UPS's Long Term Credit Rating Cut

United Parcel Service Inc.'s long- term credit rating was cut from the highest level by Moody's Investors Service because of added debt to leave a Teamsters' pension fund and weakening demand for freight shipments.

The company's senior unsecured rating falls two steps to Aa2 from Aaa, affecting $2.5billion in debt, Moody's said in a statement today. The change follows a review that began Oct. 1, when UPS had been among eight non-financial companies to hold the top rating from both Moody's and Standard & Poor's.

As part of a new Teamsters contract, UPS agreed to pay $6.1 billion to exit the Central States Fund, a multiemployer pension plan for 42,000 union members at the Atlanta-based company. Moody's and S&P both said they would reassess their ratings on UPS debt as a result.

The cost to leave the plan ``was considerably larger than Moody's had anticipated when UPS was rated Aaa,'' said George Godlin, an analyst at the New York-based debt rating company. The decline in freight demand also increases the ``potential for softness in UPS's profits and cash flow going forward,'' he said in the statement.

The rating cut was no surprise to the company, which has been in talks with Moody's, UPS spokesman Norman Black said. The change is ``not a significant financial issue'' for UPS, which based its decision to exit Central States on long-range planning, he said.

FedEx Corp., the second-largest U.S. parcel-shipping company behind UPS, today blamed reduced freight shipments and increased fuel prices for a 6.3 percent decline in its quarterly profit.

UPS's $6.1 billion pretax cost will be partially offset by a $2.3 billion reduction in income-tax expense, the company said today on its Web site.

Debt Increase

The company said its debt will rise by $3.8 billion this year, and its pension obligations will increase $1.7 billion. The change will trim 2008 profit by 9 to 10 cents a share, UPS said.

UPS workers in the Central States Fund will be shifted to a new plan run by the company and the Teamsters.

The five-year Teamsters contract, covering about 240,000 workers such as drivers, clerks and package sorters, takes effect Aug. 1. UPS is the largest employer of the union's members.