Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

v3.5.0.2
INVESTMENTS AND RESTRICTED CASH
6 Months Ended
Jun. 30, 2016
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 June 30, 2016 and December 31, 2015 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2016:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
1,358

 
$

 
$

 
$
1,358

Carbon credit investments (1)
431

 

 
(178
)
 
253

Total trading marketable securities
$
1,789

 
$

 
$
(178
)
 
$
1,611

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
339

 
$
4

 
$

 
$
343

Mortgage and asset-backed debt securities
77

 
1

 

 
78

Corporate debt securities
573

 
2

 

 
575

U.S. state and local municipal debt securities
1

 

 

 
1

Equity Securities
2

 

 

 
2

Non-U.S. government debt securities
3

 

 

 
3

Total available-for-sale marketable securities
$
995

 
$
7

 
$

 
$
1,002

 
 
 
 
 
 
 
 
Total current marketable securities
$
2,784

 
$
7

 
$
(178
)
 
$
2,613

 
 
 
 
 
 
 
 
 
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 June 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 June 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
$
1,816

 
$
1,816

Due after one year through three years
449

 
452

Due after three years through five years
15

 
15

Due after five years
71

 
75

 
2,351

 
2,358

Equity and carbon credit investments
433

 
255

 
$
2,784

 
$
2,613


Non-Current Investments and Restricted Cash
We had $444 and $442 million of restricted cash related to our self-insurance requirements as of June 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 June 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 June 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 7.50% and 8.22% as of June 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 June 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 
June 30, 2016:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
343

 
$

 
$

 
$
343

Mortgage and asset-backed debt securities

 
78

 

 
78

Corporate debt securities

 
1,932

 

 
1,932

U.S. state and local municipal debt securities

 
2

 

 
2

Equity securities

 
2

 

 
2

Non-U.S. government debt securities

 
3

 

 
3

Carbon credit investments
253

 

 

 
253

Total marketable securities
596

 
2,017

 

 
2,613

Other non-current investments
19

 

 
22

 
41

Total
$
615

 
$
2,017

 
$
22

 
$
2,654

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 June 30, 2016 and 2015 (in millions):    
 
Marketable
Securities
 
Other
Non-Current
Investments
 
Total
Balance on April 1, 2016
$

 
$
27

 
$
27

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 June 30, 2016
$

 
$
22

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable
Securities
 
Other
Non-Current
Investments
 
Total
Balance on April 1, 2015
$

 
$
56

 
$
56

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 June 30, 2015
$

 
$
48

 
$
48



The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the six months ended June 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)

 
(10
)
 
(10
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2016
$

 
$
22

 
$
22

 
 
 
 
 
 
 
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)

 
(16
)
 
(16
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2015
$

 
$
48


$
48


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