Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

v3.3.0.814
INVESTMENTS AND RESTRICTED CASH
9 Months Ended
Sep. 30, 2015
Marketable Securities [Abstract]  
INVESTMENTS AND RESTRICTED CASH
INVESTMENTS AND RESTRICTED CASH
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.