US Postal Service 2004 Annual Report Download - page 33

financial review
2004 annual report united states postal service | 31
Our฀opportunity฀for฀debt฀reduction฀in฀2005฀will฀depend฀upon฀
our฀ability฀to฀operate฀at฀close฀to฀break฀even,฀combined฀with฀our฀
ability฀to฀control฀our฀level฀of฀capital฀investment.฀Our฀debt฀level฀
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฀P.L.108-18,฀which฀requires฀that฀savings฀attrib-
utable฀to฀the฀legislation฀after฀2005฀must฀be฀held฀in฀escrow฀
and฀can฀not฀be฀obligated฀or฀expended฀until฀otherwise฀provided฀
for฀by฀law.฀An฀additional฀factor฀that฀will฀affect฀our฀2006฀debt฀
level฀is฀the฀uncertain฀result฀of฀any฀rate฀case฀filings฀with฀the฀
Postal฀Rate฀Commission.฀In฀the฀event฀that฀we฀implement฀a฀rate฀
increase฀and฀the฀resulting฀additional฀revenues฀do฀not฀cover฀
both฀the฀normal฀projected฀increases฀in฀expenses฀and฀also฀the฀
escrow฀requirement,฀then฀the฀shortfall฀will฀need฀to฀be฀covered฀
by฀increasing฀debt,฀all฀else฀remaining฀constant.
INTEREST฀EARNING฀INVESTMENTS
Whenever฀we฀determine฀that฀we฀have฀funds฀in฀excess฀of฀our฀
current฀needs,฀we฀invest฀those฀funds฀with฀the฀U.S.฀Treasury’s฀
Bureau฀of฀Public฀Debt.฀We฀invest฀primarily฀in฀overnight฀securi-
ties฀issued฀by฀the฀U.S.฀Treasury,฀but฀by฀statute฀we฀may฀invest฀
in฀any฀obligation฀of,฀or฀any฀obligation฀guaranteed฀by,฀the฀U.S.฀
government,฀through฀the฀Secretary฀of฀the฀Treasury.฀We฀favor฀
short-term฀ investments฀because฀ of฀the฀nature฀ of฀our฀cash฀
flow฀patterns,฀but฀also฀ to฀ensure฀ that฀our฀investments฀ are฀
not฀unnecessarily฀exposed฀to฀the฀price฀risk฀associated฀with฀
increases฀in฀interest฀rates.฀Investment฀income฀was฀$33฀million฀
in฀2004,฀versus฀$58฀million฀in฀2003฀and฀$46฀million฀in฀2002.
Cash฀Flow
NET฀CASH฀PROVIDED฀BY฀OPERATING฀ACTIVITIES
During฀2004,฀net฀cash฀provided฀by฀operating฀activities฀was฀
$5.8฀billion฀compared฀with฀$6.4฀billion฀in฀2003.฀The฀decrease฀
of฀ $570฀ million฀ was฀ due฀ primarily฀ to฀ increased฀ operat-
ing฀expenses฀resulting฀from฀higher฀benefit฀costs.฀The฀main฀
driver฀of฀these฀benefit฀increases฀was฀a฀$697฀million฀(11.9%)฀
increase฀in฀retirement฀costs฀mainly฀as฀a฀result฀of฀a฀full฀year฀of฀
funding฀CSRS฀retirement฀contributions฀at฀17.4%฀as฀required฀
by฀P.L.108-18฀and฀a฀$180฀million฀(15.9%)฀increase฀in฀retiree฀
health฀benefit฀costs.฀These฀increases฀were฀offset฀by฀an฀addi-
tional฀$247฀million฀in฀accrued฀payroll฀and฀benefit฀expenses฀
caused฀by฀one฀additional฀day฀of฀accrued฀payroll฀at฀year฀end.
During฀2003,฀net฀cash฀provided฀by฀operating฀activities฀was฀
$5฀billion฀higher฀than฀2002฀mainly฀due฀to฀P.L.108-18฀which฀
decreased฀our฀pension฀payments฀by฀$3.5฀billion.
