CONTENTS HIGHLIGHTS PMG,BOG LETTER MAIL! IT'S REAL. BOG FINANCIAL

De-pend-able adj [from Latin de- + pendere to hang from] 1: suitable or fit to be relied on 2: just another way to say the United Stated Postal Service.

Management Discussion & Analysis Capital Investment and Financing

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% fixed-rate debt. However, we strive for a favorable balance, and we borrow fixed-rate debt when market opportunities arise, or when we believe doing so reduces risk. Such was the case this year with long-term interest rates declining to historically low levels not seen in 40 years. We shifted the balance of our debt portfolio toward more fixed-rate long-term debt, reducing our exposure to any increase in interest rates.

We entered 2002 knowing that $1.15 billion of our long-term debt would become reclassified as short-term debt by the end of the year. We also believed that long-term rates had become very attractive for borrowers.

Rather than execute all of our transactions at one time, we prefer to assess market conditions continuously and then make measured increments in our borrowing. Beginning in February, and then again in July and September, we added $2.7 billion in long-term debt in eleven separate transactions. The weighted average rate on this year’s financings was 4.36%, and the weighted average maturity was 10.49 years. We benefited from declining rates by stabilizing future interest expense volatility.

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

AT THE END OF 2002, ONLY $250 MILLION OR 2% OF OUR DEBT HAD A RATE ABOVE 6%.

This illustration shows two arcs, one for 2002 and another for 2001. Each arc is basically a bar chart that shows the percentage of debt at specific interest rate ranges.

In 2002, forty percent of our debt had and interest rate below 4 percent, while in 2001, fifty-six percent of our debt was at an interest rate below 4 percent.
In 2002, twenty-five percent of our debt had and interest rate between 4 and 5 percent, while in 2001, twenty-eight percent of our debt was at an interest rate between 4 and 5 percent.
In 2002, thirty-three percent of our debt had and interest rate between 5 and 6 percent, while in 2001, fourteen percent of our debt was at an interest rate between 5 and 6 percent.
In 2002 and 2001, two percent of our debt had and interest rate greater than 6 percent.

AT YEAR-END 2002,
$2.7 BILLION OF OUR
DEBT HAD AN INTEREST
RATE BELOW 2%.