US Postal Service 2007 Annual Report Download - page 33

2007 Annual Report United States Postal Service | 33
Financial Section Part II
Network Growth
We estimate that network growth in 2008 will continue at the 2007 level of
1.8 million delivery points per year. Expansion of the delivery network, while
increasing the number of customers served, also causes continuing upward
cost pressures.
Despite the recent slowdown in the housing market, long-term trends for
housing can be expected to track long-term trends in population. Household
growth will translate into a continuing expansion of our delivery network. As
the population and delivery network continue to grow, we expect First-Class
Mail volume to continue to decline. This combination of trends will continue
to challenge us to build other postal business and increase productivity to
continue to finance the nation’s universal delivery system.
Expense Growth
Total expenses for 2008 are estimated at $78.8 billion, a 1.6% reduction
from 2007 expenses of $80.1 billion. This reduction in expenses is primar-
ily due to the effects of legislation P.L.109-435 that occurred in 2007.
P.L.109-435 increased expenses by $6.8 billion in 2007, as we began
funding the PSRHBF. This impact included the $2.958 billion payment
from escrow, which was expensed in 2007 and placed into the PSRHBF.
Excluding this one time escrow payment, personnel costs in 2008 are
estimated to increase by approximately $700 million or 1.2%, primarily
driven by cost-of-living adjustments, contractual pay increases, and
increases in health benefits costs. This will be offset by a planned reduction
of 28 million work hours. This work-hour reduction target is equal to
approximately 14,000 full-time equivalent employees. Contract agreements
are in place with all unions through at least 2010 except the NRLCA.
Personnel costs in 2008 including retiree health benefits are expected to
account for 79% of total expenses.
Nonpersonnel costs, excluding transportation, are estimated to increase by
about $550 million, a 6.0% increase primarily driven by projected inflation.
Transportation costs are also estimated to increase by $400 million, or
6.0%, compared with 2007, due to contractual obligations and expected
increases in energy prices.
We cannot estimate the additional costs associated with modifying any
of our systems that will be required to separately report the financial
activity of shipping services at this time. Additional costs as a result of the
new financial reporting requirements, costs of complying with new PRC
regulations, and the cost of compliance with the requirements of Section
404 of the Sarbanes-Oxley Act have not yet been determined.
Item 7A – Quantitative and qualitative
disclosures about market risk
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. We do not use derivative financial instru-
ments to manage market risks. Additionally, we do not purchase or hold
derivative financial instruments for speculative purposes.
Interest Rate Risk
We have not used derivative financial instruments to manage risk related to
interest rate fluctuations for debt instruments.
We estimate that a 1.0% increase in interest rates would have an
insignificant impact on our financial statements due to the structure of our
investment portfolio.
Labor Contracts
As discussed in Item 1A, Risk Factors, the contracts with three of our four
largest unions include provisions granting cost-of-living allowances linked to
changes in the CPI.
Item 8 – Financial statements and
supplementary data
Our audited Statements of Operations, Balance Sheets, Statements of
Changes in Net Capital, and Statements of Cash Flows are included in the
Financial Statements section of this report.
Item 9 – Changes in and disagreements
with accountants on accounting and
financial disclosure
None