NET฀CASH฀USED฀IN฀INVESTING฀ACTIVITIES
During฀2004,฀2003฀and฀2002,฀net฀cash฀used฀in฀investing฀activi-
ties฀was฀$1.7฀billion,฀$1.3฀billion฀and฀$1.7฀billion฀respectively.฀
The฀increase฀in฀2004฀from฀2003฀reflects฀an฀increased฀invest-
ment฀strategy฀in฀mail฀processing฀and฀retail฀equipment฀as฀well฀
as฀increased฀funds฀spent฀on฀building฀improvements.฀The฀2003฀
decrease฀reflects฀a฀reduction฀of฀spending฀on฀mail฀processing฀
equipment,฀building฀construction฀and฀building฀improvements.
NET฀CASH฀USED฀IN฀FINANCING฀ACTIVITIES
In฀both฀2004฀and฀2003฀the฀net฀cash฀used฀in฀financing฀activities฀
of฀$5.6฀billion฀and฀$4.0฀billion฀respectively,฀reflect฀our฀desire,฀
and฀the฀requirement฀of฀P.L.108-18,฀that฀any฀“savings”฀gener-
ated฀by฀the฀enactment฀of฀the฀law฀be฀used฀to฀pay฀down฀debt.฀
Consequently฀in฀2004฀we฀paid฀down฀$5.5฀billion฀in฀debt฀and฀
in฀2003฀we฀paid฀down฀a฀net฀$3.8฀billion฀in฀debt.฀In฀2002฀the฀
$383฀million฀of฀cash฀provided฀by฀financing฀activities฀reflects฀
the฀balance฀of฀appropriations฀provided฀by฀the฀President฀and฀
Congress฀ for฀ emergency฀ preparedness฀ expenses฀ of฀ $583฀
million฀and฀a฀reduction฀of฀debt฀of฀$200฀million.฀
Liquidity
Liquidity฀is฀the฀ cash฀that฀ we฀have฀in฀the฀bank฀ (the฀Postal฀
Service฀Fund฀in฀the฀U.S.฀Treasury)฀and฀the฀amount฀of฀money฀
we฀can฀borrow฀on฀short฀notice฀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,฀
renewed฀this฀year,฀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.฀The฀notes฀provide฀us฀the฀
flexibility฀to฀borrow฀short-term฀or฀long-term,฀using฀fixed฀or฀
floating฀rate฀debt,฀and฀can฀be฀either฀callable฀or฀non-callable.฀
We฀believe฀that฀our฀arrangement฀with฀the฀Federal฀Financing฀
Bank฀provides฀us฀with฀adequate฀tools฀to฀effectively฀manage฀
our฀interest฀expense฀and฀risk.
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฀statutory฀limits฀on฀our฀borrowing.฀First,฀our฀total฀
debt฀outstanding฀cannot฀exceed฀$15฀billion.฀Second,฀the฀net฀
increase฀in฀debt฀for฀any฀fiscal฀year฀cannot฀exceed฀$2฀billion฀for฀
capital฀purposes฀and฀$1฀billion฀to฀defray฀operating฀expenses฀
($3฀billion฀maximum฀annual฀limit).฀For฀2005,฀we฀do฀not฀project฀
an฀increase฀in฀debt,฀and฀we฀have฀not฀asked฀the฀Governors฀to฀
authorize฀an฀increase.
Our฀ liquidity฀ will฀ be฀ comprised฀ of฀ the฀ cash฀ that฀ we฀ have฀
entering฀2005฀plus฀the฀cash฀flow฀that฀we฀can฀generate฀from฀
operations.฀We฀expect฀cash฀flow฀from฀operations฀to฀not฀only฀
supply฀enough฀cash฀to฀fund฀our฀capital฀investments,฀but฀to฀
generate฀some฀additional฀cash฀flow฀that฀could฀be฀applied฀to฀
Part II
On฀average,฀every฀one฀of฀our฀54,769฀
mail฀handlers฀moved฀3.7฀million฀pieces฀
of฀mail฀in฀2004.