4. Financing
The amount we borrow over time is largely determined by the difference between our cash flow from operations and our capital cash outlays. Our capital cash outlays are the funds we invest in the business for such capital improvements as facilities, vehicles, automation equipment, and information technology, much of which is required to service our ever-expanding delivery network. From 1997 through 2001, our capital cash outlays exceeded cash flow from operations by $5.2 billion; the difference was covered with borrowed funds. Our debt outstanding with the Department of Treasury’s Federal Financing Bank increased by $5.4 billion. Debt outstanding at the end of 2001 was $11.3 billion, an increase of $2 billion compared to 2000.

Normally, our debt balance at the end of our year represents our highest level of debt for the year because, while expenses for workers’ compensation and retirement benefits are accrued throughout the year, the actual payments are not made until late September of each year. The amount that we paid this year was $4.5 billion, including $694 million for workers’ compensation and $3.75 billion for the Civil Service Retirement System and Cost of Living Adjustments for retirees. Our cash flow during the year was sufficiently strong to reduce debt from the prior year-end level. Debt outstanding reached a low of $4.6 billion in July. In other words, we had eliminated 50 percent of the debt that we had entering the year. Since we have debt financing flexibility, we can manage the fluctuations in our debt during the year by actively managing our credit lines. However, just as our debt balance at year-end has increased in recent years, so has our average debt balance. In 2001, our average outstanding debt was $6.4 billion, far less than the year-end balance but an increase of 36 percent, or $1.7 billion, over the prior year's average debt.

The interest expense on our debt in 2001 totaled $306 million, compared to $220 million in 2000. Managing cash to minimize debt on a daily basis produces favorable financial results because average debt is one of the two primary drivers of annual interest expense. Interest rates are the other important driver, as is evident in an interest rate comparison of 1997 with 2001. In 2001, our average debt outstanding was $2 billion higher than 1997, a 45 percent difference. Yet our interest expense was no higher than in 1997, because of lower interest rates.

Our interest expense is determined by debt management activities as well as by prevailing interest rates. It was a challenge to manage interest expense during a year of increasing average debt outstanding. We cannot claim any credit for producing lower interest rates but we did position our debt portfolio to benefit from declining rates and simultaneously took some steps to stabilize future interest expense volatility by managing the mix of fixed- and floating-rate debt on our books.

In planning for 2002, we prepared a financing plan with a $1.6 billion net increase in our debt. However, we made that estimate before the attacks of September 11 and the ensuing events increased our costs and decreased our revenues. We are not now able to predict the 2002 net increase in our debt with any degree of certainty.