DEBT, CREDIT FACILITIES, AND CAPITAL LEASE OBLIGATIONS

Long-term debt matures more than one year from the date of the financial statements. We summarize UNS Energy’s and TEP’s long-term debt in the statements of capitalization.

UNS ENERGY CONVERTIBLE SENIOR NOTES

In 2005, UNS Energy issued $150 million of 4.50% Convertible Senior Notes due in 2035. In 2012, UNS Energy converted approximately $147 million of the Convertible Senior Notes into approximately 4.3 million shares of Common Stock and redeemed $3 million for cash.

TEP DEBT ISSUANCES AND REDEMPTIONS

Unsecured Tax-Exempt Variable Rate Bonds

In November 2013, the Industrial Development Authority of Apache County, Arizona issued $100 million of tax-exempt, variable rate Industrial Development Revenue Bonds (IDRBs), due April 2032. The lender resets the interest rate monthly based on a percentage of an index rate equal to one-month LIBOR plus a bank margin rate; the rate at December 31, 2013 was 0.948% per annum. These bonds are multi-modal bonds, and the initial term is set at five years through November 2018, at which time the bonds will be subject to mandatory tender for purchase. Proceeds were deposited with a trustee to redeem $100 million variable rate bonds in December 2013.

Secured Tax-Exempt Variable Rate Bonds and Interest Rate Swap

Certain of TEP's tax-exempt, variable rate bonds are secured by Letter of Credits (LOCs) issued under the TEP Credit Agreement and TEP Reimbursement Agreement, see below.

The following table shows interest rates on TEP’s weekly variable rate bonds, which are reset weekly by its remarketing agents:



	Years Ended December 31,
	2013	2012	2011
Interest Rates on Bonds:
Average Interest Rate	0.10%	0.17%	0.18%
Range of Average Weekly Rates	0.06% - 0.25%	0.06% - 0.26%	0.05% - 0.34%

In August 2009, TEP entered into an interest rate swap that had the effect of converting $50 million of variable rate bonds to a fixed rate of 2.4% from September 2009 to September 2014.

Unsecured Tax-Exempt Fixed Rate Bonds

In March 2013, TEP issued approximately $91 million aggregate principal amount of Pima County, Arizona, unsecured tax-exempt Industrial Development Bonds (IDBs). The bonds bear interest at a fixed rate of 4.0%, mature in September 2029, and may be redeemed at par on or after March 1, 2023. The proceeds from the sale of the bonds were deposited with a trustee to retire approximately $91 million of 6.375% unsecured tax-exempt bonds in April 2013.

In June 2012, TEP issued approximately $16 million of Pima County, Arizona, unsecured tax-exempt IDBs. The bonds bear interest at a fixed rate of 4.5%, mature in June 2030, and may be redeemed at par on or after June 1, 2022. The proceeds from the sale of the bonds were deposited with a trustee to retire approximately $16 million of unsecured, tax-exempt bonds with interest rates of 5.85% and 5.875%, and maturity dates ranging from 2026 to 2033.

In March 2012, TEP issued $177 million of Apache County, Arizona, unsecured, tax-exempt pollution control bonds. The bonds bear interest at a fixed rate of 4.5%, mature in March 2030, and may be redeemed at par on or after March 1, 2022. The proceeds from the sale of the bonds, together with $7 million of principal and $1 million for accrued interest provided by TEP, were deposited with a trustee to retire $184 million of unsecured tax-exempt bonds with interest rates of 5.85% and 5.875% and maturity dates ranging from 2026 to 2033.

Unsecured Fixed Rate Notes

In September 2012, TEP issued $150 million of 3.85% unsecured notes due March 2023. TEP may call the debt prior to December 15, 2022, with a make-whole premium plus accrued interest. After December 15, 2022, TEP may call the debt at par plus accrued interest. The unsecured notes contain a limitation on the amount of secured debt that TEP may have outstanding. TEP used the net proceeds to repay approximately $72 million outstanding on the revolving credit facility, with the remaining proceeds used for general corporate purposes.

TEP MORTGAGE INDENTURE

Prior to November 2013, the TEP Credit Agreement and the 2010 TEP Reimbursement Agreement were secured by $423 million in mortgage bonds issued under the 1992 Mortgage. As a result of TEP's credit rating upgrade, in October 2013, TEP canceled $423 million in mortgage bonds and discharged the 1992 Mortgage, which had created a lien on and security interest in substantially all of TEP’s utility plant assets. TEP’s obligations under the TEP Credit Agreement and the 2010 TEP Reimbursement Agreement are now unsecured.

UNS ENERGY CREDIT AGREEMENT

The UNS Energy Credit Agreement consists of a $125 million revolving credit facility and revolving LOC facility and expires in November 2016. UNS Energy’s obligations under the agreement are secured by a pledge of the capital stock of Millennium, UES, and UED.

