UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
 
x
 
 
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
or
 
 
 
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from           to
 
Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                                                                                                                                             Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                                                                                                                                             Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
[X]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ]
(Do not check if a smaller reporting company)
Smaller reporting company
[   ]
     
Emerging growth company
[   ]

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
                                                                                                                                                                              Yes [   ]   No [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                              Yes [   ]   No [X]
At October 31, 2017, there were 6,139 million common shares outstanding.
 
 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
Dollars in millions except per share amounts
 
(Unaudited)
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Operating Revenues
                       
Service
 
$
36,378
   
$
37,272
   
$
109,372
   
$
111,515
 
Equipment
   
3,290
     
3,618
     
9,498
     
10,430
 
Total operating revenues
   
39,668
     
40,890
     
118,870
     
121,945
 
                                 
Operating Expenses
                               
Cost of services and sales
                               
   Equipment
   
4,191
     
4,455
     
12,177
     
13,090
 
   Broadcast, programming and operations
   
5,284
     
4,909
     
15,156
     
14,239
 
   Other cost of services (exclusive of depreciation and
         amortization shown separately below)
   
9,431
     
9,526
     
27,714
     
28,436
 
Selling, general and administrative
   
8,317
     
9,013
     
24,917
     
26,363
 
Depreciation and amortization
   
6,042
     
6,579
     
18,316
     
19,718
 
Total operating expenses
   
33,265
     
34,482
     
98,280
     
101,846
 
Operating Income
   
6,403
     
6,408
     
20,590
     
20,099
 
Other Income (Expense)
                               
Interest expense
   
(1,686
)
   
(1,224
)
   
(4,374
)
   
(3,689
)
Equity in net income (loss) of affiliates
   
11
     
16
     
(148
)
   
57
 
Other income (expense) – net
   
246
     
(7
)
   
354
     
154
 
Total other income (expense)
   
(1,429
)
   
(1,215
)
   
(4,168
)
   
(3,478
)
Income Before Income Taxes
   
4,974
     
5,193
     
16,422
     
16,621
 
Income tax expense
   
1,851
     
1,775
     
5,711
     
5,803
 
Net Income
   
3,123
     
3,418
     
10,711
     
10,818
 
Less: Net Income Attributable to Noncontrolling Interest
   
(94
)
   
(90
)
   
(298
)
   
(279
)
Net Income Attributable to AT&T
 
$
3,029
   
$
3,328
   
$
10,413
   
$
10,539
 
Basic Earnings Per Share Attributable to AT&T
 
$
0.49
   
$
0.54
   
$
1.69
   
$
1.70
 
Diluted Earnings Per Share Attributable to AT&T
 
$
0.49
   
$
0.54
   
$
1.69
   
$
1.70
 
Weighted Average Number of Common Shares
   Outstanding – Basic (in millions)
   
6,162
     
6,168
     
6,164
     
6,171
 
Weighted Average Number of Common Shares
   Outstanding with Dilution (in millions)
   
6,182
     
6,189
     
6,184
     
6,191
 
Dividends Declared Per Common Share
 
$
0.49
   
$
0.48
   
$
1.47
   
$
1.44
 
See Notes to Consolidated Financial Statements.
 
 
2

 
AT&T INC.
                       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                   
Dollars in millions
                       
(Unaudited)
                       
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
3,123
   
$
3,418
   
$
10,711
   
$
10,818
 
Other comprehensive income (loss), net of tax:
                               
    Foreign currency:
                               
        Foreign currency translation adjustment (includes $10,
            $21, $6 and $21 attributable to noncontrolling interest),
            net of taxes of $74, $(91), $580 and $35
   
151
     
(225
)
   
490
     
(51
)
    Available-for-sale securities:
                               
        Net unrealized gains (losses), net of taxes of $28, $28, $72
            and $15
   
45
     
46
     
128
     
25
 
        Reclassification adjustment included in net income, net of
            taxes of $(50), $(3), $(54) and $(3)
   
(79
)
   
(5
)
   
(86
)
   
(5
)
     Cash flow hedges:
                               
        Net unrealized gains (losses), net of taxes of $178, $240,
            $(94) and $99
   
330
     
446
     
(174
)
   
183
 
        Reclassification adjustment included in net income, net of
            taxes of $5, $5, $15 and $15
   
10
     
10
     
29
     
29
 
     Defined benefit postretirement plans:
                               
        Net prior service credit arising during period, net of
            taxes of $0, $0, $594 and $0
   
-
     
-
     
969
     
-
 
        Amortization of net prior service credit included in net
            income, net of taxes of $(157), $(131), $(447) and $(393)
   
(256
)
   
(215
)
   
(731
)
   
(644
)
Other comprehensive income (loss)
   
201
     
57
     
625
     
(463
)
Total comprehensive income
   
3,324
     
3,475
     
11,336
     
10,355
 
Less: Total comprehensive income attributable to
        noncontrolling interest
   
(104
)
   
(111
)
   
(304
)
   
(300
)
Total Comprehensive Income Attributable to AT&T
 
$
3,220
   
$
3,364
   
$
11,032
   
$
10,055
 
See Notes to Consolidated Financial Statements.
                               
 
3

 
AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
   
September 30,
   
December 31,
 
   
2017
   
2016
 
Assets
 
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
 
$
48,499
   
$
5,788
 
Accounts receivable - net of allowances for doubtful accounts of $741 and $661
   
15,876
     
16,794
 
Prepaid expenses
   
1,258
     
1,555
 
Other current assets
   
10,724
     
14,232
 
Total current assets
   
76,357
     
38,369
 
Property, plant and equipment
   
326,240
     
319,648
 
   Less: accumulated depreciation and amortization
   
(199,778
)
   
(194,749
)
Property, Plant and Equipment – Net
   
126,462
     
124,899
 
Goodwill
   
105,668
     
105,207
 
Licenses
   
96,071
     
94,176
 
Customer Lists and Relationships – Net
   
11,573
     
14,243
 
Other Intangible Assets – Net
   
7,775
     
8,441
 
Investments in Equity Affiliates
   
1,627
     
1,674
 
Other Assets
   
18,332
     
16,812
 
Total Assets
 
$
443,865
   
$
403,821
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Debt maturing within one year
 
$
8,551
   
$
9,832
 
Accounts payable and accrued liabilities
   
28,928
     
31,138
 
Advanced billing and customer deposits
   
4,503
     
4,519
 
Accrued taxes
   
2,703
     
2,079
 
Dividends payable
   
3,008
     
3,008
 
Total current liabilities
   
47,693
     
50,576
 
Long-Term Debt
   
154,728
     
113,681
 
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
   
64,381
     
60,128
 
Postemployment benefit obligation
   
31,231
     
33,578
 
Other noncurrent liabilities
   
19,723
     
21,748
 
Total deferred credits and other noncurrent liabilities
   
115,335
     
115,454
 
                 
Stockholders' Equity
               
Common stock ($1 par value, $14,000,000,000 authorized at September 30, 2017 and
   December 31, 2016: issued 6,495,231,088 at September 30, 2017 and December 31, 2016)
   
6,495
     
6,495
 
Additional paid-in capital
   
89,527
     
89,604
 
Retained earnings
   
36,074
     
34,734
 
Treasury stock (355,897,357 at September 30, 2017 and 356,237,141
   at December 31, 2016, at cost)
   
(12,716
)
   
(12,659
)
Accumulated other comprehensive income
   
5,580
     
4,961
 
Noncontrolling interest
   
1,149
     
975
 
Total stockholders' equity
   
126,109
     
124,110
 
Total Liabilities and Stockholders' Equity
 
$
443,865
   
$
403,821
 
See Notes to Consolidated Financial Statements.
               
 
4

 
AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
           
   
Nine months ended
 
   
September 30,
 
   
2017
   
2016
 
Operating Activities
           
Net income
 
$
10,711
   
$
10,818
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
   
18,316
     
19,718
 
   Undistributed loss (earnings) from investments in equity affiliates
   
171
     
(22
)
   Provision for uncollectible accounts
   
1,216
     
1,036
 
   Deferred income tax expense
   
3,254
     
3,011
 
   Net loss (gain) from sale of investments, net of impairments
   
(114
)
   
(88
)
   Actuarial loss (gain) on pension and postretirement benefits
   
(259
)
   
-
 
Changes in operating assets and liabilities:
               
   Accounts receivable
   
(652
)
   
(1,108
)
   Other current assets
   
(106
)
   
1,805
 
   Accounts payable and other accrued liabilities
   
(1,437
)
   
(1,173
)
   Equipment installment receivables and related sales
   
1,116
     
207
 
   Deferred fulfillment costs
   
(1,102
)
   
(1,883
)
Retirement benefit funding
   
(420
)
   
(770
)
Other - net
   
(1,420
)
   
(2,349
)
Total adjustments
   
18,563
     
18,384
 
Net Cash Provided by Operating Activities
   
29,274
     
29,202
 
                 
Investing Activities
               
Capital expenditures:
               
   Purchase of property and equipment
   
(15,756
)
   
(15,283
)
   Interest during construction
   
(718
)
   
(669
)
Acquisitions, net of cash acquired
   
1,154
     
(2,922
)
Dispositions
   
56
     
184
 
(Purchases) sales of securities, net
   
(2
)
   
501
 
Net Cash Used in Investing Activities
   
(15,266
)
   
(18,189
)
                 
Financing Activities
               
Issuance of long-term debt
   
46,761
     
10,140
 
Repayment of long-term debt
   
(10,309
)
   
(10,688
)
Purchase of treasury stock
   
(460
)
   
(444
)
Issuance of treasury stock
   
26
     
137
 
Dividends paid
   
(9,030
)
   
(8,850
)
Other
   
1,715
     
(534
)
Net Cash Provided by (Used in) Financing Activities
   
28,703
     
(10,239
)
Net increase in cash and cash equivalents
   
42,711
     
774
 
Cash and cash equivalents beginning of year
   
5,788
     
5,121
 
Cash and Cash Equivalents End of Period
 
$
48,499
   
$
5,895
 
Cash paid during the nine months ended September 30 for:
               
   Interest
 
$
5,031
   
$
4,430
 
   Income taxes, net of refunds
 
$
1,861
   
$
3,166
 
See Notes to Consolidated Financial Statements.
 
 
5

 
AT&T INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
Dollars and shares in millions except per share amounts
 
(Unaudited)
 
   
September 30, 2017
 
   
Shares
   
Amount
 
Common Stock
           
Balance at beginning of year
   
6,495
   
$
6,495
 
Issuance of stock
   
-
     
-
 
Balance at end of period
   
6,495
   
$
6,495
 
                 
Additional Paid-In Capital
               
Balance at beginning of year
         
$
89,604
 
Issuance of treasury stock
           
4
 
Share-based payments
           
(81
)
Balance at end of period
         
$
89,527
 
                 
Retained Earnings
               
Balance at beginning of year
         
$
34,734
 
Net income attributable to AT&T ($1.69 per diluted share)
           
10,413
 
Dividends to stockholders ($1.47 per share)
           
(9,075
)
Other
           
2
 
Balance at end of period
         
$
36,074
 
                 
Treasury Stock
               
Balance at beginning of year
   
(356
)
 
$
(12,659
)
Repurchase and acquisition of common stock
   
(14
)
   
(530
)
Issuance of treasury stock
   
14
     
473
 
Balance at end of period
   
(356
)
 
$
(12,716
)
                 
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
               
Balance at beginning of year
         
$
4,961
 
Other comprehensive income attributable to AT&T
           
619
 
Balance at end of period
         
$
5,580
 
                 
Noncontrolling Interest
               
Balance at beginning of year
         
$
975
 
Net income attributable to noncontrolling interest
           
298
 
Distributions
           
(270
)
Acquisition of noncontrolling interest
           
140
 
Translation adjustments attributable to noncontrolling interest, net of taxes
           
6
 
Balance at end of period
         
$
1,149
 
                 
Total Stockholders' Equity at beginning of year
         
$
124,110
 
Total Stockholders' Equity at end of period
         
$
126,109
 
See Notes to Consolidated Financial Statements.
               
 
6

 
AT&T INC.
SEPTEMBER 30, 2017

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 digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. The results for the interim periods are not necessarily indicative of those for the full year.

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
 
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The consolidated financial statements include the accounts of the Company and our subsidiaries and affiliates over which we exercise control.

All significant intercompany transactions are eliminated in the consolidation process. Investments in unconsolidated subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates.

Recently Adopted Accounting Standards
Income Taxes   As of January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either sale or transfer to a third party or recognition of depreciation or impairment.

New Accounting Standards
Pension and Other Postretirement Benefits  In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and other components of our net periodic benefit cost in "other income (expense) – net" in our consolidated statements of income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for our components of net periodic benefit cost.

Revenue Recognition   In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606), and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard using the "modified retrospective method." Under that method, we will apply the rules to all open contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.
 
7

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and nine months ended September 30, 2017 and 2016, is shown in the table below:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Numerators
                       
Numerator for basic earnings per share:
                       
   Net Income
 
$
3,123
   
$
3,418
   
$
10,711
   
$
10,818
 
   Less: Net income attributable to noncontrolling interest
   
(94
)
   
(90
)
   
(298
)
   
(279
)
   Net Income attributable to AT&T
   
3,029
     
3,328
     
10,413
     
10,539
 
   Dilutive potential common shares:
                               
      Share-based payment
   
3
     
3
     
9
     
9
 
Numerator for diluted earnings per share
 
$
3,032
   
$
3,331
   
$
10,422
   
$
10,548
 
Denominators (000,000)
                               
Denominator for basic earnings per share:
                               
   Weighted average number of common shares outstanding
   
6,162
     
6,168
     
6,164
     
6,171
 
   Dilutive potential common shares:
                               
      Share-based payment (in shares)
   
20
     
21
     
20
     
20
 
Denominator for diluted earnings per share
   
6,182
     
6,189
     
6,184
     
6,191
 
Basic earnings per share attributable to AT&T
 
$
0.49
   
$
0.54
   
$
1.69
   
$
1.70
 
Diluted earnings per share attributable to AT&T
 
$
0.49
   
$
0.54
   
$
1.69
   
$
1.70
 
 
 
8

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.

 
Foreign Currency Translation Adjustment
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Defined Benefit Postretirement Plans
 
Accumulated Other Comprehensive Income
Balance as of December 31, 2016
$
(1,995)
 
$
541
 
$
744
 
$
5,671
 
$
4,961
Other comprehensive income
   (loss) before reclassifications
 
484
   
128
   
(174)
   
969
   
1,407
Amounts reclassified
   from accumulated OCI
 
-
1
 
 
(86)
1
 
 
29
2
 
 
(731)
3
 
 
(788)
Net other comprehensive
   income (loss)
 
484
   
42
   
(145)
   
238
   
619
Balance as of September 30, 2017
$
(1,511)
 
$
583
 
$
599
 
$
5,909
 
$
5,580
                               
 
Foreign Currency Translation Adjustment
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Defined Benefit Postretirement Plans
 
Accumulated Other Comprehensive Income
Balance as of December 31, 2015
$
(1,198)
 
$
484
 
$
16
 
$
6,032
 
$
5,334
Other comprehensive income
   (loss) before reclassifications
 
(72)
   
25
   
183
   
-
   
136
Amounts reclassified
   from accumulated OCI
 
-
1
 
 
(5)
1
 
 
29
2
 
 
(644)
3
 
 
(620)
Net other comprehensive
   income (loss)
 
(72)
   
20
   
212
   
(644)
   
(484)
Balance as of September 30, 2016
$
(1,270)
 
$
504
 
$
228
 
$
5,388
 
$
4,850
 1
(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
 2
(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 6).
 3
The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor,
are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. 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 segment operating performance. EBITDA does not give effect
 
9

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
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.
 
The Business Solutions 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 to provide a complete communications solution to our business customers.

The Entertainment Group 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 our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

The International 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 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.

In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

Certain operating items are not allocated to our business segments, and those include:
·
Acquisition-related items which consists of (1) items associated with the merger and integration of acquired businesses and (2) the noncash amortization of intangible assets acquired in acquisitions.
·
Certain significant items which consists of (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) losses resulting from abandonment or impairment of assets and (4) other items for which the segments are not being evaluated.

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.
 
10

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
For the three months ended September 30, 2017
 
   
Revenues
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
17,061
   
$
10,233
   
$
6,828
   
$
2,325
   
$
4,503
   
$
-
   
$
4,503
 
Entertainment Group
   
12,648
     
9,953
     
2,695
     
1,379
     
1,316
     
(6
)
   
1,310
 
Consumer Mobility
   
7,748
     
4,551
     
3,197
     
877
     
2,320
     
-
     
2,320
 
International
   
2,099
     
1,937
     
162
     
304
     
(142
)
   
17
     
(125
)
Segment Total
   
39,556
     
26,674
     
12,882
     
4,885
     
7,997
   
$
11
   
$
8,008
 
Corporate and Other
   
201
     
89
     
112
     
21
     
91
                 
Acquisition-related items
   
-
     
134
     
(134
)
   
1,136
     
(1,270
)
               
Certain significant items
   
(89
)
   
326
     
(415
)
   
-
     
(415
)
               
AT&T Inc.
 
$
39,668
   
$
27,223
   
$
12,445
   
$
6,042
   
$
6,403
                 
 
For the nine months ended September 30, 2017
 
   
Revenues
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
51,016
   
$
30,722
   
$
20,294
   
$
6,972
   
$
13,322
   
$
-
   
$
13,322
 
Entertainment Group
   
37,953
     
29,112
     
8,841
     
4,256
     
4,585
     
(23
)
   
4,562
 
Consumer Mobility
   
23,279
     
13,599
     
9,680
     
2,621
     
7,059
     
-
     
7,059
 
International
   
6,054
     
5,468
     
586
     
905
     
(319
)
   
62
     
(257
)
Segment Total
   
118,302
     
78,901
     
39,401
     
14,754
     
24,647
   
$
39
   
$
24,686
 
Corporate and Other
   
657
     
397
     
260
     
54
     
206
                 
Acquisition-related items
   
-
     
622
     
(622
)
   
3,508
     
(4,130
)
               
Certain significant items
   
(89
)
   
44
     
(133
)
   
-
     
(133
)
               
AT&T Inc.
 
$
118,870
   
$
79,964
   
$
38,906
   
$
18,316
   
$
20,590
                 
 
 
11

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
For the three months ended September 30, 2016
 
 
Revenues
 
Operations
and Support
Expenses
 
EBITDA
 
Depreciation
and
Amortization
 
Operating
Income (Loss)
 
Equity in Net
Income (Loss) of
Affiliates
 
Segment
Contribution
 
Business Solutions
 
$
17,767
   
$
10,925
   
$
6,842
   
$
2,539
   
$
4,303
   
$
-
   
$
4,303
 
Entertainment Group
   
12,720
     
9,728
     
2,992
     
1,504
     
1,488
     
-
     
1,488
 
Consumer Mobility
   
8,267
     
4,751
     
3,516
     
944
     
2,572
     
-
     
2,572
 
International
   
1,879
     
1,640
     
239
     
293
     
(54
)
   
1
     
(53
)
Segment Total
   
40,633
     
27,044
     
13,589
     
5,280
     
8,309
   
$
1
   
$
8,310
 
Corporate and Other
   
270
     
270
     
-
     
17
     
(17
)
               
Acquisition-related items
   
-
     
290
     
(290
)
   
1,282
     
(1,572
)
               
Certain significant items
   
(13
)
   
299
     
(312
)
   
-
     
(312
)
               
AT&T Inc.
 
$
40,890
   
$
27,903
   
$
12,987
   
$
6,579
   
$
6,408
                 
 
For the nine months ended September 30, 2016
 
 
Revenues
 
Operations
and Support
Expenses
 
EBITDA
 
Depreciation
and
Amortization
 
Operating
Income (Loss)
 
Equity in Net
Income (Loss) of
Affiliates
 
Segment
Contribution
 
Business Solutions
 
$
52,955
   
$
32,584
   
$
20,371
   
$
7,568
   
$
12,803
   
$
-
   
$
12,803
 
Entertainment Group
   
38,089
     
28,875
     
9,214
     
4,481
     
4,733
     
1
     
4,734
 
Consumer Mobility
   
24,781
     
14,343
     
10,438
     
2,798
     
7,640
     
-
     
7,640
 
International
   
5,374
     
4,951
     
423
     
868
     
(445
)
   
24
     
(421
)
Segment Total
   
121,199
     
80,753
     
40,446
     
15,715
     
24,731
   
$
25
   
$
24,756
 
Corporate and Other
   
759
     
940
     
(181
)
   
54
     
(235
)
               
Acquisition-related items
   
-
     
818
     
(818
)
   
3,949
     
(4,767
)
               
Certain significant items
   
(13
)
   
(383
)
   
370
     
-
     
370
                 
AT&T Inc.
 
$
121,945
   
$
82,128
   
$
39,817
   
$
19,718
   
$
20,099
                 
 
 
12

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our
consolidated statements of income. 
                         
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Business Solutions
 
$
4,503
   
$
4,303
   
$
13,322
   
$
12,803
 
Entertainment Group
   
1,310
     
1,488
     
4,562
     
4,734
 
Consumer Mobility
   
2,320
     
2,572
     
7,059
     
7,640
 
International
   
(125
)
   
(53
)
   
(257
)
   
(421
)
Segment Contribution
   
8,008
     
8,310
     
24,686
     
24,756
 
Reconciling Items:
                               
  Corporate and Other
   
91
     
(17
)
   
206
     
(235
)
  Merger and integration charges
   
(134
)
   
(290
)
   
(622
)
   
(818
)
  Amortization of intangibles acquired
   
(1,136
)
   
(1,282
)
   
(3,508
)
   
(3,949
)
  Actuarial gain (loss)
   
-
     
-
     
259
     
-
 
  Employee separation costs
   
(208
)
   
(260
)
   
(268
)
   
(314
)
  Gain (loss) on wireless spectrum transactions
   
-
     
(22
)
   
181
     
714
 
  Natural disaster costs and revenue credits
   
(207
)
   
(30
)
   
(207
)
   
(30
)
  Venezuela devaluation
   
-
     
-
     
(98
)
   
-
 
  Segment equity in net (income) loss of affiliates
   
(11
)
   
(1
)
   
(39
)
   
(25
)
AT&T Operating Income
   
6,403
     
6,408
     
20,590
     
20,099
 
Interest expense
   
1,686
     
1,224
     
4,374
     
3,689
 
Equity in net income (loss) of affiliates
   
11
     
16
     
(148
)
   
57
 
Other income (expense) - net
   
246
     
(7
)
   
354
     
154
 
Income Before Income Taxes
 
$
4,974
   
$
5,193
   
$
16,422
   
$
16,621
 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility II), the primary holding company for our domestic wireless business, to the pension trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of $9,354 at September 30, 2017. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by Mobility II to the trust, in equal amounts and accounted for as contributions. Mobility II distributed $420 to the trust during the nine months ended September 30, 2017. So long as those distributions are made, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.

The preferred equity interest is not transferable by the trust except through its put and call features. In early September 2017, AT&T notified the trust and the fiduciary of the preferred equity interest that AT&T committed that it would not exercise its call option of the preferred interest until at least September 9, 2022, which resulted in an increase in the fair value of the preferred interest of approximately $1,245.
 
13

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. During the second quarter of 2017, a substantive plan change involving the frequency of considering potential health reimbursement account credit increases was communicated to our retirees. This plan change triggered a remeasurement of our postretirement obligations and resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $1,563. Such credits amortize through earnings over a period approximating the average service period to full eligibility. Upon our adoption of ASU 2017-07, the amortization of these prior service credits will be recorded in other income (expense) – net.

The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Pension cost:
                       
   Service cost – benefits earned during the period
 
$
282
   
$
278
   
$
846
   
$
834
 
   Interest cost on projected benefit obligation
   
484
     
495
     
1,452
     
1,485
 
   Expected return on assets
   
(783
)
   
(778
)
   
(2,350
)
   
(2,336
)
   Amortization of prior service credit
   
(31
)
   
(26
)
   
(93
)
   
(77
)
   Net pension (credit) cost
 
$
(48
)
 
$
(31
)
 
$
(145
)
 
$
(94
)
                                 
Postretirement cost:
                               
   Service cost – benefits earned during the period
 
$
32
   
$
48
   
$
107
   
$
144
 
   Interest cost on accumulated postretirement benefit obligation
   
193
     
243
     
617
     
729
 
   Expected return on assets
   
(81
)
   
(88
)
   
(240
)
   
(266
)
   Amortization of prior service credit
   
(382
)
   
(320
)
   
(1,084
)
   
(958
)
   Actuarial (gain) loss
   
-
     
-
     
(259
)
   
-
 
   Net postretirement (credit) cost
 
$
(238
)
 
$
(117
)
 
$
(859
)
 
$
(351
)
                                 
   Combined net pension and postretirement (credit) cost
 
$
(286
)
 
$
(148
)
 
$
(1,004
)
 
$
(445
)

As part of our second-quarter 2017 remeasurement, we decreased the weighted-average discount rate used to measure our postretirement benefit obligation to 4.10%. The discount rate in effect for determining postretirement service and interest costs after remeasurement is 4.50% and 3.30%, respectively.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the third quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above were $22 and $23. For the first nine months of 2017 and 2016, net supplemental pension benefit costs were $67 and $70.
 
14

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2
Inputs to the valuation methodology include:
·
Quoted prices for similar assets and liabilities in active markets.
·
Quoted prices for identical or similar assets or liabilities in inactive markets.
·
Inputs other than quoted market prices that are observable for the asset or liability.
·
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
·
Fair value is often based on developed models in which there are few, if any, external observations.

The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2016.

Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:

 
September 30, 2017
 
December 31, 2016
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures 1
 
$
162,450
   
$
171,025
   
$
122,381
   
$
128,726
 
Bank borrowings
   
2
     
2
     
4
     
4
 
Investment securities
   
2,565
     
2,565
     
2,587
     
2,587
 
1 Includes credit agreement borrowings.
                               

The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
 
15

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2017 and December 31, 2016:

   
September 30, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
   Domestic equities
 
$
1,274
   
$
-
   
$
-
   
$
1,274
 
   International equities
   
380
     
-
     
-
     
380
 
   Fixed income bonds
   
-
     
659
     
-
     
659
 
Asset Derivatives 1
                               
   Interest rate swaps
   
-
     
45
     
-
     
45
 
   Cross-currency swaps
   
-
     
967
     
-
     
967
 
Liability Derivatives 1
                               
   Interest rate swaps
   
-
     
(34
)
   
-
     
(34
)
   Cross-currency swaps
   
-
     
(1,809
)
   
-
     
(1,809
)
Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of 
  interest rate swaps, "Other current assets" in our consolidated balance sheets. 

   
December 31, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
   Domestic equities
 
$
1,215
   
$
-
   
$
-
   
$
1,215
 
   International equities
   
594
     
-
     
-
     
594
 
   Fixed income bonds
   
-
     
508
     
-
     
508
 
Asset Derivatives 1
                               
   Interest rate swaps
   
-
     
79
     
-
     
79
 
   Cross-currency swaps
   
-
     
89
     
-
     
89
 
Liability Derivatives 1
                               
   Interest rate swaps
   
-
     
(14
)
   
-
     
(14
)
   Cross-currency swaps
   
-
     
(3,867
)
   
-
     
(3,867
)
1 Derivatives  designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of 
  interest rate swaps, "Other current assets" in our consolidated balance sheets. 

Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $509 have maturities of less than one year, $33 within one to three years, $32 within three to five years and $85 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.
 
16

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the nine months ended September 30, 2017 and September 30, 2016, no ineffectiveness was measured on interest rate swaps designated as fair value hedges .

Cash Flow Hedging   We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the nine months ended September 30, 2017 and September 30, 2016, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the nine months ended September 30, 2017 and September 30, 2016, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
 
Collateral and Credit-Risk Contingency   We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2017, we had posted
17

 
 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
collateral of $837 (a deposit asset) and held collateral of $338 (a receipt liability). Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we would have been required to post additional collateral of $141. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $221. At December 31, 2016, we had posted collateral of $3,242 (a deposit asset) and held no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

 
September 30,
 
December 31,
 
 
2017
 
2016
 
Interest rate swaps
 
$
10,775
   
$
9,650
 
Cross-currency swaps
   
38,694
     
29,642
 
Total
 
$
49,469
   
$
39,292
 

Following are the related hedged items affecting our financial position and performance:
 
                         
Effect of Derivatives on the Consolidated Statements of Income
                   
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
Fair Value Hedging Relationships
2017
 
2016
 
2017
 
2016
 
Interest rate swaps (Interest expense):
                       
     Gain (Loss) on interest rate swaps
 
$
(3
)
 
$
(54
)
 
$
(51
)
 
$
17
 
     Gain (Loss) on long-term debt
   
3
     
54
     
51
     
(17
)

In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were offset against interest expense.

 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
Cash Flow Hedging Relationships
2017
 
2016
 
2017
 
2016
 
Cross-currency swaps:
                       
     Gain (Loss) recognized in accumulated OCI
 
$
429
   
$
686
   
$
(268
)
 
$
282
 
Interest rate locks:
                               
     Gain (Loss) recognized in accumulated OCI
   
79
     
-
     
-
     
-
 
     Interest income (expense) reclassified from
        accumulated OCI into income
   
(15
)
   
(15
)
   
(44
)
   
(44
)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions
Auction 1000 On April 13, 2017, the Federal Communications Commission (FCC) announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017, which was recorded as cash from investing activities on our consolidated statements of cash flows.
 
18

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Dispositions
YP Holdings LLC  In June 2017, YP Holdings LLC was acquired by Dex Media. Our results include a gain of $36 for our portion of the proceeds.

Pending Acquisitions
Time Warner Inc.  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, 2017, the total transaction value is approximately $105,834. 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.

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. The transaction has been approved by all requisite foreign jurisdictions and remains subject to review by the U.S. Department of Justice. 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. On October 20, 2017, to facilitate obtaining final regulatory approval required to close the merger, AT&T and Time Warner elected to extend the October 22, 2017 termination date of the agreement for a short period of time .
 
Other Events
FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to build, operate and maintain the network. AT&T will construct and operate the network and provide sustainability payments to FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to be in the $75-$100 range annually, and when adjusted for inflation, we expect to be in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.

States have until December 28, 2017 to elect to opt-out of the federally funded program, after which any state that did not formally make an election will automatically be opted-in. We do not expect FirstNet to materially impact our 2017 results.

19

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of September 30, 2017 and December 31, 2016, gross equipment installment receivables of $4,176 and $5,665 were included on our consolidated balance sheets, of which $2,485 and $3,425 are notes receivable that are included in "Accounts receivable - net."

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $4,019.

The following table sets forth a summary of equipment installment receivables sold during the three and nine months ended September 30, 2017 and 2016:

 
Three months ended
   
Nine months ended
 
 
September 30,
   
September 30,
 
 
2017
   
2016
   
2017
   
2016
 
Gross receivables sold
 
$
1,619
   
$
1,485
   
$
6,217
   
$
5,812
 
Net receivables sold 1
   
1,478
     
1,336
     
5,698
     
5,263
 
Cash proceeds received
   
1,292
     
891
     
4,139
     
3,538
 
Deferred purchase price recorded
   
285
     
463
     
1,767
     
1,745
 
Guarantee obligation recorded
   
65
     
-
     
139
     
-
 
Receivables net of allowance, imputed interest and trade-in right guarantees.

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
 
20

 
AT&T INC.
SEPTEMBER 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price during the three months and nine months ended September 30, 2017 and 2016:

 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
Fair value of repurchased receivables
 
$
567
   
$
749
   
$
1,281
   
$
1,281
 
Carrying value of deferred purchase price
   
507
     
722
     
1,147
     
1,261
 
Gain (loss) on repurchases 1
 
$
60
   
$
27
   
$
134
   
$
20
 
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income. 

At September 30, 2017 and December 31, 2016, our deferred purchase price receivable was $3,170 and $3,090, respectively, of which $2,023 and $1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.

Derecognized Installment Receivables
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.

   
2017
 
Outstanding derecognized receivables at January 1,
 
$
7,232
 
Gross receivables sold
   
6,217
 
Collections on cash purchase price
   
(3,556
)
Collections on deferred purchase price
   
(665
)
Trade ins and other
   
(295
)
Fair value of repurchased receivables
   
(1,281
)
Outstanding derecognized receivables at September 30,
 
$
7,652
 
 
 
21

 
AT&T INC.
SEPTEMBER 30, 2017

Item 2.  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

AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. 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.

