bringing the total amount of long-term debt refinanced to $1.3 billion. The repurchase price of Postal Service debt changes inversely to the market level of interest rates for treasury securities with similar maturity dates and terms. That is, if interest rates fall below the level at which Postal Service debt was issued, the purchase price of that debt increases above the issuance price. In this case, the Postal Service would have had to pay an up-front premium if it chose to retire this debt before maturity. Entering the year, the purchase price to prepay the $1.3 billion of retired debt was $68 million, and $778 million for the entire debt portfolio. If interest rates at the time of repurchase are roughly equivalent to the interest rates at the time of issuance, no up-front premium is required. That was the case when the Postal Service acted to retire $1.3 billion of long-term debt. With no up-front cost to retire this debt, the Postal Service realized savings from these transactions immediately. Interest expense was decreased by $28 million in 2003 and will be less by $60 million in 2004. The weighted average interest rate for the retired debt was 4.5 percent.

     Then, in August, the Postal Service paid an up-front premium of $360 million, a charge to 2003 net income, in order to retire the remaining $6 billion of long-term debt. At the time of this final refinancing transaction, the spread between short-term rates and long-term rates was the widest experienced in 10 years. Moreover, long-term rates had increased rapidly in the weeks leading up to the transaction, while short-term rates had changed little. The higher long-term interest rates served to reduce the market-based repurchase price of the Postal Service debt portfolio which would have cost $948 million to prepay at rates effective as recently as June. The retired debt carried an average interest of 5.1 percent and was replaced by debt carrying an average interest rate of 1.1 percent. The economics of the refinancing were compelling, and may have been undertaken even without the legislative mandate to reduce debt. The debt restructuring accomplished in 2003 will allow the Postal Service to pay off a substantial amount of debt over the course of 2004 and to completely offset

the premium paid, with interest expense savings to be realized in less than 16 months. The interest expense savings resulting from this final debt prepayment were $34 million in 2003 and are expected to be $277 million in 2004.

     Public Law 108-18, in providing for debt reduction, effectively created limits for Postal Service debt outstanding for 2003 and 2004. Specifically, Postal Service debt outstanding cannot exceed $7.6 billion in 2003. The Postal Service ended 2003 with $7.3 billion in debt outstanding, some $300 million lower than required by the Act. Accordingly, debt outstanding for 2004 cannot exceed $4.9 billion. Having accomplished debt restructuring, the Postal Service is now well positioned not only to meet but also to far exceed the Act's requirements for additional debt reduction in 2004. Further, the Postal Service is now positioned to apply all cash in excess of current needs towards debt reduction on a daily basis. As a result, in 2004, interest expense on Postal Service debt is projected to be the lowest since 1974. The Integrated Financial Plan for 2004 includes a projected debt reduction of $4.2 billion to $4.7 billion, well beyond the estimated $2.7 billion required by statute.

     The Postal Service's opportunity for debt reduction in 2005 will depend upon its ability to operate at close to the break-even requirement, combined with its ability to hold capital expenditures to levels that approximate its depreciation expense. The level of debt for 2006 and beyond will be influenced by these same factors and will also be greatly influenced by the yet to be specified requirements