Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

v3.8.0.1
INVESTMENTS AND RESTRICTED CASH
9 Months Ended
Sep. 30, 2017
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 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.