Consolidated Results  Our financial results in the third quarter and for the first nine months of 2017 and 2016 are summarized as follows:

   
Third Quarter
   
Nine-Month Period
 
               
Percent
               
Percent
 
   
2017
   
2016
   
Change
   
2017
   
2016
   
Change
 
Operating Revenues
                                   
   Service
 
$
36,378
   
$
37,272
     
(2.4
)%
 
$
109,372
   
$
111,515
     
(1.9
)%
   Equipment
   
3,290
     
3,618
     
(9.1
)
   
9,498
     
10,430
     
(8.9
)
Total Operating Revenues
   
39,668
     
40,890
     
(3.0
)
   
118,870
     
121,945
     
(2.5
)
                                                 
Operating expenses
                                               
   Cost of services and sales
                                               
      Equipment
   
4,191
     
4,455
     
(5.9
)
   
12,177
     
13,090
     
(7.0
)
      Broadcast, programming and
        operations
   
5,284
     
4,909
     
7.6
     
15,156
     
14,239
     
6.4
 
      Other cost of services
   
9,431
     
9,526
     
(1.0
)
   
27,714
     
28,436
     
(2.5
)
   Selling, general and administrative
   
8,317
     
9,013
     
(7.7
)
   
24,917
     
26,363
     
(5.5
)
   Depreciation and amortization
   
6,042
     
6,579
     
(8.2
)
   
18,316
     
19,718
     
(7.1
)
Total Operating Expenses
   
33,265
     
34,482
     
(3.5
)
   
98,280
     
101,846
     
(3.5
)
Operating Income
   
6,403
     
6,408
     
(0.1
)
   
20,590
     
20,099
     
2.4
 
Income Before Income Taxes
   
4,974
     
5,193
     
(4.2
)
   
16,422
     
16,621
     
(1.2
)
Net Income
   
3,123
     
3,418
     
(8.6
)
   
10,711
     
10,818
     
(1.0
)
Net Income Attributable to AT&T
 
$
3,029
   
$
3,328
     
(9.0
)%
 
$
10,413
   
$
10,539
     
(1.2
)%

Overview

Operating revenues decreased $1,222, or 3.0%, in the third quarter and $3,075, or 2.5%, for the first nine months of 2017.
Service revenues decreased $894, or 2.4%, in the third quarter and $2,143, or 1.9%, for the first nine months of 2017. The decreases were primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting increased adoption of unlimited plans. Additionally, we waived $89 in service revenues for customers in areas affected by natural disasters during the third quarter of 2017. These were partially offset by increased revenues from strategic business services.

Equipment revenues decreased $328, or 9.1%, in the third quarter and $932, or 8.9%, for the first nine months of 2017. The decreases were primarily due to lower wireless handset sales and upgrades. Equipment revenue is becoming increasingly unpredictable as many customers are choosing to upgrade devices less frequently or are bringing their own devices.

Operating   expenses decreased $1,217, or 3.5%, in the third quarter and $3,566, or 3.5%, for the first nine months of 2017.
Equipment expenses decreased $264, or 5.9%, in the third quarter and $913, or 7.0%, for the first nine months of 2017. The decreases were driven by a decline in devices sold reflecting a change in customer buying habits.
 
22

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
Broadcast, programming and operations expenses increased $375, or 7.6%, in the third quarter and $917, or 6.4%, for the first nine months of 2017, reflecting annual content cost increases and additional programming costs for DIRECTV NOW.

Other cost of services expenses decreased $95, or 1.0%, in the third quarter and $722, or 2.5%, for the first nine months of 2017. The decreases reflect our continued focus on cost management and the utilization of automation and digitalization where appropriate, as well as lower Federal Universal Service Fund (USF) rates and fees. The decrease for the first nine months also includes an actuarial gain from the second-quarter 2017 remeasurement of our postretirement benefit obligation. These expense declines were partially offset by an increase in amortization of deferred customer fulfillment cost.

Selling, general and administrative   expenses decreased $696, or 7.7%, in the third quarter and $1,446, or 5.5%, for the first nine months of 2017. The decreases were attributable to our disciplined cost management, lower selling and wireless commission costs from reduced volumes, fewer advertising costs, and, for the nine month period, the actuarial gain resulting from the second-quarter remeasurement of our postretirement benefit obligation. The decreases in the third quarter were partially offset by costs arising from natural disasters, and, for the first nine months, lower gains on wireless spectrum transactions during 2017 than in the comparable period of 2016.   We are continuing to assess network damage from the natural disasters that occurred in the third quarter as well as the recent fires in California, and expect additional pressure in the fourth quarter.

Depreciation and amortization expense decreased $537, or 8.2%, in the third quarter and $1,402, or 7.1%, for the first nine months of 2017. Depreciation expense decreased $393, or 7.4%, in the third quarter and $962, or 6.1%, for the first nine months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease in the third quarter and $980 of the decrease for the first nine months. Also contributing to lower depreciation expenses were network assets becoming fully depreciated. These decreases were partially offset by increases resulting from ongoing capital spending for upgrades and expansion.

Amortization expense decreased $144, or 11.2%, in the third quarter and $440, or 11.1%, for the first nine months of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.

Operating   income decreased $5, or 0.1%, in the third quarter and increased $491, or 2.4%, for the first nine months of 2017. Our operating income margin in the third quarter increased from 15.7% in 2016 to 16.1% in 2017, and for the first nine months increased from 16.5% in 2016 to 17.3% in 2017.

Interest expense increased $462, or 37.7%, in the third quarter and $685, or 18.6%, for the first nine months of 2017. The increases were primarily due to higher debt balances in anticipation of closing our acquisition of Time Warner Inc. (Time Warner) and an increase in average interest rates when compared to the prior year. Financing fees related to pending acquisitions also contributed to higher interest expense in 2017.

Equity in net income (loss) of affiliates decreased $5, or 31.3%, in the third quarter and $205 for the first nine months of 2017, predominantly from losses from our legacy publishing business (which we sold in June 2017), partially offset by income from our investments in video-related businesses.

Other income (expense) – net increased $253 in the third quarter and $200 for the first nine months. The increases were primarily due to higher net gains from the sale of non-strategic assets and investments of $123 and $26, respectively, and growth in interest and dividend income of $91 and $146, including interest on cash held in anticipation of closing our acquisition of Time Warner.

Income taxes increased $76, or 4.3%, in the third quarter and decreased $92, or 1.6%, for the first nine months of 2017. Our effective tax rate was 37.2% in the third quarter and 34.8% for the first nine months of 2017, as compared to 34.2% in the third quarter and 34.9% for the first nine months of 2016. The increase in the third quarter was primarily due to state-level legislation changes that resulted in a remeasurement of our deferred tax liabilities offset by lower income before income taxes. The decrease for the first nine months of 2017 was primarily due to lower income before income taxes and the
 
23

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
recognition of tax benefits related to the restructuring of a portion of our wireless business offset by state-level legislation changes.
 
Selected Financial and Operating Data
           
   
September 30,
 
Subscribers and connections in (000s)
 
2017
   
2016
 
Domestic wireless subscribers
   
138,826
     
133,338
 
Mexican wireless subscribers
   
13,779
     
10,698
 
North American wireless subscribers
   
152,605
     
144,036
 
                 
North American branded subscribers
   
106,098
     
100,821
 
North American branded net additions
   
2,782
     
3,881
 
                 
Domestic satellite and over-the-top video subscribers
   
21,392
     
20,777
 
AT&T U-verse® (U-verse) video subscribers
   
3,718
     
4,544
 
Latin America satellite video subscribers 1
   
13,490
     
12,476
 
Total video subscribers
   
38,600
     
37,797
 
                 
Total domestic broadband connections
   
15,715
     
15,618
 
                 
Network access lines in service
   
12,249
     
14,603
 
U-verse VoIP connections
   
5,774
     
5,707
 
                 
Debt ratio 2
   
56.4
%
   
50.1
%
Net debt ratio 3
   
39.7
%
   
47.8
%
Ratio of earnings to fixed charges 4
   
3.55
     
3.91
 
Number of AT&T employees
   
256,800
     
273,140
 
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. At June 30, 2017, SKY Mexico had 8.0 million subscribers.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.

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. 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.
 
24

 
AT&T INC.
SEPTEMBER 30, 2017

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 Business Solutions 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 to provide a complete integrated communications solution to our business customers.

The Entertainment Group 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 our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, 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 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 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.  Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our asset base.   T herefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.  In expectation of the close of our acquisition of Time Warner, we are beginning to realign our operations and strategies. We are pushing down administrative activities into the business units to better manage costs and serve our customers.

Business Solutions
                                   
Segment Results
                                   
   
Third Quarter
   
Nine-Month Period
 
   
2017
   
2016
   
Percent
Change
   
2017
   
2016
   
Percent
 Change
 
 
Segment operating revenues
                                   
     Wireless service
 
$
8,034
   
$
8,050
     
(0.2
)%
 
$
23,969
   
$
23,868
     
0.4
%
     Fixed strategic services
   
3,087
     
2,913
     
6.0
     
9,089
     
8,469
     
7.3
 
     Legacy voice and data services
   
3,434
     
4,042
     
(15.0
)
   
10,572
     
12,577
     
(15.9
)
     Other service and equipment
   
852
     
886
     
(3.8
)
   
2,513
     
2,619
     
(4.0
)
     Wireless equipment
   
1,654
     
1,876
     
(11.8
)
   
4,873
     
5,422
     
(10.1
)
Total Segment Operating Revenues
   
17,061
     
17,767
     
(4.0
)
   
51,016
     
52,955
     
(3.7
)
                                                 
Segment operating expenses
                                               
     Operations and support
   
10,233
     
10,925
     
(6.3
)
   
30,722
     
32,584
     
(5.7
)
     Depreciation and amortization
   
2,325
     
2,539
     
(8.4
)
   
6,972
     
7,568
     
(7.9
)
Total Segment Operating Expenses
   
12,558
     
13,464
     
(6.7
)
   
37,694
     
40,152
     
(6.1
)
Segment Operating Income
   
4,503
     
4,303
     
4.6
     
13,322
     
12,803
     
4.1
 
Equity in Net Income of Affiliates
   
-
     
-
     
-
     
-
     
-
     
-
 
Segment Contribution
 
$
4,503
   
$
4,303
     
4.6
%
 
$
13,322
   
$
12,803
     
4.1
%
 
25

 
AT&T INC.
SEPTEMBER 30, 2017

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

   
September 30,
   
Percent
 
(in 000s)
 
2017
   
2016
   
Change
 
Business Wireless Subscribers
                 
   Postpaid/Branded
   
51,412
     
50,014
     
2.8
%
   Reseller
   
77
     
58
     
32.8
 
   Connected devices 1
   
35,909
     
29,355
     
22.3
 
Total Business Wireless Subscribers
   
87,398
     
79,427
     
10.0
 
                         
Business IP Broadband Connections
   
1,017
     
963
     
5.6
%
1 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems.
  Excludes postpaid tablets

   
Third Quarter
   
Nine-Month Period
 
             
Percent
             
Percent
 
(in 000s)
 
2017
   
2016
 
Change
   
2017
   
2016
 
Change
 
                                 
Business Wireless Net Additions 1, 4
                               
   Postpaid/Branded
   
15
     
191
     
(92.1
)%
   
(74
)
   
509
     
-
%
   Reseller
   
2
     
1
     
-
     
3
     
(34
)
   
-
 
   Connected devices 2
   
2,292
     
1,290
     
77.7
     
7,015
     
4,067
     
72.5
 
Business Wireless Net Subscriber Additions
   
2,309
     
1,482
     
55.8
     
6,944
     
4,542
     
52.9
 
                                                 
Business Wireless Postpaid Churn 1, 3, 4
   
1.01
%
   
0.97
%
4 BP
     
1.02
%
   
0.97
%
5 BP
 
                                                 
Business IP Broadband Net Additions
   
25
     
15
     
66.7
%
   
41
     
52
     
(21.2
)%
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems.
 
  Excludes postpaid tablets.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number
 
  of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for
 
  each month of that period.
 
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.
 

Operating Revenues decreased $706, or 4.0%, in the third quarter and $1,939, or 3.7%, for the first nine months of 2017. Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in customer buying habits. These decreases were partially offset by fixed strategic services, which represent 41% of non-wireless revenues. Our revenues continue to be pressured by slower fixed business investment.

Wireless service revenues decreased $16, or 0.2%, in the third quarter and increased $101, or 0.4%, for the first nine months of 2017. The decrease in the third quarter was primarily due to customers shifting to our unlimited plans as well as fewer migrations from our Consumer Mobility segment during the quarter. The increase in the first nine months was primarily due to the migration of customers from our Consumer Mobility segment.

At September 30, 2017, we served 87.4 million subscribers, an increase of 10.0% from the prior year. Postpaid subscribers increased 2.8% from the prior year 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 churn, increased 22.3% from the prior year reflecting growth in our connected car business and other data centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT) .
 
26

 
AT&T INC.
SEPTEMBER 30, 2017

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 effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the third quarter, business wireless postpaid churn increased to 1.01% in 2017 from 0.97% in 2016, and for the first nine months increased to 1.02% in 2017 from 0.97% in 2016.

Fixed strategic services revenues increased $174, or 6.0%, in the third quarter and $620, or 7.3%, for the first nine months of 2017. Our revenues increased in the third quarter and first nine months of 2017 primarily due to: Ethernet of $77 and $243; Dedicated Internet services of $46 and $150; and VoIP of $41 and $159, respectively.

Legacy wired voice and data service revenues decreased $608, or 15.0%, in the third quarter and $2,005, or 15.9%, for the first nine months of 2017. In the third quarter and first nine months of 2017, legacy voice billings decreased $324 and $1,068 and traditional data billings decreased $284 and $937, respectively. These decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors.

Wireless equipment revenues decreased $222, or 11.8%, in the third quarter and $549, or 10.1%, for the first nine months of 2017. The decreases were primarily due to decreases in device upgrades reflecting a change in customer buying habits.

Operations and support expenses decreased $692, or 6.3%, in the third quarter and $1,862, or 5.7%, for the first nine months of 2017. 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.

Decreased operations and support expenses in the third quarter and first nine months were primarily due to lower equipment sales and wireless upgrade transactions, which decreased equipment costs by $336 and $732, and efforts to automate and digitize our support activities improved results $146 and $543, respectively. As of September 30, 2017, approximately 45% of our network functions have been moved to software-based systems. Expense reductions also reflect lower administrative costs, contributing to a reduction in expenses of $49 and $213, and fewer traffic compensation and wireless interconnect costs, resulting in declines of $44 and $155, respectively, in access and interconnect costs. Lower selling and wireless commission costs also contributed to decreased expenses for the first nine months.

Depreciation expense decreased $214, or 8.4%, in the third quarter and $596, or 7.9%, for the first nine months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $200, or 4.6%, in the third quarter and $519, or 4.1%, for the first nine months of 2017. Our Business Solutions segment operating income margin in the third quarter increased from 24.2% in 2016 to 26.4% in 2017, and for the first nine months increased from 24.2% in 2016 to 26.1% in 2017. Our Business Solutions EBITDA margin in the third quarter increased from 38.5% in 2016 to 40.0% in 2017, and for the first nine months increased from 38.5% in 2016 to 39.8% in 2017.
 
27

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
Entertainment Group
 
Segment Results
                                   
   
Third Quarter
   
Nine-Month Period
 
   
2017
   
2016
   
Percent
Change
   
2017
   
2016
   
Percent
Change
 
 
Segment operating revenues
                                   
     Video entertainment
 
$
9,200
   
$
9,026
     
1.9
%
 
$
27,373
   
$
26,893
     
1.8
%
     High-speed internet
   
1,916
     
1,892
     
1.3
     
5,784
     
5,562
     
4.0
 
     Legacy voice and data services
   
949
     
1,168
     
(18.8
)
   
3,010
     
3,725
     
(19.2
)
     Other service and equipment
   
583
     
634
     
(8.0
)
   
1,786
     
1,909
     
(6.4
)
Total Segment Operating Revenues
   
12,648
     
12,720
     
(0.6
)
   
37,953
     
38,089
     
(0.4
)
                                                 
Segment operating expenses
                                               
     Operations and support
   
9,953
     
9,728
     
2.3
     
29,112
     
28,875
     
0.8
 
     Depreciation and amortization
   
1,379
     
1,504
     
(8.3
)
   
4,256
     
4,481
     
(5.0
)
Total Segment Operating Expenses
   
11,332
     
11,232
     
0.9
     
33,368
     
33,356
     
-
 
Segment Operating Income
   
1,316
     
1,488
     
(11.6
)
   
4,585
     
4,733
     
(3.1
)
Equity in Net Income (Loss) of Affiliates
   
(6
)
   
-
     
-
     
(23
)
   
1
     
-
 
Segment Contribution
 
$
1,310
   
$
1,488
     
(12.0
)%
 
$
4,562
   
$
4,734
     
(3.6
)%

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

   
September 30,
    Percent  
(in 000s)
  2017     2016    
Change 
 
Video Connections
                 
   Satellite
   
20,605
     
20,777
     
(0.8
)%
   U-verse
   
3,691
     
4,515
     
(18.3
)
   DIRECTV NOW 1
   
787
     
-
     
-
 
Total Video Connections
   
25,083
     
25,292
     
(0.8
)
                         
Broadband Connections
                       
   IP
   
13,367
     
12,752
     
4.8
 
   DSL
   
964
     
1,424
     
(32.3
)
Total Broadband Connections
   
14,331
     
14,176
     
1.1
 
                         
Retail Consumer Switched Access Lines
   
4,996
     
6,155
     
(18.8
)
U-verse Consumer VoIP Connections
   
5,337
     
5,378
     
(0.8
)
Total Retail Consumer Voice Connections
   
10,333
     
11,533
     
(10.4
)%
1 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial. 
 
28

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
   
Third Quarter
   
Nine-Month Period
 
               
Percent
               
Percent
 
(in 000s)
 
2017
   
2016
   
Change
   
2017
   
2016
   
Change
 
Video Net Additions
                                   
   Satellite 1
   
(251
)
   
323
     
-
%
   
(407
)
   
993
     
-
%
   U-verse 1
   
(134
)
   
(326
)
   
58.9
     
(562
)
   
(1,099
)
   
48.9
 
   DIRECTV NOW 2
   
296
     
-
     
-
     
520
     
-
     
-
 
Net Video Additions
   
(89
)
   
(3
)
   
-
     
(449
)
   
(106
)
   
-
 
                                                 
Broadband Net Additions
                                               
   IP
   
125
     
156
     
(19.9
)
   
479
     
396
     
21.0
 
   DSL
   
(96
)
   
(161
)
   
40.4
     
(327
)
   
(506
)
   
35.4
 
Net Broadband Additions
   
29
     
(5
)
   
-
%
   
152
     
(110
)
   
-
%
1 Includes disconnections for customers that migrated to DIRECTV NOW.  
2 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial. 

Operating revenues decreased $72, or 0.6%, in the third quarter and $136, or 0.4%, for the first nine months of 2017, largely due to lower revenues from legacy voice and data products, partially offset by growth in revenues from consumer IP broadband services.

As consumers continue to demand more mobile access to video, we provide 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 $174, or 1.9%, in the third quarter and $480, or 1.8%, for the first nine months of 2017.   These increases include a third-quarter 2017 pay-per-view event and reflect a 4.5% and 3.3% increase in average revenue per linear (combined satellite and U-verse) video connection. Advertising revenues also increased $41 and $113, respectively.

Linear video subscriber losses, and associated margin pressure, continued their recent trend, with some of the losses due to the impact from hurricanes as well as tightening of our credit policies. We are also seeing the impact of customers wanting mobile and over-the-top offerings, which is contributing to growth in DIRECTV NOW connections and partially offsetting linear video subscriber losses. DIRECTV NOW connections continue to grow as we add eligible devices and increase content choices. Our strategy to bundle services has positively impacted subscriber trends and churn, with customers who bundle our wireless and video having nearly half the rate of churn as customers with a single service. Customers with linear video but no wireless service through AT&T increased churn during the quarter, partially due to pricing increases associated with annual content cost increases and involuntary churn.

High-speed internet revenues increased $24, or 1.3%, in the third quarter and $222, or 4.0%, for the first nine months of 2017, reflecting a 4.8% increase in IP broadband subscribers when compared to the prior year. Average revenue per IP broadband connection (ARPU) decreased 3.7% in the third quarter and 0.8% for the first nine months of 2017. Our bundling strategy is also helping to lower churn for broadband subscribers, with subscribers who bundle broadband with another AT&T service having about 30% lower churn than broadband-only subscribers. To compete more effectively against other broadband providers in the midst of ongoing declines in DSL subscribers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates. We also expect our planned 5G national deployment to aid our ability to provide more locations with competitive broadband speeds.

Legacy voice and data service revenues decreased $219, or 18.8%, in the third quarter and $715, or 19.2%, for the first nine months of 2017. For the nine months ended September 30, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% for the September 30, 2016 period, and reflect third quarter and year to date decreases of $148 and $483 in local voice and long-distance, and $70 and $232 in traditional data billings, respectively. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to
 
 
29

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
competitors. At September 30, 2017, approximately 7% of our broadband connections were DSL compared to 10% at September 30, 2016.

Operations and support expenses increased $225, or 2.3%, in the third quarter and increased $237, or 0.8%, for the first nine months of 2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

Increased operations and support expenses in the third quarter and for the first nine months of 2017 were primarily due to annual content cost increases, a pay-per-view event, deferred customer fulfillment cost amortization, and video platform development costs. Partially offsetting these increases were the impact of our ongoing focus on cost efficiencies and merger synergies, as well as workforce reductions and lower marketing costs.

Depreciation expense decreased $125, or 8.3%, in the third quarter, and $225, or 5.0%, for the first nine months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated. These decreases were offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased $172, or 11.6%, in the third quarter and $148, or 3.1%, for the first nine months of 2017. Our Entertainment Group segment operating income margin in third quarter decreased from 11.7% in 2016 to 10.4% in 2017, and for the first nine months decreased from 12.4% in 2016 to 12.1% in 2017. Our Entertainment Group segment EBITDA margin in the third quarter decreased from 23.5% in 2016 to 21.3% in 2017, and for the first nine months decreased from 24.2% in 2016 to 23.3% in 2017.

Consumer Mobility
                                   
Segment Results
                                   
   
Third Quarter
   
Nine-Month Period
 
   
2017
   
2016
   
Percent
Change
   
2017
   
2016
   
Percent
Change
 
 
Segment operating revenues
                                   
     Service
 
$
6,507
   
$
6,914
     
(5.9
)%
 
$
19,644
   
$
20,805
     
(5.6
)%
     Equipment
   
1,241
     
1,353
     
(8.3
)
   
3,635
     
3,976
     
(8.6
)
Total Segment Operating Revenues
   
7,748
     
8,267
     
(6.3
)
   
23,279
     
24,781
     
(6.1
)
                                                 
Segment operating expenses
                                               
     Operations and support
   
4,551
     
4,751
     
(4.2
)
   
13,599
     
14,343
     
(5.2
)
     Depreciation and amortization
   
877
     
944
     
(7.1
)
   
2,621
     
2,798
     
(6.3
)
Total Segment Operating Expenses
   
5,428
     
5,695
     
(4.7
)
   
16,220
     
17,141
     
(5.4
)
Segment Operating Income
   
2,320
     
2,572
     
(9.8
)
   
7,059
     
7,640
     
(7.6
)
Equity in Net Income of Affiliates
   
-
     
-
     
-
     
-
     
-
     
-
 
Segment Contribution
 
$
2,320
   
$
2,572
     
(9.8
)%
 
$
7,059
   
$
7,640
     
(7.6
)%
 
30

 
AT&T INC.
SEPTEMBER 30, 2017

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 following tables highlight other key measures of performance for the Consumer Mobility segment:
 
                   
   
September 30,
   
Percent
 
(in 000s)
 
2017
   
2016
   
Change
 
Consumer Mobility Subscribers
                 
Postpaid
   
26,003
     
27,374
     
(5.0
)%
Prepaid 2
   
15,136
     
13,035
     
16.1
 
Branded
   
41,139
     
40,409
     
1.8
 
Reseller
   
9,800
     
12,566
     
(22.0
)
Connected devices 1, 2
   
489
     
936
     
(47.8
)
Total Consumer Mobility Subscribers
   
51,428
     
53,911
     
(4.6
)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes
 
  postpaid tablets. See (2) below.
 
2 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of
 
  prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers that
 
  were formerly included in connected devices.
 

   
Third Quarter
   
Nine-Month Period
 
             
Percent
             
Percent
 
(in 000s)
 
2017
   
2016
 
Change
   
2017
   
2016
 
Change
 
Consumer Mobility Net Additions 1, 4
                               
Postpaid
   
102
     
21
     
-
%
   
127
     
89
     
42.7
%
Prepaid 5
   
324
     
304
     
6.6
     
873
     
1,169
     
(25.3
)
Branded Net Additions
   
426
     
325
     
31.1
     
1,000
     
1,258
     
(20.5
)
Reseller
   
(394
)
   
(316
)
   
(24.7
)
   
(1,345
)
   
(1,140
)
   
(18.0
)
Connected devices 2, 5
   
(18
)
   
41
     
-
     
87
     
14
     
-
 
Consumer Mobility Net Subscriber Additions
   
14
     
50
     
(72.0
)%
   
(258
)
   
132
     
-
%
                                                 
Total Churn 1, 3, 4
   
2.37
%
   
2.11
%
26 BP
     
2.32
%
   
2.06
%
26 BP
 
Postpaid Churn 1, 3, 4
   
1.17
%
   
1.19
%
(2) BP
     
1.16
%
   
1.17
%
(1) BP
 
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes
 
  postpaid tablets. See (5) below.
 
3 Calculated 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 period is equal to the average of the churn rate for
 
  each month of that period.
 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of
 
  period subscribers.
 
5 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component
 
  of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid
 
  net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of ,
 
  2017 and 2016, respectively.
 

Operating Revenues   decreased $519, or 6.3%, in the third quarter and $1,502, or 6.1%, for the first nine months of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited 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.
31

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
Service   revenue decreased $407, or 5.9%, in the third quarter and $1,161, or 5.6%, for the first nine months of 2017. The decreases were largely due to postpaid customers continuing to shift to discounted monthly service charges under our unlimited plans and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $419, or 8.6%, in the third quarter and $1,422, or 9.5%, for the first nine months of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 4.6% and 5.2%, respectively. The decreases were partially offset by higher prepaid service revenues of $155, or 10.7%, in the third quarter and $595, or 14.5%, for the first nine months primarily from growth in Cricket and AT&T PREPAID SM subscribers.

Equipment revenue decreased $112, or 8.3%, in the third quarter and  $341, or 8.6%, for the first nine months of 2017. The decreases in equipment revenues resulted from lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

Operations and support expenses decreased $200, or 4.2%, in the third quarter and $744, or 5.2%, for the first nine months of 2017. 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.

Decreased operations and support expenses for the third quarter were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment and selling and commission costs, and operational efficiencies. The nine-month period also reflects lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.

Depreciation expense decreased $67, or 7.1%, in the third quarter and $177, or 6.3%, for the first nine months of 2017. The decreases were primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased $252 , or 9.8%, in the third quarter and $581, or 7.6%, for the first nine months of 2017. Our Consumer Mobility segment operating income margin in the third quarter decreased from 31.1% in 2016 to 29.9% in 2017, and for the first nine months decreased from 30.8% in 2016 to 30.3% in 2017. Our Consumer Mobility EBITDA margin in the third quarter decreased from 42.5% in 2016 to 41.3% in 2017, and for the first nine months decreased from 42.1% in 2016 to 41.6% in 2017.

International
                                   
Segment Results
                                   
   
Third Quarter
   
Nine-Month Period
 
   
2017
   
2016
   
Percent
Change
   
2017
   
2016
   
Percent
Change
 
Segment operating revenues
                                   
     Video entertainment
 
$
1,363
   
$
1,297
     
5.1
%
 
$
4,065
   
$
3,649
     
11.4
%
     Wireless service
   
536
     
484
     
10.7
     
1,546
     
1,428
     
8.3
 
     Wireless equipment
   
200
     
98
     
-
     
443
     
297
     
49.2
 
Total Segment Operating Revenues
   
2,099
     
1,879
     
11.7
     
6,054
     
5,374
     
12.7
 
                                                 
Segment operating expenses
                                               
     Operations and support
   
1,937
     
1,640
     
18.1
     
5,468
     
4,951
     
10.4
 
     Depreciation and amortization
   
304
     
293
     
3.8
     
905
     
868
     
4.3
 
Total Segment Operating Expenses
   
2,241
     
1,933
     
15.9
     
6,373
     
5,819
     
9.5
 
Segment Operating Income (Loss)
   
(142
)
   
(54
)
   
-
     
(319
)
   
(445
)
   
28.3
 
Equity in Net Income (Loss)
   of Affiliates
   
17
     
1
     
-
     
62
     
24
     
-
 
Segment Contribution
 
$
(125
)
 
$
(53
)
   
-
%
 
$
(257
)
 
$
(421
)
   
39.0
%
 
32

 
AT&T INC.
SEPTEMBER 30, 2017

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 following tables highlight other key measures of performance for the International segment:
   
September 30,
   
Percent
 
(in 000s)
 
2017
   
2016
   
Change
 
Mexican Wireless Subscribers
                 
   Postpaid
   
5,316
     
4,733
     
12.3
%
   Prepaid
   
8,231
     
5,665
     
45.3
 
Branded
   
13,547
     
10,398
     
30.3
 
Reseller
   
232
     
300
     
(22.7
)
Total Mexican Wireless Subscribers
   
13,779
     
10,698
     
28.8
 
                         
Latin America Satellite Subscribers
                       
   PanAmericana
   
8,201
     
7,139
     
14.9
 
   SKY Brazil 1
   
5,289
     
5,337
     
(0.9
)
Total Latin America Satellite Subscribers
   
13,490
     
12,476
     
8.1
%
Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico 
   had 8.0 million subscribers at June 30, 2017 and 7.9 million subscribers at September 30, 2016. 

   
Third Quarter
   
Nine-Month Period
 
(in 000s)
 
2017
   
2016
   
Percent
Change
   
2017
   
2016
   
Percent
Change
 
Mexican Wireless Net Additions
                                   
   Postpaid
   
129
     
163
     
(20.9
)%
   
351
     
444
     
(20.9
)%
   Prepaid
   
585
     
606
     
(3.5
)
   
1,504
     
1,670
     
(9.9
)
Branded Net Additions
   
714
     
769
     
(7.2
)
   
1,855
     
2,114
     
(12.3
)
Reseller
   
(17
)
   
(26
)
   
34.6
     
(49
)
   
(100
)
   
51.0
 
Mexican Wireless
  Net Subscriber Additions
   
697
     
743
     
(6.2
)
   
1,806
     
2,014
     
(10.3
)
                                                 
Latin America Satellite Net Additions 1
                                               
   PanAmericana
   
98
     
(36
)
   
-
     
163
     
73
     
-
 
   SKY Brazil
   
(230
)
   
(12
)
   
-
     
(260
)
   
(107
)
   
-
 
Latin America Satellite
  Net Subscriber Additions 2
   
(132
)
   
(48
)
   
-
%
   
(97
)
   
(34
)
   
-
%
1 In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period
 
  subscribers.
 
2 Excludes SKY Mexico net subscriber losses of 13 for the six months ended June 30, 2017 and additions of 519 for the six
 
  months of June 30, 2016.
 

Operating Results
Our International segment consists of the Latin American operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. 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.

Operating revenues increased $220, or 11.7%, in the third quarter and $680, or 12.7%, for the first nine months of 2017. The increases include $66 and $416 from video services in Latin America due to price increases driven primarily by macroeconomic conditions with mixed local currencies. Mexico wireless revenues increased $154, or 26.5%, in the third quarter and $264, or 15.3%, for the first nine months of 2017, primarily due to growth in equipment revenues as we have increased our subscriber base, partially offset by competitive pricing for services.
33

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
Operations and support expenses increased $297, or 18.1%, in the third quarter and $517, or 10.4%, for the first nine months of 2017. 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 increases in Latin America in the third quarter and for the first nine months were primarily due to higher programming and other operating costs. The nine-month period was partially offset by foreign currency exchange rates and our reassessment of operating tax contingencies in Brazil. The increases in Mexico for the first nine months were primarily driven by higher operational costs, including expenses associated with our network expansion and foreign currency pressures.

Depreciation expense increased $11, or 3.8%, in the third quarter and $37, or 4.3%, for the first nine months of 2017. The increases were primarily due to updating the estimated asset lives for video equipment in Latin America and higher capital spending in Mexico.

