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, 2017

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2017 and December 31, 2016 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
September 30, 2017:
Current trading marketable securities:
Corporate debt securities	$	159	$	—	$	—		$	159
Carbon credit investments ⁽¹⁾	241		46		—			287
Total trading marketable securities	$	400	$	46	$	—		$	446

Current available-for-sale securities:
U.S. government and agency debt securities	$	286	$	—	$	(1	)	$	285
Mortgage and asset-backed debt securities	90		—		—			90
Corporate debt securities	210		1		—			211
U.S. state and local municipal debt securities	—		—		—			—
Equity securities	2		—		—			2
Non-U.S. government debt securities	9		—		—			9
Total available-for-sale marketable securities	$	597	$	1	$	(1	)	$	597

Total current marketable securities	$	997	$	47	$	(1	)	$	1,043

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 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 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
⁽¹⁾ These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 13 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, 2017. 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.

Maturity Information

The amortized cost and estimated fair value of marketable securities at September 30, 2017, 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	$	218	$	218
Due after one year through three years	443		442
Due after three years through five years	18		18
Due after five years	75		76
	754		754
Equity and carbon credit investments	243		289
	$	997	$	1,043

Non-Current Investments and Restricted Cash

Non-current 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 various marketable securities. Collateral provided is reflected in "Other investing activities" in the statements of consolidated cash flows. At September 30, 2017 and December 31, 2016, we had $448 and $445 million in self-insurance investments and restricted cash, respectively.

We held a $19 and $18 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at September 30, 2017 and December 31, 2016, 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 $14 and $13 million as of September 30, 2017 and December 31, 2016, respectively.

The amounts described above are classified as “Non-Current 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 7.78% and 8.06% as of September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, 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, 2017:
Marketable Securities:
U.S. government and agency debt securities	$	285	$	—	$	—	$	285
Mortgage and asset-backed debt securities	—		90		—		90
Corporate debt securities	21		349		—		370
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		9		—		9
Carbon credit investments	287		—		—		287
Total marketable securities	593		450		—		1,043
Other non-current investments	19		—		8		27
Total	$	612	$	450	$	8	$	1,070



December 31, 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

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2017 and 2016 (in millions):



	Marketable Securities		Other Non-Current Investments			Total
Balance on July 1, 2017	$	—	$	9		$	9
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other)	—		(1		)	(1		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2017	$	—	$	8		$	8



	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

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2017 and 2016 (in millions):



	Marketable Securities		Other Investments			Total
Balance on January 1, 2017	$	—	13			13
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other)	—		(5		)	(5		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on September 30, 2017	$	—	$	8		$	8

	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

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2017 and 2016.