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

3 Months Ended

Mar. 31, 2016

The following is a summary of marketable securities classified as trading and available-for-sale as of March 31, 2016 and December 31, 2015 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
March 31, 2016:
Current trading marketable securities:
Corporate debt securities	$	910	$	—	$	—		$	910
Non-U.S. government debt securities ⁽¹⁾	197		—		—			197
Carbon credit investments ⁽¹⁾	440		—		(156		)	284
Total trading marketable securities	$	1,547	$	—	$	(156	)	$	1,391

Current available-for-sale securities:
U.S. government and agency debt securities	$	335	$	2	$	—		$	337
Mortgage and asset-backed debt securities	72		—		—			72
Corporate debt securities	572		2		(1		)	573
U.S. state and local municipal debt securities	2		—		—			2
Equity Securities	2		—		—			2
Non-U.S. government debt securities	3		—		—			3
Total available-for-sale marketable securities	$	986	$	4	$	(1	)	$	989

Total current marketable securities	$	2,533	$	4	$	(157	)	$	2,380

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 2015:
Current trading marketable securities:
Corporate debt securities	$	715	$	—	$	—		$	715
Non-U.S. government debt securities ⁽¹⁾	363		—		—			363
Carbon credit investments ⁽¹⁾	347		9		(5		)	351
Total trading marketable securities	$	1,425	$	9	$	(5	)	$	1,429

Current available-for-sale securities:
U.S. government and agency debt securities	$	341	$	—	$	(1	)	$	340
Mortgage and asset-backed debt securities	74		1		(1		)	74
Corporate debt securities	147		—		(1		)	146
U.S. state and local municipal debt securities	2		—		—			2
Equity securities	2		—		—			2
Non-U.S. government debt securities	3		—		—			3
Total available-for-sale marketable securities	$	569	$	1	$	(3	)	$	567

Total current marketable securities	$	1,994	$	10	$	(8	)	$	1,996
⁽¹⁾ These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 14 for offsetting statement of consolidated income impact.

The unrealized gains and (losses) recognized on trading securities in investment income and other on the statements of consolidated income for the three months ended March 31, 2016 and 2015 were $(156) and $1 million, respectively.

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of March 31, 2016. 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 March 31, 2016, 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	$	2,015	$	1,858
Due after one year through three years	429		430
Due after three years through five years	15		16
Due after five years	72		74
	2,531		2,378
Equity securities	2		2
	$	2,533	$	2,380

Restricted Cash and Non-Current Investments

We had $442 million of restricted cash related to our self-insurance requirements as of March 31, 2016 and December 31, 2015 which is reported in non-current investments and restricted cash on the consolidated balance sheets. This restricted cash is primarily invested in money market funds.

At March 31, 2016 and December 31, 2015, 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 $23 and $12 million as of March 31, 2016 and December 31, 2015, 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 and other on the statements of consolidated income.

Fair Value Measurements

Marketable securities utilizing Level 1 inputs include active exchange-traded carbon credit investments, equity securities, equity index funds and certain U.S. Government debt securities, as these securities 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 7.77% and 8.22% as of March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015, 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
March 31, 2016:
Marketable Securities:
U.S. government and agency debt securities	$	337	$	—	$	—	$	337
Mortgage and asset-backed debt securities	—		72		—		72
Corporate debt securities	—		1,483		—		1,483
U.S. state and local municipal debt securities	—		2		—		2
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		200		—		200
Carbon credit investments	284		—		—		284
Total marketable securities	621		1,759		—		2,380
Other non-current investments	19		—		27		46
Total	$	640	$	1,759	$	27	$	2,426



December 31, 2015:
Marketable Securities:
U.S. government and agency debt securities	$	340	$	—	$	—	$	340
Mortgage and asset-backed debt securities	—		74		—		74
Corporate debt securities	—		861		—		861
U.S. state and local municipal debt securities	—		2		—		2
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		366		—		366
Carbon credit investments	351		—		—		351
Total marketable securities	691		1,305		—		1,996
Other non-current investments	19		—		32		51
Total	$	710	$	1,305	$	32	$	2,047

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended March 31, 2016 and 2015 (in millions):




	Marketable Securities		Other Investments			Total
Balance on January 1, 2016	$	—	32			32
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(5		)	(5		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on March 31, 2016	$	—	$	27		$	27

	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)	—		(8		)	(8		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on March 31, 2015	$	—	$	56		$	56

There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2016 and 2015.