Operating income decreased $88 in the third quarter and increased $126, or 28.3%, for the first nine months of 2017, and were negatively impacted by foreign exchange pressure. Our International segment operating income margin in the third quarter decreased from (2.9)% in 2016 to (6.8)% in 2017, and for the first nine months increased from (8.3)% in 2016 to (5.3)% in 2017. Our International EBITDA margin in the third quarter decreased from 12.7% in 2016 to 7.7% in 2017, and for the first nine months increased from 7.9% in 2016 to 9.7% in 2017.
 
 
34

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
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). See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.

AT&T Mobility Results
                                   
   
Third Quarter
   
Nine-Month Period
 
   
2017
   
2016
   
Percent Change
   
2017
   
2016
   
Percent Change
 
 
Operating revenues
                                   
   Service
 
$
14,541
   
$
14,964
     
(2.8
)%
 
$
43,613
   
$
44,673
     
(2.4
)%
   Equipment
   
2,895
     
3,229
     
(10.3
)
   
8,508
     
9,398
     
(9.5
)
Total Operating Revenues
   
17,436
     
18,193
     
(4.2
)
   
52,121
     
54,071
     
(3.6
)
                                                 
Operating expenses
                                               
   Operations and support
   
10,113
     
10,697
     
(5.5
)
   
30,308
     
31,822
     
(4.8
)
EBITDA
   
7,323
     
7,496
     
(2.3
)
   
21,813
     
22,249
     
(2.0
)
   Depreciation and amortization
   
2,010
     
2,107
     
(4.6
)
   
5,999
     
6,244
     
(3.9
)
Total Operating Expenses
   
12,123
     
12,804
     
(5.3
)
   
36,307
     
38,066
     
(4.6
)
Operating Income
 
$
5,313
   
$
5,389
     
(1.4
)%
 
$
15,814
   
$
16,005
     
(1.2
)%

The following tables highlight other key measures of performance for AT&T Mobility:
 
       
   
September 30,
   
Percent
 
(in 000s)
 
2017
   
2016
   
Change
 
Wireless Subscribers 1
                 
Postpaid smartphones
   
59,277
     
58,688
     
1.0
%
Postpaid feature phones and data-centric devices
   
18,138
     
18,700
     
(3.0
)
Postpaid
   
77,415
     
77,388
     
-
 
Prepaid 3
   
15,136
     
13,035
     
16.1
 
Branded
   
92,551
     
90,423
     
2.4
 
Reseller
   
9,877
     
12,624
     
(21.8
)
Connected devices 2, 3
   
36,398
     
30,291
     
20.2
 
Total Wireless Subscribers
   
138,826
     
133,338
     
4.1
 
                         
Branded Smartphones
   
72,242
     
69,752
     
3.6
 
Smartphones under our installment programs at end of period
   
31,207
     
29,382
     
6.2
%
1 Represents 100% of AT&T Mobility wireless subscribers.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes
 
  postpaid tablets. See (3) below.
 
3 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of
 
  prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers
 
  that were formerly included in connected devices.
 
 
35

 
AT&T INC.
SEPTEMBER 30, 2017

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
                       
   
Third Quarter
   
Nine-Month Period
 
             
Percent
             
Percent
 
(in 000s)
 
2017
   
2016
 
Change
   
2017
   
2016
 
Change
 
Wireless Net Additions 1, 4
                               
Postpaid
   
117
     
212
     
(44.8
)%
   
53
     
598
     
(91.1
)%
Prepaid 5
   
324
     
304
     
6.6
     
873
     
1,169
     
(25.3
)
Branded Net Additions
   
441
     
516
     
(14.5
)
   
926
     
1,767
     
(47.6
)
Reseller
   
(392
)
   
(315
)
   
(24.4
)
   
(1,342
)
   
(1,174
)
   
(14.3
)
Connected devices 2, 5
   
2,274
     
1,331
     
70.8
     
7,102
     
4,081
     
74.0
 
Wireless Net Subscriber Additions
   
2,323
     
1,532
     
51.6
     
6,686
     
4,674
     
43.0
 
                                                 
Smartphones sold under our installment
   programs during period
   
3,491
     
4,283
     
(18.5
)%
   
10,575
     
12,378
     
(14.6
)%
                                                 
Total Churn 3, 4
   
1.32
%
   
1.45
%
(13) BP
     
1.35
%
   
1.41
%
(6) BP
 
Branded Churn 3, 4
   
1.70
%
   
1.63
%
7 BP
     
1.66
%
   
1.57
%
9 BP
 
Postpaid Churn 3, 4
   
1.07
%
   
1.05
%
2 BP
     
1.07
%
   
1.04
%
3 BP
 
Postpaid Phone Only Churn 3, 4
   
0.84
%
   
0.90
%
(6) BP
     
0.84
%
   
0.90
%
(6) BP
 
1 Excludes acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes
 
  postpaid tablets. See (5) below.
 
3 Calculated 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 period is equal to the average of the churn rate for each month of that period.
 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
 
5 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component
 
  of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid
 
  net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of,
 
  2017 and 2016, respectively.
 

Operating income decreased $76, or 1.4%, in the third quarter and $191, or 1.2%, for the first nine months of 2017. The third-quarter operating income margin of AT&T Mobility increased from 29.6% in 2016 to 30.5% in 2017 and for the first nine months increased from 29.6% in 2016 to 30.3% in 2017. AT&T Mobility's third-quarter EBITDA margin increased from 41.2% in 2016 to 42.0% in 2017 and for the first nine months increased from 41.1% in 2016 to 41.9% in 2017. AT&T Mobility's third-quarter EBITDA service margin increased from 50.1% in 2016 to 50.4% in 2017 and for the first nine months increased from 49.8% in 2016 to 50.0% in 2017 (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 unlimited, as well as equipment installment programs. Beginning in the first quarter of 2017, we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.
36

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
ARPU
Postpaid phone-only ARPU was $58.29 for the third quarter and $58.23 for the first nine months of 2017, compared to $59.64 and $59.66 in 2016. Postpaid phone-only ARPU plus equipment installment billings was $68.95 for the third quarter and $68.94 for the first nine months of 2017, compared to $69.99 and $69.83 in 2016. ARPU has been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.

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 lower for the third quarter and first nine months of 2017. Postpaid churn was higher for the third quarter and first nine months of 2017, driven by higher tablet churn. Postpaid phone-only churn was lower in the third quarter and first nine months of 2017, despite competitive pressure in the industry.

Branded Subscribers
Branded subscribers increased 1.1% in the third quarter of 2017 when compared to June 30, 2017 and increased 2.4% when compared to September 30, 2016. Both the sequential and year-over-year increases reflect postpaid subscribers remaining essentially flat while prepaid subscribers grew 6.7% and 16.1%, respectively. Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars where customers actively subscribe for vehicle connectivity, as a component of prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543,000 subscribers that were formerly included in connected devices.

At September 30, 2017, 92% of our postpaid phone subscriber base used smartphones, compared to 90% at September 30, 2016, with more than 95% of phone sales during both years attributable to smartphones. 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 plans now represent 86% of our postpaid customer base, compared to 83% at September 30, 2016. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.

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. At September 30, 2017, about 53% of the postpaid smartphone base is on an equipment installment program compared to 50% at September 30, 2016. Over 90% of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plans or Bring Your Own Device (BYOD).   While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Connected device subscribers increased 5.0% during the third quarter when compared to June 30, 2017 and 20.2% when compared to September 30, 2016. During the third quarter and first nine months of 2017, we added approximately 1.5 million and 4.7 million wholesale connected cars, respectively, through agreements with various carmakers, and experienced strong growth in other IoT connections as well. 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   In October 2016, we announced an agreement (Merger Agreement) to acquire 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). 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. The cash portion of the purchase price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice, but is
 
37

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for a discussion of our financing arrangements.
 
FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to build, operate and maintain the network. AT&T will construct and operate the network and provide sustainability payments to FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to be in the $75-$100 range annually, and when adjusted for inflation, we expect to be in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.

States have until December 28, 2017 to elect to opt-out of the federally funded program, after which any state that did not formally make an election will automatically be opted-in. We do not expect FirstNet to materially impact our 2017 results.
 
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. I n June 2017, the court granted the NFL defendants' motion to dismiss the complaint without leave to amend, finding that: (1) the plaintiffs did not plead a viable market; (2) the plaintiffs did not plead facts supporting the contention that the exclusive agreement between the NFL and DIRECTV harms competition; (3) the claims failed to overcome the fact that the NFL and its teams must cooperate to sell broadcasts; and (4) the plaintiffs do not have standing to challenge the horizontal agreement among the NFL and the teams. In light of the order granting the motion to dismiss, the court denied DIRECTV's motion to compel arbitration as moot. In July 2017, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit, which is pending.

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 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 vigorously dispute these allegations. A bench trial began on August 14, 2017, and was suspended on August 25, 2017, after the FTC rested its case, so that the court could consider DIRECTV's motion for judgment. The hearing on the motion occurred on October 25, 2017, and the judge took it under advisement.

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
 
38

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
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 asked the Court of Appeals to reconsider the decision   " en banc, " which the Court agreed to do. The en banc hearing was held on September 19, 2017. We do not expect a decision until early 2018. 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.
 
 
39

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
Labor Contracts As of September 30, 2017, we employed approximately 257,000 persons. Approximately 46% of our employees are represented by the Communications Workers of America, the International Brotherhood of Electrical Workers or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
 
A summary of labor contract negotiations, by region or employee group, is as follows:
·
Approximately 20,000 mobility employees across the country are covered by a contract that expired in early 2017. We continue to negotiate with labor representatives. On October 30, 2017, we presented a contract that provides for, among other things, compounded annual wage increases totaling nearly 10% over the term of the contract and continued health care coverage. The contract is subject to acceptance and ratification.
·
Approximately 15,000 traditional wireline employees in our West region are covered by a contract that expired in April 2016. In August, these employees, along with 2,300 legacy DIRECTV non-management employees, ratified a new four-year contract that will expire in April 2020.

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. 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.

On April 20, 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-based services, extends such light touch pricing regulation to high-speed TDM transport services and to most of our TDM channel termination services, based on a competitive market test for such services. For those services that do not qualify for light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the FCC's decision. These appeals were consolidated in the U.S. Court of Appeals for the Eighth Circuit, where they 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 were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress. In June 2017, the FCC released an order clarifying that providers of broadband internet access service continue to be subject to privacy requirements under section 222 of The Communications Act of 1934 (Communications Act), but not the more restrictive rules that were adopted in October 2016.

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The FCC's decision significantly expanded its authority to regulate the provision of fixed and mobile broadband internet access services. AT&T and other providers of
40

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, a panel of the Court of Appeals upheld the FCC's classification of broadband internet access and the attendant rules by a 2-1 vote. On May 1, 2017, the Court of Appeals denied requests for rehearing filed by AT&T and several other parties. In May 2017, the FCC initiated a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. AT&T fully supports an open internet and believes that Congress should pass bipartisan legislation that codifies core principles of net neutrality while maintaining a stable regulatory environment conducive to investment, future innovation and economic growth. On September 28, 2017, AT&T and other parties filed with the United States Supreme Court petitions for certiorari to review the Court of Appeals decision.

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 our 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 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 or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areas of consumer protection and the deployment of cell sites and equipment. The anticipated industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell" equipment and therefore increase the need for a quick permitting process.

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").

In May 2014, 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. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.

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, we have:
·
Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in the AWS-3 Auction.
·
Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks.
·
Secured the FirstNet contract, which provides us with access to a nationwide low band 20 MHz of spectrum, assuming all states opt-in.
·
Invested in 5G and millimeter-wave technologies with our in-process acquisition of Fiber-Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.
 
41

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
Tax Reform  On November 2, 2017, the Tax Cuts and Jobs Act was introduced in the U.S. House of Representatives. If enacted, we expect it would stimulate investment, job creation and economic growth which would result in a positive impact on demand for our services. As written, we anticipate the legislation will have a positive impact on our consolidated operations and cash flows .
 
LIQUIDITY AND CAPITAL RESOURCES

In anticipation of the Time Warner transaction, we had $48,499 in cash and cash equivalents available at September 30, 2017. Cash and cash equivalents included cash of $3,707 and money market funds and other cash equivalents of $44,792. Approximately $888 of our cash and cash equivalents resided in foreign jurisdictions and were primarily in foreign currencies; these funds are primarily used to meet working capital requirements of foreign operations.

Cash and cash equivalents increased $42,711 since December 31, 2016. In the first nine months of 2017, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties. We also received a $1,438 deposit refund from the FCC. 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 the first nine months of 2017, cash provided by operating activities was $29,274, compared to $29,202 for the first nine months of 2016. Higher operating cash flows in 2017 were primarily due to higher receipts from our sale of AT&T Next receivables and working capital improvements.

Cash Used in or Provided by Investing Activities
For the first nine months of 2017, cash used in investing activities totaled $15,266 and consisted primarily of $15,756 for capital expenditures, excluding interest during construction.

Investing activities also include a refund from the FCC in the amount of $1,438 in April 2017, resulting from the conclusion of the FCC's 600 MHz Auction. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910.

The majority of our capital expenditures are spent on our networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $473 in the first nine months. The increase was primarily due to our continued fiber buildout and timing of build schedules in 2017 compared with 2016. Additionally, in connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing). For the first nine months of 2017, vendor financing related to capital investments was $897. We do not report capital expenditures at the segment level.

We continue to 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 takes into account existing tax law and does not reflect anticipated tax reform. We continue to focus on ensuring DIRECTV merger commitments are met.

Cash Provided by or Used in Financing Activities
For the first nine months of 2017, cash provided by financing activities totaled $28,703 and included net proceeds of $46,761 primarily from the following long-term debt issuances:
·
February issuance of $1,250 of 3.200% global notes due 2022.
·
February issuance of $750 of 3.800% global notes due 2024.
·
February issuance of $2,000 of 4.250% global notes due 2027.
·
February issuance of $3,000 of 5.250% global notes due 2037.
·
February issuance of $2,000 of 5.450% global notes due 2047.
·
February issuance of $1,000 of 5.700% global notes due 2057.
·
March issuance of $1,430 of 5.500% global notes due 2047.
·
March issuance of $800 floating rate global notes due 2020. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points.
·
March draw of $300 on a private financing agreement with Banco Nacional de Mexico, S.A. due March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate.
 
42

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
·
May issuance of $1,500 floating rate global notes due 2021. The floating rate for the notes is based upon the three-month LIBOR, reset quarterly, plus 95 basis points.
·
May issuance of CAD$600 of 2.850% global notes due 2024 and CAD$750 of 4.850% global notes due 2047 (together, equivalent to $994, when issued).
·
June issuance of £1,000 of 3.550% global notes due 2037, subject to mandatory redemption (equivalent to $1,282 when issued).
·
June issuance of €750 of 1.050% global notes due 2023, €1,750 of 1.800% global notes due 2026, €1,500 of 2.350% global notes due 2029, €1,750 of 3.150% global notes due 2036 and €1,250 of floating rate global notes due 2023. All except the 2036 global notes are subject to mandatory redemption (together, equivalent to $7,883, when issued).
·
August issuance of $750 of floating rate notes due 2023, $1,750 of 2.85% global notes due 2023, $3,000 of 3.40% global notes due 2024, $5,000 of 3.90% global notes due 2027, $4,500 of 4.90% global notes due 2037, $5,000 of 5.15% global notes due 2050 and $2,500 of 5.30% global notes due 2058. All are subject to mandatory redemption.

For notes subject to mandatory redemption ($29,801), if we do not consummate the Time Warner acquisition pursuant to the merger agreement, on or prior to April 22, 2018, or, if prior to such date, the merger agreement is terminated, then in either case we must redeem certain of the notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.
On October 27, 2017, we issued $1,150 of 5.35% global notes due 2066. The underwriters have an option to purchase up to an additional $173 aggregate principal amount within 30 days of the offering.

On October 30, 2017, we launched an exchange offer covering approximately $24,000 of notes issued by AT&T Inc., DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. due between 2020 and 2023. We may issue up to $8,000 of new AT&T Inc. notes, subject to increase, due 2028 and 2030. Also on October 30, 2017, we offered to exchange approximately $9,000 of high-coupon existing AT&T Inc. notes and existing subsidiary notes for new AT&T Inc. notes. The notes covered in the exchange have coupons ranging from 5.85% to 8.75% and maturities from 2022 to 2097. The existing AT&T Inc. notes may be exchanged for new AT&T Inc. notes due 2046 and the subsidiary bonds may be exchanged for new AT&T Inc. notes due 2046 or new AT&T Inc. notes with identical coupon and maturity as the existing subsidiary notes. We are also seeking consent of bondholders to modify the covenants of the subsidiary indentures to generally conform to AT&T Inc.'s indenture. The exchange offers will expire on November 28, 2017.

During the first nine months of 2017, we redeemed or repaid $10,309 of debt, primarily consisting of the following:
·
$1,142 of 2.400% global notes due 2017.
·
$1,000 of 1.600% global notes due 2017.
·
$500 of floating rate notes due 2017.
·
£750 of 5.875% global notes due 2017.
·
$750 repayment of a private financing agreement with Export Development Canada due 2017.
·
$1,150 of 1.700% global notes due 2017.
·
$4,155 repayment of amounts outstanding under our syndicated credit agreement.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.4% as of September 30, 2017, compared to 4.2% as of December 31, 2016. We had $162,450 of total notes and debentures outstanding at September 30, 2017, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately $37,260.

As of September 30, 2017, we had approximately 388 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 2017, we repurchased approximately 7 million shares totaling $279 under these authorizations. In 2017, 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 $9,030 during the first nine months of 2017, compared with $8,850 for the first nine months of 2016, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016. Dividends declared by our Board of Directors totaled $0.49 per share in the third quarter and $1.47 per share in the first nine months of 2017 and $0.48 per share in the third quarter and $1.44 for the first nine months of 2016. Our dividend policy considers the
 
43

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
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.

At September 30, 2017, we had $8,551 of debt maturing within one year, $8,379 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. In May 2017, $1 was redeemed by the holder for $1. If the remainder of the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,029.

Credit Facilities
The following summary of our various credit and loan agreements 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.

We use credit facilities as a tool in managing our liquidity status. In December 2015, we entered into a five-year $12,000 revolving credit agreement of which no amounts are outstanding as of September 30, 2017. On September 5, 2017 we repaid all of the amounts outstanding under our $9,155 syndicated credit agreement and terminated the facility. On September 29, 2017, we entered into a five-year $2,250 syndicated term loan credit agreement containing (i) a $750 term loan facility (the "Tranche A Facility), (ii) a $750 term loan facility (the "Tranche B Facility") and (iii) a $750 term loan facility (the "Tranche C Facility"), with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. No amounts are outstanding under the Tranche A Facility, the Tranche B Facility or the Tranche C Facility as of September 30, 2017.

We also enter into various credit arrangements supported by government agencies to support network equipment purchases.

In connection with our pending Merger with Time Warner, we entered into a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). Following the August issuances of $22,500 of global notes, we reduced the commitments under the Bridge Loan to $0 and terminated the facility. No amounts will be borrowed under the Term Loan prior to the closing of the Merger. Borrowings under the Term Loan 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.

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 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. As of September 30, 2017, we were in compliance with the covenants for our credit facilities.

Collateral Arrangements
During the first nine months of 2017, we received $2,743 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. At September 30, 2017, we had posted collateral assets of $837 and received collateral liabilities of $338, compared to December 31, 2016, posted collateral assets of $3,242 and no collateral liabilities. (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, 2017, our debt ratio was 56.4%, compared to 50.1% at September 30, 2016, and 49.9% at December 31, 2016. Our net debt ratio was 39.7% at September 30, 2017, compared to 47.8% at September 30, 2016 and 47.5% at December 31, 2016. 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 2017, we received $4,217 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.
 
44

 
AT&T INC.
SEPTEMBER 30, 2017

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 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 pension trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of $9,354 as of September 30, 2017, and $8,477 as of December 31, 2016, 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. Mobility II distributed $420 to the trust during the first nine months of 2017. So long as those distributions are made, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.

During the third quarter, AT&T notified the trust and the fiduciary of the preferred interest that AT&T would not exercise its call option of the preferred interest until at least September 9, 2022, which raised the valuation of the preferred interest by approximately $1,245.
 
 
45

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.

   
Three Months Ended
 
   
September 30, 2017
   
September 30, 2016
 
   
Consumer Mobility
   
Business Solutions
   
Adjustments 1
   
AT&T Mobility
   
Consumer Mobility
   
Business Solutions
   
Adjustments 1
   
AT&T Mobility
 
Operating Revenues
                                               
   Wireless service
 
$
6,507
   
$
8,034
   
$
-
   
$
14,541
   
$
6,914
   
$
8,050
   
$
-
   
$
14,964
 
   Fixed strategic services
   
-
     
3,087
     
(3,087
)
   
-
     
-
     
2,913
     
(2,913
)
   
-
 
   Legacy voice and data services
   
-
     
3,434
     
(3,434
)
   
-
     
-
     
4,042
     
(4,042
)
   
-
 
   Other service and equipment
   
-
     
852
     
(852
)
   
-
     
-
     
886
     
(886
)
   
-
 
   Wireless equipment
   
1,241
     
1,654
     
-
     
2,895
     
1,353
     
1,876
     
-
     
3,229
 
Total Operating Revenues
   
7,748
     
17,061
     
(7,373
)
   
17,436
     
8,267
     
17,767
     
(7,841
)
   
18,193
 
                                                                 
Operating Expenses
                                                               
   Operations and support
   
4,551
     
10,233
     
(4,671
)
   
10,113
     
4,751
     
10,925
     
(4,979
)
   
10,697
 
EBITDA
   
3,197
     
6,828
     
(2,702
)
   
7,323
     
3,516
     
6,842
     
(2,862
)
   
7,496
 
   Depreciation and amortization
   
877
     
2,325
     
(1,192
)
   
2,010
     
944
     
2,539
     
(1,376
)
   
2,107
 
Total Operating Expense
   
5,428
     
12,558
     
(5,863
)
   
12,123
     
5,695
     
13,464
     
(6,355
)
   
12,804
 
Operating Income
 
$
2,320
   
$
4,503
   
$
(1,510
)
 
$
5,313
   
$
2,572
   
$
4,303
   
$
(1,486
)
 
$
5,389
 
1 Non-wireless (fixed) operations reported in Business Solutions segment.
 
 
46

 
AT&T INC.
SEPTEMBER 30, 2017

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
 
   
Nine Months Ended
 
   
September 30, 2017
   
September 30, 2016
 
   
Consumer Mobility
   
Business Solutions
   
Adjustments 1
   
AT&T Mobility
   
Consumer Mobility
   
Business Solutions
   
Adjustments 1
   
AT&T Mobility
 
Operating Revenues
                                               
   Wireless service
 
$
19,644
   
$
23,969
   
$
-
   
$
43,613
   
$
20,805
   
$
23,868
   
$
-
   
$
44,673
 
   Fixed strategic services
   
-
     
9,089
     
(9,089
)
   
-
     
-
     
8,469
     
(8,469
)
   
-
 
   Legacy voice and data services
   
-
     
10,572
     
(10,572
)
   
-
     
-
     
12,577
     
(12,577
)
   
-
 
   Other service and equipment
   
-
     
2,513
     
(2,513
)
   
-
     
-
     
2,619
     
(2,619
)
   
-
 
   Wireless equipment
   
3,635
     
4,873
     
-
     
8,508
     
3,976
     
5,422
     
-
     
9,398
 
Total Operating Revenues
   
23,279
     
51,016
     
(22,174
)
   
52,121
     
24,781
     
52,955
     
(23,665
)
   
54,071
 
                                                                 
Operating Expenses
                                                               
   Operations and support
   
13,599
     
30,722
     
(14,013
)
   
30,308
     
14,343
     
32,584
     
(15,105
)
   
31,822
 
EBITDA
   
9,680
     
20,294
     
(8,161
)
   
21,813
     
10,438
     
20,371
     
(8,560
)
   
22,249
 
   Depreciation and amortization
   
2,621
     
6,972
     
(3,594
)
   
5,999
     
2,798
     
7,568
     
(4,122
)
   
6,244
 
Total Operating Expense
   
16,220
     
37,694
     
(17,607
)
   
36,307
     
17,141
     
40,152
     
(19,227
)
   
38,066
 
Operating Income
 
$
7,059
   
$
13,322
   
$
(4,567
)
 
$
15,814
   
$
7,640
   
$
12,803
   
$
(4,438
)
 
$
16,005
 
1 Non-wireless (fixed) operations reported in Business Solutions segment.
 
 
47

 
AT&T INC.
SEPTEMBER 30, 2017

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
 
At September 30, 2017, we had interest rate swaps with a notional value of $10,775 and a fair value of $11.

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 $38,694 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 $(842) at September 30, 2017.

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, 2017. 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, 2017.
 
48

 
AT&T INC.
SEPTEMBER 30, 2017

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 or repeal 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; wireless equipment siting regulations; E911 services; competition policy; privacy; net neutrality, including the FCC's order classifying broadband as Title II services subject to much more comprehensive 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), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures.
·
The extent of competition including from governmental networks and other providers and the resulting pressure on customer 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 non-regulation of comparable alternative technologies (e.g., VoIP).
·
The continued development and delivery of attractive and profitable video and broadband offerings; the extent to which regulatory and build-out requirements apply to our offerings; our ability to match speeds offered by our competitors 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 video, 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 video and 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 ability to close our pending acquisition of Time Warner Inc. and successfully reorganize our operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.
·
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, including foreign exchange fluctuations as well as regulatory and political uncertainty.
·
Changes in our corporate strategies, such as changing network-related 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.
·
The uncertainty and impact of anticipated regulatory and corporate tax reform, which may impact the overall economy and incentives for business investments.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
 
49

 
AT&T INC.
SEPTEMBER 30, 2017

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. For the third quarter 2017, there were no such material developments.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
   
                   
(c) A summary of our repurchases of common stock during the third quarter of 2017 is as follows:
                   
   
(a)
 
(b)
 
(c)
 
(d)
Period
Total Number of Shares (or Units) Purchased 1, 2, 3
 
Average Price Paid Per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 1
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
                   
July 1, 2017 -
July 31, 2017
  19,060
 
$
37.45
 
-
 
388,296,000
August 1, 2017 -
August 31, 2017
  16,379
   
38.88
 
-
 
388,296,000
September 1, 2017 -
September 30, 2017
618,928
   
38.08
 
-
 
388,296,000
Total
654,367
 
$
38.10
 
-
   
1 In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common
  stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock.
  The authorizations have no expiration date.
2 Of the shares repurchased, 63,861 shares were acquired through the withholding of taxes on the vesting of restricted stock
  and performance shares or on the exercise price of options.
3 Of the shares repurchased, 590,506 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
  Association (VEBA) trusts.
 
50

 
AT&T INC.
SEPTEMBER 30, 2017
 
Item 6. Exhibits
               
                             
The following exhibits are filed or incorporated by reference as a part of this report:
           
                             
Exhibit
         
Filed
 
Incorporated by Reference
Number
 
Exhibit Description
Herewith
 
Form
Period Ending
Exhibit
Filing Date
 
x
               
 
x
               
 
x
               
 
x
               
     
8-K
     
10.1
 
10/4/2017
 
x
               
 
x
               
31
 
Rule 13a-14(a)/15d-14(a) Certifications
                 
   
x
               
   
x
               
 
x
               
101
 
XBRL Instance Document
x
               
 
 
 
51

 
 
 
SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
 
 
November 3, 2017
 
 
AT&T Inc.
 
 
 
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer

 
52
Exhibit 10-a

AT&T INC.
 
HUMAN RESOURCES COMMITTEE
 
PROPOSED RESOLUTION, September 28, 2017
 

Whereas, AT&T Inc. ("AT&T Inc." or the "Company") has embarked on an operational reorganization that will allow it to compete more effectively across a broad range of communications and entertainment businesses; and
Whereas, it is critical to the Company that John Donovan , Chief Executive Officer, AT&T Communications, LLC, be retained through December 30, 2020;
Now, therefore, be it:
RESOLVED, that the provisions of the 2011 Incentive Plan, the 2016 Incentive Plan and of any successor plan relating to the automatic proration of performance shares upon Termination of Employment, as that term is defined in the 2016 Incentive Plan, shall not apply under the following circumstances:
1.
The proration shall not apply to the performance shares granted after the date of this resolution to Mr. Donovan if he remains employed through December 30, 2020;

2.
In addition, the existing and future performance shares granted to Mr. Donovan shall not be prorated:

(a)
if Mr. Donovan reports to an officer or employee of the Company or any of its affiliates other than the Chief Executive Officer of AT&T Inc.; or

(b)
if the Company creates a higher-level position (e.g., Vice Chairman or Chief Operating Officer of AT&T Inc.) and Mr. Donovan is not placed in that role or an equivalent role; and

RESOLVED FURTHER, that the proper officers of AT&T Inc. are authorized to do or cause to be done any and all such acts and things, and to execute and deliver any and all documents and papers that they may deem necessary, proper or advisable to carry out the foregoing resolutions.

Exhibit 10-b

AT&T INC.
 
HUMAN RESOURCES COMMITTEE
 
PROPOSED RESOLUTION, September 28, 2017
 

Whereas, AT&T Inc. ("AT&T Inc." or the "Company") has embarked on an operational reorganization that will allow it to compete more effectively across a broad range of communications and entertainment businesses; and
Whereas, it is critical to the Company that John Stankey , Senior Executive Vice President-AT&T/Time Warner Merger Integration Planning, AT&T Services, Inc., be retained through December 30, 2020;
Now, therefore, be it:
RESOLVED, that the provisions of the 2011 Incentive Plan, the 2016 Incentive Plan and of any successor plan relating to the automatic proration of performance shares upon Termination of Employment, as that term is defined in the 2016 Incentive Plan, shall not apply under the following circumstances:
1.
The proration shall not apply to the performance shares granted after the date of this resolution to Mr. Stankey if he remains employed through December 30, 2020;

2.
In addition, the existing and future performance shares granted to Mr. Stankey shall not be prorated:

(a)
if Mr. Stankey reports to an officer or employee of the Company or any of its affiliates other than the Chief Executive Officer of AT&T Inc.; or

(b)
if the Company creates a higher-level position (e.g., Vice Chairman or Chief Operating Officer of AT&T Inc.) and Mr. Stankey is not placed in that role or an equivalent role; and
RESOLVED FURTHER, that the proper officers of AT&T Inc. are authorized to do or cause to be done any and all such acts and things, and to execute and deliver any and all documents and papers that they may deem necessary, proper or advisable to carry out the foregoing resolutions.

Exhibit 10-c

AT&T INC.
 
HUMAN RESOURCES COMMITTEE
 
PROPOSED RESOLUTION, September 28, 2017
 

Whereas, AT&T Inc. ("AT&T Inc." or the "Company") has embarked on an operational reorganization that will allow it to compete more effectively across a broad range of communications and entertainment businesses; and
Whereas, it is critical to the Company that John Stephens , Senior Executive Vice President and Chief Financial Officer, AT&T Inc., be retained through December 30, 2020;
Now, therefore, be it:
RESOLVED, that the provisions of the 2011 Incentive Plan, the 2016 Incentive Plan and of any successor plan relating to the automatic proration of performance shares upon Termination of Employment, as that term is defined in the 2016 Incentive Plan, shall not apply under the following circumstances:
1.
The proration shall not apply to the performance shares granted after the date of this resolution to Mr. Stephens if he remains employed through December 30, 2020;

2.
In addition, the existing and future performance shares granted to Mr. Stephens shall not be prorated:

(a)
if Mr. Stephens reports to an officer or employee of the Company or any of its affiliates other than the Chief Executive Officer of AT&T Inc.; or

(b)
if the Company creates a higher-level position (e.g., Vice Chairman or Chief Operating Officer of AT&T Inc.) and Mr. Stephens is not placed in that role or an equivalent role; and
RESOLVED FURTHER, that the proper officers of AT&T Inc. are authorized to do or cause to be done any and all such acts and things, and to execute and deliver any and all documents and papers that they may deem necessary, proper or advisable to carry out the foregoing resolutions.

