United Parcel Service, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

INVESTMENTS AND RESTRICTED CASH

9 Months Ended

Sep. 30, 2015

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2015 and December 31, 2014 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
September 30, 2015:
Current trading marketable securities:
Corporate debt securities	$	1,049	$	—	$	—		$	1,049
Other investment securities	410		36		—			446
Total trading marketable securities	$	1,459	$	36	$	—		$	1,495

Current available-for-sale marketable securities:
U.S. government and agency debt securities	$	327	$	2	$	—		$	329
Mortgage and asset-backed debt securities	77		—		—			77
Corporate debt securities	339		1		(1		)	339
Other investment securities	8		—		—			8
Total available-for-sale marketable securities	$	751	$	3	$	(1	)	$	753

Total current marketable securities	$	2,210	$	39	$	(1	)	$	2,248

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 2014:
Current trading marketable securities:
Corporate debt securities	$	388	$	—	$	—		$	388
Other investment securities	42		—		—			42
Total trading marketable securities	$	430	$	—	$	—		$	430

Current available-for-sale marketable securities:
U.S. government and agency debt securities	$	321	$	1	$	(1	)	$	321
Mortgage and asset-backed debt securities	89		1		(1		)	89
Corporate debt securities	146		—		—			146
Other investment securities	6		—		—			6
Total available-for-sale marketable securities	$	562	$	2	$	(2	)	$	562

Total current marketable securities	$	992	$	2	$	(2	)	$	992

The net unrealized gains included in net income related to trading securities still held on the consolidated balance sheets for the three months ended September 30, 2015 and 2014 were $27 and $0 million, respectively ($36 and $0 million, respectively, for the nine months ended September 30, 2015 and 2014).

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of September 30, 2015. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Maturity Information

The amortized cost and estimated fair value of marketable securities at September 30, 2015, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.



	Cost		Estimated Fair Value
Due in one year or less	$	1,423	$	1,423
Due after one year through three years	420		421
Due after three years through five years	14		15
Due after five years	71		71
	1,928		1,930
Equity and other investment securities	282		318
	$	2,210	$	2,248

Restricted Cash and Non-Current Investments

We had restricted cash of $100 million related to proceeds from the Delaware County, Pennsylvania Industrial Development Authority facility bond issued in September 2015. The proceeds will be used to extinguish an existing facility bond due in December 2015. The restricted cash is reported in “other current assets” on the consolidated balance sheets.

We had $442 million of restricted cash related to our self-insurance requirements as of September 30, 2015 and December 31, 2014, which is reported in “non-current investments and restricted cash” on the consolidated balance sheets. This restricted cash is invested in money market funds and similar cash equivalent type assets.

At September 30, 2015 and December 31, 2014, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $22 and $28 million as of September 30, 2015 and December 31, 2014, respectively. The amounts described above are classified as “non-current investments and restricted cash” on the consolidated balance sheets, while the quarterly change in investment fair value is recognized in "investment income" on the statements of consolidated income.

Fair Value Measurements

Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.

We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other non-current investments” in the tables below and as “other non-current assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership and (2) the risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.13% and 7.81% as of September 30, 2015 and December 31, 2014, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.

The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
September 30, 2015:
Marketable Securities:
U.S. government and agency debt securities	$	329	$	—	$	—	$	329
Mortgage and asset-backed debt securities	—		77		—		77
Corporate debt securities	—		1,388		—		1,388
Other debt, equity and investment securities	—		454		—		454
Total marketable securities	329		1,919		—		2,248
Other non-current investments	19		—		40		59
Total	$	348	$	1,919	$	40	$	2,307



December 31, 2014:
Marketable Securities:
U.S. government and agency debt securities	$	321	$	—	$	—	$	321
Mortgage and asset-backed debt securities	—		89		—		89
Corporate debt securities	—		534		—		534
Other debt, equity and investment securities	—		48		—		48
Total marketable securities	321		671		—		992
Other non-current investments	19		—		64		83
Total	$	340	$	671	$	64	$	1,075

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2015 and 2014 (in millions):



	Marketable Securities		Other Non-Current Investments			Total
Balance on July 1, 2015	$	—	$	48		$	48
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(8		)	(8		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2015	$	—	$	40		$	40




	Marketable Securities		Other Non-Current Investments			Total
Balance on July 1, 2014	$	—	$	95		$	95
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(11		)	(11		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2014	$	—	$	84		$	84

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2015 and 2014 (in millions):




	Marketable Securities		Other Investments			Total
Balance on January 1, 2015	$	—	64			64
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(24		)	(24		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2015	$	—	$	40		$	40

	Marketable Securities		Other Investments			Total
Balance on January 1, 2014	$	—	110			110
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(26		)	(26		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2014	$	—	$	84		$	84

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.