US Postal Service 2003 Annual Report Download - page 39

2003 annual report united states postal service | 37
management discussion & analysis
other issues
Market Risk Disclosure
In the normal course of business, we are
exposed to market risk from changes in
commodity prices, certain foreign currency
exchange rate fluctuations and interest rates.
With the limited exception explained below, we
do not use derivative financial instruments to
manage market risks. Additionally, we do not
purchase or hold derivative financial instru-
ments for speculative purposes.
Commodity Price Risk
We are exposed to changes in commodity
prices primarily for diesel fuel, unleaded gaso-
line and aircraft fuel for transportation of the
mails and natural gas for heating facilities. We
currently do not use derivative commodity
instruments to manage the risk of changes in
energy prices.
Foreign Currency Exchange Rate
Risk
We have foreign currency risk related to the
settlement of terminal dues and transit fees
with foreign postal administrations for interna-
tional mail. The majority of our international
accounts are denominated in Special Drawing
Rights (SDRs). The SDR exchange rate fluctu-
ates daily based on a basket of currencies
comprised of the euro, Japanese yen, the
pound sterling and the U.S. dollar. Changes in
the relative value of these currencies will
increase or decrease the value of our settle-
ment accounts and result in a gain or loss from
revaluation reported in the results of opera-
tions. The actual currency used to settle
accounts varies by country.
We purchase the required currency at the
time of settlement, but when we know the
timing and the amount of scheduled payments
in advance, we may purchase short duration
forward contracts. In 2003 we purchased short
term forward contracts for Canadian dollars
representing approximately $34 million for
provisional payments to Canada under a previ-
ous year bilateral agreement. We completed
the delivery of funds under these contracts
before the end of the year.
We adjust the reported international
payables and receivables to reflect their value
based on the SDR rate in effect at year end.
This revaluation resulted in a loss of $9 million
in 2003 solely due to the change in the SDR
rate from 2002. In addition to the year end
revaluation, we also recognize gains and losses
on our receivables and payables when we
settle with foreign postal administrations. Due
to our status as a net international debtor,
coupled with the decline in the dollar relative to
the SDR, in 2003 we recognized $12 million in
settlement-related net losses on foreign
exchange. We do not use derivative financial
instruments to manage the risk of changes in
the SDR.
Interest Rate Risk
As described in Note 5 of the Notes to the
Financial Statements, we refinanced all of our
outstanding long term Federal Financing Bank
debt with short term debt in 2003. We have
not used derivative financial instruments to
manage risk related to interest rate fluctua-
tions for debt instruments.
Legal Proceedings
We are subject to various claims and liabil-
ities that arise in the ordinary and normal
course of postal operations. These claims
generally cover labor, tort and contract disputes
and are regularly reviewed by management
and, where significant, by the Audit and
Finance Committee of the Board of Governors
and/or the full Board of Governors. In our eval-
uation, no single claim is material to our
financial statements taken as a whole. We have
incorporated into our financial statements of
September 30, 2003 the estimated impact of
those claims we think it is probable we will pay.
On average, every one of our 56,776 mail handlers
moved 3.56 million pieces of mail in 2003.