Exhibit 10-d





















AT&T HEALTH PLAN


















Effective:  January 1, 1987
                                                        Previously Amended and Restated:  January 1, 2017
Amended and Restated Effective:  January 1, 2018 (unless otherwise provided herein)
 
 


 
 
AT&T HEALTH PLAN

TABLE OF CONTENTS
 
 
ARTICLE 1
 PURPOSE ………………………………………………………………………………………………………………................................................................................................................................................................….
1
ARTICLE 2
 DEFINITIONS………………………………………………………………………………………………………….....................................................................................................................................................................…
1
ARTICLE 3
 ELIGIBILITY ………………………………………………………………………………………………………….....................................................................................................................................................................…
4
ARTICLE 4
 BENEFITS …………………………………………………………………………………………………………….........................................................................................................................................................................
5
ARTICLE 5
 TERMINATION OF PARTICIPATION …………………………………………………………………..…................................................................................................................................................................................…..
7
ARTICLE 6
 DISABILITY ………………………………………………………………………………………………………….........................................................................................................................................................................
9
ARTICLE 7
 COSTS ………………………………………………………………………………………………………………….......................................................................................................................................................................
9
ARTICLE 8
 LOYALTY CONDITIONS ……………………………………………………………………………………….........................................................................................................................................................................…...
10
ARTICLE 9
 MISCELLANEOUS …………………………………………………………………………………………………….......................................................................................................................................................................
13
ARTICLE 10
 COBRA …………………………………………………………………………………………………………………......................................................................................................................................................................
15
ARTICLE 11
 PRIVACY OF MEDICAL INFORMATION …………………………………………………………………......................................................................................................................................................................................
18
ARTICLE 12
 CLAIM AND APPEAL PROCESS ………………………………………………………………………………................................................................................................................................................................................
24
 

 



AT&T HEALTH PLAN


ARTICLE 1   PURPOSE
The AT&T Health Plan ("Plan") provides Participants with certain medical, dental, and vision benefits, as specified herein.  Effective March 23, 2010, the Plan shall be frozen to new Participants, as further described in Section 2.16.  The Company intends this Plan to be a "grandfathered health plan" under the Patient Protection and Affordable Care Act (the "Affordable Care Act").  Appendix C hereto contains the required Participant disclosure regarding the Plan's grandfathered status under the Affordable Care Act.

ARTICLE 2   DEFINITIONS
For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise:

2.1
Active Participant .  "Active Participant" shall mean an Active Employee Participant and his Dependents.

2.2
Active Employee Participant .  "Active Employee Participant" shall mean an Eligible Employee electing to participate in the Plan while in active service, on a Leave of Absence or while receiving short term disability benefits under the Officer Disability Plan.

2.3
Annual Deductible .  "Annual Deductible" shall mean the amount the Active Participant must pay for Covered Health Services in a Plan Year before the Plan will begin paying for Covered Benefits in that calendar year.  The Annual Deductible applies to all Covered Health Services.  The Annual Deductible does not apply to Preventive Care, Dental Services and Vision Services.    Once the Participant meets his applicable Annual Deductible, the Plan will begin to pay Covered Benefits, subject to any required Coinsurance, in accordance with and as governed by Section 4.1.  The applicable Annual Deductible is set forth in Appendix A to this Plan.

2.4
Annual Out-of-Pocket Maximum .   "Annual Out-of-Pocket Maximum" shall mean the maximum amount of Covered Health Services an Active Participant must pay out-of-pocket every calendar year, including the Participant's Annual Deductible. Once the Participant reaches the applicable Annual Out-of-Pocket Maximum, Covered Benefits for those Covered Health Services that apply to the Annual Out-of-Pocket Maximum are payable in accordance with and as governed by Section 4.1 during the rest of that Plan Year.  The following costs shall never apply toward the Annual Out-of-Pocket Maximum:  (a) any applicable Monthly Contributions and (b) any charges for Non-Covered Health Services.  Even when the Annual Out-of-Pocket Maximum has been reached, Covered Benefits will not be provided for the following:  (a) any applicable Monthly Contributions and (b) any charges for Non-Covered Health Services.  The applicable Annual Out-of-Pocket Maximum is set forth in Appendix A to this Plan.

2.5
AT&T .  "AT&T" shall mean AT&T Inc.  References to "Company" shall mean AT&T.

2.6
Basic Plan(s) . "Basic Plan(s)" shall mean AT&T's group dental (non-DHMO option), and vision care plans (including the AT&T Retiree Vision Care Program) or the "AT&T International Health Plan" for Officers serving in expatriate positions with the Company.
 

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2.7
CEO .  "CEO" shall mean the Chief Executive Officer of AT&T Inc.

2.8
COBRA " COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

2.9
Coinsurance .   "Coinsurance" shall mean the amount an Active Participant must pay each time he/she receives Covered Health Services, after he/she meets the applicable Annual Deductible.  Coinsurance payments are calculated as a percentage of Covered Health Services, rather than a set dollar amount.  Coinsurance does not apply to Preventive Care, Dental Services and Vision Services (or Medical Services for Retired Participants as provided in Section 4.1(c)).  The applicable Coinsurance percentage is set forth in Appendix A to this Plan.

2.10
Committee .  "Committee" shall mean the Human Resources Committee of the Board of Directors of AT&T Inc.

2.11
Covered Benefits .  "Covered Benefits" shall mean the benefits provided by the Plan, as provided for and governed by Section 4.1 of the Plan.

2.12
Covered Health Services .  "Covered Health Services" means all Medical Services or Preventive Care that would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not.  Dental Services and Vision Services are not included in the definition of Covered Health Services.

2.13
Dental Services .  "Dental Services" shall mean services for dental and orthodontic care.   The Plan Administrator, in its sole discretion, shall determine whether a particular service is classified as Preventive Care or a Dental, Medical or Vision Service.

2.14
Dependent(s) .  "Dependent(s)" shall mean those individuals who would qualify as a Participant's dependent(s) under the terms of the Basic Plan in which the Participant participates (or last previously participated with respect to Medicare Eligible Retired Participants (the "Prior Basic Plan"), or, if applicable, Substitute Basic Coverage.

2.15
Disability .   "Disability" shall mean qualification for long term disability benefits under Section 3.1 of the Officer Disability Plan.

2.16
Eligible Employee .  "Eligible Employee" shall mean an Officer.  Notwithstanding the foregoing, the CEO may, from time to time, exclude any Officer or group of Officers from being an "Eligible Employee" under this Plan.  Employees of a company acquired by AT&T shall not be considered an Eligible Employee unless designated as such by the CEO.  Notwithstanding the foregoing, only the Committee shall have the authority to exclude from participation or take any action with respect to Executive Officers. 

Notwithstanding the foregoing provisions, individuals hired, rehired or promoted to an Officer level position on or after March 23, 2010 shall be excluded from the term Eligible Employee, and such individuals (and their Dependents) shall not be eligible to participate in this Plan.                                                                                                                                                                                                                        
2.17
Employer .  "Employer" shall mean AT&T Inc. or any of its Subsidiaries.
 

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2.18
Executive Officer .  "Executive Officer" shall mean any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934.

2.19
Leave of Absence .  "Leave of Absence" shall mean a Company-approved leave of absence.

2.20
Medical Services .   "Medical Services" shall mean medical/surgical, mental health/substance abuse and prescription pharmacy services.  The Plan Administrator, in its sole discretion, shall determine whether a particular service is classified as Preventive Care or a Medical, Dental or Vision Service.  Medical Services do not include Dental Services and Vision Services.

2.21
Monthly Contributions "Monthly Contributions" shall mean the monthly premiums or contributions required for participation in this Plan as further governed by Article 7 of the Plan.  The applicable Monthly Contributions are set forth in Exhibit A to this Plan.

2.22
Non-Covered Health Services "Non-Covered Health Services" shall mean any Medical Services or Preventive Care which do not meet the definition of Covered Health Services.

2.23
Officer .  "Officer" shall mean an individual who is designated as an officer level employee for compensation purposes on the records of AT&T.

2.24
Participant .  "Participant" shall mean an Active Participant or Retired Participant or both, as the context indicates.

2.25
Plan Administrator .  "Plan Administrator" shall mean the SEVP-HR, or any other person or persons whom the Committee may appoint to administer the Plan; provided that the Committee may act as the Plan Administrator at any time.

2.26
Plan Year .   "Plan Year" shall mean the calendar year.

2.27
Preventive Care .  "Preventive Care" generally focuses on evaluating a Participant's current health status when the Participant is symptom-free and taking the necessary steps to maintain the Participant's health. The Plan Administrator, in its sole discretion, shall determine whether a particular service constitutes Preventive Care.

2.28
Qualified Dependent .  "Qualified Dependent" shall mean a Dependent who loses coverage under a COBRA eligible program due to a Qualifying Event.

2.29
Qualifying Event .   "Qualifying Event" shall mean any of the following events if, but for COBRA continuation coverage, they would result in a Participant's loss of coverage under this Plan:

(1)
death of a covered Eligible Employee;
(2)
termination (other than by reason of such Eligible Employee's gross  misconduct) of an Employee's employment;
(3)
reduction in hours of an Eligible Employee;
(4)
divorce or legal separation of an Eligible Employee or dissolution of an Eligible Employee's registered domestic partnership;
 
 

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(5)
an Eligible Employee's entitlement to Medicare benefits; or
(6)
a Dependent child ceasing to qualify as a Dependent under the Basic Plan, (or, if applicable, Substitute Basic Coverage) or with respect to a Dependent child who is a Medicare Eligible Retired Participant, the child's ceasing to otherwise qualify under the Prior Basic Plan .

2.30
Retire, Retired or Retirement .  "Retire," "Retired" or "Retirement" shall mean the termination of an Active Employee Participant's employment with AT&T or any of its Subsidiaries, for reasons other than death, on or after the earlier of the following dates:  (1) the date such Active Employee Participant has attained age 55, and, for an Active Employee Participant on or after January 1, 2002, has five (5) years of service, or (2) the date the Active Employee Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997:  
 
Net Credit Services
Age
25 years or more
50 or older
30 years or more
Any age
 
2.31                Retired Participant .  "Retired Participant" shall mean a Retired Employee Participant and his Dependents.

2.32
Retired Employee Participant .   "Retired Employee Participant" shall mean a former Active Employee Participant who has Retired within the meaning of Section 2.30 and who meets the additional requirements of Section 3.2 to be eligible for coverage in Retirement.
 
        2.33                SEVP-HR . "SEVP-HR" shall mean AT&T's highest ranking Officer, specifically responsible for human resources matters.
 
2.34
Subsidiary .   "Subsidiary" shall mean any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest.  The Committee may, at its sole discretion, designate any other corporation, partnership, venture or other entity a Subsidiary for the purpose of participating in this Plan.  Notwithstanding anything herein to the contrary, unless designated a "Subsidiary" pursuant to the immediately preceding sentence, Cingular Wireless LLC, Sterling Commerce, Inc., and their respective subsidiaries shall not be considered a Subsidiary under this Plan.
 
2.35
Vision Services .   "Vision Services" shall mean services for vision care.  The Plan Administrator, in its sole discretion, shall determine whether a particular service is classified as Preventive Care or a Vision, Medical or Dental Service.
 
2.36                  Medicare Eligible Retired Participant .   "Medicare Eligible Retired Participant" shall mean a Retired Participant who is eligible for Medicare due to reaching the eligible age for     Medicare.


ARTICLE 3   ELIGIBILITY

3.1
Active Participants .   Each Eligible Employee shall be eligible to participate in this Plan along with his/her Dependent(s) beginning on the effective date of the employee
 

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becoming an Eligible Employee.
 
Upon becoming an Eligible Employee, he/she shall have 90 days to elect to participate in this Plan.  In order to continue participation, the Active Participant must pay all applicable Monthly Contributions.  If an Active Employee Participant terminates participation in this Plan at any time for any reason, that Participant and his/her Dependent(s) shall be ineligible to participate in the Plan at any time in the future.
 

3.2
Retired Participants Provisions of this Plan will continue in effect during Retirement for each Retired Employee Participant and his/her Dependent(s) with respect to any Eligible Employee who became a Participant before January 1, 1999.  Neither an Eligible Employee who became a Participant after December 31, 1998 nor his/her Dependent(s) shall be eligible for participation hereunder on or after such Participant's Retirement. Coverage for Retired Participants shall be subject to the payment of all applicable Monthly Contributions, as governed by Article 7.  The provisions of this Plan related to Retired Participants, including the level of Covered Benefits and the applicable Monthly Premiums, shall begin to apply on the first day of the month following the month in which the Active Employee Participant Retires.  If a Retired Employee Participant terminates participation at any time for any reason, participation of that Retired Employee participant and his/her Dependent(s) may not be reinstated for any reason.

3.3
Requirement to Enroll and Participate in Basic Plans and Medicare .   Notwithstanding any provision in this plan to the contrary, as a condition to participation in the Plan, each Participant must be enrolled in, paying for, and participating in (i) the Basic Plans if such Participant is eligible for coverage under the terms of the Basic Plans, or, if applicable, Substitute Basic Coverage, and (ii) all parts of Medicare for which such Participant is eligible and for which Medicare would be primary if enrolled therein, except for Medicare Part D relating to prescription drug coverage.

Notwithstanding any other provision of the Plan to the contrary, an individual who first becomes an Eligible Employee in the middle of a Plan Year and who is enrolled in AT&T sponsored group health plans other than the Basic Plans, will be allowed to participate in the Plan for the remainder of the Plan Year along with his/her Dependent(s) who are enrolled in such other AT&T sponsored health plans, as if they were participating in the Basic Plans.  At the next group enrollment opportunity for the Basic Plans, the Active Employee Participant and his/her Dependent(s) must enroll in the Basic Plans to continue participation in this Plan.
 
ARTICLE 4   BENEFITS

4.1
Covered Benefits . Subject to the limitations in this Plan (including but not limited to the loyalty conditions set forth in Article 8 below) , this Plan provides the benefits described below.  Monthly Contributions for participation in this Plan, the Basic Plans, Medicare, or any other health plan are not considered "services", and are therefore are not Covered Benefits under this Plan.

(a)
Active Participants (Medical Services and Preventive Care) -

Medical Services - After the Annual Deductible has been met, 100% payment of Covered Health Services not paid under the AT&T International Health Plan (with respect to Officers serving in expatriate positions with the Company) or Medicare minus the amount
 
 

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of Coinsurance, until the Active Participant reaches the Annual Out-of-Pocket Maximum, at which time coverage is 100% of Covered Health Services (or 100% of Covered Health Services not paid under the AT&T International Health Plan with respect to Officers serving in expatriate positions with the Company) .

Preventive Care - Preventive Care is covered at 100%, not subject to the Annual Deductible or Coinsurance.

(b)
Active Participants (Dental Services and Vision Services) -

100% payment, through reimbursement or otherwise, of all Dental Services and Vision Services not paid under the Active Participant's (i) Basic Plans or (ii) Medicare, provided expenses for such services would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not.

(c)
Retired Participants

100% payment, through reimbursement or otherwise, of all Medical, Dental, Vision and Preventive services not paid under the Retired Participant's (i) Basic Plans or Substitute Basic Coverage, if either is applicable or (ii) Medicare, provided expenses for such services would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not.

4.2
Covered Benefit Limits RESERVED

4.3
Priority of Paying Covered Claims .  Claims for benefits will be applied against the various health plans, as applicable, and coordinated with Medicare in the following order:
(1)
Medicare, to the extent the Participant is eligible therefore and such claim is actually paid by Medicare,
(2)
Basic Plans, if applicable,
(3)
CarePlus, if elected,
(4)
Long Term Care Plan, if elected,
(5)
this Plan.

4.4
Substitute Basic Coverage .  Notwithstanding any other provision of this Plan to the contrary, if a Retired Employee Participant, other than a Medicare Eligible Retired Participant, is eligible for participation under this Plan during Retirement, but not eligible to participate under the Basic Plans, the Plan shall provide medical, dental, and vision benefits for the Retired Employee Participant and his/her Dependent(s) substantially equivalent to the benefits under the Basic Plans through an insured product (hereinafter, "Substitute Basic Coverage").  Eligibility for Substitute Basic Coverage is conditioned upon the Retired Participant's payment of contributions in the same amount that a similarly situated retired Basic Plan participant is required to pay under the Basic Plans. Such Substitute Basic Coverage shall constitute such Retired Participant's Basic Plans for all purposes under this Plan.  The costs of Substitute Basic Coverage (except for the required monthly contributions referenced in this paragraph) shall be borne by AT&T, and the costs of Substitute Basic Coverage shall not be included in the determination of any Retired Participant's annual Plan contribution amount as provided in Article 7.  In addition, certain other Retired Employee Participants participate in the "Separation Medical Plan" rather than the Basic Plans.  References to Substitute Basic Coverage
 

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throughout this Plan shall be deemed to include the Separation Medical Plan.  The Plan Administrator maintains records governing the names of those Retired Employee Participants who have Substitute Basic Coverage or Separation Medical Plan coverage.


ARTICLE 5   TERMINATION OF PARTICIPATION

5.1
Termination of Participation .   Participation will cease on the last day of the month in which one of the following conditions occurs:
(1)
The Participant, other than a Medicare Eligible Retired Participant, is no longer a participant in the Basic Plans or Substitute Basic Coverage, in which case participation ceases for such Participant;

(2)
A Participant ceases to meet the definition of a Dependent (as set forth in Section 2.14 of this Plan) for any reason, in which case participation ceases for such Participant;

(3)
A Participant eligible to enroll in Medicare is no longer a participant in all parts of Medicare for which such Participant is eligible to enroll and for which Medicare would be primary if enrolled therein, except for Medicare Part D relating to prescription drug coverage, in which case participation ceases for such Participant;

(4)
The Active Employee Participant's termination of employment for reasons other than Death, Disability, or Retirement by an individual who meets the applicable requirements of Section 3.2 in order to qualify for Plan benefits in Retirement, in which case participation ceases for the Participant and his/her Dependent(s);

(5)
The demotion or designation of an Active Employee Participant so as to no longer be eligible to participate in the Plan, in which case participation ceases for the Participant and his/her Dependent(s);

(6)
The Active Employee Participant (or Retired Employee Participant) participates in an activity that constitutes engaging in competitive activity with AT&T or engaging in conduct disloyal to AT&T under Article 8, in which case participation ceases for the Active Employee Participant (or Retired Employee Participant) and his/her Dependent(s); or

(7)
Discontinuance of the Plan by AT&T, or, with respect to a Subsidiary's Active Employee Participants (or Retired Employee Participants), such Subsidiary's failure to make the benefits hereunder available to Active Employee Participants employed by it (or its Retired Employee Participants).

5.2
Dependents Failure to Participate in Basic Plans .  If a Dependent, other than a Medicare Eligible Retired Participant, ceases participation under a Basic Plan or, if applicable, Substitute Basic Coverage, such Dependent's participation under this Plan will cease with the same effective date.

5.3
Death .  In the event of the Active Employee Participant's (or Retired Employee's Participant's) death, his Dependents may continue participation in this Plan as follows:
 

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(1)
In the event of the death of a Retired Employee Participant such Retired Employee Participant's Dependents may continue participation in this Plan, eligible for the Covered Benefits described in Section 4.1(c) of the Plan, for so long as such Dependents are participating in the Basic Plans (or, if applicable, Substitute Basic Coverage) or with respect to a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible for participation under the terms of  the Prior Basic Plan and are paying any applicable contributions for this Plan as provided in Article 7. If a surviving spouse of such deceased Active Employee Participant otherwise eligible for participation in the Plan remarries, his/her participation and the participation of any otherwise eligible Dependents will cease with the effective date of his/ her marriage.

(2)
In the event of an in-service death of an Active Employee Participant eligible to participate in the Plan in Retirement as provided under Article 3.2, who was Retirement eligible, within the meaning of Section 2.30, at the time of death, such Active Employee Participant's surviving Dependents may continue participation in this Plan, eligible for the Covered Benefits described in Section 4.1(a) and (b),  for so long as such Dependents are participating in the Basic Plans  (or, if applicable Substitute Basic Coverage) or with respect to a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible for participation under the terms of the Prior Basic Plan and are paying any applicable contributions for this Plan as provided in Article 7.  If a surviving spouse of such deceased Active Employee Participant otherwise eligible for participation in the Plan remarries, his/her participation and the participation of any otherwise eligible Dependents will cease with the effective date of his/ her marriage.

(3)
In the event of (i) an in-service death of an Active Employee Participant not eligible to participate in the Plan in Retirement as provided in Article 3.2 or (ii) an in-service death of an Active Employee Participant eligible to participate in the Plan in Retirement as provided in Article 3.2 but the individual was not Retirement eligible, within the meaning of Section 2.30, at the time of death, such Active Employee Participant's Dependent(s) may continue participation in this Plan, eligible for the Covered Benefits described in Sections 4.1(a) and (b), for a 36-month period commencing the month following the month in which such Active Employee Participant dies as long as such Dependent(s) are participating in the Basic Plans (or with respect to a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible for participation under the terms of the Prior Basic Plan) and subject to the payment of Active Participant Contributions for the first 12 months and payment of Active COBRA Contributions for the remaining 24 months, as provided by Articles 7 and 10.1.  If the Active Employee Participant's Dependent(s) are eligible for COBRA, they will automatically be enrolled in COBRA so that there is no lapse in coverage, and this 36-month coverage will be integrated and run concurrently with COBRA coverage.

 

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ARTICLE 6   DISABILITY

6.1
Disability .  With respect to any Active Employee Participant who commences receipt of short term or long term disability benefits under the Officer Disability Plan, participation under this Plan will be as follows:

(1)
The Participant will continue to participate in this Plan, eligible for the Covered Benefits described in Section 4.1(a) and (b), for as long as he/she receives short term disability benefits under the Officer Disability Plan and pays the applicable contributions for this Plan as provided by Article 7.

(2)
An Active Employee Participant not eligible to participate in the Plan in Retirement as provided in Article 3.2 who commences long term disability benefits under the Officer Disability Plan or an Active Employee Participant eligible to participate in the Plan in Retirement as provided in Article 3.2 but who is not Retirement eligible, within the meaning of Section 2.30, at the time long term disability benefits under the Officer Disability Plan commence, will cease participation in this Plan (along with his/her Dependents) effective as of the last day of the calendar month in which such long term disability benefits commence, unless such benefits commence on the first day of a calendar month, in which case participation in this Plan shall cease effective as of the last day of the prior month.

(3)
An Active Employee Participant eligible to participate in the Plan in Retirement as provided in Article 3.2 ,who is Retirement eligible, within the meaning of Section 2.30, at the time long term disability benefits under the Officer Disability Plan commence, will be eligible to continue participation in this Plan on the same terms and conditions that participation would be available to such Participant in Retirement, subject to the payment of applicable contributions for this Plan as provided by Article 7, regardless of his/her continued receipt of long term disability benefits under the Officer Disability Plan.


ARTICLE 7   COSTS

7.1
Provision of Benefits under the Plan .  Except as provided below in this Article 7 with respect to required Monthly Contributions or with respect to any required Coinsurance, the benefits available to Participants under this Plan shall be provided through an insurance policy maintained by AT&T.

7.2
Active Participant Contributions .  An Active Participant electing to participate in the Plan will pay Monthly Contributions to participate in the Plan while in active service, while on Leave of Absence or while receiving short term disability benefits under the Officer Disability Plan. The Monthly Contribution for participation may change annually, effective at the beginning of each Plan Year.  Contributions to be made by Active Participants electing to participate in the Plan shall be set annually by the SEVP-HR, determined in the SEVP-HR's sole and absolute discretion.  The SEVP-HR may adopt tiered rates for similarly situated groups of Participants based on factors such as the number of Dependents covered or Medicare eligibility.  Notwithstanding the foregoing, required Monthly Contributions for Executive Officers shall be approved by the Committee.
 

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7.3
Retired Participant Contributions .  Retired Participants who elect to participate will pay Monthly Contributions to participate in the Plan. The Monthly Contribution for participation may change annually, effective at the beginning of each Plan Year.  Contributions to be made by Retired Participants who elect to participate shall be set annually by the SEVP-HR (in his/her sole and absolute discretion), to the extent their contributions have not previously been provided for in a separate agreement.

7.4
Survivor Contributions.   Upon the death of a Participant, the Participant's Dependents shall be required to pay Monthly Contributions to participate in the Plan.  The Monthly Contributions shall be set annually by the SEVP-HR, in the SEVP-HR's sole and absolute discretion.  Any changes to the Monthly Contributions shall be effective at the beginning of each Plan Year.

7.5
Contributions for Participants on Disability .  Participants continuing benefits while on Disability shall be required to pay Monthly Contributions to participate in the Plan.  The Monthly Contributions shall be set annually by the SEVP-HR, determined in the SEVP-HR's sole and absolute discretion.  Any changes to the Monthly Contributions shall be effective at the beginning of each Plan Year.

ARTICLE 8   LOYALTY CONDITIONS

8.1
Participants acknowledge that no coverage and benefits would be provided under this Plan on and after January 1, 2010 but for the loyalty conditions and covenants set forth in this Article, and that the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan coverage and benefits for the Participants on or after January 1, 2010.  Accordingly, as a condition of receiving coverage and any Plan benefits on or after January 1, 2010, each Participant is deemed to agree that he/she shall not, without obtaining the written consent of the Plan Administrator in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in this Section.  Further and notwithstanding any other provision of this Plan, all coverage and benefits under this Plan on and after January 1, 2010 with respect to a Participant and his or her Dependents shall be subject in their entirety to the enforcement provisions of this Section if the Participant, without the Plan Administrator's consent, participates in an activity that constitutes engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as defined below.  The provisions of this Article 8 as in effect immediately before such date shall be applicable to Participants who retire before January 1, 2010.
8.2
Definitions .  For purposes of this Article and of the Plan generally
(1)
an "Employer Business" shall mean AT&T, any Subsidiary, or any business in which AT&T or a Subsidiary or an affiliated company of AT&T has a substantial ownership or joint venture interest;
(2)
"engaging in competition with AT&T" shall mean, while employed by an Employer Business or within two (2) years after the Participant's termination of employment, engaging by the Participant in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an

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Employer Business.  "Engaging in competition with AT&T" shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer Business.  "Engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee or director of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.
(3)
"engaging in conduct disloyal to AT&T" means, while employed by an Employer Business or within two  (2) years after the Participant's termination of employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by AT&T or its affiliates during the one (1)  year prior to the termination of the Participant's employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T and its affiliates; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Participant had business contact on behalf of any Employer Business during the two (2) years prior to the termination of the Participant's employment, for any reason to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or its affiliate; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom Participant had business contact, whether in person or by other media, on behalf of any Employer Business during the two (2) years prior to the termination of Participant's employment for any reason ("Customer"), to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business.  "Engaging in conduct disloyal to AT&T" also means, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.
(4)
"Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to the Participant, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure.  Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by the Participant.  For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs,

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costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business.  Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by the Participant from a third party; (iii) was known to the Participant prior to receipt from the Employer Business; or (iv) was independently developed by the Participant or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by the Participant or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.
8.3
Forfeiture of Benefits .  Subject to the provisions of Section 1001(5) of the Affordable Care Act, coverage and benefits shall be forfeited and shall not be provided under this Plan for any period as to which the Plan Administrator determines that, within the time period and without the written consent specified, Participant has been either engaging in competition with AT&T or engaging in conduct disloyal to AT&T.
8.4
Equitable Relief .   The parties recognize that any Participant's breach of any of the covenants in this Article 8 will cause irreparable injury to AT&T, will represent a failure of the consideration under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to provide the Participant with the opportunity to receive Plan coverage and benefits, and that monetary damages would not provide AT&T with an adequate or complete remedy that would warrant AT&T's continued sponsorship of the Plan and payment of Plan benefits for all Participants.  Accordingly, in the event of a Participant's actual or threatened breach of the covenants in this Article, the Plan Administrator, in addition to all other rights and acting as a fiduciary under ERISA on behalf of all Participants, shall have a fiduciary duty (in order to assure that AT&T receives fair and promised consideration for its continued Plan sponsorship and funding) to seek an injunction restraining the Participant from breaching the covenants in this Article 8.  In addition, AT&T shall pay for any Plan expenses that the Plan Administrator incurs hereunder, and shall be entitled to recover from the Participant its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies.  To enforce its repayment rights with respect to a Participant, the Plan shall have a first priority, equitable lien on all Plan benefits provided to or for the Participant and his or her Dependents.  In the event the Plan Administrator succeeds in enforcing the terms of this Article through a written settlement with the Participant or a court order granting an injunction hereunder, the Participant shall be entitled to collect Plan benefits collect Plan benefits prospectively, if the Participant is otherwise entitled to such benefits, net of any fees and costs assessed pursuant hereto (which fees and costs shall be paid to AT&T as a repayment on behalf of the Participant), provided that the Participant complies with said settlement or injunction.
8.5
Uniform Enforcement .  In recognition of AT&T's need for nationally uniform standards for the Plan administration, it is an absolute condition in consideration of any Participant's accrual or receipt of benefits under the Plan after January 1, 2010 that each
 

12


 
and all of the following conditions apply to all Participants and to any benefits that are paid or are payable under the Plan:
(1)
ERISA shall control all issues and controversies hereunder, and the Committee shall serve for purposes hereof as a "fiduciary" of the Plan, and as its "named fiduciary" within the meaning of ERISA.
(2)
All litigation between the parties relating to this Article shall occur in federal court, which shall have exclusive jurisdiction, any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA.
(3)
If the Plan Administrator determines in its sole discretion either (I) that AT&T or its affiliate that employed the Participant terminated the Participant's employment for cause, or (II) that equitable relief enforcing the Participant's covenants under this Article 8 is either not reasonably available, not ordered by a court of competent jurisdiction, or circumvented because the Participant has sued in state court, or has otherwise sought remedies not available under ERISA, then in any and all of such instances the Participant shall not be entitled to collect any Plan benefits, and if any Plan benefits have been paid to the, the Participant shall immediately repay all Plan benefits to the Plan (with such repayments being used within such year for increased benefits for other Participants in any manner determined in the Plan Administrator's discretion) upon written demand from the Plan Administrator.  Furthermore, the Participant shall hold AT&T and its affiliates harmless from any loss, expense, or damage that may arise from any of the conduct described in clauses (I) and (II) hereof.

ARTICLE 9   MISCELLANEOUS

9.1
Administration .  The Plan Administrator is the named fiduciary of the Plan and has the power and duty to do all things necessary to carry out the terms of the Plan.  The Plan Administrator has the sole and absolute discretion to interpret the provisions of the Plan, to make findings of fact, to determine the rights and status of Participants and other under the Plan, to determine which expenses and benefits qualify as Covered Health Services or Covered Benefits, to make all benefit determinations under the Plan, to decide disputes under the Plan and to delegate all or a part of this discretion to third parties and insurers.  To the fullest extent permitted by law, such interpretations, findings, determinations and decisions shall be final, binding and conclusive on all persons for all purposes of the Plan.  The Plan Administrator may delegate any or all of its authority and responsibility under the Plan to other individuals, committees, third party administrators, claims administrators or insurers for any purpose, including, but not limited to the processing of benefits and claims related thereto.  In carrying out these functions, these individuals or entities have been delegated responsibility and discretion for interpreting the provisions of the Plan, making findings of fact, determining the rights and status of Participants and others under the Plan, and deciding disputes under the Plan and such interpretations, findings, determinations and decisions shall be final, binding and conclusive on all persons for all purposes of the Plan.
 

 

13

 
9.2
Amendments and Termination .  This Plan may be modified or terminated at any time in accordance with the provisions of AT&T's Schedule of Authorizations.

9.3
Newborns' and Mothers' Health Protection Act of 1996 .  To the extent this Plan provides benefits for hospital lengths of stay in connection with childbirth, the Plan will cover the minimum length of stay required for deliveries (i.e., a 48-hour hospital stay after a vaginal delivery or a 96-hour stay following a delivery by Cesarean section.)  The mother's or newborn's attending physician, after consulting with the mother, may discharge the mother or her newborn earlier than the minimum length of stay otherwise required by law.  Such coverage shall be subject to all other provisions of this Plan.

9.4
Women's Health and Cancer Rights Act of 1998 .  To the extent this Plan provides benefits for mastectomies, it will provide, for an individual who is receiving benefits in connection with a mastectomy and who elects breast reconstruction in connection with such mastectomy, coverage for reconstruction on the breast on which the mastectomy was performed, surgery and reconstruction on the other breast to give a symmetrical appearance, and prosthesis and coverage for physical complications of all stages of the mastectomy, including lymphedemas.  Such coverage shall be subject to all other provisions of this Plan.

9.5
Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 .   To the extent this Plan provides mental health benefits or substance use disorder benefits it will not place annual or lifetime maximums for such benefits that are lower than the annual and lifetime maximums for physical health benefits.  In addition, the financial requirements (e.g., deductibles and co-payments) and treatment limitations (e.g., number of visits or days of coverage) that apply to mental health benefits or substance use disorder benefits will not be more restrictive than the predominant financial requirements or treatment limitations that apply to substantially all medical/surgical benefits; mental health benefits and substance use disorder benefits will not be subject to any separate cost sharing requirements or treatment limitations that only apply to such benefits; if the Plan provides for out of network medical/surgical or substance use disorder benefits, it will provide for out of network mental health and substance use disorder benefits and standards for medical necessity determinations and reasons for any denial of benefits relating to mental health benefits and substance use disorder benefits will be made available upon request to plan participants.  Such coverage shall be subject to all other provisions of this Plan.

