For 2006, cash flow from operations, after funding the escrow requirement, estimated at $3.1 billion, will not be sufficient to pay for all the capital investments. A projected borrowing of at least $1 billion will be needed to make up the shortfall. Debt levels beyond 2006 will be influenced by our ability to operate at close to break even, and control the level of capital investment. Additionally, our debt levels will also be greatly influenced by the requirements of P.L.108-18, which requires that the "savings" we realize, be held in escrow, and not be obligated or expended until otherwise provided for by law.

(Dollars in millions)

Interest and Investment Income

When we determine that our funds exceed our current needs, we invest those funds with the U.S. Treasury’s Bureau of Public Debt. We invest primarily in overnight securities issued by the U.S. Treasury. We favor short-term investments because of the nature of our cash flow patterns, and to ensure that our investments are not unnecessarily exposed to the price risk associated with increases in interest rates.

We also record imputed interest on the funds owed to us under the Revenue Forgone Act of 1993. Under the Act, Congress is required to reimburse us $29 million annually through 2035. See Note 8 of the Notes to the Financial Statements for additional information.

Cash Flow

Net Cash Provided by Operating Activities

During 2005, net cash provided by operating activities decreased $2.2 billion due primarily to increases in compensation and benefits and transportation expenses. Compensation and benefit increases were driven by general salary and COLA pay increases of $1.4 billion, retirement increases of $500 million fueled by an increase of half a percent in the FERS employer contribution cost and current and retiree health benefit increases of more than $400 million. Cash outlays for transportation expenses were approximately $450 million higher than in 2004. A change from recent experience was the decline in the cash payment for workers’ compensation in 2005 from 2004 levels. This is the first time that the cash outlays for workers’ compensation have decreased year over year. Also the cash payment exceeded the expense for the first time since 1997 reducing the overall workers’ compensation liability.

The decrease of $570 million in operating cash flows in 2004 from 2003 was due primarily to increased operating expenses resulting from higher benefit costs. The main driver of these benefit increases was a $697 million or 11.9% increase in retirement costs mainly as a result of a full year of funding CSRS retirement contributions at 17.4% as required by P.L.108-18 and a $180 million or 15.9% increase in retiree health benefit costs. These increases were offset by an additional $247 million in accrued payroll and benefit expenses caused by one additional day of accrued payroll at year end.

Net Cash Used in Investing Activities

During 2005, 2004 and 2003, net cash used in investing activities was $2.3 billion, $1.7 billion and $1.3 billion respectively. The increase in net cash used in investing activities for the last two years reflects increased investment for mail processing equipment, retail equipment and for building improvements. In 2005 capital outlays exceeded depreciation expense for the first time since 2001.

Net Cash Used in Financing Activities

During 2005, we repaid what remained of our prior year-end debt to the Federal Financing Bank, leaving us debt free at year end. There was no mandatory debt reduction provision in the legislation for 2005. Our action this year continues our established practice of going beyond the debt reduction requirements of P.L.108-18. We also received a net appropriation from Congress of $503 million to fund additional biohazard detection systems, ventilation filtration systems and an irradiation facility.

In both 2004 and 2003 the net cash used in financing activities of $5.6 billion and $4.0 billion respectively, reflect our desire, and the requirement of P.L.108-18, that any "savings" generated by the enactment of the law be used to pay down debt. Consequently in 2004 we paid down $5.5 billion in debt and in 2003 we paid down $3.8 billion in debt.

Liquidity

Our liquidity is the cash in the Postal Service Fund in the U.S. Treasury and the amount of money we can borrow on short notice if needed. Our Note Purchase Agreement with the Federal Financing Bank, renewed this year, provides for revolving credit lines of $4 billion. These credit lines enable us to draw up to $3.4 billion with two days notice and up to $600 million on the same business day the funds are needed. Under this agreement we can also use a series of other notes with varying provisions to draw upon with two days notice. The notes provide the flexibility to borrow short-term or long-term, using fixed or floating rate debt, and can be either callable or non-callable. These arrangements with the Federal Financing Bank provide us with adequate tools to effectively manage our interest expense and risk.