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Company would pay $6.1 billion in tentative contract to stabilize retiree costs
By Mary Schlangenstein Bloomberg News Service
Published on Tuesday, Oct 02, 2007
United Parcel Service Inc.'s five-year tentative contract agreement with the Teamsters will allow it to pay $6.1 billion to gain greater control of some pensions and will provide pay and benefit increases for workers.
The two sides bargained through the weekend to reach the tentative accord Sunday night, about 10 months before the current contract expires and before a union-imposed deadline of Monday.
The contract, if approved by the employees, would fulfill UPS' decade-old goal of withdrawing from what was called the Central States Fund, a multi-employer pension plan for 42,000 Teamsters members at the company. UPS wants to gain greater stability in pension costs by shifting the workers to a new plan run by the company and the union.
''By exiting the plan, we believe UPS eliminates a significant cloud of uncertainty from its long-term liabilities,'' said William Greene, a Morgan Stanley analyst, in a report to investors. Leaving the plan could allow UPS to ''take a more aggressive approach to balance-sheet management, including more leverage to buy back shares.''
The Central States payment, which covers UPS' remaining obligations to the plan, was estimated by analysts to be $3.9 billion after taxes.
UPS shares rose 80 cents to $75.90 Monday. They have gained 3 percent, including reinvested dividends, this year.
The accord calls for UPS to fully fund the new pension plan jointly administered by the union and the company. Details of the pay and health benefit increases weren't disclosed. The agreement covers almost 240,000 drivers, clerks and package sorters at UPS, the largest employer of Teamsters members.
Members will vote on the tentative agreement from late October to late November.
''It's clearly more money than has ever been put into a contract for pension and health benefits,'' said Ken Hall, director of the Teamsters parcel and small-package division. ''The average guy working for UPS has clearly told us they want us to focus on their benefits, pension and health care.''
Teamsters' pay and benefits will increase by about $9 an hour over the five-year term of the agreement, Hall said. That compares with an $8.75-an-hour boost in the six-year contract reached in 2002.
''This agreement will allow us to remain competitive in a challenging marketplace,'' UPS Chairman and CEO Michael Eskew said in a statement.
Moody's Investors Service and Standard & Poor's Ratings Services said they are reviewing their long-term ratings on UPS for possible reductions, citing the pension-fund agreement. The current Aaa by Moody's and AAA by S&P are their highest ratings.
The pension-fund payment might result in a lower credit rating by boosting UPS' net debt ratio to almost 48 percent from 20 percent now, said Edward Wolfe, a Bear Stearns & Co. analyst in New York. It will cut earnings per share by about 17 cents in 2008 and 14 cents on an ''ongoing'' basis because of higher interest expense, said Wolfe, who rates UPS ''peer perform.''
''UPS could be back in this same position five years from now, paying another lump sum into some or all of the remaining 20 other underfunded Teamster pension funds in which it contributes,'' Wolfe said in a report to investors.
The company probably will take a $3.9 billion charge for the payment this quarter and fund it with cash and debt, said Morgan Stanley analyst Greene, who rates UPS ''equal-weight/attractive.'' UPS had about $2.1 billion in cash at the end of June.
UPS employees belong to 20 other multi-employer pension plans. Labor is about 60 percent of the company's costs.
The Central States Fund has suffered as several unionized trucking companies have failed or been acquired during the past decade, leaving UPS and other remaining employers to bear greater liability for retirees covered.
The fund is about 47 percent underfunded, and faces a shortfall of about $18 billion, Thomas Wadewitz, a JPMorgan Chase & Co. analyst, has estimated. UPS doesn't break out how much it pays into the fund annually.
The union wanted to reach an agreement by Monday to allow for member voting before Jan. 1, when federal legislation approved last year to shore up underfunded pension plans takes effect. UPS' withdrawal must be approved by the pension plan's trustees.
The Teamsters historically opposed UPS' efforts to pull out of Central States, and the dispute was a key factor in the union's two-week strike in 1997. Union President James P. Hoffa, whose father James R. Hoffa helped organize Central States in the 1950s, reversed course this year, saying the change would benefit members' retirement security.
United Parcel Service Inc.'s five-year tentative contract agreement with the Teamsters will allow it to pay $6.1 billion to gain greater control of some pensions and will provide pay and benefit increases for workers.
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