9.6
Continuation of Coverage During Family or Medical Leave .  During any period which an Active Employee Participant is on a family or medical leave as defined in the Family or Medical Leave Act, any benefit elections in force for such Participant shall remain in effect.  While the Participant is on paid leave, contributions shall continue.  If the Participant is on an unpaid leave, the Participant may elect to prepay required contributions on a pre-tax basis before the commencement of such unpaid leave.  Alternatively, the Participant may elect to make such payments on an after-tax basis monthly in accordance with an arrangement that the Plan Administrator shall provide.  If coverage is not continued during the entire period of the family or medical leave because the Participant declines to pay the premium, the coverage must be reinstated upon reemployment with no exclusions or waiting periods, notwithstanding any other provision of this Plan to the contrary. If the Participant does not return to work upon completion of the leave, the Participant must pay the full cost of any health care coverage that was continued on his/her behalf during the leave.  These rules apply to the COBRA eligible programs.
 

14

 
9.7
Rights While on Military Leave .  Pursuant to the provisions of the Uniformed Services Employment and Reemployment Rights Act of 1994, an Active Employee Participant on military leave will be considered to be on a Leave of Absence and will be entitled during the leave to the health and welfare benefits that would be made available to other similarly situated employees if they were on a Leave of Absence.  This entitlement will end if the individual provides written notice of intent not to return to work following the completion of the military leave.  The individual shall have the right to continue his/her coverage, including any Dependent coverage, for the lesser of the length of the leave or 18 months.  If the military leave is for a period of 31 days or more, the individual may be required to pay 102 percent of the total premium (determined in the same manner as a COBRA continuation coverage premium).  If coverage is not continued during the entire period of the military leave because the individual declines to pay the premium or the leave extends beyond 18 months, the coverage must be reinstated upon reemployment with no pre-existing condition exclusions (other than for service-related illnesses or injuries) or waiting periods (other than those applicable to all Eligible Employees).

9.8
Qualified Medical Child Support Orders .  The Plan will comply with any Qualified Medical Child Support Order issued by a court of competent jurisdiction or administrative body that requires the Plan to provide medical coverage to a Dependent child of an Active Employee or Retired Employee Participant.  The Plan Administrator will establish reasonable procedures for determining whether a court order or administrative decree requiring medical coverage for a Dependent child meets the requirements for a Qualified Medical Child Support Order.  The cost of coverage or any additional cost of such coverage, if any, shall be borne by the Participant.

9.9
Right of Recovery .   If the Plan has made an erroneous or excess payment to any Participant, the Plan Administrator shall be entitled to recover such excess from the individual or entity to whom such payments were made.  The recovery of such overpayment may be made by offsetting the amount of any other benefit or amount payable by the amount of the overpayment under the Plan.

ARTICLE 10   COBRA

10.1
Continuation of Coverage Under COBRA .  Participants shall have all COBRA continuation rights required by federal law and all conversion rights.  COBRA continuation coverage shall be continued as provided in this Article 10.

10.2
COBRA Continuation Coverage for Terminated Participants .  A covered Active Employee Participant may elect COBRA continuation coverage, at his/her own expense, if his participation under this Plan would terminate as a result of one of the following Qualifying Events: an Employee's termination of employment or reduction of hours with an Employer.

10.3
COBRA Continuation Coverage for Dependents .  A Qualified Dependent may elect COBRA continuation coverage, at his/her own expense, if his/her participation under this Plan would terminate as a result of a Qualifying Event.

10.4
Period of Continuation Coverage for Covered Participants .   A covered Active Employee Participant who qualifies for COBRA continuation coverage as a result of a Participant's termination of employment or reduction in hours of employment described in Subsection 10.2 may elect COBRA continuation coverage for up to 18 months
 

15

 
measured from the date of the Qualifying Event.

Coverage under this Subsection 10.4 may not continue beyond the:

(1)
date on which the Active Employee Participant's Employer ceases to maintain this Plan;
(2)
last day of the month for which premium payments have been made with respect to this Plan, if the individual fails to make premium payments on time, in accordance with Subsection 10.6;
(3)
date the covered Active Employee Participant becomes entitled to Medicare; or
(4)
date the covered Participant is no longer subject to a pre-existing condition exclusion under the Participant's other coverage or new employer plan for the type of coverage available under the COBRA eligible program for which the COBRA election was made.

10.5
Period of COBRA Continuation Coverage for Dependents .  If a Qualified Dependent elects COBRA continuation coverage under a COBRA eligible program as a result of the an Active Employee Participant's termination of employment as described in Subsection 10.2, continuation coverage may be continued for up to 18 months measured from the date of the Qualifying Event.  COBRA continuation coverage for all other Qualifying Events may continue for up to 36 months.

Continuation coverage under this Subsection 10.5 with respect to a COBRA eligible program may not continue beyond the date:

(1)
on which premium payments have not been made, in accordance with Subsection 10.6 below;
(2)
the Qualified Dependent becomes entitled to Medicare;
(3)
on which the Employer ceases to maintain this Plan; or
(4)
the Qualified Dependent is no longer subject to a pre-existing condition exclusion under the Participant's other coverage or new employer plan for the type of coverage available under this Plan.

10.6
Contribution Requirements for COBRA Continuation Coverage .  Covered Participants and Qualified Dependents who elect COBRA continuation coverage as a result of a Qualifying Event will be required to pay continuation coverage payments.  Continuation coverage payments are the payments required for COBRA continuation coverage that is an amount equal to a reasonable estimate of the cost to this Plan of providing coverage for all covered Participants at the time of the Qualifying Event plus a 2% administrative expense.  In the case of a disabled individual who receives an additional 11-month extended coverage under COBRA, the Employer may assess up to 150% of the cost for this extended coverage period.  Such cost shall be determined on an actuarial basis and take into account such factors as the Secretary of the Treasury may prescribe in regulations.

 

16


 
Covered Participants and Qualified Dependents must make the continuation coverage payment prior to the first day of the month in which such coverage will take effect.  However, a covered Participant or Qualified Dependent has 45 days from the date of an affirmative election to pay the continuation coverage payment for the first month's payment and the cost for the period between the date medical coverage would otherwise have terminated due to the Qualifying Event and the date the covered Participant and/or Qualified Dependent actually elects COBRA continuation coverage.

The covered Participant and/or Qualified Dependent shall have a 30-day grace period to make the continuation coverage payments due thereafter.  Continuation coverage payments must be postmarked on or before the completion of the 30-day grace period.  If continuation coverage payments are not made on a timely basis, COBRA continuation coverage will terminate as of the last day of the month for which timely premiums were made.  The 30-day grace period shall not apply to the 45-day period for the first month's payment of COBRA premiums as set out in the section above.

If payment is received that is significantly less than the required continuation coverage payment, then continuation coverage will terminate as of the last day of the month for which premiums were paid.  A payment is considered significantly less than the amount due if it is greater than the lesser of $50 or 10% of the required continuation coverage payment.  Upon receipt of a continuation coverage payment that is insignificantly less than the required amount, the Plan Administrator must notify the covered Participant or Qualified Dependent of the amount of the shortfall and provide them with an additional 30-day grace period from the date of the notice for this payment only.

10.7
Limitation on Participant's Rights to COBRA Continuation Coverage .

(1)
If a Qualified Dependent loses, or will lose medical coverage under this Plan as a result of divorce, legal separation, entitlement to Medicare, or ceasing to be a Dependent, such Qualified Dependent is responsible for notifying the Plan Administrator in writing within 60 days of the Qualifying Event.  Failure to make timely notification will terminate the Qualified Dependent's rights to COBRA continuation coverage under this Article.
(2)
A Participant must complete and return the required enrollment materials within 60 days from the later of (a) the date of loss of coverage, or (b) the date the Plan Administrator sends notice of eligibility for COBRA continuation coverage.  Failure to enroll for COBRA continuation coverage during this 60-day period will terminate all rights to COBRA continuation coverage under this Article.  An affirmative election of COBRA continuation coverage by a Participant or his/her spouse shall be deemed to be an election for that Participant's Dependent(s) who would otherwise lose coverage under the Plan.

10.8
Subsequent Qualifying Event .  If a second Qualifying Event occurs during an 18-month extension explained above, coverage may be continued for a maximum of 36 months from the date of the first Qualifying Event.  In the event the Dependent loses coverage due to a Qualifying Event and after such date the Participant becomes entitled to Medicare, the Dependent shall have available up to 36 months of coverage measured from the date of the Qualifying Event that causes the loss of coverage.  If the Participant
 

17

 
was entitled to Medicare prior to the Qualifying Event, the Dependent shall have up to 36 months of coverage measured from the date of entitlement to Medicare.

10.9
Extension of COBRA Continuation Period for Disabled Individuals .  The period of continuation shall be extended to 29 months in total (measured from the date of the Qualifying Event) in the event the individual is disabled as determined by the Social Security laws within 60 days of the Qualifying Event.  The individual must provide evidence to the Plan Administrator of such Social Security determination prior to the earlier of 60 days after the date of the Social Security determination, or the expiration of the initial 18 months of COBRA continuation coverage.  In such event, the Employer may charge the individual up to 150% of the COBRA cost of the coverage.

ARTICLE 11   PRIVACY OF MEDICAL INFORMATION

11.1
Definitions .  For purposes of this Article 11, the following defined terms shall have the meaning assigned to such terms in this subsection:
(1)   "Business Associate" shall have the meaning assigned to such phrase at 45 C.F.R. § 160.103;

(2)   "Health Care Operations" shall have the meaning assigned to such phrase at 45 C.F.R. § 164.501;

(3)   "HIPAA" shall mean Parts 160 ("General Administrative Requirements") and 164 ("Security and Privacy") of Title 45 of the Code of Federal Regulations as such parts are amended from time to time;

(4)   "Payment" shall have the meaning assigned to such phrase at 45 C.F.R § 160.103;

(5)   "Protected Health Information" or "PHI" shall have the meaning assigned to such phrase at 45 C.F.R. § 160.103; and

(6)   "Treatment" shall have the meaning assigned to such phrase at 45 C.F.R. § 164.501.

11.2
Privacy Provisions Relating to Protected Health Information ("PHI") .  The Plan and its Business Associates shall use and disclose PHI to the extent permitted by, and in accordance with, HIPAA, for purposes of providing benefits under the Plan and for purposes of administering the plan, including, by way of illustration and not by way of limitation, for purposes of Treatment, Payment, and Health Care Operations.
11.3
Disclosure of De-Identified or Summary Health Information .  The HIPAA Plan, or, with respect to the HIPAA Plan, a health insurance issuer, may disclose summary health information (as that phrase is defined at 45 C.F.R. § 160.5049a))  to the Plan Sponsor of the HIPAA Plan (and its affiliates) if such entity requests such information for the purpose of:

(1)   Obtaining premium bids from health plans for providing health
insurance coverage under the HIPAA Plan;
 

 

18


(2)   Modifying, amending or terminating the group health benefits
  under the HIPAA Plan.

In addition, the HIPAA Plan or a health insurance insurer with respect to the HIPAA Plan may disclose to the Plan Sponsor of the HIPAA Plan (or its affiliates) information on whether an individual is participating in the group health benefits provided by the HIPAA Plan or is enrolled in, or has ceased enrollment with health insurance offered by the HIPAA Plan.

11.4
The HIPAA Plan Will Use and Disclose PHI as Required by Law
               or as Permitted by the Authorization of the Participant or Beneficiary .

Upon submission of an authorization signed by a Participant, beneficiary, subscriber or personal representative that meets HIPAA requirements, the HIPAA Plan will disclose PHI.

In addition, PHI will be disclosed to the extent permitted or required by law, without the submission of an authorization form.

11.5
Disclosure of PHI to the Plan Sponsor .   The HIPAA Plan will disclose information to the Plan Sponsor only upon certification from the Plan Sponsor that the HIPAA Plan documents have been amended to incorporate the assurances provided below.

The Plan Sponsor agrees to:

(1)
not use or further disclose PHI other than as permitted or required by the HIPAA Plan document or as required by law;

(2)
ensure that any affiliates or agents, including a subcontractor, to whom the Plan Sponsor provides PHI received from the HIPAA Plan, agrees to the same restrictions and conditions that apply to the Plan Sponsor with respect to such PHI;

(3)
not use or disclose PHI for employment-related actions and decisions unless authorized by the individual to whom the PHI relates;

(4)
not use or disclose PHI in connection with any other benefits or employee benefit plan of the Plan Sponsor or its affiliates unless permitted by the Plan or authorized by an individual to whom the PHI relates;

(5)
report to the Plan any PHI use or disclosure that is inconsistent with the uses or disclosures provided for of which it becomes aware;

(6)
make PHI available to an individual in accordance with HIPAA's access rules;

(7)
make PHI available for amendment and incorporate any amendments to PHI in accordance with HIPAA;
 
(8)
make available the information required to provide an accounting

 

19


 
of disclosures;

(9)
make internal practices, books and records relating to the use and disclosure of PHI received from the HIPAA Plan available to the Secretary of the United States Department of Health and Human Resources for purposes of determining the Plan's compliance with HIPAA; and

(10)
if feasible, return or destroy all PHI received from the HIPAA Plan that the Plan Sponsor still maintains in any form, and retain no copies of such PHI when no longer needed for the purpose for which disclosure was made (or if return or destruction is not feasible, limit further uses and disclosures to those purposes that make the return or destruction infeasible).

11.6
Separation Between the Plan Sponsor and the HIPAA Plan .   In accordance with HIPAA, only the following employees and Business Associate personnel shall be given access to PHI:

(1)
employees of the AT&T Benefits and/or AT&T Executive Compensation organizations responsible for administering group health plan benefits under the HIPAA Plan, including those employees whose functions in the regular course of business include Payment, Health Care Operations or other matters pertaining to the health care programs under a HIPAA Plan;

(2)
employees who supervise the work of the employees described in (1), above;

(3)
support personnel, including other employees outside of the AT&T Benefits or AT&T Executive Compensation organizations whose duties require them to rule on health plan-related appeals or perform functions concerning the HIPAA Plan;

(4)
investigatory personnel to the limited extent that such PHI is necessary to conduct investigations of possible fraud;

(5)
outside and in-house legal counsel providing counsel to the HIPAA Plan;

(6)
consultants providing advice concerning the administration of the HIPAA Plan; and

(7)
the employees of Business Associates charged with providing services to the HIPAA Plan.

The persons identified above shall have access to and use PHI to the extent that such access and use is necessary for the administration of group health benefits under a HIPAA Plan.  If these persons do not comply with this Plan document, the Plan Sponsor shall provide a mechanism for resolving issues of noncompliance, including disciplinary sanctions.

11.7
Enforcement .
Enforcement of this Article 11 shall be as provided for by HIPAA. In particular, participants and beneficiaries are not authorized to sue with regard to purported breaches of this Article
 

 

20

 
11 except as explicitly permitted by HIPAA.


ARTICLE 12                 CLAIM AND APPEAL PROCESS

12.1   Claims for Benefits under the Plan . – See Appendix B.

12.2   Claims Related to Basic Eligibility for Coverage under the Plan and Claims Related to the Article 8 Loyalty Conditions .


( a)   Claims.  A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as a "Claimant") based on a claim for basic eligibility for coverage under the Plan or a claim related to the Article 8 Loyalty Conditions may file a written request for such benefit with the Executive Compensation Administration Department, setting forth his or her claim. The request must be addressed to the AT&T Executive Compensation Administration Department at its then principal place of business.
(b)               Claim Decision.  Upon receipt of a claim, the AT&T Executive Compensation Administration Department shall review the claim and provide the Claimant with a written notice of its decision within a reasonable period of time, not to exceed ninety (90) days, after the claim is received. If the AT&T Executive Compensation Administration Department determines that special circumstances require an extension of time beyond the initial ninety (90)- day claim review period, the AT&T Executive Compensation Administration Department shall notify the Claimant in writing within the initial ninety (90)-day period and explain the special circumstances that require the extension and state the date by which the AT&T Executive Compensation Administration Department expects to render its decision on the claim. If this notice is provided, the AT&T Executive Compensation Administration Department may take up to an additional ninety (90) days (for a total of one hundred eighty (180) days after receipt of the claim) to render its decision on the claim.
If the claim is denied by the AT&T Executive Compensation Administration Department, in whole or in part, the AT&T Executive Compensation Administration Department shall provide a written decision using language calculated to be understood by the Claimant and setting forth:  (i) the specific reason or reasons for such denial; (ii) specific references to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) a description of the Plan's procedures for review of denied claims and the steps to be taken if the Claimant wishes to submit the claim for review; (v) the time limits for requesting a review of a denied claim under this section and for conducting the review under this section ; and (vi)  a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review under this section.
(c)               Request for Review. Within sixty (60) days after the receipt by the Claimant of the written decision on the claim provided for in this section, the Claimant may request in writing that the Plan Administrator review the determination of the AT&T Executive Compensation Administration Department.  Such request must be addressed to the Plan Administrator at the address provided in the written decision regarding the claim.  To assist the Claimant in deciding whether to request a review of a denied claim or in preparing a request for review of a denied
 

 

21

 
claim, a Claimant shall be provided, upon written request to the Plan Administrator and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim.  The Claimant or his or her duly authorized representative may, but need not, submit a statement of the issues and comments in writing, as well as other documents, records or other information relating to the claim for consideration by the Committee.  If the Claimant does not request a review by the Plan Administrator of the AT&T Executive Compensation Administration Department's decision within such sixty (60)-day period, the Claimant shall be barred and estopped from challenging the determination of the AT&T Executive Compensation Administration Department.
(d)               Review of Decision.  Within sixty (60) days after the Plan Administrator's receipt of a request for review, the Plan Administrator will review the decision of the AT&T Executive Compensation Administration Department.  If the Plan Administrator determines that special circumstances require an extension of time beyond the initial sixty (60)-day review period, the Plan Administrator shall notify the Claimant in writing within the initial sixty (60)-day period and explain the special circumstances that require the extension and state the date by which the Plan Administrator expects to render its decision on the review of the claim.  If this notice is provided, the Plan Administrator may take up to an additional sixty (60) days (for a total of one hundred twenty (120) days after receipt of the request for review) to render its decision on the review of the claim.
During its review of the claim, the Plan Administrator shall:
(1)          Take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial review of the claim conducted pursuant to this section;
(2)          Follow reasonable procedures to verify that its benefit determination is made in accordance with the applicable Plan documents; and
(3)          Follow reasonable procedures to ensure that the applicable Plan provisions are applied to the Participant to whom the claim relates in a manner consistent with how such provisions have been applied to other similarly-situated Participants.
After considering all materials presented by the Claimant, the Plan Administrator will render a decision, written in a manner designed to be understood by the Claimant.  If the Plan Administrator denies the claim on review, the written decision will include (i) the specific reasons for the decision; (ii) specific references to the pertinent provisions of this Plan on which the decision is based; (iii) a statement that the Claimant is entitled to receive, upon request to the Plan Administrator and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA.
In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.
 
 

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Appendix A

AT&T Health Plan

2018 Monthly Contributions, Annual Deductible, Coinsurance Percentages and
Annual Out-of-Pocket Maximum

Active Participants
Monthly Contributions
Individual - $152
Individual + Spouse - $187
Individual + 1 or More Children - $152
Individual + Spouse + 1 or More Children - $361
Annual Deductible
Individual - $1,600
Individual + 1 or More - $3,200
Coinsurance Percentage
10% after the Annual Deductible is met.  Coinsurance applies until the Annual Out-of-Pocket Maximum is reached.
Annual Out-of-Pocket Maximum
Individual - $5,500
Individual + 1 or More - $11,000 (individual amount of $5,500)

Retired Participants – Monthly Contributions
Retired Prior to August 31, 1992 and Surviving Spouses
Individual - $203
Individual + Spouse - $203
Individual + 2 or More - $203
Retired on or after September 1, 1992 and Surviving Spouses
 
Note:  The Plan Administrator shall maintain records governing whether a Retired Participant is in Class A, B, C or D.
 
Class A
Individual - $556
Individual + Spouse - $908
Individual + 1 or More Children - $556
Individual + Spouse + 1 or More Children - $782
Class B
Individual - $680
Individual + Spouse - $1,110
Individual + 1 or More Children - $680
Individual + Spouse + 1 or More Children - $958
Class C
Individual - $859
Individual + Spouse - $1,387
Individual + 1 or More Children - $859
Individual + Spouse + 1 or More Children - $1,209
Class D
Individual - $1,046
Individual + Spouse - $2,076
Individual + 1 or More Children - $1,046
Individual + Spouse + 1 or More Children - $1,770

COBRA Continuation Coverage – Monthly Contributions
Active COBRA
Individual - $1,793
Individual + Spouse - $3,674
Individual + 1 or More Children - $2,959
Individual + Spouse + 1 or More Children - $5,089
Retired Prior to August 31, 1992 and Surviving Spouses COBRA
Individual - $1,550
Individual + 1 - $3,176
Individual + 2 or More - $3,333
Retired on or after September 1, 1992 and Surviving Spouses COBRA
Individual - $1,501
Individual + Spouse - $3,186
Individual + 1 or More Children - $2,446
Individual + Spouse + 1 or More Children - $4,400



24

 
Appendix B

Claims Procedure Applicable to Claims for Benefits under the Plan

Claim for Benefits Procedures
You, your covered dependents or a duly authorized person has the right under ERISA and the Plan to file a written claim for benefits under the Plan. The following describes the procedures used by the Plan to process claims for benefits, along with your rights and responsibilities. These procedures were designed to comply with the rules of the Department of Labor (DOL) concerning claims for Benefits. It is important that you follow these procedures to make sure that you receive full benefits under the Plan.
The Plan is an ERISA plan, and you may file suit in federal court if you are denied benefits you believe are due you under the Plan. However, you must complete the full claims and appeal process offered under the Plan before filing a lawsuit.
Filing a Claim for Benefits
When filing a claim for benefits, you should file the claim with the Claims Administrator.  The Claims Administrator is the third party to whom claims and appeal responsibility has been delegated as permitted under Section 9.1 of the Plan.
The following are not considered claims for benefits under the Plan:
·
A claim related to basic eligibility for coverage under the Plan (See Section 12.2 of the Plan).
·
A claim related to the Loyalty Conditions contained in Article 8 of the Plan (See Section 12.2 of the Plan).
Claim Filing Limits
A request for payment of benefits must be submitted within one year after the date of service or the date the prescription was provided.
Required Information
When you request payment of benefits from the Plan, you must provide certain information as requested by the Claims Administrator.
Benefit Determinations
Post-Service Claims
Post-service claims are those claims that are filed for payment of benefits after medical care has been received. If your post-service claim is denied, you will receive a written notice from the Claims Administrator within 30 days of receipt of the claim, as long as all needed information identified above and any other information that the Claims Administrator may request in connection with services rendered to you was provided with the claim. The Claims Administrator will notify you within this 30-day period if additional information is needed to process the Claim and may request a one-time extension not longer than 15 days and pend your Claim until all information is received.
Once notified of the extension, you then have 45 days to provide this information. If all of the needed information is received within the 45-day time frame and the claim is denied, the claims Administrator will notify you of the denial within 15 days after the information is received. If you don't provide the needed information within the 45-day period, your claim will be denied.
A denial notice will explain the reason for denial, refer to the part of the Plan on which the denial is based, and provide the claim appeal procedures.
Pre-Service Claims
Pre-service claims are those claims that require notification or approval prior to receiving medical care or require notification within a specified time period after service begins as required under the Plan provisions. If your claim is a pre-service claim and is submitted properly with all needed information, you will receive written notice of the claim decision from the Claims Administrator within 15 days of receipt of the claim. If you file a pre-service claim improperly, the Claims Administrator will notify you of the improper filing and how to correct it within five days after the pre-service claim is received. If additional information is needed to process the

 

25

 
pre-service claim, the Claims Administrator will notify you of the information needed within 15 days after the claim was received and may request a one-time extension not longer than 15 days and pend your claim until all information is received. Once notified of the extension, you then have 45 days to provide this information. If all of the needed information is received within the 45-day time frame, the Claims Administrator will notify you of the determination within 15 days after the information is received. If you don't provide the needed information within the 45-day period, your claim will be denied. A denial notice will explain the reason for denial, refer to the part of the Plan on which the denial is based, and provide the claim appeal procedures.
Urgent Care Claims That Require Immediate Action
Urgent care claims are those claims that require notification or approval prior to receiving medical care in which a delay in treatment could seriously jeopardize your life or health or the ability to regain maximum function or, in the opinion of a physician with knowledge of your medical condition, could cause severe pain. In these situations:
·
You will receive notice of the benefit determination in writing or electronically within 72 hours after the Claims Administrator receives all necessary information, taking into account the seriousness of your condition.
·
Notice of denial may be oral with a written or electronic confirmation to follow within three days.
If you filed an urgent claim improperly, the Claims Administrator will notify you of the improper filing and how to correct it within 24 hours after the urgent claim was received. If additional information is needed to process the claim, the Claims Administrator will notify you of the information needed within 24 hours after the claim was received. You then have 48 hours to provide the requested information.
You will be notified of a determination no later than 48 hours after either:
·
The Claims Administrator's receipt of the requested information.
·
The end of the 48-hour period within which you were to provide the additional information, if the information is not received within that time.
A denial notice will explain the reason for denial, refer to the part of the Plan on which the denial is based, and provide the claim appeal procedures.
Concurrent Care Claims
If an ongoing course of treatment was previously approved for a specific period of time or number of treatments, and your request to extend the treatment is an urgent care claim as defined above, your request will be decided within 24 hours, provided your request is made at least 24 hours prior to the end of the approved treatment. The Claims Administrator will make a determination on your request for the extended treatment within 24 hours from receipt of your request.
If your request for extended treatment is not made at least 24 hours prior to the end of the approved treatment, the request will be treated as an urgent care claim and decided according to the time frames described above. If an ongoing course of treatment was previously approved for a specific period of time or number of treatments, and you request to extend treatment in a non-urgent circumstance, your request will be considered a new claim and decided according to post-service or pre-service timeframes, whichever applies.
How to Appeal a Claim Decision
If you disagree with a pre-service or post-service claim determination after following the above steps, you can contact the applicable Claims Administrator in writing to formally request an appeal. Your first appeal request must be submitted to the Claims Administrator within 180 days after you receive the Claim denial.
Appeal Process
A qualified individual who was not involved in the decision being appealed will be appointed to decide the appeal. The Claims Administrator may consult with, or seek the participation of, medical experts as part of the appeal resolution process. You must consent to this referral and the sharing of pertinent medical claim information. Upon written request and free of charge you have the right to reasonable access to and copies of all documents, records and other information relevant to your claim for benefits.
 

 

26

 
Appeals Determinations
Pre-Service and Post-Service Claim Appeals
You will be provided written or electronic notification of the decision on your appeal as follows:
·
For appeals of pre-service claims, the first-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 15 days from receipt of a request for appeal of a denied Claim. The second-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 15 days from receipt of a request for review of the first-level appeal decision.
·
For appeals of post-service claims, the first-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 30 days from receipt of a request for appeal of a denied claim. The second-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 30 days from receipt of a request for review of the first-level appeal decision.
·
For procedures associated with urgent Claims, refer to the following "Urgent Claim Appeals That Require Immediate Action" section.
·
If you are not satisfied with the first-level appeal decision of the Claims Administrator, you have the right to request a second-level appeal from the Claims Administrator. Your second level appeal request must be submitted to the Claims Administrator in writing within 60 days from receipt of the first-level appeal decision.
·
For pre-service and post-service claim appeals, the Plan Administrator has delegated to the Claims Administrator the exclusive right to interpret and administer the provisions of the Plan. The Claims Administrator's decisions are conclusive and binding.
Please note that the Claims Administrator's decision is based only on whether or not benefits are available under the Plan for the proposed treatment or procedure. The determination as to whether the pending health service is necessary or appropriate is between you and your physician.
Urgent Claim Appeals That Require Immediate Action
Your appeal may require immediate action if a delay in treatment could significantly increase the risk to your health or the ability to regain maximum function or cause severe pain.
In these urgent situations, the appeal does not need to be submitted in writing. You or your physician should call the Claims Administrator as soon as possible. The Claims Administrator will provide you with a written or electronic determination within 72 hours following receipt by the Claims Administrator of your request for review of the determination taking into account the seriousness of your condition.
For urgent claim appeals, the Plan Administrator has delegated to the applicable Claims Administrator the exclusive right to interpret and administer the provisions of the Plan. The Claims Administrator's decisions are conclusive and binding.
In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue and exhaust all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.
 

 

27


APPENDIX C
DISCLOSURE OF GRANDFATHERED STATUS
MODEL NOTICE

AT&T, as plan sponsor, believes this Plan is a "grandfathered health plan" under the Patient Protection and Affordable Care Act (the "Affordable Care Act").  As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted.  Being a grandfathered health plan means that the plan may not include certain consumer protections of the Affordable Care Act that apply to other plans, for example, the requirement for the provision of preventive health services without any cost sharing.  However, grandfathered health plans must comply with certain other consumer protections of the Affordable Care Act, for example, the elimination of lifetime limits on benefits.
Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at P.O. Box 30558, Salt Lake City, Utah  84130-0558 You may also contact the Employee Benefits Security Administration, U.S. Department of labor at 1-866-444-3272 or www.dol.gov/ebsa/healthreform .  This website has a table summarizing which protections do and do not apply to grandfathered health plans.
 


