US Postal Service 2003 Annual Report Download - page 38

36 | 2003 annual report united states postal service
management discussion & analysis
finance
5.1% and was replaced by debt carrying an
average interest rate of 1.1%. Although we paid
a premium to retire this debt, we will more than
make it up because of the much lower interest
we will pay in the future. The economics of the
transaction were compelling, with the difference
between long-term interest rates and short-
term interest rates reaching levels not seen
since 1992. In November 1992, we restruc-
tured a smaller level of debt while paying a
higher premium.
As a result of our 2003 refinancing, we
saved $62 million in interest in 2003, and we
expect to save an additional $336 million in
2004. We also gained flexibility in paying off a
substantial amount of debt in 2004 as
required by the Act. Our net cash flow can now
be applied to debt reduction without concern
of paying any penalty.
In requiring debt reduction, the Act effectively
creates limits for our debt outstanding for
2003 and 2004. Our debt outstanding cannot
exceed $7.6 billion for 2003 and approxi-
mately $4.6 billion for 2004. We ended 2003
with $7.3 billion debt outstanding, some $300
million lower than required by the Act.
Because of our debt refinancing, we are now
well positioned not only to meet but to far
exceed the Act’s requirements for additional
debt reduction for 2004. We can now apply all
cash in excess of current needs toward debt
reduction on a daily basis. As a result, we
project interest expense on our debt in 2004
will be the lowest since 1974. Moreover, we
project debt reduction of between $4.2 billion
and $4.7 billion in 2004, well beyond the esti-
mated $2.7 billion required by the Act.
Our opportunity for debt reduction in 2005
will depend upon our ability to operate at close
to break even, combined with our ability to
finance capital investment through deprecia-
tion expense. Our level of debt for 2006 and
beyond will be influenced by these same
factors and will also be greatly influenced by
the yet to be specified requirements of the Act
which requires that savings attributable to the
legislation after 2005 be held in escrow and
not obligated or expended until otherwise
provided for by law.
Liquidity
Liquidity is the cash that we have in the bank
(the Postal Service Fund) and the amount of
money we can borrow immediately if needed. In
recent years we have relied less on the cash we
have on hand and more on the readily available
cash we can borrow as needed. Our Note
Purchase Agreement with the Federal
Financing Bank was renewed this year, and
provides for revolving credit lines of $4 billion.
These credit lines enable us to draw up to $3.4
billion with two days’ notice and up to $600
million on the same business day the funds are
needed. Under this agreement we can also use
a series of other notes with varying provisions to
draw upon with two days’ notice.
We are limited in the amount of funds we
can borrow by the amount of debt authorized
by the Board of Governors and by certain statu-
tory limits on our borrowing. First, our total debt
outstanding cannot exceed $15 billion.
Second, the net increase in debt for any year
cannot exceed $2 billion for capital purposes
and $1 billion for operating purposes.
For 2004, the Act, with its mandatory debt
reduction requirement, limits our liquidity
somewhat by removing financing as a possible
source of funds. Our liquidity will be comprised
of the cash that we have entering the year plus
the cash flow that we can generate from oper-
ations. That said, we expect cash flow from
operations to not only supply enough excess
cash to fund our capital investments but to far
exceed our mandatory debt reduction require-
ments. For 2005 and beyond, with our access
to financing, if needed, being restored, liquid-
ity will be enhanced.