DEBT, CREDIT FACILITY, AND CAPITAL LEASE OBLIGATIONS

DEBT

Long-term debt matures more than one year from the date of the financial statements. The following table presents the components of Long-Term Debt, Net on the Consolidated Balance Sheets:



			December 31,
($ in millions)	Interest Rate	Maturity Date	2017		2016
Notes
2011 Notes	5.15%	2021	$	250	$	250
2012 Notes	3.85%	2023	150		150
2014 Notes	5.00%	2044	150		150
2015 Notes	3.05%	2025	300		300
Tax-Exempt Local Furnishings Bonds
2010 Pima A	5.25%	2040	100		100
2012 Pima A	4.50%	2030	16		16
2013 Pima A	4.00%	2029	91		91
2013 Apache A ⁽¹⁾	1.41%	2032	100		100
Tax-Exempt Pollution Control Bonds
2009 Pima A	4.95%	2020	80		80
2009 Coconino A	5.13%	2032	15		15
2010 Coconino A⁽²⁾	1.76%	2032	37		37
2012 Apache A	4.50%	2030	177		177
Total Long-Term Debt ⁽³⁾			1,466		1,466
Less Unamortized Discount and Debt Issuance Costs			12		13
Less Current Maturities of Long-Term Debt⁽¹⁾			100		—
Total Long-Term Debt, Net			$	1,354	$	1,453

⁽¹⁾

The bonds are variable rate debt for which rates are reset monthly. The interest rate is calculated using a weighted average based on a percentage of an index equal to one-month LIBOR plus a credit spread. The bonds are subject to mandatory tender for purchase in November 2018, and were reclassified to Current Maturities of Long-Term Debt on the Consolidated Balance Sheets as of December 31, 2017.


⁽²⁾	The bonds are variable rate debt for which rates are reset weekly. The interest rate is calculated using a weighted average and includes LOC fees and remarketing fees. The bonds are backed by an LOC issued pursuant to the 2010 Reimbursement Agreement, which expires in February 2019.


⁽³⁾	As of December 31, 2017, all of TEP's debt is unsecured, with the exception of the 2010 Coconino A variable rate bonds, which are backed by an LOC.

DEBT ISSUANCES AND REDEMPTIONS

Fixed Rate Debt

In February 2015, TEP issued and sold $300 million aggregate principal amount of senior unsecured notes. TEP may redeem the notes prior to December 2024, with a make-whole premium plus accrued interest. On or after December 2024, TEP may redeem the notes at par plus accrued interest.

In January 2015, TEP purchased $130 million aggregate principal amount of unsecured tax-exempt IDRBs issued in June 2008 by the Industrial Development Authority (IDA) of Pima County, Arizona for the benefit of TEP. The bonds were not remarketed and were subsequently retired in September 2017.

Variable Rate Debt

In August 2015, TEP redeemed two series of variable rate tax-exempt bonds at par with an aggregate principal amount of $79 million prior to maturity. In September 2015, TEP terminated the associated LOCs issued under a revolving credit facility.

CREDIT FACILITY

In October 2015, TEP entered into an unsecured credit agreement which replaced its previous credit agreements. The credit facility included: (i) a borrowing capacity of $250 million in revolving credit commitments; (ii) an LOC facility with a sublimit of $50 million; and (iii) an original maturity date of October 2020 with a provision allowing TEP to request up to two one-year maturity extensions.

As permitted by the credit agreement, TEP requested and was granted two one-year extensions. The facility's new maturity date is October 2022.

Interest rates and fees under the credit facility are based on a pricing grid tied to TEP’s credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.00% for Eurodollar loans or ABR with no spread for ABR loans.

TEP expects that amounts borrowed under the credit agreement will be used for working capital and other general corporate purposes and that LOCs will be issued from time to time to support energy procurement and hedging transactions. As of December 31, 2017, TEP had $35 million borrowings outstanding included in Current Liabilities on the Consolidated Balance Sheets. As of February 14, 2018, there was $232 million available under the revolving credit commitments and LOC facilities.

TEP's previous credit agreements provided for a total of $270 million in revolving credit commitments, LOCs supporting variable-rate, tax-exempt bonds, and a $130 million term loan commitment, with original expiration dates of November 2016 and November 2015, respectively.

2010 REIMBURSEMENT AGREEMENT

In December 2010, a $37 million LOC was issued to support certain variable rate tax-exempt bonds pursuant to the 2010 Reimbursement Agreement. The LOC has an expiration date of February 2019. Fees are payable on the aggregate outstanding amount of the LOC at a rate of 0.75% per annum based on TEP's current credit ratings.

COVENANT COMPLIANCE

Certain of TEP's credit and long-term debt agreements contain restrictive covenants, including restrictions on additional indebtedness, liens to secure indebtedness, mergers, sales of assets, transactions with affiliates, and restricted payments. As of December 31, 2017, TEP was in compliance with the terms of its credit and long-term debt agreements.