28
EXECUTION COPY

U.S. $2,250,000,000
TERM LOAN CREDIT AGREEMENT
Dated as of September 29, 2017
Among
AT&T INC.
as   Borrower
EA MARKETS
as   Arranger
THE INITIAL LENDERS NAMED HEREIN
as   Initial   Lenders
THE BANK OF NOVA SCOTIA
as   Administrative   Agent
THE BANK OF NOVA SCOTIA
SUMITOMO MITSUI BANKING CORPORATION
and
INDUSTRIAL AND COMMERCIAL BANK OF CHINA LIMITED, NEW YORK BRANCH
as   Joint   Lead   Arrangers   and   Joint   Bookrunners
SUMITOMO MITSUI BANKING CORPORATION
as   Syndication   Agent
INDUSTRIAL AND COMMERCIAL BANK OF CHINA LIMITED, NEW YORK BRANCH
as   Documentation   Agent
and
CITIZENS BANK, N.A.
HSBC SECURITIES (USA) INC.
and
STANDARD CHARTERED BANK
as   M andated Lead Arrangers


 
 

  NYDOCS02/1129553.6
 


 
 
TABLE OF CONTENTS
Page
ARTICLE I  
     
DEFINITIONS AND ACCOUNTING TERMS 
     
Section 1.01
Certain Defined Terms……………………………………………………………………………………...............................................................................................................................................................................................................
1
Section 1.02
Computation of Time Periods………………………………………………………………………….....................................................................................................................................................................................................................
15
Section 1.03
Accounting Terms……………………………………………………………………………………….....................................................................................................................................................................................……......................
15
     
ARTICLE II  
     
AMOUNTS AND TERMS OF THE ADVANCES 
     
Section 2.01
The Advances............................................................................................................................................................................................................................................................................................................................................................
15
Section 2.02
Making the Advances................................................................................................................................................................................................................................................................................................................................................
16
Section 2.03
Fees...........................................................................................................................................................................................................................................................................................................................................................................
17
Section 2.04
Optional Termination or Reduction of the Commitments........................................................................................................................................................................................................................................................................................
18
Section 2.05
Repayment of Advances...........................................................................................................................................................................................................................................................................................................................................
18
Section 2.06
Interest on Advances.................................................................................................................................................................................................................................................................................................................................................
18
Section 2.07
Interest Rate Determination......................................................................................................................................................................................................................................................................................................................................
19
Section 2.08
Optional Conversion of Advances............................................................................................................................................................................................................................................................................................................................
20
Section 2.09
Optional Prepayments of Advances.........................................................................................................................................................................................................................................................................................................................
21
Section 2.10
Increased Costs.........................................................................................................................................................................................................................................................................................................................................................
21
Section 2.11
Illegality.....................................................................................................................................................................................................................................................................................................................................................................
22
Section 2.12
Payments and Computations.....................................................................................................................................................................................................................................................................................................................................
22
Section 2.13
Taxes..........................................................................................................................................................................................................................................................................................................................................................................
23
Section 2.14
Sharing of Payments, Etc. .........................................................................................................................................................................................................................................................................................................................................
27
Section 2.15
Evidence of Debt........................................................................................................................................................................................................................................................................................................................................................
27
Section 2.16
Use of Proceeds..........................................................................................................................................................................................................................................................................................................................................................
28
Section 2.17
Defaulting Lenders.....................................................................................................................................................................................................................................................................................................................................................
28
Section 2.18
Replacement of Lenders.............................................................................................................................................................................................................................................................................................................................................
29
     
ARTICLE III  
     
CONDITIONS TO EFFECTIVENESS AND LENDING 
     
Section 3.01
Conditions Precedent to Effectiveness of Section 2.01............................................................................................................................................................................................................................................................................................
30
Section 3.02
Conditions Precedent to Each Borrowing................................................................................................................................................................................................................................................................................................................
31
Section 3.03
Determinations Under Section 3.01..........................................................................................................................................................................................................................................................................................................................
32
     
ARTICLE IV  
     
REPRESENTATIONS AND WARRANTIES 
     
Section 4.01
Representations and Warranties...............................................................................................................................................................................................................................................................................................................................
32
 
 
NYDOCS02/1129553.6


 
 
     
ARTICLE V  
     
COVENANTS OF THE BORROWER 
     
Section 5.01
Affirmative Covenants...........................................................................................................................................................................................................................................................................................................................................
33
Section 5.02
Negative Covenants .............................................................................................................................................................................................................................................................................................................................................. 
36
Section 5.03
Financial Covenant.................................................................................................................................................................................................................................................................................................................................................
38
     
ARTICLE VI  
     
EVENTS OF DEFAULT 
     
Section 6.01
Events of Default..................................................................................................................................................................................................................................................................................................................................................
38
     
ARTICLE VII  
     
THE AGENT  
     
Section 7.01
Authorization and Authority.................................................................................................................................................................................................................................................................................................................................
41
Section 7.02
Agent Individually................................................................................................................................................................................................................................................................................................................................................
41
Section 7.03
Duties of Agent; Exculpatory Provisions.............................................................................................................................................................................................................................................................................................................
41
Section 7.04
Reliance by Agent................................................................................................................................................................................................................................................................................................................................................
42
Section 7.05
Delegation of Duties.............................................................................................................................................................................................................................................................................................................................................
43
Section 7.06
Resignation of Agent............................................................................................................................................................................................................................................................................................................................................
43
Section 7.07
Non-Reliance on Agent and Other Lenders..........................................................................................................................................................................................................................................................................................................
43
Section 7.08
Indemnification.....................................................................................................................................................................................................................................................................................................................................................
44
Section 7.09
Other Agents.........................................................................................................................................................................................................................................................................................................................................................
44
     
ARTICLE VIII  
     
MISCELLANEOUS 
     
Section 8.01
Amendments, Etc. ...............................................................................................................................................................................................................................................................................................................................................
44
Section 8.02
Notices; Effectiveness; Electronic Communication ............................................................................................................................................................................................................................................................................................
45
Section 8.03
No Waiver; Remedies .........................................................................................................................................................................................................................................................................................................................................
46
Section 8.04
Costs and Expenses .............................................................................................................................................................................................................................................................................................................................................
47
Section 8.05
Binding Effect ......................................................................................................................................................................................................................................................................................................................................................
48
Section 8.06
Assignments and Participations ...........................................................................................................................................................................................................................................................................................................................
48
Section 8.07
Confidentiality; PATRIOT Act .............................................................................................................................................................................................................................................................................................................................
52
Section 8.08
Governing Law .....................................................................................................................................................................................................................................................................................................................................................
53
Section 8.09
Jurisdiction, Etc. ...................................................................................................................................................................................................................................................................................................................................................
53
Section 8.10
Severability ...........................................................................................................................................................................................................................................................................................................................................................
54
Section 8.11
Waiver of Jury Trial ..............................................................................................................................................................................................................................................................................................................................................
54
Section 8.12
Acknowledgement and Consent to Bail-In of EEA Financial Institutions ...........................................................................................................................................................................................................................................................
54
Section 8.13
No Fiduciary Duties ..............................................................................................................................................................................................................................................................................................................................................
55
 
NYDOCS02/1129553.6
ii


 
 
Schedules
Schedule I                            -   Commitments
Schedule 5.02(a)                     -   Existing Liens
Exhibits
Exhibit A                             -   Form of Note
Exhibit B-1                           -   Form of Notice of Borrowing
Exhibit B-2                           -   Form of Notice of Continuation/Conversion
Exhibit C                             -   Form of Assignment and Assumption
Exhibit D                             -   Form of Opinion of In-House Counsel for the Borrower
Exhibit E                             -   Non-U.S. Lender Form

 
 
NYDOCS02/1129553.6
iii

 
TERM LOAN CREDIT AGREEMENT
 
Dated as of September 29, 2017 (this " Agreement " )
AT&T INC., a Delaware corporation (the " Borrower " ), the banks, financial institutions and other institutional lenders listed on the signature pages hereof (the " Initial Lenders " ), THE BANK OF NOVA SCOTIA ( " Scotiabank " ) as agent (in such capacity, the " Agent " ) for the Lenders (as hereinafter defined), agree as follows:
ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01   Certain Defined Terms .  As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
" Administrative Questionnaire " means an Administrative Questionnaire in a form supplied by the Agent.
" Advance " means a Tranche A Advance, a Tranche B Advance or a Tranche C Advance, as applicable.
" Affiliate " means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person.  For purposes of this definition, the term " control " (including the terms " controlling, "   " controlled by " and " under common control with " ) of a Person means the possession, direct or indirect, of the power to vote 15% or more of the Voting Stock of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by contract or otherwise; provided , however , that with respect to the Agent or any Lender, the term " control " (including the terms " controlling, "   " controlled by " and " under common control with " ) of a Person means the possession, direct or indirect, of the power to vote 5% or more of the Voting Stock of such Person.
" Agent " has the meaning specified in the preamble hereto.
" Agent's Account " means (a) the account of the Agent maintained by the Agent at The Bank of Nova Scotia, New York Agency at its office at 250 Vesey Street, New York, New York  10281, SWIFT Code/ABA No. NOSCUS33/026002532, for further credit to The Bank of Nova Scotia, GWO Loan Administration & Agency Services, 720 King Street West, 2 nd Floor, Toronto, Ontario M5V2T3, Account No.  0618632, Reference:  AT&T Inc., Attention:  Loan Administration & Agency Services or (b) such other account of the Agent as is designated in writing from time to time by the Agent to the Borrower and the Lenders for such purpose.
" Agent Parties " has the meaning specified in Section 8.02(d)(ii).
 
NYDOCS02/1129553.6
 
1

 
" Anti-Corruption Laws " means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery or corruption.
" Applicable Lending Office " means, with respect to each Lender, such Lender ' s Domestic Lending Office in the case of a Base Rate Advance and such Lender ' s Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
" Applicable Margin " means, as of any date, a percentage per annum determined by reference to the applicable Public Debt Rating in effect on such date as set forth below:
Public Debt Rating S&P/Moody's/Fitch
Level 1
A- / A3 / A- or higher
Level 2
BBB+ / Baa1 / BBB+
Level 3
Lower than Level 2
Applicable Margin for Eurodollar Rate Advances under the Tranche A Facility
0.8750%
1.0000%
1.1250%
Applicable Margin for Eurodollar Rate Advances under the Tranche B Facility
0.9375%
1.0625%
1.1875%
Applicable Margin for Eurodollar Rate Advances under the Tranche C Facility
1.0000%
1.1250%
1.2500%
Applicable Margin for Base Rate Advances under the Tranche A Facility
0.0000%
0.0000%
0.1250%
Applicable Margin for Base Rate Advances under the Tranche B Facility
0.0000%
0.0625%
0.1875%
Applicable Margin for Base Rate Advances under the Tranche C Facility
0.0000%
0.1250%
0.2500%

" Appropriate Commitment " means, at any time, (a) with respect to any Tranche A Lender, its Tranche A Commitment or Tranche A Advance, as applicable, (b) with respect to any Tranche B Lender, its Tranche B Commitment or Tranche B Advance, as applicable, and (c) with respect to any Tranche C Lender, its Tranche C Commitment or Tranche C Advance, as applicable.
 
NYDOCS02/1129553.6
2



 
" Appropriate Commitment Termination " means, with respect to any Appropriate Lender, the earlier of (i) the termination of its Appropriate Commitment and payment in full of all obligations of the Borrower hereunder in respect thereof or (ii) the termination or expiration of this Agreement.
" Appropriate Lender " means, at any time, (a) with respect to the Tranche A Facility, a Lender that has a Tranche A Commitment or holds a Tranche A Advance at such time, (b) with respect to the Tranche B Facility, a Lender that has a Tranche B Commitment or holds a Tranche B Advance at such time and (c) with respect to the Tranche C Facility, a Lender that has a Tranche C Commitment or holds a Tranche C Advance at such time.
" Approved Fund " means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
" Arranger " means EA Markets LLC.
" Assignment and Assumption " means an assignment and assumption entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto.
" Audited Financial Statements " means the Consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 2016, and the related Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the fiscal year then ended.
" Bail-In Action " means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
" Bail-In Legislation " means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
" Base Rate " means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the highest of:
(a) the rate of interest announced publicly by Scotiabank in New York, New York, from time to time, as Scotiabank ' s prime rate;
(b) 1 2 of one percent per annum above the Federal Funds Rate; and
(c) the ICE Benchmark Administration Limited Settlement Rate (or the successor thereto if ICE Benchmark Administration Limited is no longer making such a rate available) applicable to Dollars for a period of one month ( " One Month LIBOR " ) plus 1.00% (for the avoidance of doubt, the One Month LIBOR for any day shall be based on the rate appearing on Bloomberg Screen BBAM Page (or other commercially available source providing such quotations as designated by the Agent from time to time) at approximately 11:00 a.m. London time on such day); provided that if One Month LIBOR shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.
 
NYDOCS02/1129553.6
3


 
" Base Rate Advance " means an Advance denominated in Dollars that bears interest as provided in Section 2.06(a)(i).
" Board of Directors " shall mean the governing body of a corporation, limited liability company or equivalent business organization.
" Borrower " has the meaning specified in the preamble hereto.
" Borrowing " means a Tranche A Borrowing, a Tranche B Borrowing or a Tranche C Borrowing, as applicable.
" Business Day " means a day of the year on which banks are not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market and banks are open for business in London.
" Commitment " means a Tranche A Commitment, a Tranche B Commitment or a Tranche C Commitment, as applicable.
" Communications " has the meaning specified in Section 8.02(d).
" Confidential Information " means information that is furnished to the Agent or any Lender by or on behalf of the Borrower, but does not include any such information that is or becomes generally available to the public (other than as a result of a violation of this Agreement).
" Consolidated " refers to the consolidation of accounts in accordance with GAAP.
" Consolidated EBITDA " means, for any Person for any period, Consolidated Net Income of such Person for such period adjusted to exclude the effects of (a) gains or losses from discontinued operations, (b) any extraordinary or other non-recurring non-cash gains or losses (including non-cash restructuring charges), (c) accounting changes including any changes to Accounting Standards Codification 715 (or any subsequently adopted standards relating to pension and postretirement benefits) adopted by the Financial Accounting Standards Board after the date hereof, (d) interest expense, (e) income tax expense or benefit, (f) depreciation, amortization and other non-cash charges (including actuarial gains or losses from pension and postretirement plans), (g) interest income, (h) equity income and losses, and (i) other non-operating income or expense.  For the purpose of calculating Consolidated EBITDA for any Person for any period, if during such period such Person or any Subsidiary of such Person shall have made a Material Acquisition or Material Disposition, Consolidated EBITDA for such period shall be calculated after giving pro forma effect to such Material Acquisition or Material Disposition as if such Material Acquisition or Material Disposition occurred on the first day of such period.
 
NYDOCS02/1129553.6
4



 
" Consolidated Net Income " means, for any Person for any period, the net income of such Person and its Consolidated Subsidiaries, determined on a Consolidated basis for such period in accordance with GAAP.
" Convert, "   " Conversion " and " Converted " each refers to a conversion of Advances of one Type into Advances of the other Type pursuant to Section 2.07, 2.08 or 2.11.
" Debt " of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments and (c) all guarantees by such Person of Debt of others.
" Default " means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
" Default Interest " has the meaning specified in Section 2.06(b).
" Defaulting Lender " means, subject to Section 2.17(c), at any time, any Lender that, at such time (a) has failed to perform any of its funding obligations hereunder, including in respect of its Advances, within two Business Days of the date required to be funded by it hereunder, (b) has notified the Borrower or the Agent that it does not intend to comply with its funding obligations or has made a public statement to that effect with respect to its funding obligations hereunder or generally under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after written request by the Agent or the Borrower (based on its reasonable belief that such Lender may not fulfill its funding obligations hereunder), to confirm in a manner reasonably satisfactory to the Agent and the Borrower that it will comply with its funding obligations hereunder, provided that such Lender shall cease to be a Defaulting Lender upon receipt of such confirmation by, in form and substance reasonably acceptable to, the Agent and the Borrower, (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any debtor relief law, (ii) had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or a custodian appointed for it, (iii) taken any action in furtherance of, or indicated its consent to, approval of or acquiescence in any such proceeding or appointment   or (iv) become the subject of a Bail-In Action, or (e) shall generally not pay its debts as those debts come due or shall admit in writing its inability to pay its debts or shall become insolvent;   provided that a Lender shall not be a Defaulting Lender solely by virtue of the control, ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a governmental authority, so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such governmental authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender.
 
NYDOCS02/1129553.6
5


 
" Dollars " and the " $ " sign each means lawful currency of the United States of America.
" Domestic Lending Office " means, with respect to any Lender, the office of such Lender specified as its " Domestic Lending Office " in its Administrative Questionnaire delivered to the Agent, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.
" EEA Financial Institution " means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
" EEA Member Country " means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
" EEA Resolution Authority " means any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country ( including any delegee) having responsibility for the resolution of any EEA Financial Institution.
" Effective Date " has the meaning specified in Section 3.01.
" Eligible Assignee " means any (i) Lender, Affiliate of a Lender or Approved Fund and (ii) bank, financial institution or other institutional lender that meets the requirements to be an assignee under Section 8.06(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under Section 8.06(b)(iii)).
" ERISA " means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
" ERISA Affiliate " means any Person that for purposes of Title IV of ERISA is a member of the Borrower ' s controlled group, or under common control with the Borrower, within the meaning of Section 414 of the Internal Revenue Code.
" EU Bail-In Legislation Schedule " means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time.
" Eurocurrency Liabilities " has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.
" Eurodollar Lending Office " means, with respect to any Lender, the office of such Lender specified as its " Eurodollar Lending Office " in its Administrative Questionnaire delivered to the Agent, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.
 
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" Eurodollar Rate " means, for any Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate per annum appearing on Bloomberg Screen BBAM Page (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average of the rate per annum at which deposits in Dollars are offered by the principal office of each of the Reference Banks in London, England, to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank ' s Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period; provided that if the Eurodollar Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.  If the Bloomberg Screen BBAM Page (or any successor page) is unavailable, the Eurodollar Rate for any Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.07.
" Eurodollar Rate Advance " means an Advance denominated in Dollars that bears interest as provided in Section 2.06(a)(ii).
" Eurodollar Rate Reserve Percentage " for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period.
" Events of Default " has the meaning specified in Section 6.01.
" Existing Credit Agreement " means the $12,000,000,000 Amended and Restated Credit Agreement, dated as of December 11, 2015, among the Borrower, the lenders parties thereto and Citibank, N.A., as administrative agent, as such credit agreement may be amended from time to time (or any credit agreement refinancing thereof).
" Facility " means the Tranche A Facility, the Tranche B Facility or the Tranche C Facility, as applicable.
" FATCA " means Sections 1471 through 1474 of the Internal Revenue Code, as in effect on the date hereof, (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Internal Revenue Code.
 
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" Federal Funds Rate " means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it; provided that if the Federal Funds Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.
" Fitch " means Fitch, Inc.
" Fund " means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities.
" Funding Date " means the date that the Advances are made, which shall be a Business Day specified by the Borrower in the Notice of Borrowing during the period from the Effective Date until January 31, 2018.
" GAAP " has the meaning specified in Section 1.03.
" Indemnified Costs " has the meaning specified in Section 7.08.
" Indemnified Party " has the meaning specified in Section 8.04(b).
" Initial Lenders " has the meaning specified in the preamble hereto.
" Interest Period " means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below.  The duration of each such Interest Period shall be three or six months as the Borrower may, upon notice received by the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided , however , that:
(a) the Borrower may not select any Interest Period in respect of any Borrowing that ends, in the case of any Tranche A Borrowing, after the third anniversary of the Funding Date, in the case of any Tranche B Borrowing, after the fourth anniversary of the Funding Date or, in the case of any Tranche C Borrowing, after the fifth anniversary of the Funding Date;
 
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(b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration;
(c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided , however , that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and
(d) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month.
" Internal Revenue Code " means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
" IRS " has the meaning specified in Section 2.13(f)(i).
" Lender Appointment Period " has the meaning specified in Section 7.06.
" Lenders " means the Initial Lenders and each Person that shall become a party hereto pursuant to Section 8.06; provided that, following the Appropriate Commitment Termination for the Tranche A Lenders, the Tranche B Lenders or the Tranche C Lenders, as applicable, the term "Lenders" shall cease to include such Lenders.
" Lien " means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor.
" Material Acquisition " means any acquisition or series of related acquisitions that involves consideration (including non-cash consideration) with a fair market value, as of the date of the closing thereof, in excess of $10,000,000,000.
" Material Adverse Change " means any change, development or event that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the financial condition, properties, assets, liabilities, business or results of operations of the Borrower and its Subsidiaries, taken as a whole.
" Material Adverse Effect " means a material adverse effect on (a) the financial condition, properties, assets, liabilities, business or results of operations of the Borrower and its Subsidiaries, taken as a whole, (b) the material rights and remedies of the Agent or any Lender under this Agreement or any Note or (c) the ability of the Borrower to perform its payment obligations under this Agreement or any Note.
 
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" Material Disposition " means any disposition of property or series of related dispositions of property that involves consideration (including non-cash consideration) with a fair market value, as of the date of the closing thereof, in excess of $1,000,000,000.
" Material Subsidiary " means, at any time, any Subsidiary of the Borrower   to which 5% or more of Net Tangible Assets of the Borrower are attributable.
" Moody's " means Moody ' s Investors Service, Inc.
" Multiple Employer Plan " means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and at least one Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.
" Net Debt for Borrowed Money " of any Person means (a) all items that, in accordance with GAAP, would be classified as indebtedness on a Consolidated balance sheet of such Person minus (b) the amount by which the sum of (i) 100% of unrestricted cash and cash equivalents held by the Borrower and its Subsidiaries in the United States (it being understood and agreed that any proceeds of any issuance by the Borrower of unsecured debt securities, other debt securities or borrowing of term loans in connection with financing an acquisition, investment, refinancing or other transaction held or placed into escrow shall be deemed to be unrestricted for purposes of this definition), and funds available on demand by the Borrower and its Subsidiaries in the United States (including but not limited to time deposits), and (ii) 65% of unrestricted cash and cash equivalents held by the Borrower and its Subsidiaries outside of the United States, exceeds $2,000,000,000 in the aggregate.  For the avoidance of doubt, any cash and cash equivalents held by the Borrower and its Subsidiaries outside of the United States shall not be considered "restricted" solely as a result of the repatriation of such cash and cash equivalents being subject to any legal limitation or otherwise resulting in adverse tax consequences to the Borrower or any of its Subsidiaries.
" Net Tangible Assets " means, at any date, with respect to the Borrower, the total assets appearing on the most recently prepared Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of the most recent fiscal quarter of the Borrower for which such balance sheet is available, prepared in accordance with GAAP, less (a) all current liabilities as shown on such balance sheet and (b) the value (net of any applicable reserves), as shown on such balance sheet of (i) all trade names, trademarks, licenses, patents, copyrights and goodwill, (ii) organizational costs and (iii) deferred charges (other than prepaid items such as insurance, taxes, interest, commissions, rents and similar items and tangible assets being amortized), as adjusted in good faith by the Borrower to give pro forma effect to any Material Acquisition or Material Disposition occurring after the end of such fiscal quarter.
" Non-Consenting Lender " means any Lender that does not approve any consent, waiver or amendment that (i) requires the approval of all or all affected Lenders in accordance with the terms of Section 8.01 and (ii) has been approved by the Required Lenders.
" Non-U.S. Lender " has the meaning specified in Section 2.13(f)(i).
 
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" Note " means a promissory note of the Borrower payable to any Lender, delivered pursuant to a request made under Section 2.15 in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Advances made by such Lender under the applicable Facility.
" Notice of Borrowing " has the meaning specified in Section 2.02(a).
" Other Connection Taxes " means, with respect to any Lender or Agent, taxes imposed as a result of a present or former connection between such Person and the jurisdiction imposing such tax (other than connections arising solely from such Person having executed, delivered, become a party to, performed obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced this Agreement, or the Notes or any other documents to be delivered hereunder, or sold or assigned an interest in any such documents).
" Other Taxes " has the meaning specified in Section 2.13(b).
" Participant Register " has the meaning specified in Section 8.06(d).
" PATRIOT Act " means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. 107-56, as it may be amended or otherwise modified from time to time.
" Permitted Liens " means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced:  (a) Liens for taxes, assessments and governmental charges or levies to the extent not required to be paid under Section 5.01(b) hereof; (b) Liens imposed by law, such as materialmen ' s, mechanics ' , carriers ' , workmen ' s and repairmen ' s Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 30 days; (c) pledges or deposits to secure obligations under workers ' compensation laws or similar legislation or to secure public or statutory obligations; (d) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes; (e) any interest or title of a lessor or sublessor under, and Liens arising from Uniform Commercial Code financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases and subleases entered into by the Borrower or any of its Subsidiaries in the ordinary course of its business and covering only the assets so leased or subleased; (f) Liens that are contractual rights of set-off generally; (g) licenses, sublicenses, leases or subleases of intellectual property granted to Persons who are not Affiliates of the Borrower in the ordinary course of business not interfering in any material respect with the business of the Borrower or any of its Subsidiaries; and (h) Liens on deposit or securities accounts arising solely by virtue of any statutory or common law provisions or ordinary course contractual provisions, in each case, relating to banker ' s Liens, rights of set-off or similar rights and remedies for account and transaction fees and other amounts due to the depository institution or securities intermediary where any deposit, securities or brokerage accounts are maintained so long as the amounts subject to such Liens do not secure Debt.
 
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" Person " means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof.
" Plan " means a Single Employer Plan or a Multiple Employer Plan.
" Platform " has the meaning specified in Section 8.02(d).
" Process Agent " has the meaning specified in Section 8.09(c).
" Public Debt Rating " means, as of any date, the rating that has been most recently announced by any of S&P, Moody ' s or Fitch, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower or, if any such rating agency shall have issued more than one such rating, the lowest such rating issued by such rating agency.  For purposes of the foregoing, (a) if only one of S&P, Moody ' s and Fitch shall have in effect a Public Debt Rating, the Applicable Margin shall be determined by reference to the available rating; (b) if none of S&P, Moody ' s or Fitch shall have in effect a Public Debt Rating, the Applicable Margin will be set in accordance with Level 3 under the definition of " Applicable Margin " ; (c) if the ratings established by S&P, Moody ' s and Fitch fall within different levels, the Applicable Margin shall be based upon the highest rating, unless the lowest of such ratings is more than one level below the highest of such ratings, in which case the Applicable Margin shall be based upon the rating that is one level above the lowest of such ratings; (d) if any rating established by S&P, Moody ' s or Fitch shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (e) if S&P, Moody ' s or Fitch shall change the basis on which ratings are established, each reference to the Public Debt Rating announced by S&P, Moody ' s or Fitch, as the case may be, shall refer to the then equivalent rating by S&P, Moody ' s or Fitch, as the case may be.
" Quarterly Financial Statements " means the Consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 2017, and the related Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the six-month period then ended.
" Receivables Securitization " means sales of accounts receivable of the Borrower or any of its Subsidiaries in connection with agreements for limited recourse or non-recourse sales by the Borrower or Subsidiary for cash; provided that (a) any such agreement is of a type and on terms customary for comparable transactions in the good faith judgment of the Board of Directors of the Borrower or Subsidiary and (b) such agreement does not create any interest in any asset other than accounts receivable (and property securing or otherwise supporting accounts receivable), proceeds of the foregoing and accounts into which such proceeds are paid or held.
" Reference Banks " means Scotiabank and such other Lenders, if any, so appointed by the Borrower and the Agent that agrees to serve in such role.
" Register " has the meaning specified in Section 8.06(c).
" Related Parties " means, with respect to any Person, such Person ' s Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person ' s Affiliates.
 
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" Required Lenders " means at any time Lenders owed at least a majority in interest of the then aggregate unpaid principal amount of the Advances, or, if no such principal amount is then outstanding, Lenders having at least a majority in interest of the Commitments, provided that if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time the Advances or Commitments, as applicable, of such Lender at such time.
" S&P " means S&P Global Ratings, a Standard & Poor ' s Financial Services LLC company.
" Sanctions " means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, or (b) the United Nations Security Council, the European Union or Her Majesty ' s Treasury of the United Kingdom.
" Single Employer Plan " means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and no Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.
" Subsidiary " of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person ' s other Subsidiaries.
" Taxes " has the meaning specified in Section 2.13(a).
" Threshold Amount " means $750,000,000 or, if higher, the cross default threshold, judgment threshold or ERISA threshold, as applicable, then set forth in the Existing Credit Agreement, but in no event exceeding $2,000,000,000.
" Tranche A Advance " has the meaning specified in Section 2.01(a).
" Tranche A Borrowing " means, initially, the borrowing consisting of simultaneous Tranche A Advances by the Tranche A Lenders on the Funding Date. After the Tranche A Advances are outstanding, "Tranche A Borrowing" means a portion of the Tranche A Advances (as to which each Tranche A Lender has a ratable part) that (a) bears interest by reference to the Base Rate or (b) bears interest by reference to the Eurodollar Rate and has a single Interest Period.
 
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" Tranche A Commitment " means, with respect to any Tranche A Lender (a) the Dollar amount set forth under the caption "Tranche A Commitments" opposite such Lender's name on Schedule I hereto or (b) if such Lender has entered into any Assignment and Assumption, the Dollar amount set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.06(c), in each case as such Lender's Tranche A Commitment, as such amount may be reduced pursuant to Section 2.04.
" Tranche A Facility " means, at any time, the aggregate amount of the Tranche A Lenders' Tranche A Commitments at such time.
" Tranche A Lender " means any Lender that has a Tranche A Commitment.
" Tranche B Advance " has the meaning specified in Section 2.01(b).
" Tranche B Borrowing " means, initially, the borrowing consisting of simultaneous Tranche B Advances by the Tranche B Lenders on the Funding Date. After the Tranche B Advances are outstanding, "Tranche B Borrowing" means a portion of the Tranche B Advances (as to which each Tranche B Lender has a ratable part) that (a) bears interest by reference to the Base Rate or (b) bears interest by reference to the Eurodollar Rate and has a single Interest Period.
" Tranche B Commitment " means, with respect to any Tranche B Lender (a) the Dollar amount set forth under the caption "Tranche B Commitments" opposite such Lender's name on Schedule I hereto or (b) if such Lender has entered into any Assignment and Assumption, the Dollar amount set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.06(c), in each case as such Lender's Tranche B Commitment, as such amount may be reduced pursuant to Section 2.04.
" Tranche B Facility " means, at any time, the aggregate amount of the Tranche B Lenders' Tranche B Commitments at such time.
" Tranche B Lender " means any Lender that has a Tranche B Commitment.
" Tranche C Advance " has the meaning specified in Section 2.01(c).
" Tranche C Borrowing " means, initially, the borrowing consisting of simultaneous Tranche C Advances by the Tranche C Lenders on the Funding Date.  After the Tranche C Advances are outstanding, "Tranche C Borrowing" means a portion of the Tranche C Advances (as to which each Tranche C Lender has a ratable part) that (a) bears interest by reference to the Base Rate or (b) bears interest by reference to the Eurodollar Rate and has a single Interest Period.
" Tranche C Commitment " means, with respect to any Tranche C Lender (a) the Dollar amount set forth under the caption "Tranche C Commitments" opposite such Lender's name on Schedule I hereto or (b) if such Lender has entered into any Assignment and Assumption, the Dollar amount set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.06(c), in each case as such Lender's Tranche C Commitment, as such amount may be reduced pursuant to Section 2.04.
 
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" Tranche C Facility " means, at any time, the aggregate amount of the Tranche C Lenders' Tranche C Commitments at such time.
" Tranche C Lender " means any Lender that has a Tranche C Commitment.
" Type " refers to the distinction between Advances bearing interest at the Base Rate and Advances bearing interest at the Eurodollar Rate.
" Voting Stock " means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right to so vote has been suspended by the happening of such a contingency.
" Write-Down and Conversion Powers " means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
SECTION 1.02   Computation of Time Periods .   In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding."
SECTION 1.03   Accounting Terms .   All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the Audited Financial Statements ( "GAAP"); provided that whether a lease constitutes a capital lease or an operating lease shall be determined based on GAAP as in effect on the date hereof, notwithstanding any modification or interpretative change thereto after the date hereof (including without giving effect to any treatment of leases under Accounting Standards Codification 842 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect)), and provided further that all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made (i) without giving effect to any election under Accounting Standards Codification 825-10-25 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any Debt or other liabilities of the Borrower or any Subsidiary thereof at "fair value," as defined therein and (ii) without giving effect to any treatment of Debt in respect of convertible debt instruments under Accounting Standards Codification 470-20 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any such Debt in a reduced or bifurcated manner as described therein, and such Debt shall at all times be valued at the full stated principal amount thereof.
ARTICLE II

AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01   The Advances .   (a)  Tranche A Advances Each Tranche A Lender severally agrees, on the terms and conditions hereinafter set forth, to make a single advance (a "Tranche A Advance") to the Borrower on the Funding Date in an amount not to exceed such Lender's Tranche A Commitment.  The Tranche A Borrowing shall consist of Advances made simultaneously by the Tranche A Lenders ratably according to their respective Tranche A Commitments.  Amounts borrowed under this Section 2.01(a) and repaid or prepaid may not be reborrowed.
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(b)    Tranche B Advances .  Each Tranche B Lender severally agrees, on the terms and conditions hereinafter set forth, to make a single advance (a " Tranche B Advance ") to the Borrower on the Funding Date in an amount not to exceed such Lender's Tranche B Commitment.  The Tranche B Borrowing shall consist of Advances made simultaneously by the Tranche B Lenders ratably according to their respective Tranche B Commitments.  Amounts borrowed under this Section 2.01(b) and repaid or prepaid may not be reborrowed.
(c)    Tranche C Advances .  Each Tranche C Lender severally agrees, on the terms and conditions hereinafter set forth, to make a single advance (a " Tranche C Advance ") to the Borrower on the Funding Date in an amount not to exceed such Lender's Tranche C Commitment.  The Tranche C Borrowing shall consist of Advances made simultaneously by the Tranche C Lenders ratably according to their respective Tranche C Commitments.  Amounts borrowed under this Section 2.01(c) and repaid or prepaid may not be reborrowed.
SECTION 2.02   Making the Advances .  (a) Each Borrowing shall be made on notice, given not later than (x) 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar Rate Advances or (y) 10:00 A.M. (New York City time) on the date of the proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances, by the Borrower to the Agent, which shall give to each Appropriate Lender prompt notice thereof by telecopier (and, in the case of a notice requesting Base Rate Advances, no later than 11:00 A.M. (New York City time) on the date of the proposed Borrowing).  Each such notice of a Borrowing (a " Notice of Borrowing ") shall be by telephone, confirmed immediately in writing, or telecopier in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Advance.  Each Appropriate Lender shall, before 1:00 P.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Agent at the Agent's Account, in same day funds, such Lender's ratable portion of such Borrowing in accordance with the respective Commitments under the applicable Facility of such Lender and the other Appropriate Lenders.  After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower at the Agent's address referred to in Section 8.02.
(b)    Anything in subsection (a) above to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Advances for any Borrowing if the aggregate amount of such Borrowing is less than $10,000,000 or if the obligation of the Appropriate Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.07 or 2.11 and (ii) the Eurodollar Rate Advances may not be outstanding as part of more than 12 separate Borrowings.
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(c)    Each Notice of Borrowing shall be irrevocable and binding on the Borrower.  In the case of any Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Appropriate Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date.
(d)     Unless the Agent shall have received notice from an Appropriate Lender prior to the time of any Borrowing that such Lender will not make available to the Agent such Lender ' s ratable portion of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount.  If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the higher of (A) the interest rate applicable at the time to Advances comprising such Borrowing and (B) the cost of funds incurred by the Agent in respect of such amount and (ii) in the case of such Lender, the Federal Funds Rate.  If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender ' s Advance as part of such Borrowing for purposes of this Agreement.
(e)    The failure of any Appropriate Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Appropriate Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make any Advance to be made by such other Lender on the date of any Borrowing.
SECTION 2.03    Fees .  (a)  The Borrower agrees to pay to the Agent for the account of each Appropriate Lender a ticking fee on the amount of such Lender's Tranche A Commitment, Tranche B Commitment and/or Tranche C Commitment, as applicable, commencing on (i) the Effective Date in the case of each Initial Lender and (ii) the effective date specified in the Assignment and Assumption pursuant to which it became a Lender in the case of each other Lender, until the earlier of the Funding Date and January 31, 2018, at a rate equal to 0.07% per annum, payable in arrears on the earlier of the Funding Date and January 31, 2018; provided that no Defaulting Lender shall be entitled to receive any ticking fee in respect of its Commitment(s) for any period during which that Lender is a Defaulting Lender (and the Borrower shall not be required to pay such fee that otherwise would have been required to have been paid to that Defaulting Lender).
(b)   Agent's Fees .  The Borrower shall pay to the Agent for its own account such fees as may from time to time be agreed between the Borrower and the Agent.
 