UNS Energy had $54 million of outstanding borrowings at December 31, 2013 and $45 million of outstanding borrowings at December 31, 2012, under its revolving credit facility. The weighted average interest rate on the revolver was 1.66% at December 31, 2013 and 1.96% at December 31, 2012. We report the revolver borrowings in Long-Term Debt on the balance sheet as UNS Energy has the ability and the intent to have outstanding borrowings for the next twelve months. As of February 14, 2014, outstanding borrowings under the UNS Energy Credit Agreement totaled $52 million.

Interest rates and fees under the UNS Energy Credit Agreement are based on a pricing grid tied to UNS Energy’s credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.25% for Eurodollar loans or Alternate Base Rate plus 0.25% for Alternate Base Rate loans.

TEP CREDIT AGREEMENT

The TEP Credit Agreement consists of a $200 million revolving credit, revolving LOC facility, and a $82 million LOC facility to support tax-exempt bonds, and expires in November 2016. In December 2013, TEP reduced its letter of credit facility from $186 million to $82 million, following the refinancing of $100 million of variable rate bonds and the cancellation of $104 million of LOCs supporting those bonds.

Interest rates and fees under the TEP Credit Agreement are based on a pricing grid tied to TEP’s credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.125% for Eurodollar loans or Alternate Base Rate plus 0.125% for Alternate Base Rate loans. The margin rate currently in effect on the $82 million LOC facility is 1.125%.

TEP had no borrowings and $1 million outstanding in LOCs issued under its revolving credit facility at December 31, 2013 and December 31, 2012. The revolving loan balance was included in Current Liabilities on UNS Energy’s and TEP’s balance sheets. The outstanding LOCs are off-balance sheet obligations of TEP. As of February 14, 2014, TEP had $90 million in borrowings and $1 million outstanding in LOCs under its revolving credit facility.

2010 TEP REIMBURSEMENT AGREEMENT

A $37 million LOC was issued pursuant to the 2010 TEP Reimbursement Agreement. The LOC supports $37 million aggregate principal amount of variable rate tax-exempt bonds that were issued on behalf of TEP in December 2010. In February 2014, TEP amended the agreement to extend the LOC expiration date from 2014 to 2019. Fees are payable on the aggregate outstanding amount of the LOC at a rate of 1.00% per annum.

UNS ELECTRIC/UNS GAS CREDIT AGREEMENT

The UNS Electric/UNS Gas Credit Agreement consists of a $100 million revolving credit and revolving LOC facility, and expires in November 2016. The maximum borrowings outstanding at any one time for UNS Gas or UNS Electric under the agreement may not exceed $70 million. UNS Electric and UNS Gas each are liable for only their own individual borrowings under the UNS Electric/UNS Gas Credit Agreement. UES guarantees the obligations of both UNS Electric and UNS Gas. The UNS Electric/UNS Gas Credit Agreement may be used to issue LOCs, as well as for revolver borrowings. UNS Electric and UNS Gas issue LOCs, which are off-balance sheet obligations, to support power and gas purchases and hedges.

Interest rates and fees under the UNS Electric/UNS Gas Credit Agreement are based on a pricing grid tied to their credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.125% for Eurodollar loans or Alternate Base Rate plus 0.125% for Alternate Base Rate loans.

UNS Electric had $22 million in borrowings and less than $0.5 million in outstanding LOCs under the UNS Electric/UNS Gas Credit Agreement as of December 31, 2013. The revolving loan balance was included in Current Liabilities on UNS Energy’s balance sheet. UNS Electric had no borrowings outstanding and less than $0.5 million LOCs under UNS Electric/UNS Gas Credit Agreement as of December 31, 2012. The oustanding LOCs balances are not shown on the balance sheet. As of February 14, 2014, UNS Electric had $25 million in borrowings and less than $0.5 million in outstanding LOCs under the UNS Electric/UNS Gas Credit Agreement.

UNS ELECTRIC TERM LOAN CREDIT AGREEMENT AND INTEREST RATE SWAP

In August 2011, UNS Electric entered into a four-year $30 million variable rate term loan credit agreement. The interest rate currently in effect is three-month LIBOR plus 1.125%. At the same time, UNS Electric entered into a fixed-for-floating interest rate swap in which UNS Electric will pay a fixed rate of 0.97% and receive a three-month LIBOR rate on a $30 million notional amount over a four years period ending August 2015. The UNS Electric term loan credit agreement, included in Long-Term Debt on the balance sheet, is guaranteed by UES.

COVENANT COMPLIANCE

Our credit agreements, the 2010 TEP Reimbursement Agreement, and certain of our 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. The UNS Energy Credit Agreement also requires UNS Energy to meet a minimum cash flow to interest coverage ratio, and each of our credit agreements stipulate a maximum leverage ratio. UNS Energy and its subsidiaries may pay dividends so long as we maintain compliance with our credit agreements.

At December 31, 2013, we were in compliance with the terms of our long-term debt, credit agreements, and the 2010 TEP Reimbursement Agreement. No amounts of net income were subject to dividend restrictions.

