Financial Section Part II

APPROPRIATIONS

Although the Postal Service is self-funded and does not receive an appropriation for its operations, we have received appropriations to reimburse us for un-funded statutorily-mandated services.

The 2006 House-passed bill and the Senate-reported bill both provide Fiscal Year 2007 funding at almost $109 million, which includes $29 million for revenue forgone and almost $80 million for free matter for the blind and overseas voters. These funds would not be available until October 1, 2007. These amounts are subject to change because the appropriations process was not finalized by our reporting deadline, and the allocations could be subject to further congressional action.

ENERGY

A new Energy Initiatives Office was created in 2006 to bring a central focus to our energy issues and to develop an integrated and strategic energy plan that will reduce energy use, minimize the price paid for energy, ensure that legal requirements are met and support continuity of operations.

In 2006, the Postal Service paid nearly $2.4 billion in energy costs to process, transport and deliver the mail. Postal energy costs increased 27% over 2005. The overall increase was driven by fuel which accounted for 74% of our total energy costs.

With more than 216,000 vehicles, the Postal Service has the largest civilian fleet in the United States. We continue to evaluate various fuel types and alternative fuel vehicles including hybrid trucks, hydrogen fuel cell vans, electric step vans and liquid natural gas delivery vehicles.

The Postal Service occupies more than 34,000 buildings and spent $671 million on utilities in 2006. This was a 16% increase over the previous year. We also won the Presidential Award for Leadership in Federal Energy Management as well as a Federal Energy and Water Management Award.

IDENTITY THEFT

Despite widespread expectations, none of the 2005 federal bills that applied data breach notification requirements to private sector firms were able to gain passage in Congress. In May 2006, President Bush directed the Postmaster General and sixteen other agency heads to form the first national Identity Theft Task Force.

The Postmaster General directed the Inspection Service to represent the Postal Service on the Identity Theft Task Force. The Inspection Service and Postal Service Privacy Office provided input that was incorporated into the Task Force interim recommendations released in September. The following day, the White House Office of Management of the Budget issued the Task Force recommendations to all agencies, including the requirement that government agencies use the mail to notify citizens of data security breaches.

Transformation Plan

Since its publication in April 2002, our Transformation Plan has provided focus and direction to all Postal Service business and operating activities. It is our principal planning tool for improving the value of mail and sustaining a financially stable enterprise that meets the nation’s needs for affordable and reliable universal service. The plan defines our vision and establishes our strategic goals in the areas of service, revenue, cost savings and human capital.

Transformation assures continuity between our longer-term direction and our near-term corporate objectives, which are published each year as our Annual Performance Plan. It bridges our internal priorities and operating activities with events and conditions in our larger business environment. Transformation in the Postal Service is designed to be dynamic and adaptable. For that reason, the plan was updated at the start of this fiscal year, with the publication of the new Strategic Transformation Plan, 2006–2010, which commits us to new advances in service, customer convenience, productivity, and employee engagement. This new plan builds on our successes since 2002. Since 2002 we have seen record levels of on-time service performance for First-Class Mail, as well as record levels of customer satisfaction, as measured by our independently-conducted Customer Satisfaction Measurement, and productivity. Our ease of use and expanded access made it quicker, easier and more convenient than ever for customers to do business with us. We have eliminated more than $5 billion in costs from our 2001 base, and significantly reduced our outstanding debt, which was $11.3 billion in 2001. We have seen strong and steady progress in efficiency, with an unprecedented seventh consecutive year of growth in total-factor productivity. We are delivering almost 50% more mail to 33 million more homes and business than we did 20 years ago, at essentially the same staffing levels. We have seen significant reductions in illnesses, injuries and workplace disputes due to continued improvements in our workplace environment.

Evolutionary Network Development

We have continued our network redesign by focusing on asset optimization within and across our networks.

We continue to take advantage of opportunities created through the ongoing automation deployments to increase efficiency and improve processing quality. Consolidating operations takes advantage of economies of scale improving overall financial performance. For example, Automated Package Processing System (APPS) deployment enables small parcels and bundles to move from decentralized manual or mechanized processing to centralized and automated processing at significantly higher processing speeds. Also, continued letter and flat automation improvements coupled with declining First-Class Mail volume allowed us to consolidate eleven area mail processing (AMP) centers. This should achieve significant savings.

The bulk mail center (BMC) network was created in the 1970s to process parcel post. At that time we deployed state of the art technology, however today the BMC technology is in need of modernization. In 2006, we began to upgrade the BMC network, starting with Kansas City, by removing outdated equipment and replacing it with new automation technology.