United Parcel Service, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

CASH AND INVESTMENTS

CASH AND INVESTMENTS

12 Months Ended

Dec. 31, 2016

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



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
2016
Current trading marketable securities:
Corporate debt securities	$	427	$	—	$	—		$	427
Carbon credit investments⁽¹⁾	80		10		—			90
Total trading marketable securities	507		10		—			517

Current available-for-sale marketable securities:
U.S. government and agency debt securities	$	314	$	—	$	(2	)	$	312
Mortgage and asset-backed debt securities	90		1		—			91
Corporate debt securities	167		—		(1		)	166
Equity securities	2		—		—			2
Non-U.S. government debt securities	3		—		—			3
Total available-for-sale marketable securities	576		1		(3		)	574

Total current marketable securities	$	1,083	$	11	$	(3	)	$	1,091

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
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 marketable 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 15 for offsetting statement of consolidated income impact.

Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated fair value of $572 and $564 million at December 31, 2016 and 2015, respectively.

The gross realized gains on sales of available-for-sale securities totaled $1, $1 and $1 million in 2016, 2015, and 2014, respectively. The gross realized losses on sales of available-for-sale securities totaled $1, $1 and $0 million in 2016, 2015, and 2014, respectively.

There were no material impairment losses recognized on marketable securities during 2016, 2015 or 2014.

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of December 31, 2016. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Unrealized Losses

The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2016 (in millions):



	Less Than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agency debt securities	$	206	$	(2	)	$	—	$	—	$	206	$	(2	)
Mortgage and asset-backed debt securities	—		—			—		—		—		—
Corporate debt securities	68		(1		)	—		—		68		(1		)
Equity securities	—		—			—		—		—		—
Non-U.S. government debt securities	—		—			—		—		—		—
Total marketable securities	$	274	$	(3	)	$	—	$	—	$	274	$	(3	)

The unrealized losses for the U.S. government and agency debt securities are primarily due to changes in market interest rates. We have both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the cost basis.

Maturity Information

The amortized cost and estimated fair value of marketable securities at December 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	$	463	$	462
Due after one year through three years	450		449
Due after three years through five years	16		16
Due after five years	72		72
	1,001		999
Equity and carbon credit investment securities	82		92
	$	1,083	$	1,091

Non-Current Investments and Restricted Cash

Investments and Restricted Cash is primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in money market funds and corporate and municipal bonds. Collateral provided is reflected in "other investing activities" in the statements of consolidated cash flows. At December 31, 2016 and 2015, we had $445 and $442 million in self-insurance investments and restricted cash, respectively.

We held an $18 and $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at December 31, 2016 and 2015, respectively. The quarterly change in investment fair value is recognized in "investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $13 and $12 million at December 31, 2016 and 2015, respectively.

The amounts described above are classified as “investments and restricted cash” in the consolidated balance sheets.

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) a 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 8.06% and 8.22% as of December 31, 2016 and 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 December 31, 2016 and 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)		Total
2016
Marketable securities:
U.S. government and agency debt securities	$	312	$	—	$	—	$	312
Mortgage and asset-backed debt securities	—		91		—		91
Corporate debt securities	—		593		—		593
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		3		—		3
Carbon credit investments	90		—		—		90
Total marketable securities	402		689		—		1,091
Other non-current investments	18		—		13		31
Total	$	420	$	689	$	13	$	1,122

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
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 years ended December 31, 2016 and 2015 (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)	—		(32		)	(32		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Settlements	—		—			—
Balance on December 31, 2015	$	—	$	32		$	32
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(19		)	(19		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Settlements	—		—			—
Balance on December 31, 2016	$	—	$	13		$	13