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SECTION 2.04   Optional Termination or Reduction of the Commitments .  The Borrower shall have the right, upon at least three Business Days' notice to the Agent, to terminate in whole or permanently reduce ratably in part the Tranche A Commitments, Tranche B Commitments and/or the Tranche C Commitments, as applicable, provided that (i) each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (ii) each such reduction shall be made ratably among the Appropriate Lenders in accordance with their Appropriate Commitments with respect to such Facility.
SECTION 2.05   Repayment of Advances .  (a)  Tranche A Advances . The Borrower shall repay to the Agent for the ratable account of the Tranche A Lenders the aggregate outstanding principal amount of the Tranche A Advances on the third anniversary of the Funding Date.
(b)    Tranche B Advances . The Borrower shall repay to the Agent for the ratable account of the Tranche B Lenders the aggregate outstanding principal amount of the Tranche B Advances on the fourth anniversary of the Funding Date.
(c)    Tranche C Advances . The Borrower shall repay to the Agent for the ratable account of the Tranche C Lenders the aggregate outstanding principal amount of the Tranche C Advances on the fifth anniversary of the Funding Date.
SECTION 2.06   Interest on Advances .  (a) Scheduled Interest.  The Borrower shall pay interest on the unpaid principal amount of each Advance made to it owing to each Appropriate Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:
(i)
Base Rate Advances .  During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Applicable Margin in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full.
(ii)
Eurodollar Rate Advances .  During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Advance plus (y) the Applicable Margin in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
(b)    Default Interest .  Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a), the Agent shall, and upon the occurrence and during the continuance of any other Event of Default, the Agent may, and upon the request of the Required Lenders shall, require the Borrower to pay interest (" Default Interest ") on (A) the unpaid principal amount of each Advance, payable in arrears on the dates referred to in clause (a)(i) or (a)(ii) above, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to clause (a)(i) or (a)(ii) above and (B) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable hereunder by the Borrower that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on Base Rate Advances pursuant to clause (a)(i) above, provided, however, that following acceleration of the Advances pursuant to Section 6.01, Default Interest shall accrue and be payable hereunder whether or not previously required by the Agent.
 
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SECTION 2.07   Interest Rate Determination .  (a) Each Reference Bank agrees to furnish to the Agent timely information for the purpose of determining each Eurodollar Rate.  If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks.  The Agent shall give prompt notice (i) to the Borrower and the Appropriate Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.06(a)(i) or (a)(ii) and (ii) to the Borrower the rate, if any, furnished by each Reference Bank for the purpose of determining the interest rate under Section 2.06(a)(ii) (it being understood that the Agent shall not be required to disclose to any party hereto (other than the Borrower) any information regarding any Reference Bank or any rate provided by such Reference Bank in accordance with the definition of "Eurodollar Rate," including, without limitation, whether a Reference Bank has provided a rate or the rate provided by any individual Reference Bank).  Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.
(b)    If, with respect to any Eurodollar Rate Advances under any Facility, Lenders owed at least 50% of the then aggregate unpaid principal amount thereof notify the Agent that (i) they are unable to obtain matching deposits in the London interbank market at or about 11:00 A.M. (London time) on the second Business Day before the making of a Borrowing in sufficient amounts to fund their respective Advances as a part of such Borrowing during its Interest Period or (ii) the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrower and the Appropriate Lenders, whereupon (A) the Borrower will, on the last day of the then existing Interest Period therefor either (x) prepay such Advances or (y) Convert such Advances into Base Rate Advances and (B) the obligation of the Appropriate Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
(c)    If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances made to it in accordance with the provisions contained in the definition of " Interest Period " in Section 1.01, the Agent will forthwith so notify the Borrower and the Appropriate Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances; provided , that the Borrower may direct the Agent in the applicable Notice of Borrowing to continue Eurodollar Rate Advances as successive Interest Periods of the same duration until the Borrower shall give the Agent written notice at least three Business Days prior to the end of an Interest Period in the form of Exhibit B-2 that, as of the end of such Interest Period, the applicable Eurodollar Rate Advances shall Convert into Base Rate Advances or shall be continued as Eurodollar Rate Advances having an Interest Period as so notified.
 
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(d)    On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $10,000,000, such Advances shall automatically Convert into Base Rate Advances.
(e)    Upon the occurrence and during the continuance of any Event of Default (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, be Converted into Base Rate Advances and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended.
(f)    If Bloomberg Screen BBAM Page is unavailable and fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances,
(i)
the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances,
(ii)
with respect to Eurodollar Rate Advances, each such Advance will automatically, on the last day of the then existing Interest Period, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and
(iii)
the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
SECTION 2.08   Optional Conversion of Advances .  The Borrower of any Advance may on any Business Day, upon notice given to the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.07 and 2.11, Convert all Advances of one Type comprising the same Borrowing into Advances of the other Type; provided , however , that any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b) and no Conversion of any Advances shall result in more separate Borrowings than permitted under Section 2.02(b).  Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Advance.  Each notice of Conversion shall be irrevocable and binding on the Borrower giving such notice.
 
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SECTION 2.09   Optional Prepayments of Advances .  The Borrower may, upon notice at least three Business Days' prior to the date of such prepayment, in the case of Eurodollar Rate Advances, and not later than 11:00 A.M. (New York City time) on the date of such prepayment, in the case of Base Rate Advances, to the Agent stating the relevant Facility, the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Advances made to the Borrower comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided , however , that (x) each partial prepayment shall be in an aggregate principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in the event of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Appropriate Lenders in respect thereof pursuant to Section 8.04(c).
SECTION 2.10    Increased Costs .  (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority including, without limitation, any agency of the European Union or similar monetary or multinational authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, continuing, converting to, funding or maintaining Eurodollar Rate Advances (excluding for purposes of this Section 2.10(a) and Section 2.10(b) any such increased costs resulting from (i) Taxes or taxes described in clauses (w) – (z) of the definition of Taxes, imposed on or with respect to any payment made by or on behalf of the Borrower, or Other Taxes (as to which Section 2.13 shall govern) and (ii) Other Connection Taxes that are imposed on or measured by overall net income, or that are franchise taxes or branch profits taxes), then the Borrower shall, from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost; provided , however , that before making any such demand, each Lender agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.  A certificate as to the amount of such increased cost, submitted to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error.
(b)   If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital or liquidity required or expected to be maintained by such Lender or any corporation or other entity controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender ' s commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrower shall pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital or liquidity to be allocable to the existence of such Lender ' s commitment to lend hereunder.  A certificate as to such amounts submitted to the Borrower and the Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error.  For the avoidance of doubt, this Section 2.10(b) shall apply to all requests, rules, guidelines or directives concerning capital adequacy or liquidity issued in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives concerning capital adequacy or liquidity promulgated by the Bank for International Settlements, the Basel Committee on Banking Regulations and Supervisory Practices (or any successor or similar authority) or the United States financial regulatory authorities, regardless of the date adopted, issued, promulgated or implemented.
 
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SECTION 2.11   Illegality .  Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder (a) each Eurodollar Rate Advance in respect of the Appropriate Commitments will automatically, upon such demand, be Converted into a Base Rate Advance and (b) the obligation of the Appropriate Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Appropriate Lenders that the circumstances causing such suspension no longer exist; provided, however, that before making any such demand, each Lender agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Eurodollar Lending Office if the making of such a designation would allow such Lender or its Eurodollar Lending Office to continue to perform its obligations to make Eurodollar Rate Advances or to continue to fund or maintain Eurodollar Rate Advances and would not, in the judgment of such Lender, be otherwise disadvantageous to such Lender.
SECTION 2.12   Payments and Computations .  (a) The Borrower shall make each payment hereunder, without counterclaim or set-off, not later than 11:00 A.M. (New York City time) on the day when due in Dollars to the Agent at the Agent's Account in same day funds.  The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or ticking fees ratably (other than amounts payable pursuant to Section 2.10, 2.13 or 8.04(c)) to the Appropriate Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement.  Upon its acceptance of an Assignment and Assumption and recording of the information contained therein in the Register pursuant to Section 8.06(c), from and after the effective date specified in such Assignment and Assumption, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Assumption shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.
(b)    All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of ticking fees shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or ticking fees are payable.  Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.
 
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(c)    Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or ticking fee, as the case may be; provided , however , that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.
(d)    Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders or the Appropriate Lenders (as applicable) hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender or each Appropriate Lender (as applicable) on such due date an amount equal to the amount then due such Lender.  If and to the extent the Borrower shall not have so made such payment in full to the Agent, each such Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.
SECTION 2.13    Taxes .  (a) Any and all payments by or on behalf of the Borrower to or for the account of any Lender or the Agent hereunder or under the Notes or any other documents to be delivered hereunder shall be made, in accordance with Section 2.12 or the applicable provisions of such other documents, free and clear of and without deduction or withholding for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities, including any interest, additions to tax or penalties applicable with respect thereto, excluding, in the case of each Lender and the Agent, (v) taxes imposed on overall net income, branch profits taxes, franchise taxes imposed in lieu of net income taxes and other similar taxes, in each case by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its overall net income, branch profits taxes, franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof, or by any other jurisdiction with respect to which the Lender or the Agent, as the case may be, has a present or former connection (other than connections arising from such Person having executed, delivered, become a party to, performed obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced this Agreement, or the Notes or any other documents to be delivered hereunder, or sold or assigned an interest in any such documents), (w) taxes that are attributable to a Lender's failure to comply with the requirements of paragraph (f) of this Section, (x) United States federal withholding taxes imposed on amounts payable to such Lender on the date such Lender becomes a party to this Agreement, or changes its Applicable Lending Office except to the extent that such Lender or its assignor (if any) was entitled, at the time of the change in Applicable Lending Office (or assignment) to receive additional amounts from the Borrower pursuant to this paragraph, (y) any United States withholding taxes imposed pursuant to FATCA and (z) any interest, additions to tax or penalties applicable to such excluded taxes (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as "Taxes").  If any Taxes from or in respect of any sum payable hereunder or under any Note or any other documents to be delivered hereunder to any Lender or the Agent are required by law to be deducted or withheld, (i) the sum payable by the Borrower shall be increased as may be necessary so that after making all required withholdings or deductions (including withholdings or deductions applicable to additional sums payable under this Section 2.13) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made and (ii) if the Borrower is the withholding agent under applicable law, the Borrower shall make such deductions and shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.
 
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(b)    In addition, the Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or any other documents to be delivered hereunder or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the Notes or any other documents to be delivered hereunder except any such taxes that are Other Connection Taxes imposed with respect to any assignment (other than an assignment pursuant to Section 2.13(g)) (hereinafter referred to as " Other Taxes " ).
(c)    The Borrower shall indemnify each Lender and the Agent for and hold it harmless against the full amount of Taxes or Other Taxes (including, without limitation, taxes of any kind imposed or asserted by any jurisdiction on amounts payable under this Section 2.13) imposed on or paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto.  This indemnification shall be made within 30 days from the date such Lender or the Agent (as the case may be) makes written demand therefor.
(d)    Within 30 days after the date of any payment of Taxes by the Borrower, the Borrower shall furnish to the Agent, at its address referred to in Section 8.02, the original or a certified copy of a receipt evidencing such payment to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Agent.
(e)    Each Lender shall indemnify the Agent for the full amount of any taxes, levies, imposts, duties, charges, fees, deductions, withholdings or similar charges imposed by any governmental authority that are attributable to such Lender and that are payable or paid by the Agent in good faith, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto.  This indemnification shall be made within 30 days from the date the Agent makes written demand therefor.  Notwithstanding anything to the contrary, nothing in this Section 2.13(e) shall affect the Lender ' s rights with respect to the Borrower pursuant to this Agreement or the Notes.
 
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(f)    (i) (A) Each Lender that is a " United States Person " as defined in Section 7701(a)(30) of the Internal Revenue Code shall deliver to the Borrower and the Agent on or before the date on which it becomes a party to this Agreement two properly completed and duly signed originals of U.S. Internal Revenue Service Form W-9 (or any successor form) certifying that such Lender is exempt from U.S. federal withholding tax.  (B) Each Lender that is not a " United States Person " as defined in Section 7701(a)(30) of the Internal Revenue Code (a " Non-U.S. Lender " ) shall deliver to the Borrower and the Agent, whichever of the following is applicable:  (w) in the case of a Non-U.S. Lender claiming the benefits of an income tax treaty to which the United States is a party (i) with respect to payments of interest under this Agreement and the Notes, two properly completed and duly signed originals of U.S. Internal Revenue Service ( " IRS " ) Form W-8BEN-E (or any subsequent versions thereof or successors thereto) establishing an exemption from or reduction of, U.S. federal withholding tax pursuant to an " interest " article of such tax treaty, and (ii) with respect to any other applicable payments under this Agreement and the Notes, IRS Form W-8BEN-E (or any subsequent versions thereof or successors thereto) establishing an exemption from, or reduction of, U.S. federal withholding tax pursuant to the " business profits " or " other income " article of such tax treaty, (x) two properly completed and duly signed originals of IRS Form W-8ECI (or any subsequent versions thereof or successors thereto); (y) in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of " portfolio interest, " a statement substantially in the form of Exhibit E-1 to the effect that such Non-U.S. Lender is not a " bank " within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, a " 10 percent shareholder " of the Borrower within the meaning of Section 881(c)(3)(B) of the Internal Revenue Code, or a " controlled foreign corporation " described in Section 881(c)(3)(C) of the Internal Revenue Code (a " U.S. Tax Compliance Certificate " ) and two properly completed and duly signed originals of IRS Form W-8BEN-E (or any subsequent versions thereof or successors thereto); or (z) to the extent the Non-U.S. Lender is not the beneficial owner, two properly completed and signed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN-E, a U.S. Tax Compliance certificate substantially in the form of Exhibit E-2 or Exhibit E-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable, provided that if a Non-U.S. Lender is a partnership and one or more direct or indirect partners of such Non-U.S. Lender are claiming the portfolio interest exemption, such Non-U.S. Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit E-4 on behalf of each such direct or indirect partner.  Any Non-U.S. Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Agent any other form prescribed by applicable requirements of U.S. federal income tax law as a basis for claiming exemption from, or a reduction in, U.S. federal withholding tax, in each case, duly completed and signed together with such supplementary documentation as may be prescribed by applicable requirements of law which permits the Borrower and/or the Agent to determine any withholdings or deductions required to be made.  Forms referred to in this Section 2.13(f)(i) shall be delivered by each Lender on or before the date it becomes a party to this Agreement and from time to time thereafter upon the request of the Borrower or the Agent.  In addition, each Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Lender.  Each Lender shall promptly notify the Borrower and the Agent at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower and the Agent (or any other form of certification adopted by the U.S. taxing authorities for such purpose).  Notwithstanding any other provision of this Section, a Lender shall not be required to deliver any form pursuant to this Section that such Lender is not legally able to deliver or would materially prejudice the commercial position of such Lender.
 
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(ii)
If a payment made to a Lender hereunder would be subject to United States federal withholding tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Internal Revenue Code, as applicable), such Lender shall deliver to the Borrower and the Agent, at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Agent, such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Internal Revenue Code) and such additional documentation reasonably requested by the Borrower or the Agent as may be necessary for the Borrower or the Agent to comply with its obligations under FATCA, to determine that such Lender has complied with such Lender ' s obligations under FATCA or to determine the amount to deduct and withhold from such payment.  Solely for purposes of this clause (ii), FATCA shall include any amendments to FATCA after the date hereof.
(g)     Any Lender claiming any additional amounts payable pursuant to Section 2.10 or this Section 2.13 agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Eurodollar Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender; provided , however , that if any such Lender fails to change the jurisdiction of its Applicable Lending Office to a jurisdiction with respect to which no additional amounts are owed under this Section 2.13 within of 30 days of receiving such a request from the Borrower, the Borrower may replace such Lender in accordance with Section 2.18.
(h)    If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any amount as to which it has been indemnified pursuant to this Section 2.13 (including additional amounts paid pursuant to this Section 2.13), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the amounts giving rise to such refund), net of all out-of-pocket expenses (including any taxes) of such indemnified party and without interest (other than any interest paid by the relevant governmental authority with respect to such refund).  Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid to such indemnified party pursuant to the previous sentence (plus any penalties, interest or other charges imposed by the relevant governmental authority) in the event such indemnified party is required to repay such refund to such governmental authority.  Notwithstanding anything to the contrary in this Section 2.13(h), in no event will any indemnified party be required to pay any amount to any indemnifying party pursuant to this Section 2.13(h) if such payment would place such indemnified party in a less favorable position (on a net after-tax basis) than such indemnified party would have been in if the tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed, and the indemnification payments or additional amounts with respect to such tax had never been paid.  This Section 2.13(h) shall not be construed to require any indemnified party to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the indemnifying party or any other Person.
 
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SECTION 2.14    Sharing of Payments, Etc ..  If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances owing to it (other than pursuant to Section 2.10, 2.13 or 8.04(c)) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided , however , that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered; provided , further , that, notwithstanding the foregoing, so long as the Advances shall not have become due and payable pursuant to Section 6.01, any excess payment received by any Appropriate Lender that is not by its terms payable to all Lenders shall be calculated and shared on a pro rata basis only with other Appropriate Lenders.  The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.
SECTION 2.15    Evidence of Debt .  (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Advance owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder in respect of Advances.  The Borrower agrees that upon notice by any Lender to the Borrower (with a copy of such notice to the Agent) to the effect that a Note is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Advances owing to, or to be made by, such Lender in respect of its Appropriate Commitment, the Borrower shall promptly execute and deliver to such Lender a Note payable to the order of such Lender in a principal amount up to the Appropriate Commitment of such Lender.  Each Lender that receives a Note pursuant to this Section 2.15 agrees that, upon its Appropriate Commitment Termination, such Lender will return such Note to the Borrower.
(b)    The Register maintained by the Agent pursuant to Section 8.06(c) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assignment and Assumption delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender ' s share thereof.
(c)    Entries made in good faith by the Agent in the Register pursuant to subsection (b) above, and by each Lender in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from the Borrower to, in the case of the Register, each Lender and, in the case of such account or accounts, such Lender, under this Agreement, absent manifest error; provided , however , that the failure of the Agent or such Lender to make an entry, or any finding that an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement.
 
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SECTION 2.16    Use of Proceeds .  The proceeds of the Advances shall be available (and the Borrower agrees that it shall use such proceeds) for general corporate purposes of the Borrower and its Subsidiaries.
SECTION 2.17     Defaulting Lenders .  (a) Notwithstanding anything to the contrary contained in this Agreement, any payment by the Borrower for the account of a Defaulting Lender under this Agreement shall not be paid or distributed to such Defaulting Lender, but shall instead be retained by the Agent in a segregated non-interest bearing account until the earlier of the date the Defaulting Lender is no longer a Defaulting Lender or the termination of the Commitments and payment in full of all obligations of the Borrower hereunder and shall be applied at such time or times as may be determined by the Agent as follows:  first , to the payment of any amounts owing by such Defaulting Lender to the Agent hereunder; second, as the Borrower may request (so long as no Default exists), to the funding of any Advance in respect of which that Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as reasonably determined by the Agent or if no such funding has been requested, to be held by the Agent as cash collateral to fund future Advances by such Defaulting Lender; third , to the payment of any amounts owing to the Lenders or the Appropriate Lenders (as applicable) as a result of any judgment of a court of competent jurisdiction obtained by any Lender against such Defaulting Lender as a result of such Defaulting Lender's breach of its obligations under this Agreement; fourth , so long as no Default exists, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against such Defaulting Lender as a result of such Defaulting Lender's breach of its obligations under this Agreement; and fifth , to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that any amounts held as cash collateral for funding obligations of a Defaulting Lender shall be returned to such Defaulting Lender upon its Appropriate Commitment Termination (or, if it is a Tranche A Lender, a Tranche B Lender and a Tranche C Lender, the termination or expiration of this Agreement) and the satisfaction of such Defaulting Lender's obligations hereunder. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post cash collateral pursuant to this Section 2.17 shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
(b)    No Commitment of any Lender shall be increased or otherwise affected, and, except as otherwise expressly provided in this Section 2.17, performance by the Borrower of its obligations shall not be excused or otherwise modified as a result of the operation of this Section 2.17.  The rights and remedies against a Defaulting Lender under this Section 2.17 are in addition to any other rights and remedies which the Borrower, the Agent or any Lender may have against such Defaulting Lender.
 
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(c)    If the Borrower and the Agent agree in writing in their reasonable determination that a Defaulting Lender should no longer be deemed to be a Defaulting Lender, the Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any cash collateral), that Lender will, to the extent applicable, purchase that portion of outstanding Advances of the other Appropriate Lenders or take such other actions as the Agent may determine to be necessary to cause the Advances to be funded and held on a pro rata basis by the Appropriate Lenders in accordance with their pro rata share, whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided , further , that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from such Lender ' s having been a Defaulting Lender.
SECTION 2.18    Replacement of Lenders .  If (a) any Lender requests compensation under Section 2.10, (b) the Borrower is required to pay additional amounts to any Lender or any governmental authority for the account of any Lender pursuant to Section 2.13 or (c) any Lender is a Defaulting Lender or a Non-Consenting Lender, then the Borrower may, at its sole expense and effort and so long as no Default is continuing, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 8.06), all of its interests, rights and obligations under this Agreement to an Eligible Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that:
(i)
the Borrower shall have paid to the Agent the assignment fee (if any) specified in Section 8.06;
(ii)
such assigning Lender shall have received payment of an amount equal to the outstanding principal of its Advances, accrued interest thereon, accrued fees and all other amounts then payable to it hereunder (including any amounts under Section 8.04(c)) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
(iii)
in the case of any such assignment resulting from a claim for compensation under Section 2.10 or payments required to be made pursuant to Section 2.13, such assignment will result in a reduction in such compensation or payments after the date of such assignment;
(iv)
such assignment does not conflict with applicable law; and
(v)
in the case of any assignment resulting from a Lender becoming a Non-Consenting Lender, the applicable assignee shall have consented to the applicable amendment, waiver or consent.
 
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A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
ARTICLE III

CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01    Conditions Precedent to Effectiveness of Section 2.01 .  Section 2.01 of this Agreement shall become effective on and as of the first date (the " Effective Date ") on which the following conditions precedent have been satisfied:
(a)
Except as disclosed in filings with the Securities and Exchange Commission prior to the date hereof, there shall have occurred no Material Adverse Change since December 31, 2016.
(b)
There shall exist no action, suit, investigation, litigation or proceeding affecting the Borrower or any of its Subsidiaries pending or, to the knowledge of the Borrower, threatened before any court, governmental agency or arbitrator that (i) would be reasonably likely to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of this Agreement or any Note or the consummation of the transactions contemplated hereby.
(c)
All governmental and third party consents and approvals necessary in connection with the transactions contemplated hereby shall have been obtained (without the imposition of any conditions that are not acceptable to the Lenders) and shall remain in effect, and no law or regulation shall be applicable in the reasonable judgment of the Lenders that restrains, prevents or imposes materially adverse conditions upon the transactions contemplated hereby.
(d)
The Borrower shall have notified the Agent in writing as to the proposed Effective Date.
(e)
The Borrower shall have paid all accrued fees and expenses of the Agent and the Lenders (including the accrued fees and expenses of counsel to the Agent) required to be paid on or prior to the Effective Date.
(f)
On the Effective Date, the following statements shall be true and the Agent shall have received for the account of each Lender a certificate signed by a duly authorized officer of the Borrower, dated the Effective Date, stating that:
(i)
The representations and warranties contained in Section 4.01 are correct on and as of the Effective Date, and
(ii)
No event has occurred and is continuing that constitutes a Default.
 
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(g)
The Agent shall have received on or before the Effective Date the following, each dated the Effective Date, in form and substance satisfactory to the Agent and (except for the Notes) in sufficient copies for each Lender:
(i)
The Notes of the Borrower to the order of the Lenders to the extent requested by any Lender pursuant to Section 2.15.
(ii)
Certified excerpts of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes to be delivered by it, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes.
(iii)
A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes to be delivered by it and the other documents to be delivered by it hereunder.
(iv)
A favorable opinion of the associate general counsel of the Borrower, substantially in the form of Exhibit D hereto.
SECTION 3.02    Conditions Precedent to Each Borrowing .  The obligation of each Appropriate Lender to make an Advance on the occasion of each relevant Borrowing shall be subject to the conditions precedent that the Effective Date shall have occurred and on the date of such Borrowing (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing such statements are true):
(i)
the representations and warranties of the Borrower contained in Section 4.01 (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f)(i) thereof) are correct in all material respects (except such representations that are qualified by materiality, which shall be correct) on and as of such date, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date,
(ii)
no event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, that constitutes a Default, and
(iii)
such Borrowing is within any mandatory debt limitations established by the Board of Directors of the Borrower;
and (b) the Agent shall have received such other approvals, opinions or documents as any Appropriate Lender through the Agent may reasonably request related to clauses (a)(i) or (ii) of this Section.
 
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SECTION 3.03    Determinations Under Section 3.01 .  For purposes of determining compliance with the conditions specified in Section 3.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the date that the Borrower, by notice to the Lenders, designates as the proposed Effective Date, specifying its objection thereto.  The Agent shall promptly notify the Lenders of the occurrence of the Effective Date.
ARTICLE IV

REPRESENTATIONS AND WARRANTIES
SECTION 4.01    Representations and Warranties .  The Borrower represents and warrants on the Effective Date and on the Funding Date as follows:
(a)
The Borrower is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization.
(b)
The execution, delivery and performance by the Borrower of this Agreement and the Notes, and the consummation of the transactions contemplated hereby, are within the Borrower ' s corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower ' s charter or by-laws, (ii) any material law applicable to the Borrower in any material respect or (iii) any material contractual restriction binding on or affecting the Borrower.
(c)
No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes.
(d)
This Agreement has been, and each of the Notes when delivered hereunder will have been, duly executed and delivered by the Borrower.  This Agreement is, and each of the Notes when delivered hereunder will be, the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
(e)
The Audited Financial Statements, accompanied by an opinion of Ernst & Young LLP, independent public accountants (or other independent public accountants of national standing), and the Quarterly Financial Statements, duly certified by the chief financial officer of the Borrower, copies of which have been furnished to each Lender, fairly present in all material respects, subject, in the case of said Quarterly Financial Statements, to year-end audit adjustments, the Consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the Consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied.  Except as disclosed in filings with the Securities and Exchange Commission prior to the date hereof, since December 31, 2016, there has been no Material Adverse Change.
 
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(f)
There is no pending or, to the knowledge of the Borrower, threatened action, suit, investigation, litigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that (i) is not disclosed in a filing by the Borrower with the Securities and Exchange Commission and would be reasonably likely to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of this Agreement or any Note or the consummation of the transactions contemplated hereby.
(g)
The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock.  Following application of the proceeds of each Advance, not more than 25 percent of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a Consolidated basis) that are subject to a restriction on sale, pledge, or disposal under this Agreement will be represented by margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System).
(h)
The Borrower is not an " investment company, " or a company " controlled " by an " investment company, " within the meaning of the Investment Company Act of 1940, as amended.
(i)
(i) None of the Borrower or any of the Borrower ' s Subsidiaries is a Person that is, or is owned or controlled by Persons that are the subject or target of any Sanctions; (ii) the Borrower has implemented and maintains in effect policies and procedures designed to promote compliance by the Borrower with Anti-Corruption Laws, and (iii) the Borrower and its Subsidiaries are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects.
(j)
The Borrower is not an EEA Financial Institution.
ARTICLE V

COVENANTS OF THE BORROWER
SECTION 5.01    Affirmative Covenants .  So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will:
(a)
Compliance with Laws, Etc .  Comply, and cause each of its Subsidiaries to comply with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with ERISA and the PATRIOT Act, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
 
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(b)
Payment of Taxes, Etc .  Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all federal and other material taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its material property; provided , however , that neither the Borrower nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors.
(c)
Maintenance of Insurance .  Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates; provided , however , that the Borrower and its Subsidiaries may self-insure (including through captive insurance subsidiaries) to the extent consistent with prudent business practice.
(d)
Preservation of Corporate Existence, Etc .  Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence and its material rights (charter and statutory) and franchises; provided , however , that the Borrower and its Subsidiaries may consummate any merger or consolidation permitted under Section 5.02(b) and provided   further that neither the Borrower nor any of its Subsidiaries shall be required to preserve any right or franchise, or in the case of any Subsidiary its corporate existence, if the Board of Directors of the Borrower or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Borrower or such Subsidiary.
(e)
Visitation Rights .  At any reasonable time and from time to time during normal business hours, permit the Agent or any of the Lenders or any agents or representatives thereof, to examine the records and books of account of, and visit the properties of, the Borrower and any of its Subsidiaries, and, upon execution of a confidentiality agreement, to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of the officers or directors of the Borrower and with their independent certified public accountants, provided , however , that examination of the records and books of account of the Borrower or any of its Subsidiaries shall occur only at times when an Advance shall be outstanding.
(f)
Keeping of Books .  Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary in accordance with generally accepted accounting principles in effect from time to time.
 