TEP CAPITAL LEASE OBLIGATIONS

In January 2014, through scheduled lease payments, TEP reduced its capital lease obligations by $80 million.

Springerville Unit 1 Capital Lease Purchase Commitments

The Springerville Unit 1 Leases have an initial term to January 2015, and include a fair market value purchase option at the end of the initial lease term. In 2011, TEP and the owner participants of Springerville Unit 1 completed a formal appraisal procedure to determine the fair market value purchase price of Springerville Unit 1 in accordance with the Springerville Unit 1 Leases. The purchase price was determined to be $478 per kW of capacity based on a capacity rating of 387 MW.

In August 2013, TEP elected to purchase 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, upon the expiration of the lease term in January 2015.

In October 2013, TEP elected to purchase an additional 10.6% leased interest in Springerville Unit 1, representing 41 MW of capacity, for $20 million, the appraised value, with the purchase scheduled to occur in December 2014.

Upon close of these lease option purchases, TEP will own 49.5% of Springerville Unit 1, or 192 MW of capacity. Due to TEP's purchase commitments, TEP and UNS Energy recorded an increase of approximately $55 million to both Utility Plant Under Capital Leases and Capital Lease Obligations on their balance sheets.

Springerville Coal Handling and Common Facilities Leases

The Springerville Coal Handling Facilities Leases have an initial term to April 2015 and provide for fixed-rate lease renewal options if certain conditions are satisfied as well as a fixed-price purchase provision of $120 million. The leases provide for one renewal period of six years beginning in April 2015, with additional renewal periods of five or more years through 2035.

The Springerville Common Facilities Leases have an initial term to December 2017 for one lease and January 2021 for the other two leases, subject to optional renewal periods of two or more years through 2025. Instead of extending the leases, TEP may exercise a fixed-price purchase provision. The fixed prices for the acquisition of the common facilities are $38 million in 2017 and $68 million in 2021.

TEP agreed with Tri-State, the owner of Springerville Unit 3, and SRP, the owner of Springerville Unit 4, that if the Springerville Coal Handling Facilities and Common Facilities Leases are not renewed, TEP will exercise the purchase options under these contracts. SRP will then be obligated to buy a portion of these facilities and Tri-State will then be obligated to either: buy a portion of these facilities; or continue making payments to TEP for the use of these facilities.

Lease Debt and Equity

Investments in Springerville Lease Debt and Equity

In January 2013, TEP received the final maturity payment of $9 million on the investment in Springerville Unit 1 lease debt. TEP also held an undivided equity ownership interest in the Springerville Unit 1 Leases totaling $36 million at December 31, 2013 and December 31, 2012.

Interest Rate Swaps—Springerville Common Facilities Lease Debt

TEP’s interest rate swaps hedge the floating interest rate risk associated with the Springerville Common Facilities lease debt. Interest on the lease debt is payable at six-month London Interbank Offered Rate (LIBOR) plus a spread. The applicable spread was 1.75% at December 31, 2013 and December 31, 2012.

The swaps have the effect of fixing the interest rates on the amortizing principal balances as follows:



Lease Debt Outstanding at December 31, 2013	Fixed Rate		LIBOR Spread
Swap 1 - Notional Amount $33 million - Effective Date June 2006	5.77	%	1.75	%
Swap 2 - Notional Amount $16 million - Effective Date May 2009	3.18	%	1.75	%
Swap 3 - Notional Amount $6 million - Effective Date May 2009	3.32	%	1.75	%

TEP recorded these interest rate swaps as a cash flow hedge for financial reporting purposes. See Note 15.

DEBT MATURITIES

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



	TEP Long-Term Debt Maturities ⁽¹⁾		TEP Capital Lease Obligations			TEP Total			UNS Electric		UNS Gas		UNS Energy Parent Company		Total
	Millions of Dollars
2014	$	—	$	214		$	214		$	—	$	—	$	—	$	214
2015	—		69			69			80		50		—		199
2016	78		17			95			—		—		54		149
2017	—		18			18			—		—		—		18
2018	100		11			111			—		—		—		111
Total 2014 – 2018	178		329			507			80		50		54		691
Thereafter	1,046		30			1,076			50		50		—		1,176
Less: Imputed Interest	—		(42		)	(42		)	—		—		—		(42		)
Total	$	1,224	$	317		$	1,541		$	130	$	100	$	54	$	1,825

⁽¹⁾

$115 million of TEP’s variable rate bonds are backed by LOCs issued pursuant to TEP’s Credit Agreement, which expires in November 2016, and TEP’s Reimbursement Agreement, which expires in December 2019. Although the variable rate bonds mature between 2022 and 2032, the above table reflects a redemption or repurchase of such bonds in 2016 and 2019 as though the LOCs terminate without replacement upon expiration of the TEP Credit Agreement. TEP's 2013 tax-exempt variable rate IDBs, which mature in 2032, are subject to mandatory tender for purchase after the current five-year term and are therefore reflected as maturing in 2018. The repayment of TEP Unsecured Notes is not reduced by the approximately $1 million discount.