4. FINANCING
The amount that we borrow over time is largely determined by the difference between our cash flow from operations and our capital cash outlays. From 1997 through 2001, our capital cash outlays exceeded cash flow from operations by $5.2 billion, so we covered the difference with borrowed funds. Our debt outstanding with the Department of the Treasury’s Federal Financing Bank increased by $5.4 billion during that period. This year, however, we were able to reverse the trend of increasing debt each year. Debt outstanding at the end of the year was $11.1 billion, a decrease of $200 million compared to 2001.

Our debt balance at the end of the year represents our highest level of debt for the year because, while we accrue our expenses for workers’ compensation and deferred retirement benefits throughout the year, we make the actual payments in late September. This year we paid $4.7 billion, including $818 million for workers’ compensation and $3.9 billion for CSRS deferred retirement costs and cost-of-living adjustments (COLAs) for retirees. Our cash flows during the year are sufficiently strong to reduce debt from prior year-end levels. We have debt financing flexibility and 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 have our average debt levels.

For 2002, our average outstanding debt during the year was less than the prior year-end balance but increased 20.3 percent, or $1.3 billion, to $7.7 billion. The interest expense on our debt totaled $340 million in 2002, compared to $306 million in 2001. Managing cash and debt on a daily basis is one means we use to minimize our annual interest expense. Our interest expense is determined by the interaction of a number of variables including day-to-day cash flows, the behavior of interest rates, and our debt management activities.

We prefer to maintain a mix of fixed- and floating-rate debt because we believe that, over the long-term, variable or floating-rate debt may provide more cost-effective financing than 100 percent fixed-rate debt. We strive for a favorable balance in the use of these borrowing choices and will borrow fixed-rate debt when market opportunities arise, or when we believe doing so reduces risk. Such was the case this year when long-term interest rates declined to historically low levels, not seen in forty years. We shifted the balance of our debt portfolio towards more fixed-rate long-term debt, reducing our exposure to any increase in interest rates.

At year-end, our long-term debt was $7.3 billion, with a weighted average interest rate of 5.01 percent, compared with debt of $5.75 billion and a weighted average rate of 5.17 percent at the end of 2001. Our 2002 borrowing transactions ranged from a high of 5.522 percent for a twenty-nine year maturity to a low of 3.449 percent for a five-year maturity. As we enter 2003, our debt portfolio puts us in good position to manage interest expense and risk for next year and beyond.

In planning for 2002, we prepared a financing plan with a $1.6 billion net increase in our debt. That estimate, however, pre-dated the events of September 11 and ensuing changes in the economy. Both postal management and the Governors moved decisively to counteract the negative effects of these factors on our cash flow and liquidity. To increase cash flow on the revenue side, we implemented new postage rates on June 30, three months ahead of schedule. An unprecedented settlement between the Postal Service and the mailing industry enabled the Postal Rate Commission to expedite this rate case. On the disbursement side, we reduced our disbursements by reducing our expenses. By increasing revenue and reducing expenses, we turned a projected loss of $1.35 billion into a net loss of $676 million. We also continued a modified freeze on capital projects and reduced cash outlays for capital by $500 million. In addition, we received $762 million in emergency appropriations, most of which we had not spent by the end of the year but expect to spend in 2003.

We are currently projecting net income of $600 million and modest capital expenditures of $2.5 billion in 2003. If we achieve these targets, we should generate excess net cash flow that can be applied to debt reduction. Debt reduction beyond 2003 will depend on our ability to operate at close to a break-even net income combined with capital expenditures at levels that approximate our depreciation expense. Regarding the need for external financing, we continue to benefit from a policy of receiving payment in advance of service. Any change to this policy would adversely affect our level of debt outstanding. Payment of retirement expenses has not been problematic since these expenses are provided for on an ongoing basis in the cost structure of postage rates.

		Year-End Debt ($ billions)	Average Debt ($ billions)	Interest Expense ($ billions)
	1998	6.4	3.2	167
	1999	6.9	3.9	158
	2000	9.3	4.7	220
	2001	11.3	6.4	306
	2002	11.1	7.7	340