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, 2016

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2016 and December 31, 2015 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
September 30, 2016:
Current trading marketable securities:
Corporate debt securities	$	1,156	$	—	$	—		$	1,156
Carbon credit investments ⁽¹⁾	433		—		(150		)	283
Total trading marketable securities	$	1,589	$	—	$	(150	)	$	1,439

Current available-for-sale securities:
U.S. government and agency debt securities	$	321	$	2	$	—		$	323
Mortgage and asset-backed debt securities	86		1		—			87
Corporate debt securities	203		2		—			205
Equity Securities	2		—		—			2
Non-U.S. government debt securities	3		—		—			3
Total available-for-sale marketable securities	$	615	$	5	$	—		$	620

Total current marketable securities	$	2,204	$	5	$	(150	)	$	2,059

	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.

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of September 30, 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 September 30, 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	$	1,227	$	1,228
Due after one year through three years	453		454
Due after three years through five years	17		17
Due after five years	72		75
	1,769		1,774
Equity and carbon credit investments	435		285
	$	2,204	$	2,059

Non-Current Investments and Restricted Cash

We had $444 and $442 million of restricted cash related to our self-insurance requirements as of September 30, 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 September 30, 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 $22 and $12 million as of September 30, 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 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 and equity securities and corporate, government, 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 7.49% and 8.22% as of September 30, 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 September 30, 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
September 30, 2016:
Marketable Securities:
U.S. government and agency debt securities	$	323	$	—	$	—	$	323
Mortgage and asset-backed debt securities	—		87		—		87
Corporate debt securities	—		1,361		—		1,361
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		3		—		3
Carbon credit investments	283		—		—		283
Total marketable securities	606		1,453		—		2,059
Other non-current investments	19		—		18		37
Total	$	625	$	1,453	$	18	$	2,096



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 September 30, 2016 and 2015 (in millions):



	Marketable Securities		Other Non-Current Investments			Total
Balance on July 1, 2016	$	—	$	22		$	22
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other)	—		(4		)	(4		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2016	$	—	$	18		$	18




	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 and other)	—		(8		)	(8		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2015	$	—	$	40		$	40

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 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 and other)	—		(14		)	(14		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2016	$	—	$	18		$	18

	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 and other)	—		(24		)	(24		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2015	$	—	$	40		$	40

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2016 and 2015.