Financial Section Part II

NET CASH USED IN FINANCING ACTIVITIES

After funding our escrow requirements for P.L.108-18, we borrowed $2.1 billion to fund capital investments and provide operating cash for future operations. The September 30, 2006, borrowing provided us with two-thirds of the $3,230 million increase in cash from September 30, 2005, levels.

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 in 2006, provides for revolving credit lines of $4.0 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.

The amount of funds we can borrow is limited by certain statutory limits on borrowing. Our total debt outstanding cannot exceed $15 billion. The net increase in debt at year-end for any fiscal year cannot exceed a $3 billion annual limit, which consists of $2 billion for capital purposes and $1 billion for operating expenses.

At the end of 2006 we made a decision to increase our available cash from $725 million at the end of 2005 to approximately $1 billion on September 30, 2006. We increased our cash balance heading into an environment of perceived increased uncertainty, much like a private sector organization might do. Uncertainties for 2007 include: the results of collective bargaining with four major unions, the health of the overall economy, the outcome and impact of the first fully litigated rate case since R2000-1, an aggressive operating plan dependent on continued increases in productivity, further work hour reductions and whether postal legislation passes with adverse cash flow consequences. Our liquidity will be comprised of the approximately $1 billion of cash that we have entering 2007, the cash flow that we can generate from operations and the $3.0 billion that we can borrow if necessary. As was the case in 2006, for 2007 we do not expect cash flow from operations to supply enough cash to fund both our escrow requirement and our capital investments. Consequently, we anticipate increasing debt next year by at least $1.2 billion. However, this projection is not without risks, and unfavorable events would cause a re-evaluation of the planned 2007 year-end levels of debt.

Pending Legislation

POSTAL REFORM

Postal reform legislation was considered in the 109th Congress, the continuation of an effort beginning in 1996. Legislation had not yet been approved as Congress returned from its election recess on November 13, 2006. It is possible that postal reform legislation will be considered during this final session of the 109th Congress.