Annual report pursuant to Section 13 and 15(d)

DEBT AND FINANCING ARRANGEMENTS

v3.3.1.900
DEBT AND FINANCING ARRANGEMENTS
12 Months Ended
Dec. 31, 2015
Debt Disclosure [Abstract]  
DEBT AND FINANCING ARRANGEMENTS
DEBT AND FINANCING ARRANGEMENTS
The following table sets forth the principal amount, maturity or range of maturities, as well as the carrying value of our debt obligations, as of December 31, 2015 and 2014 (in millions). The carrying value of these debt obligations can differ from the principal amount due to the impact of unamortized discounts or premiums and valuation adjustments resulting from interest rate swap hedging relationships.
 
 
Principal
 
 
 
Carrying Value
 
Amount
 
Maturity
 
2015
 
2014
Commercial paper
$
2,965

 
2016
 
$
2,965

 
$
772

Fixed-rate senior notes:
 
 
 
 
 
 
 
1.125% senior notes
375

 
2017
 
372

 
369

5.50% senior notes
750

 
2018
 
787

 
802

5.125% senior notes
1,000

 
2019
 
1,064

 
1,076

3.125% senior notes
1,500

 
2021
 
1,613

 
1,616

2.45% senior notes
1,000

 
2022
 
991

 
976

6.20% senior notes
1,500

 
2038
 
1,481

 
1,481

4.875% senior notes
500

 
2040
 
489

 
489

3.625% senior notes
375

 
2042
 
367

 
367

8.375% Debentures:
 
 
 
 
 
 
 
8.375% debentures
424

 
2020
 
474

 
480

8.375% debentures
276

 
2030
 
282

 
282

Pound Sterling Notes:
 
 
 
 
 
 
 
     5.50% notes
98

 
2031
 
92

 
97

     5.125% notes
670

 
2050
 
638

 
673

Euro Senior Notes:
 
 
 
 
 
 
 
1.625% notes
765

 
2025
 
759

 

Floating rate senior notes
547

 
2020
 
544

 

Floating rate senior notes
606

 
2049 – 2065
 
600

 
458

Capital lease obligations
475

 
2016 – 3005
 
475

 
505

Facility notes and bonds
320

 
2016 – 2045
 
319

 
320

Other debt
21

 
2016 – 2022
 
22

 
16

Total debt
$
14,167

 
 
 
14,334

 
10,779

Less: current maturities
 
 
 
 
(3,018
)
 
(923
)
Long-term debt
 
 
 
 
$
11,316

 
$
9,856


Commercial Paper
We are authorized to borrow up to $10.0 billion in a variety of currencies under our U.S. commercial paper program. We had $2.618 billion outstanding under this program, including euro denominated commercial paper totaling €310 million ($339 million), as of December 31, 2015, with an average interest rate of 0.21% for our U.S. dollar denominated commercial paper and -0.12% for our euro denominated commercial paper. We also maintain a European commercial paper program under which we are authorized to borrow up to €5.0 billion in a variety of currencies. We had £234 million ($347 million) outstanding under this program as of December 31, 2015 with an average rate of 0.50%. The amount of commercial paper outstanding under these programs in 2016 is expected to fluctuate.
Fixed Rate Senior Notes
We have completed several offerings of fixed rate senior notes. All of the notes pay interest semiannually, and allow for redemption of the notes by UPS at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. We subsequently entered into interest rate swaps on several of these notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on these notes, including the impact of the interest rate swaps, for 2015 and 2014, respectively, were as follows:
 
Principal
 
 
 
