Notes to the Financial Statements

Retiree Benefits

HEALTH BENEFITS

We are required to pay a portion of the health insurance premiums of those retirees and their survivors who participate in the Federal Employees Health Benefits Program (FEHBP). FEHBP is sponsored by the U.S. government. We cannot direct the costs, benefits, or funding requirements of the federally-sponsored plan. We account for our participation in FEHBP using multi-employer plan accounting rules in accordance with FASB 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. We account for employee and retiree health benefit costs as an expense in the period our contribution is due and payable to the FEHBP. See Note 9, Health Benefits Programs for additional information.

RETIREMENT BENEFITS

We are an independent establishment of the executive branch of the U.S. government. We provide pension benefits as defined and administered by the Office of Personnel Management (OPM) and, therefore, have a parent-subsidiary type relationship. We cannot direct the costs, benefits, or funding requirements of the federally-sponsored plan. We account for our participation in U.S. government sponsored retirement plans using multi-employer plan accounting rules in accordance with Financial Accounting Standards Board Statement 87, Employers' Accounting for Pension Costs.

See Note 10, Retirement Programs for additional information.

Revenue Forgone Appropriation

Revenue forgone is an appropriation from Congress which covers our cost of providing free and reduced rate mailing service to groups designated by Congress. The amount of expense estimated by the Postal Service is submitted to Congress annually and Congress subsequently approves or alters the amount and funds the necessary appropriation. See Note 12, Revenue Forgone for additional information.

Emergency Preparedness Appropriation

Emergency preparedness appropriations are the funds we received from the federal government to help pay the costs of keeping the mail, postal employees and postal customers safe and are restricted for such use. Upon receipt of the funds, we established a liability. As we recognize emergency preparedness operating expenses, we recognize operating revenue. See Note 13, Emergency Preparedness Funding for additional information.

Note 3 – Recent Pronouncements

Currently no new pronouncements are pending that have not been incorporated into our accounting policies.

Note 4 – Debt and Related Interest

Borrowing Limits and Debt

Under the Postal Reorganization Act, as amended by Public Law 101-227, we can issue and sell debt obligations. However, we are limited to net annual increases of $2 billion in our debt for capital improvements and $1 billion for defraying operating expenses. Our total debt cannot exceed $15 billion.

On September 30, 2006, we borrowed $2.1 billon in short term debt. Debt consists of $2.1 billion in cash drawn on our line of credit with the Federal Financing Bank. At September 30, 2005, no debt was outstanding on our balance sheet. At year end, the current estimated market value of our debt is $2.1 billion.

This debt was paid October 3, 2006.

Interest Payments on Retirement

Cash outlays for interest on the retirement "supplemental liability," were $231 million in 2006, $263 million in 2005 and $219 million in 2004. See Note 10, Retirement Programs for additional information.

Interest on retirement is primarily all of our interest expense.

Note Purchase Agreements

Our Note Purchase Agreements with the Federal Financing Bank provide 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 these agreements we can also use a series of other notes with varying provisions to draw upon with two days' notice. The notes provide us the flexibility to borrow short-term or long-term, using fixed or floating rate debt, and can be either callable or non-callable.

Note 5 – Property and Equipment

Interest Capitalization

No interest was capitalized in 2006 and 2005 as no outstanding debt balance was carried for this period, except on September 30, 2006. In 2004, interest was capitalized in the amount of $5 million.

Repairs and Maintenance

Repairs and maintenance are charged to expense as incurred. This expense amounted to $933 million in 2006, $809 million in 2005 and $744 million in 2004.

Impaired Assets

In 2006, we had no newly reported impaired assets.

In 2005, hurricane Katrina devastated the gulf coast and damaged many of our facilities in that area. As a result we recorded an estimated loss of $7.5 million for impaired assets.