Com-mit-ment  n [from Latin committere to connect, entrust] 1:  the state or instance of being obligated to a specific charge, goal, or trust 2:  the essence of the motto of the United States Postal Service 2:  neither rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.

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Recognizing these continuing challenges, we nevertheless foresee the opportunity to earn net income in 2003 which would allow us to retire more of our debt. To achieve net income and to generate positive cash flow, we are committed to savings and cost avoidance of nearly $1 billion in 2003. All major field operating functions will have to become more efficient. We will deploy new automation equipment and operating management will be challenged to increase productivity for a fourth consecutive year.

We are benefiting from moderate inflation and low interest rates. For the first time in years we have labor contracts in place for each of the major craft unions, giving next year’s expenses a modicum of predictability. We expect that volume growth will resume slowly and generate increased revenue as the economy recovers from the recession. Our bottom line will also benefit from the full-year impact of the rate increase implemented last June.

In addition, our financial results will be positively affected by proposed legislation if passed into law. This legislation would change the way we fund our retirement obligations for Postal Service employees and retirees covered by the Civil Service Retirement System (CSRS). In November 2002, the Office of Personnel Management (OPM) completed a review of Postal Service funding and obligations pertaining to our employees and annuitants covered by the CSRS. This review concluded that without a change in the governing law, we would over-fund our CSRS obligations by $71 billion. This conclusion was arrived at through careful analysis conducted by actuaries and others at OPM, the Department of Treasury and the Office of Management and Budget.

For 2002, the Postal Service deferred retirement liability payment of $3.9 billion is reflected in the Statement of Operations as Compensation and Benefits ($2.3 billion) and Interest Expense on Deferred Retirement Liabilities ($1.6 billion). If enacted, the legislation has the potential to reduce Postal Service annual CSRS retirement expenses between $2 and $3 billion. It would also eliminate most of the $32 billion deferred retirement benefit asset and liability carried on the Postal Service’s balance sheet. We intend to use the benefits of this legislation to retire debt and stabilize current postage rates until 2006.

We need to produce positive net incomes and reduce debt. At the same time, we will maintain service performance and fund infrastructure replacement and expansion. Retiring debt and funding capital improvement at the same time involves a balancing act. It is appropriate to carry debt that funds capital expenditures necessary to support our infrastructure or to increase our operational efficiency.

To achieve a better balance in this regard, we must look to achieving positive bottom lines. Under the current rate-making practice, however, we can design rates to earn net income only to the extent necessary to recover prior years’ losses. We have not been permitted to accumulate retained earnings.

Our challenge is to build our business and improve productivity through control of costs, while ensuring our long-term ability to provide quality services. This may require filing for new rates. It may also require securing legislative change that gives us more flexibility in the marketplace and better control over costs.

Our discussion in the MD&A represents our best estimate of the trends we know about, the trends we anticipate and the trends we think are relevant to future operations. However, actual results may be different from our estimates.