Average Effective Interest Rate
 
Value
 
Maturity
 
2015
 
2014
3.875% senior notes
$
1,000

 
2014
 
%
 
0.94
%
1.125% senior notes
$
375

 
2017
 
0.68
%
 
0.60
%
5.50% senior notes
$
750

 
2018
 
2.54
%
 
2.49
%
5.125% senior notes
$
1,000

 
2019
 
2.06
%
 
1.97
%
3.125% senior notes
$
1,500

 
2021
 
1.04
%
 
1.06
%
2.45% senior notes
$
1,000

 
2022
 
0.87
%
 
0.82
%

On April 1, 2014, our $1.00 billion 3.875% senior notes matured and were repaid in full. The principal balance of the senior notes was repaid from the proceeds of short-term commercial paper issuances.
8.375% Debentures
The 8.375% debentures consist of two separate tranches, as follows:
$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued interest.
$424 million of the debentures have a maturity of April 1, 2020. These debentures are not subject to redemption prior to maturity.
Interest is payable semiannually on the first of April and October for both tranches and neither tranche is subject to sinking fund requirements. We subsequently entered into interest rate swaps on the 2020 notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on the 2020 notes, including the impact of the interest rate swaps, for 2015 and 2014 was 5.04% and 4.99%, respectively.
Floating Rate Senior Notes
The floating rate senior notes bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2015 and 2014 was 0.01% and 0.00%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after 10 years at a stated percentage of par value. The notes have maturities ranging from 2049 through 2065. In 2014, we redeemed notes with a principal value of $1 million after put options were exercised by the note holders.
In September 2015 and December 2015, we issued floating rate senior notes with principal balances of $104 and $40 million, respectively. These issuances bear interest at a rate equal to three-month LIBOR less 30 basis points and mature in 2065.
In December 2014, we issued floating rate senior notes with a principal amount of $90 million that bears interest at three-month LIBOR less 30 basis points. These notes mature in 2064.

Capital Lease Obligations
We have certain property, plant and equipment subject to capital leases. Some of the obligations associated with these capital leases have been legally defeased. The recorded value of our property, plant and equipment subject to capital leases is as follows as of December 31 (in millions):
 
 
2015
 
2014
Vehicles
$
74

 
$
86

Aircraft
2,289

 
2,289

Buildings
207

 
197

Accumulated amortization
(849
)
 
(781
)
Property, plant and equipment subject to capital leases
$
1,721

 
$
1,791


These capital lease obligations have principal payments due at various dates from 2016 through 3005.
Facility Notes and Bonds
We have entered into agreements with certain municipalities to finance the construction of, or improvements to, facilities that support our U.S. Domestic Package and Supply Chain & Freight operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas; and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by the municipalities, as follows:
Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds, which are due in January 2029, bear interest at a variable rate, and the average interest rates for 2015 and 2014 were 0.03% and 0.05%, respectively.
Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and the average interest rates for 2015 and 2014 were 0.02% and 0.05%, respectively.
Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.
Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development Authority associated with our Philadelphia, Pennsylvania airport facilities. The bonds, which were due in December 2015, had a variable interest rate, and the average interest rates for 2015 and 2014 were 0.02% and 0.04%, respectively. As of December 2015, these $100 million bonds were repaid in full.
In September 2015, we entered into an agreement with the Delaware County, Pennsylvania Industrial Development Authority, associated with our Philadelphia, Pennsylvania airport facilities, for bonds issued with a principal balance of $100 million. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2015 was 0.00%.
Pound Sterling Notes
The Pound Sterling notes consist of two separate tranches, as follows:
Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.
Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points and accrued interest.
Euro Senior Notes
In November 2015, we issued euro denominated senior notes. The euro senior notes consist of two separate issuances, as follows:
Notes with a principal amount of €500 million accrue interest at a variable rate equal to three-month EURIBOR plus 43 basis points and are due in July 2020. Interest is payable quarterly on the notes, commencing April 15, 2016. These notes are not callable.
Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025. Interest is payable annually on the notes, commencing November 15, 2016. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points and accrued interest.
Contractual Commitments
We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates through 2038. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $669, $676 and $575 million for 2015, 2014 and 2013, respectively.
The following table sets forth the aggregate minimum lease payments under capital and operating leases, the aggregate annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase commitments (in millions).
Year
Capital
Leases
 
Operating
Leases
 
Debt
Principal
 
Purchase
Commitments
2016
$
72

 
$
324

 
$
2,978

 
$
257

2017
73

 
263

 
377

 
119

2018
61

 
197

 
751

 
53

2019
59

 
125

 
1,000

 
24

2020
53

 
84

 
547

 
15

After 2020
392

 
266

 
8,039

 
11

Total
710

 
$
1,259

 
$
13,692

 
$
479

Less: imputed interest
(235
)
 
 
 
 
 
 
Present value of minimum capitalized lease payments
475

 
 
 
 
 
 
Less: current portion
(46
)
 
 
 
 
 
 
Long-term capitalized lease obligations
$
429

 
 
 
 
 
 

As of December 31, 2015, we had outstanding letters of credit totaling approximately $1.808 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2015, we had $623 million of surety bonds written.
Available Credit
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on March 26, 2016. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of December 31, 2015.
The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 27, 2020 . Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of December 31, 2015.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2015 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2015, 10% of net tangible assets is equivalent to $2.265 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $15.524 and $12.257 billion as of December 31, 2015 and 2014, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.