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(g)
Maintenance of Properties, Etc .   Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
(h)
Reporting Requirements .  Furnish to the Lenders:
(i)
as soon as available and in any event within 40 days after the end of each of the first three quarters of each fiscal year of the Borrower, the Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such quarter and Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, duly certified (subject to year-end audit adjustments) by the chief financial officer of the Borrower as having been prepared in accordance with generally accepted accounting principles (it being understood that the certification provided by the chief financial officer in compliance with the Sarbanes-Oxley Act is acceptable for this purpose) and prepare and deliver a certificate of the chief financial officer of the Borrower as to compliance with the terms of this Agreement and setting forth in reasonable detail the calculations necessary to demonstrate compliance with Section 5.03 (it being understood that the only certification regarding pro forma adjustments included in such calculation shall be that the adjustments are reasonable good faith estimates prepared on the basis of information available as of the date that such pro forma adjustments are determined); provided that in the event of any change since the date hereof in generally accepted accounting principles used in the preparation of such financial statements, the Borrower shall provide the financial information required for the determination of compliance with Section 5.03 based on GAAP in effect as of the date hereof;
(ii)
as soon as available and in any event within 75 days after the end of each fiscal year of the Borrower, a copy of the annual report for such year for the Borrower containing the Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for such fiscal year, in each case accompanied by an opinion by Ernst & Young LLP or other independent public accountants of national standing to the effect that such Consolidated financial statements fairly present its financial condition and results of operations on a Consolidated basis in accordance with generally accepted accounting principles consistently applied and prepare and deliver a certificate of the chief financial officer of the Borrower as to compliance with the terms of this Agreement and setting forth in reasonable detail the calculations necessary to demonstrate compliance with Section 5.03 (it being understood that the only certification regarding pro forma adjustments included in such calculation shall be that the adjustments are reasonable good faith estimates prepared on the basis of information available as of the date that such pro forma adjustments are determined); provided that in the event of any change since the date hereof in generally accepted accounting principles used in the preparation of such financial statements, the Borrower shall provide the financial information required for the determination of compliance with Section 5.03 based on GAAP in effect as of the date hereof;
 
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(iii)
as soon as possible and in any event within five Business Days after the occurrence of each Default continuing on the date of such statement, a statement of the chief financial officer of the Borrower setting forth details of such Default and the action that the Borrower has taken and proposes to take with respect thereto;
(iv)
if Advances are outstanding and if such are not available on the internet at www.att.com, www.sec.gov or another website designated by the Borrower, promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its securityholders, and copies of all reports and registration statements that the Borrower or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange;
(v)
prompt notice of the commencement of all actions and proceedings before any court, governmental agency or arbitrator affecting the Borrower or any of its Subsidiaries of the type described in Section 4.01(f); and
(vi)
such other information respecting the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request of a material nature that may reasonably relate to the condition (financial or otherwise), operations, properties or prospects of the Borrower or the Borrower and its Subsidiaries taken as a whole.
Reports and financial statements required to be furnished by the Borrower pursuant to clauses (i), (ii) and (iv) of this subsection (h) shall be deemed to have been furnished on the earlier of (A) the date on which such reports and financial statements are posted on the internet at www.sec.gov or (B) the date on which the Borrower posts such reports, or reports containing such financial statements, on its website on the internet at www.att.com or at such other website identified by the Borrower in a notice to the Agent and the Lenders and that is accessible by the Lenders without charge; provided that the Lenders shall be deemed to have received the information specified in clauses (i), (ii) and (iv) of this subsection (h) on the date (x) such information is posted at the website of the Agent identified from time to time by the Agent to the Lenders and the Borrower and (y) such posting is notified to the Lenders (it being understood that the Borrower shall have satisfied the timing obligations imposed by those clauses as of the earliest date such information is posted on the Internet at www.sec.gov or the website referred to in clause (B) above).
SECTION 5.02    Negative Covenants .  So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower shall not:
 
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(a)
Liens, Etc .  Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Lien on or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, other than:
(i)
Permitted Liens,
(ii)
purchase money Liens upon or in any real property or equipment acquired or held by the Borrower or any Subsidiary of the Borrower in the ordinary course of business to secure the purchase price of such property or equipment or to secure Debt incurred solely for the purpose of financing the acquisition of such property or equipment (including capital leases), or Liens existing on such property or equipment at the time of its acquisition (other than any such Liens created in contemplation of such acquisition that were not incurred to finance the acquisition of such property) or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided , however , that no such Lien shall extend to or cover any properties of any character other than the real property or equipment being acquired, and no such extension, renewal or replacement shall extend to or cover any properties not theretofore subject to the Lien being extended, renewed or replaced,
(iii)
the Liens existing on the date hereof and described on Schedule 5.02(a) hereto,
(iv)
Liens on property of a Person existing at the time such Person is merged into or consolidated with the Borrower or any Subsidiary of the Borrower or becomes a Subsidiary of the Borrower; provided that such Liens were not created in contemplation of such merger, consolidation or acquisition and do not extend to any assets other than those of the Person so merged into or consolidated with the Borrower or such Subsidiary or acquired by the Borrower or such Subsidiary,
(v)
Liens securing Debt incurred by the Borrower or its Subsidiaries in connection with a financing based on accounts receivable (including any Receivables Securitization),
(vi)
Liens on assets of a Subsidiary that is a regulated telephone company (a " Telco " ) that, pursuant to the public debt indenture(s) of such Telco, are created upon the merger or conveyance or sale of all or substantially all of the assets of such Telco,
(vii)
Liens on real property securing Debt and other obligations in an aggregate principal amount not to exceed $1,000,000,000 at any time outstanding,
(viii)
other Liens securing Debt and other obligations in an aggregate principal amount not to exceed at any time outstanding 10 percent of Net Tangible Assets, and
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(ix)
the replacement, extension or renewal of any Lien permitted by clause (iii) or (iv) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Debt secured thereby.
(b)
Mergers, Etc . .  Merge or consolidate with or into, or, directly or indirectly, convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person.
(c)
Accounting Changes .  Make or permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as required or permitted by generally accepted accounting principles.
 
(d)
Sanctions and Anti-Corruption .  Request any Borrowing, nor directly or to its knowledge indirectly use the proceeds of any Borrowing, in each case (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, or (ii) in any manner that would result in the violation of any Sanctions applicable to the Borrower or its Subsidiaries or, to the knowledge of the Borrower, any other party hereto.
SECTION 5.03    Financial Covenant .  The Borrower will maintain, as of the last day of each fiscal quarter, a ratio of Net Debt for Borrowed Money to Consolidated EBITDA of the Borrower and its Subsidiaries for the four quarters then ended of not more than 3.5 to 1.
ARTICLE VI

EVENTS OF DEFAULT
SECTION 6.01    Events of Default .  If any of the following events ("Events of Default") shall occur and be continuing:
(a)
Failure to pay any principal of any Advance when the same becomes due and payable; or failure to pay any interest on any Advance or to make any other payment of fees or other amounts payable under this Agreement or any Note within three Business Days after the same becomes due and payable; or
(b)
Any representation or warranty made by the Borrower herein or in connection with this Agreement shall prove to have been incorrect in any material respect when made; or
(c)
(i) The Borrower shall fail to perform or observe any term, covenant or agreement applicable to it contained in Sections 5.01(d), (e) or (h), 5.02 or 5.03, or (ii) the Borrower shall fail to perform or observe any term, covenant or agreement (other than those referred to in clauses (a) and (c)(i) above) contained in this Agreement on its part to be performed or observed and such failure shall remain unremedied for 10 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or
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(d)
(i) The Borrower or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal or net amount of at least the Threshold Amount in the aggregate (but excluding Debt owing by the Borrower outstanding hereunder) of the Borrower or such Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such Debt; or (iii) any such Debt shall be declared to be due and payable, or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; provided , that, (x) the Debt subject of clause (ii) or (iii) above shall not include Debt of a Person that is merged into or consolidated with the Borrower or any Subsidiary of the Borrower or that becomes a Subsidiary of the Borrower for a period of 90 days after the date that such Debt becomes Debt of the Borrower or any of its Subsidiaries and (y) clauses (ii) and (iii) above shall not apply to any prepayment, redemption, repurchase or defeasance required to be made as a result of the obligor of such Debt making a voluntary notice of prepayment, voluntary notice of redemption, voluntary notice of repurchase, voluntary notice of defeasance or taking similar action with comparable effect; or
(e)
The Borrower or any of its Material Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its Material Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or
(f)
Final and non-appealable judgments or orders for the payment of money in excess of the Threshold Amount in the aggregate shall be rendered against the Borrower or any of its Subsidiaries, 30 days shall have passed since such judgment became final and non-appealable and enforcement proceedings shall have been commenced by any creditor upon such judgment or order; provided , however , that any such judgment or order shall not be an Event of Default under this Section 6.01(f) if and for so long as (i) the amount of such judgment or order is covered by a valid and binding policy of insurance between the defendant and the insurer covering payment thereof and (ii) such insurer, which shall be rated at least "A" by A.M. Best Company, has been notified of, and has not disputed the claim made for payment of, the amount of such judgment or order; or
 
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(g)
(i) Any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Stock of the Borrower (or other securities convertible into such Voting Stock) representing more than 50% of the combined voting power of all Voting Stock of the Borrower; or (ii) during any period of 24 consecutive months, commencing after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Borrower shall cease for any reason (other than due to retirement, death or disability) to constitute a majority of the Board of Directors of the Borrower (except to the extent that such individuals were replaced by individuals (x) elected by 66-2/3% of the members of the Board of Directors of the Borrower or (y) nominated for election by a majority of the members of the Board of Directors of the Borrower and thereafter elected as directors by the shareholders of the Borrower); or
(h)
The Borrower or any ERISA Affiliate shall fail to satisfy minimum funding requirements under Section 412 of the Internal Revenue Code or Section 302 of ERISA to any Plan, or apply for a waiver of such requirements, and such failure could reasonably be expected to subject the Borrower or any of its Subsidiaries to any liabilities in the aggregate in excess of the Threshold Amount;
then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Advances, all interest thereon and all other amounts payable by the Borrower under this Agreement to be forthwith due and payable, whereupon such Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided , however , that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.
 
 
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ARTICLE VII

THE AGENT
SECTION 7.01    Authorization and Authority .  Each Lender hereby irrevocably appoints Scotiabank to act on its behalf as the Agent hereunder and under the Notes and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto.  The provisions of this Article are solely for the benefit of the Agent and the Lenders, and the Borrower shall have no rights as a third party beneficiary of any of such provisions.  It is understood and agreed that the use of the term "agent" herein (or any other similar term) with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law.  Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties.
SECTION 7.02    Agent Individually .  The Person serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Agent hereunder in its individual capacity.  Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Agent hereunder and without any duty to account therefor to the Lenders.
SECTION 7.03    Duties of Agent; Exculpatory Provisions .  (a) The Agent's duties hereunder are solely ministerial and administrative in nature and the Agent shall not have any duties or obligations except those expressly set forth herein.  Without limiting the generality of the foregoing, the Agent:
(i)
shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(ii)
shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein); provided that the Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Agent to liability or that is contrary to this Agreement or applicable law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any debtor relief law or that may effect a forfeiture, modification or termination of property of a Defaulting Lender in violation of any debtor relief law; and
(iii)
shall not, except as expressly set forth herein, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Agent or any of its Affiliates in any capacity.
 
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(b)    The Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 8.01 or 6.01) or (ii) in the absence of its own gross negligence or willful misconduct.  The Agent shall be deemed not to have knowledge of any Default or the event or events that give or may give rise to any Default unless and until the Borrower or any Lender shall have given notice to the Agent describing such Default and such event or events.
(c)    The Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty, representation or other information made or supplied in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith or the adequacy, accuracy and/or completeness of the information contained therein, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document or the perfection or priority of any Lien or security interest created or purported to be created hereby or (v) the satisfaction of any condition set forth in Article III or elsewhere herein, other than (but subject to the foregoing clause (ii)) to confirm receipt of items expressly required to be delivered to the Agent.
(d)    Nothing in this Agreement shall require the Agent or any of its Related Parties to carry out any " know your customer " or other checks in relation to any Person on behalf of any Lender and each Lender confirms to the Agent that it is solely responsible for any such checks it is required to carry out and that it may not rely on any statement in relation to such checks made by the Agent or any of its Related Parties.
SECTION 7.04    Reliance by Agent .  The Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person.  The Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon.  In determining compliance with any condition hereunder to the making of an Advance that by its terms must be fulfilled to the satisfaction of a Lender, the Agent may presume that such condition is satisfactory to such Lender unless an officer of the Agent responsible for the transactions contemplated hereby shall have received notice to the contrary from such Lender prior to the making of such Advance, and such Lender shall not have made available to the Agent such Lender's ratable portion of the applicable Borrowing.  The Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
 
 
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SECTION 7.05    Delegation of Duties .  The Agent may perform any and all of its duties and exercise its rights and powers hereunder by or through any one or more sub-agents appointed by the Agent.  The Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties.  Each such sub-agent and the Related Parties of the Agent and each such sub-agent shall be entitled to the benefits of all provisions of this Article VII and Section 8.04 (as though such sub-agents were the "Agent" hereunder) as if set forth in full herein with respect thereto.
SECTION 7.06    Resignation of Agent .  (a) The Agent may at any time give notice of its resignation to the Lenders and the Borrower.  At any time when the Agent or its Affiliate is a Defaulting Lender, the Required Lenders may, and upon the request of the Borrower shall, remove the Agent by giving notice to the Agent.  Upon receipt or giving of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States.  If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation (such 30-day period, the "Lender Appointment Period"), then the retiring Agent may on behalf of the Lenders, appoint a successor Agent meeting the qualifications set forth above.  In addition and without any obligation on the part of the retiring Agent to appoint, on behalf of the Lenders, a successor Agent, the retiring Agent may at any time upon or after the end of the Lender Appointment Period notify the Borrower and the Lenders that no qualifying Person has accepted appointment as successor Agent and the effective date of such retiring Agent's resignation.  Upon the resignation effective date established in such notice and regardless of whether a successor Agent has been appointed and accepted such appointment, the retiring Agent's resignation shall nonetheless become effective and (i) the retiring Agent shall be discharged from its duties and obligations as Agent hereunder and (ii) all payments, communications and determinations provided to be made by, to or through the Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Agent as provided for above in this paragraph.  Upon the acceptance of a successor's appointment as Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties as Agent of the retiring (or retired) Agent, and the retiring Agent shall be discharged from all of its duties and obligations as Agent hereunder (if not already discharged therefrom as provided above in this paragraph).  The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor.  After the retiring Agent's resignation hereunder, the provisions of this Article and Section 8.04 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Agent was acting as Agent.
SECTION 7.07    Non-Reliance on Agent and Other Lenders .  Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any related agreement or any document furnished hereunder.
 
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SECTION 7.08    Indemnification .  The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower and without limiting its obligation to do so), ratably according to the respective principal amounts of the Advances then owed to each of them (or if no Advances are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement (collectively, the "Indemnified Costs"), provided that no Lender shall be liable for any portion of the Indemnified Costs resulting from the Agent's gross negligence or willful misconduct.  Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower.  In the case of any investigation, litigation or proceeding giving rise to any Indemnified Costs, this Section 7.08 applies whether any such investigation, litigation or proceeding is brought by the Agent, any Lender or a third party.
SECTION 7.09    Other Agents .   Each Lender hereby acknowledges that neither the syndication agent, the documentation agents nor any other Lender designated as any "Agent" or "Arranger" on the cover page hereof (other than the Agent) has any liability hereunder other than in its capacity as a Lender.
ARTICLE VIII

MISCELLANEOUS
SECTION 8.01    Amendments, Etc. .  (a) No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no amendment, waiver or consent shall:  (a) waive any of the conditions specified in Section 3.01 without the written consent of all Lenders, (b) increase or extend the Commitment(s) of any Lender without the written consent of such Lender, (c) reduce the principal of, or rate of interest on, any Advances or any fees or other amounts payable hereunder without the written consent of all Lenders directly affected thereby, (d) postpone any date fixed for any payment of principal of, or interest on, any Advances or any fees or other amounts payable hereunder without the written consent of all Lenders directly affected thereby, (e) change the definition of "Required Lenders," or the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder without the written consent of all Lenders or (f) amend this Section 8.01 without the written consent of all Lenders; and provided further that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note.
 
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(b)        Any term or provision of this Section 8.01 to the contrary notwithstanding, if the Agent and the Borrower shall have jointly identified an obvious error or any error or omission of a technical or immaterial nature in any provision of this Agreement, then the Agent and the Borrower shall be permitted to amend such provision and such amendment shall become effective without any further action or consent of any other party to this Agreement so long as the Lenders shall have received prior written notice thereof and the Agent shall not have received, within two Business Days of the date of its delivery to the Lenders of such notice, a written notice from the Required Lenders stating that the Required Lenders object to such amendment.
SECTION 8.02    Notices; Effectiveness; Electronic Communication .  (a) Notices Generally.  Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile as follows:
(i)
if to the Borrower, to it at 208 S. Akard Street, 18th Floor, Dallas, Texas 75202, Attention:  Assistant Treasurer (Facsimile No. (214) 653-2578; Telephone No. (214) 757-7539; Email jk7035@att.com);
(ii)
if to the Agent, to it at The Bank of Nova Scotia, New York Agency 250 Vesey Street, New York, New York  10281, Attention of Loan Administration & Agency Services (Facsimile No. (212) 225-5709; Email:   GWSLoanOps.USAgency@scotiabank.com ; and
(iii)
if to a Lender, to it at its address (or facsimile number) set forth in its Administrative Questionnaire.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by facsimile shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient).  Notices delivered through electronic communications, to the extent provided in paragraph (b) below, shall be effective as provided in said paragraph (b).
(b)    Electronic Communications .  Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including email and Internet or intranet websites) pursuant to procedures approved by the Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Agent that it is incapable of receiving notices under such Article by electronic communication.  The Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
 
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Unless the Agent otherwise prescribes, (i) notices and other communications sent to an email address shall be deemed received upon the sender ' s receipt of an acknowledgement from the intended recipient (such as by the " return receipt requested " function, as available, return email or other written acknowledgement), and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient, at its email address as described in the foregoing clause (i), of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such notice, email or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient.
(c)    Change of Address, etc . .  Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto.
(d)    Platform .
(i)
The Borrower agrees that the Agent may, but shall not be obligated to, make the Communications (as defined below) available to the Lenders by posting the Communications on Debt Domain, Intralinks, Syndtrak or a substantially similar electronic transmission system (the " Platform " ).
(ii)
The Platform is provided " as is " and " as available. " The Agent Parties (as defined below) do not warrant the adequacy of the Platform and expressly disclaim liability for errors or omissions in the Communications.  No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or the Platform.  In no event shall the Agent or any of its Related Parties or the Arranger or any of its Related Parties (collectively, the " Agent Parties " ) have any liability to the Borrower, any Lender or any other Person or entity for damages of any kind, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the Borrower ' s or the Agent ' s transmission of communications through the Platform.  " Communications " means, collectively, any notice, demand, communication, information, document or other material that the Borrower provides to the Agent pursuant to this Agreement or the transactions contemplated herein which is distributed to the Agent any Lender by means of electronic communications pursuant to this Section, including through the Platform.
SECTION 8.03    No Waiver; Remedies .  No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
 
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SECTION 8.04    Costs and Expenses .  (a) The Borrower agrees to pay within 20 days of demand all costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, (A) all due diligence, syndication (including printing, distribution and bank meetings), transportation, computer, duplication, appraisal, consultant, and audit expenses and (B) the reasonable fees and expenses of Shearman & Sterling LLP, counsel for the Agent, with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement.  The Borrower further agrees to pay on demand all costs and expenses of the Agent and the Lenders, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement against the Borrower (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable fees and expenses of counsel for the Agent and each Lender in connection with the enforcement of its rights under this Section 8.04(a).
(b)        The Borrower agrees to indemnify and hold harmless the Agent, the Arranger and each Lender and each of their Related Parties (each, an " Indemnified Party " ) from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable and out of pocket fees and disbursements of one counsel to such Indemnified Party and its Related Parties) incurred by or asserted or awarded against any Indemnified Party or such Indemnified Party ' s Related Parties, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence, material breach of its obligations under this Agreement or willful misconduct of such Indemnified Party or its Related Parties.  In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, equityholders or creditors, an Indemnified Party, a Related Party or any other Person (except for any disputes among any Indemnified Party and its Related Parties), whether or not any Indemnified Party or Related Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated.  The Borrower also agrees not to assert any claim for special, indirect, consequential or punitive damages against the Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, arising out of or otherwise relating to the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances.
(c)        If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.07(d) or (e), 2.09 or 2.11, acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 8.06 as a result of a demand by the Borrower pursuant to Section 2.18, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain such Advance.
 
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(d)        Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 2.10, 2.13 and 8.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes.
SECTION 8.05    Binding Effect .  (a) Counterparts; Effectiveness .  This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  Except as provided in Article III, this Agreement shall become effective when it shall have been executed by the Agent and when the Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto.  Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (i.e., "pdf" or "tif") format shall be effective as delivery of an original manually executed counterpart of this Agreement.
(b)        Electronic Execution of Assignments .  The words " execution, "   " signed, "   " signature, " and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
SECTION 8.06    Assignments and Participations .  (a) Successors and Assigns Generally .  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of paragraph (b) of this Section, (ii) by way of participation in accordance with the provisions of paragraph (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of paragraph (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void).  Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, participants to the extent provided in paragraph (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
 
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(b)    Assignments by Lenders .  Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Advances at the time owing to it); provided any such assignment shall be subject to the following conditions:
(i)
Minimum Amounts.
(A)
in the case of an assignment of the entire remaining amount of the assigning Lender ' s Appropriate Commitment and/or the Advances at the time owing to it thereunder or contemporaneous assignments to related Approved Funds that equal at least the amount specified in paragraph (b)(i)(B) of this Section in the aggregate or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(B)
in any case not described in paragraph (b)(i)(A) of this Section, the aggregate amount of the Appropriate Commitment (which for this purpose includes Advances outstanding thereunder) or, if the applicable Appropriate Commitment is not then in effect, the principal outstanding balance of the Advances thereunder of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Agent or, if " Trade Date " is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $10,000,000, unless each of the Agent and, so long as no Event of Default under Section 6.01(a) or 6.01(e) has occurred and is continuing, the Borrower otherwise consents (such consent not to be unreasonably withheld or delayed).
(ii)
Proportionate Amounts .  Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender ' s rights and obligations under this Agreement with respect to the Advances and/or the Commitment assigned.
(iii)
Required Consents .  No consent shall be required for any assignment except to the extent required by paragraph (b)(i)(B) of this Section and, in addition:
(A)
the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless:
(x) an Event of Default under Section 6.01(a) or 6.01(e) has occurred and is continuing at the time of such assignment or any Advances have been accelerated in accordance with Section 6.01, or
(y) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund;
 
 
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provided that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Agent within five Business Days after having received notice thereof pursuant to clause (iv) below; and
(B)
the consent of the Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of any Commitments or Advances if such assignment is to a Person that is not a Lender, an Affiliate of such Lender or an Approved Fund with respect to such Lender.
(iv)
Assignment and Assumption .  The parties to each assignment shall execute and deliver to the Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; provided that the Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment .   The assignee, if it is not a Lender, shall deliver to the Agent an Administrative Questionnaire.  The Agent shall notify the Borrower of each Assignment and Assumption within three Business Days of receipt thereof.
(v)
No Assignment to Certain Persons .  No such assignment shall be made to (A) the Borrower or any of the Borrower ' s Affiliates or Subsidiaries or (B) any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (B).
(vi)
No Assignment to Natural Persons .  No such assignment shall be made to a natural Person.
(vii)
Certain Additional Payments .  In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations, or other compensating actions, including funding, with the consent of the Borrower and the Agent, the applicable pro rata share of Advances previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Agent and each other Lender hereunder (and interest accrued thereon), and (y) acquire (and fund as appropriate) its full pro rata share of all Advances in respect of any relevant Facility in accordance with its Appropriate Commitment.  Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
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Subject to consent from the Borrower where required and acceptance and recording thereof by the Agent pursuant to paragraph (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender ' s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.10 and 8.04 with respect to facts and circumstances occurring prior to the effective date of such assignment; provided , that except to the extent otherwise expressly agreed by the affected parties, no assignment by a Defaulting Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender ' s having been a Defaulting Lender.  Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (d) of this Section.
(c)        Register .  The Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in the United States a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Advances owing to, each Lender pursuant to the terms hereof from time to time (the " Register " ).  The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement.  The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(d)        Participations .  Each Lender may sell participations to one or more banks or other entities (other than the Borrower or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and any Note or Notes held by it); provided , however , that (i) such Lender ' s obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender ' s rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to obtain any Confidential Information except in accordance with Section 8.06(e), or approve or disapprove any amendment or waiver of any provision of this Agreement or any Note or any consent or withholding of consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation.
 
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The Borrower agrees that each participant shall be entitled to the benefits of, and subject to the limitations of, Sections 2.10 and 2.13 to the same extent as if it were a Lender and had acquired its interest by assignment, provided that, such participant shall not be entitled to receive any greater payment under Section 2.10 or 2.13 than the applicable Lender would have been entitled to receive with respect to the participation sold to such participant, unless the sale of the participation is made with the Borrower ' s prior written consent, and that no participant shall be entitled to the benefits of Section 2.13 unless such participant complies with Section 2.13(f) as if it were a Lender.  Each Lender that sells a participation, acting solely for this purpose as a nonfiduciary agent of the Borrower, shall maintain a register on which it enters the name and address of each participant and the principal amounts (and stated interest) of each participant ' s interest in the obligations under this Agreement (the " Participant Register "); provided that, subject to the last sentence of this Section 8.06(d), no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any participant or any information relating to a participant's interest in any commitments, loans or its other obligations under this Agreement) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations.  The entries in the Participant Register shall be conclusive absent manifest error, and such Lender, the Borrower and the Agent shall treat each Person whose name is recorded in the Participant Register pursuant to the terms hereof as the owner of such participation upon the terms and subject to the conditions of this Agreement.  Upon the reasonable request of the Agent or the Borrower, each Lender shall promptly provide to the Agent or the Borrower, as the case may be, the identity of such Lender ' s participants and the aggregate amount of the participation interests held by each such participant and its Affiliates as set forth on the Participant Register maintained by such Lender, as of the date specified in such request.
(e)        Sharing of Information .  Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.06, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall enter into a binding agreement enforceable by the Borrower containing provisions to preserve the confidentiality of any Confidential Information relating to the Borrower or any of its Affiliates received by it from such Lender, at least as favorable to the Borrower as Section 8.07.
(f)        Certain Pledges .  Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including, without limitation, any pledge or assignment to secure obligations to a central bank having jurisdiction over such Lender or to a Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System.
 
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SECTION 8.07    Confidentiality; PATRIOT Act .  (a) Neither the Agent nor any Lender shall disclose any Confidential Information to any other Person without the consent of the Borrower, other than (i) to the Agent's or such Lender's Affiliates and their officers, directors, employees, agents and advisors on a "need to know" basis and subject to the requirements of Section 8.06(e), to actual or prospective assignees and participants, (ii) as required by any law, rule or regulation or judicial process, (iii) as requested or required by any state, federal or foreign authority or examiner regulating banks or banking or other financial institutions or self regulatory authority, (iv) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (v) subject to an agreement containing provisions substantially the same as those of this Section, to any actual or prospective party (or its Related Parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrower and its obligations, this Agreement or payments hereunder and (vi) with the consent of the Borrower.  In the case of a disclosure pursuant to clause (ii) above, the disclosing party agrees, to the extent practicable and permitted by applicable law, to promptly notify the Borrower prior to such disclosure and to request confidential treatment.  In addition, the Arranger, the Agent and the Lenders may disclose the existence of this Agreement and information about this Agreement to market data collectors, similar service providers to the lending industry and service providers to the Agent and the Lenders in connection with the administration of this Agreement and the Commitments.
(b)        The Borrower agrees to maintain the confidentiality of any information relating to a rate provided by a Reference Bank, except (i) to its officers, directors, employees, agents, advisors or affiliates on a " need to know " basis, (ii) as required by any law, rule or regulation or judicial process, (iii) as requested or required by any state, federal or foreign authority or examiner or regulatory authority, (iv) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder and (v) with the consent of the applicable Reference Bank.  In the case of a disclosure pursuant to clause (ii) above, the disclosing party agrees, to the extent practicable and permitted by applicable law, to promptly notify the applicable Reference Bank prior to such disclosure and to request confidential treatment.
(c)        Each of the Lenders hereby notifies the Borrower that, pursuant to the requirements of the PATRIOT Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow it to identify the Borrower in accordance with the PATRIOT Act.
SECTION 8.08    Governing Law .  This Agreement and the Notes shall be governed by, and construed in accordance with, the law of the State of New York.
SECTION 8.09    Jurisdiction, Etc. .  (a) Each of the parties hereto irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against the Agent, any Lender, the Arranger or any Related Party of the foregoing in any way relating to this Agreement or any Note or the transactions relating hereto or thereto, in any forum other than the courts of the State of New York sitting in New York County, and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such New York State court or, to the fullest extent permitted by applicable law, in such federal court.  Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
 
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(b)    Waiver of Venue .  Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any Note in any court referred to in paragraph (a) of this Section.  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(c)    Service of Process .  Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 8.02.  Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by applicable law.  The Borrower hereby agrees that service of process in any such action or proceeding brought in any such New York State court or in such federal court may be made upon the Corporate Secretary of the Borrower at 208 S. Akard Street, 27th Floor, Dallas, Texas 75202 (the " Process Agent " ) and the Borrower hereby irrevocably appoints the Process Agent its authorized agent to accept such service of process.
SECTION 8.10    Severability .  If any provision of this Agreement is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions.  The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.  Without limiting the foregoing provisions of this Section 8.10, if and to the extent that the enforceability of any provisions in this Agreement relating to Defaulting Lenders shall be limited by any debtor relief laws, then such provisions shall be deemed to be in effect only to the extent not so limited.
SECTION 8.11    Waiver of Jury Trial .  Each of the Borrower, the Agent and the Lenders hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the Notes or the actions of the Agent or any Lender in the negotiation, administration, performance or enforcement thereof.
SECTION 8.12    Acknowledgement and Consent to Bail-In of EEA Financial Institutions .  Notwithstanding anything to the contrary in this Agreement or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under this Agreement may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
 
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(a)
the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and
(b)
the effects of any Bail-In Action on any such liability, including, if applicable:
(i)
a reduction in full or in part or cancellation of any such liability;
(ii)
a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent entity, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement; or the variation of the terms of such liability in connection with the exercise of the Write-Down and Conversion Powers of any EEA Resolution Authority.
SECTION 8.13    No Fiduciary Duties .  The Borrower agrees that in connection with all aspects of the transactions contemplated hereby and any communications in connection therewith, the Borrower and its Affiliates, on the one hand, and the Agent, the Lenders, the Arranger and their respective Affiliates, on the other hand, will have a business relationship that does not create, by implication or otherwise, any fiduciary duty on the part of the Agent, the Lenders, the Arranger or their respective Affiliates and no such duty will be deemed to have arisen in connection with any such transactions or communications.  The Borrower acknowledges that the Arranger and each Lender may have economic interests that conflict with those of the Borrower, its stockholders and/or its Affiliates.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.
AT&T INC.
 
 
By
                                                                   
Name:
Title:
                                                                      THE BANK OF NOVA SCOTIA,
                                                                      as Agent
By
                                                                   
Name:
Title:
          Initial Lenders
                                                                      THE BANK OF NOVA SCOTIA
By
                                                                   
Name:
Title:
                                                                        SCOTIABANK (IRELAND) DESIGNATED ACTIVITY COMPANY
By
                                                                   
Name:
Title:
                                                                      SUMITOMO MITSUI BANKING CORPORATION
By
                                                                   
Name:
Title:
 
NYDOCS02/1129553.6
 
 
56


                                                                           
                                                                       INDUSTRIAL AND COMMERCIAL BANK OF CHINA LIMITED, NEW YORK BRANCH 
By
                                                                   
Name:
Title:
                                                                      CITIZENS BANK, N.A.
By
                                                                   
Name:
Title:
                                                                      HSBC BANK USA, NATIONAL ASSOCIATION
By
                                                                   
Name:
Title:
                                                                      STANDARD CHARTERED BANK
By
                                                                   
Name:
Title:
 
NYDOCS02/1129553.6


57
                                       
EXHIBIT 12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
 
     
Nine Months Ended
   
     
September 30,
 
Year Ended December 31,
     
(Unaudited)
   
     
2017
 
2016
 
2016
 
2015
 
2014
 
2013
   
2012
Earnings:
                                         
 
Income from continuing operations before income taxes
$
16,422
 
$
16,621
 
$
19,812
 
$
20,692
 
$
10,355
 
$
28,050
 
$
10,496
 
Equity in net loss (income) of affiliates included above
 
148
   
(57)
   
(98)
   
(79)
   
(175)
   
(642)
   
(752)
 
Fixed charges
 
6,235
   
5,465
   
7,296
   
6,592
   
5,295
   
5,452
   
4,876
 
Distributed income of equity affiliates
 
22
   
35
   
61
   
30
   
148
   
318
   
137
 
Interest capitalized
 
(718)
   
(669)
   
(892)
   
(797)
   
(234)
   
(284)
   
(263)
                                             
   
Earnings, as adjusted
$
22,109
 
$
21,395
 
$
26,179
 
$
26,438
 
$
15,389
 
$
32,894
 
$
14,494
                                             
Fixed Charges:
                                       
 
Interest expense
$
4,374
 
$
3,689
 
$
4,910
 
$
4,120
 
$
3,613
 
$
3,940
 
$
3,444
 
Interest capitalized
 
718
   
669
   
892
   
797
   
234
   
284
   
263
 
Portion of rental expense representative of interest factor
 
1,143
   
1,107
   
1,494
   
1,675
   
1,448
   
1,228
   
1,169
                                           
   
Fixed Charges
$
6,235
 
$
5,465
 
$
7,296
 
$
6,592
 
$
5,295
 
$
5,452
 
$
4,876
                                             
 
Ratio of Earnings to Fixed Charges
 
3.55
   
3.91
   
3.59
   
4.01
   
2.91
   
6.03
   
2.97


Exhibit 31.1
CERTIFICATION

I, Randall Stephenson, certify that:

1.
I have reviewed this report on Form 10-Q of AT&T Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 3, 2017
 

/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
  Chief Executive Officer and President

Exhibit 31.2
CERTIFICATION

I, John J. Stephens, certify that:

1.
I have reviewed this report on Form 10-Q of AT&T Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 3, 2017
 

/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer


Exhibit 32
Certification of Periodic Financial Reports

 
 
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2017 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
November 3, 2017
November 3, 2017
 

 
By:  /s/ Randall Stephenson  
By:  /s/ John J. Stephens
Randall Stephenson
John J. Stephens
Chairman of the Board, Chief Executive Officer
Senior Executive Vice President
and President
and Chief Financial Officer
                                                    

 
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Exchange Act") or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AT&T Inc. and will be retained by AT&T Inc. and furnished to the Securities and Exchange Commission or its staff upon request.