United Parcel Service, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DEBT AND FINANCING ARRANGEMENTS

DEBT AND FINANCING ARRANGEMENTS

12 Months Ended

Dec. 31, 2016

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, 2016 and 2015 (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	2016			2015
Commercial paper	$	3,250	2017	$	3,250		$	2,965
Fixed-rate senior notes:
1.125% senior notes	375		2017	374			372
5.50% senior notes	750		2018	769			787
5.125% senior notes	1,000		2019	1,043			1,064
3.125% senior notes	1,500		2021	1,584			1,613
2.45% senior notes	1,000		2022	986			991
2.40% senior notes	500		2026	497			—
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
3.40% senior notes	500		2046	491			—
8.375% Debentures:
8.375% debentures	424		2020	461			474
8.375% debentures	276		2030	282			282
Pound Sterling Notes:
5.50% notes	82		2031	76			92
5.125% notes	560		2050	535			638
Euro Senior Notes:
1.625% notes	738		2025	732			759
1.000% notes	527		2028	523			—
Floating rate senior notes	527		2020	525			544
Floating rate senior notes	833		2049 – 2066	824			600
Capital lease obligations	447		2017– 3005	447			475
Facility notes and bonds	320		2029 – 2045	319			319
Other debt	20		2017 – 2022	20			22
Total debt	$	16,004		16,075			14,334
Less: current maturities				(3,681		)	(3,018		)
Long-term debt				$	12,394		$	11,316

Debt Issuances

On October 19, 2016, we issued U.S. and Euro senior rate notes in two separate transactions. These senior notes consist of three separate series, as follows:

•

Two series of notes, each in the principal amount of $500 million, were issued. These notes bear interest at 2.4% and 3.4% fixed rates and are due November 2026 and November 2046, respectively. Interest on these notes is payable semi-annually, in each case beginning in May 2017. Each note is 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 payments of principal and interest thereon discounted to the redemption date at a benchmark treasury yield plus 10 and 15 basis points, respectively, and accrued interest.

•

Notes in the principal amount of €500 million ($549 million) were issued. These notes bear interest at a 1.0% fixed rate and are due November 2028. Interest on these notes is payable annually, beginning in November 2017. The 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 payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points and accrued interest.

Commercial Paper

We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of December 31, 2016: $2.406 billion with an average interest rate of 0.49% and €801 million ($844 million) with an average interest rate of -0.36%. The amount of commercial paper outstanding under these programs in 2017 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 2016 and 2015, respectively, were as follows:



	Principal			Average Effective Interest Rate
	Value		Maturity	2016		2015
1.125% senior notes	$	375	2017	1.04	%	0.68	%
5.50% senior notes	$	750	2018	2.94	%	2.54	%
5.125% senior notes	$	1,000	2019	2.49	%	2.06	%
3.125% senior notes	$	1,500	2021	1.40	%	1.04	%
2.45% senior notes	$	1,000	2022	1.26	%	0.87	%

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 in 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 debentures, which effectively converted the fixed interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020 debentures, including the impact of the interest rate swaps, for 2016 and 2015 was 5.43% and 5.04%, 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 2016 and 2015 was 0.21% and 0.01%, 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 2066.

In March, June and August 2016, we issued floating rate senior notes in principal balances of $118, $74 and $35 million, respectively. These notes bear interest at three-month LIBOR less 30 basis points and mature in 2066.

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):



	2016			2015
Vehicles	$	68		$	74
Aircraft	2,291			2,289
Buildings	190			207
Accumulated amortization	(896		)	(849		)
Property, plant and equipment subject to capital leases	$	1,653		$	1,721

These capital lease obligations have principal payments due at various dates from 2017 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 2016 and 2015 were 0.37% and 0.03%, 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 2016 and 2015 were 0.36% and 0.02%, 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 2016 and 2015 were 0.00% and 0.02%, 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 2016 and 2015 was 0.40% and 0.00%, respectively.

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

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 in April 2016. These notes are not callable. The senior notes bear interest at a variable rate, and the average interest rates for 2016 and 2015 were 0.19% and 0.34%, respectively.

•

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 in November 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 $686, $669 and $676 million for 2016, 2015 and 2014, 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
2017	$	72		$	368	$	3,635	$	1,358
2018	70			302		756		1,151
2019	62			221		1,001		758
2020	56			168		528		286
2021	39			111		1,501		17
After 2021	370			300		8,136		45
Total	669			$	1,470	$	15,557	$	3,615
Less: imputed interest	(222		)
Present value of minimum capitalized lease payments	447
Less: current portion	(46		)
Long-term capitalized lease obligations	$	401

As of December 31, 2016, we had outstanding letters of credit totaling approximately $1.890 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, 2016, we had $730 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 24, 2017. 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, 2016.

The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 21, 2021. 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, 2016.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2016 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, 2016, 10% of net tangible assets is equivalent to $2.313 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 $17.134 and $15.524 billion as of December 31, 2016 and 2015, 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.