Postal Service liquidity in 2006 will be comprised of the cash on hand, the cash flow generated from operations, and the $3 billion that can be borrowed if necessary. The Postal Service does not expect cash flow from operations to supply enough cash to fund both the escrow requirement, estimated at $3.1 billion, and capital investments. Consequently, as mentioned earlier, it anticipates increasing debt by at least $1 billion in 2006. However, this projection is not without risks, and unfavorable events would cause a re-evaluation of the planned 2006 year-end levels of debt.

5. Capital Investment

Capital investments include purchases of plant, property, and equipment with a cost generally greater than $3 thousand and a useful life of more than 1 year. The Postal Service
invests in capital projects that reduce operating costs, maintain or expand its infrastructure, or provide for the safety and well being of customers and employees. The Postal Service commits capital funds when it signs a contract with a vendor.

Each year, the Board of Governors determines the annual capital commitment plan, an essential element of the Integrated Financial Plan. The Postal Service employs an internal review process that ensures each proposed investment is fiscally sound. Investments valued at $25 million or more also must be reviewed by the Board of Governors

Capital Projects Committee which may then recommend the proposed investment to the Board of Governors for its approval.
Capital commitments of $2.9 billion were made in 2005 on a plan of $3.3 billion. The difference between planned and actual commitments resulted primarily from various delays in the development process which resulted in the deferral of some projects until 2006. Examples of the delayed projects are the Postal Automated Redirection System (PARS) for Flats and projects for various processing and delivery facilities.

The following table summarizes 2005 capital by category of investment.

*Numbers may not add due to rounding.

In 2005 Mail Processing Equipment commitments included three main projects: PARS Phase II; the Flat Recognition Improvement Program (FRIP) Phase II; and the Automated Flat Sorting Machine 100 (AFSM 100) Auto Induction System. PARS automates processing of undeliverable-as-addressed mail. The FRIP provides additional read and error rate improvements for flat sorting equipment. The Auto Induction System automates the preparation and feeding of flats on the existing AFSM 100s.

More than $515 million of the Facilities commitments in 2005 were for repair and alteration projects performed at thousands of postal facilities throughout the country. The remainder of the Facilities commitments were for the Southern Maine Processing and Distribution Center and various customer service facilities.

Commitments in excess of $795 million were made in 2005 for Infrastructure and Support and included funding for: the Intelligent Mail Data Acquisition System (IMDAS) to replace and enhance the current version of mobile data collection devices; the Human Capital Enterprise/Human Resources Shared Services to capitalize on the efficiencies of a centralized shared service center; and the Surface Visibility and Surface-Air Support System Phase III to enable use of an enhanced distribution label to track sacks, trays, and tubs of mail throughout the network.

Retail commitments were made primarily for completing the Automated Postal Center kiosk deployment. Vehicles funds were for the replacement of tractors used to transport trailers of mail and equipment to and from processing and distribution centers and, for spotters which are used to move trailers to and from docks and to stage trailers for loading and unloading between Postal Service facilities. The Vehicles commitment also includes the purchase of over 3 thousand carrier route vehicles which will be deployed to city delivery routes with existing right-hand-drive vehicles. The
right-hand-drive vehicles will then be redeployed to targeted rural carriers.