video
options across multiple mobile and fixed devices. 
 
Achieving these results will depend upon obtaining governmental approvals on favorable terms within the time limits
contemplated by the parties. Delays in closing, including as a result of delays in obtaining regulatory approval, could
divert attention from ongoing operations on the part of management and employees, adversely affecting customers and
suppliers and therefore revenues. If such approvals are obtained and the transaction is consummated, then we must integrate
a large number of operational and administrative systems, which may involve significant management time and create
uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and
charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in
the past, delays in the process could have a material adverse effect on our revenues, expenses, operating results and
financial condition. This acquisition also will increase the amount of debt on our balance sheet (both Time Warner's debt
and the indebtedness which may be needed to pay a portion of the purchase price) leading to additional interest expense
and, due to additional shares being issued, will result in additional cash being required for any dividends declared. Both
of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and
declare future dividends. In addition, events outside of our control, including changes in regulation and laws as well as
economic trends, could adversely affect our ability to realize the expected benefits from this acquisition. 
 
51 
 
AT&T INC. 
 
SEPTEMBER 30, 2016 
 
PART II - OTHER INFORMATION - CONTINUED 
 
Dollars in millions except per share amounts 
 
 Item 2. Unregistered Sales                                                                                                         

- More to follow, for following part double click  ID:nRSQ5061Pf