CAPITAL LEASE OBLIGATIONS

The following table details Capital Lease Obligations on the Consolidated Balance Sheets:



	December 31,
(in millions)	2017		2016
Capital Lease Obligations	$	39	$	91
Less Current Obligations Under Capital Leases	11		52
Total Capital Lease Obligations, Non-Current	$	28	$	39

Springerville Unit 1 Capital Lease Purchases

In January 2015, upon expiration of the lease term, TEP purchased leased interests comprising 24.8% of Springerville Unit 1, representing 96 MW of capacity, for an aggregate purchase price of $46 million, the appraised value. With the completion of the purchase, TEP owned 49.5% of Springerville Unit 1, or 192 MW of capacity.

In September 2016, TEP purchased the remaining undivided interest in Springerville Unit 1 for $85 million, bringing its total ownership of the assets to 100% and total generating capacity to 387 MW. See Note 7 for more information regarding the settlement agreement relating to Springerville Unit 1.

Springerville Coal Handling Facilities Lease Purchase

In April 2015, upon expiration of the lease term, TEP purchased an 86.7% undivided ownership interest in the Springerville Coal Handling Facilities at the fixed purchase price of $120 million, bringing its total ownership of the assets to 100%. Upon purchase of the leased interest, TEP reduced Capital Lease Obligations on the Consolidated Balance Sheets for the purchase price.

In May 2015, SRP, the owner of Springerville Unit 4, purchased from TEP a 17.05% undivided interest in the Springerville Coal Handling Facilities for approximately $24 million.

Springerville Common Facilities Leases

As of December 31, 2017, the Springerville Common Facilities Leases include two leases with a total fixed price purchase options of $68 million and initial terms ending January 2021.

Under the two leases, TEP has options to: (i) renew the leases for periods of two or more years; or (ii) exercise the fixed price purchase options under these contracts. In addition, TEP entered into agreements with Tri-State, the lessee of Springerville Unit 3, and SRP, the owner of Springerville Unit 4, that contain the following conditions if the Common Facilities Leases are not renewed: (i) TEP will exercise the purchase options under these contracts; (ii) SRP will be obligated to buy a 14% undivided interest in the facilities; and (iii) Tri-State will be obligated to either: (a) buy a 14% undivided interest in the facilities; or (b) continue to make payments to TEP for the use of these facilities.

In December 2017, TEP purchased a 17.8% undivided interest in the Springerville Common Facilities for $38 million, bringing its total ownership of the assets to 67.8%. Upon purchase of the leased interest, TEP reduced Current Lease Obligations on the Consolidated Balance Sheets by $36 million.

Springerville Common Facilities Lease Interest Rate Swap

TEP entered into an interest rate swap agreement in 2006 that hedges a portion of the floating interest rate risk associated with the Springerville Common Facilities lease debt. The swap has the effect of fixing the benchmark LIBOR rate on a portion of the amortizing principal balance. The swap matures in January 2020 with interest on the lease debt payable at a swapped rate of 5.77% plus an applicable margin per the lease agreement. The lease debt outstanding as of December 31, 2017 consisted of a notional amount of $18 million on which interest was fixed by the swap and a notional amount of $3 million of debt that was not hedged. The applicable margin was 1.88% as of December 31, 2017 and 2016.

TEP recorded the interest rate swap as a cash flow hedge for financial reporting purposes. See Cash Flow Hedges in Note 11 for additional information.

DEBT MATURITIES

Long-term debt, including revolving credit facilities classified as long-term, and capital lease obligations mature on the following dates:



(in millions)	Long-Term Debt⁽¹⁾		Capital Lease Obligations			Total Debt Maturities⁽²⁾
2018	$	100	$	11		$	111
2019	37		11			48
2020	80		18			98
2021	250		—			250
2022	—		—			—
Total 2018 - 2022	467		40			507
Thereafter	999		—			999
Less: Imputed Interest	—		(1		)	(1		)
Total	$	1,466	$	39		$	1,505

⁽¹⁾

$37 million of TEP’s variable rate bonds are backed by an LOC issued pursuant to the 2010 Reimbursement Agreement, which expires in February 2019. Although the variable rate bond matures in 2032, the above table reflects a redemption or repurchase of such bond in 2019 as though the LOC terminates without replacement upon expiration of the 2010 Reimbursement Agreement. TEP's 2013 tax-exempt variable rate IDRBs, which have an aggregate principal amount of $100 million and mature in 2032, are subject to mandatory tender for purchase in November 2018.


⁽²⁾	Total long-term debt excludes $10 million of related unamortized debt issuance costs and $2 million of unamortized original issue discount.