Financial Section Part II

Capital Resources and Liquidity

Capital Investments

The Board of Governors approves the budget for investments in capital each year. The Board also approves all major capital projects, generally defined as projects greater than $25 million. At the beginning of 2007, there were 37 Board-approved projects in progress, which represent $6.2 billion in approved capital funding. During the year, the Board approved four new projects, which totaled $1.7 billion in additional capital funding. A total of ten projects representing $1.1 billion in approved capital funding were completed and one project was canceled. The year ended with 30 open projects that amount to $6.8 billion in approved capital.

While the funding for a project is authorized in one year, the commitment or contract to purchase or build may take place over several years. By year end, approximately $5.6 billion had been committed to these 30 projects. Actual capital cash outlays will occur over several years. Through the end of 2007, approximately $4.0 billion has been paid for the 30 projects.

Of the 30 active Board-approved projects, 20 are for mail processing equipment, eight for facilities and two for other projects: retail equipment and human resources shared services. In 2007, capital commitments for all projects were $2.6 billion. See Note 7, Leases and other commitments, in the Notes to the Financial Statements for additional information.

Noteworthy projects approved in 2007 include:

Phase One of the Flat Sequencing System (FSS), which will deploy 100 systems to between 30 and 60 facilities. The FSS sorts flat mail to carrier delivery point sequence at a rate of 40,000 pieces per hour with a two-pass operational throughput of nearly 18,000 pieces per run hour. The FSS will fully automate the Delivery Point Sequencing of flat mail for selected delivery sites, which will reduce the time carriers spend in-office sorting flat mail.

We purchased 5,856 carrier route vehicles. This vehicle purchase completed a three-part acquisition plan to provide vehicles to rural routes as agreed with the NRLCA.

We will also acquire 211 additional delivery barcode sorters (DBCS) and 797 stacker modules for existing DBCS machines. The additional equipment will increase the percentage of letter mail processed in automated operations and provide labor savings in manual sorting operations.

Our capital plan supports future needs by developing and implementing new automation equipment that will increase our operating efficiency and generate a high return on investment. These programs are expected to reduce workhours in our distribution, processing and delivery operations. We plan to continue to invest funds to maintain our infrastructure, including facilities, vehicles and technology systems.

Our facilities program will continue to address life, health, safety, operational needs and security. We expect to maintain our infrastructure through high priority replacement projects and ongoing repair and alteration projects.

Liquidity

Our liquidity is the cash we have with 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 2007, 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. This arrangement provides us the flexibility to borrow short-term or long-term, using fixed- or floating-rate debt that is either callable or noncallable. These arrangements with the Federal Financing Bank provide us with adequate tools to effectively fund our cash requirements and manage our interest expense and risk. See Note 5, Debt and related interest, in Notes to the Financial Statements for additional information about our debt obligations.

The amount we can borrow is limited by certain statutory limits. Our total debt outstanding cannot exceed $15 billion and the net increase in debt at year-end for any fiscal year cannot exceed $3 billion. Both of these limits preceded P.L.109-435, and the amounts were not altered by the law. The new law, however, did remove separate annual borrowing limits within the $3 billion annual limit. Prior to enactment of the new law, there were separate limits for debt issued for capital expenditures and debt issued to defray operating expenses. P.L.109-435 also imposed a new requirement that we identify borrowing for shipping services and borrowing for mailing services. The new law also instructs that until such time as accounting practices and principles for determining such borrowings are finalized by the PRC, the Postal Service must make such identification using the best information available at the time. During 2007, since rules had yet to be determined, we used information that we determined to be the best available. We estimated that borrowing for competitive product represented $438 million, calculated as 10.4% of our total year-end debt outstanding with the Federal Financing Bank.

Looking forward, our liquidity will be comprised of the approximately $1 billion of cash that we have entering 2008, the cash flow that we generate from operations and the $3 billion that we can borrow if necessary. As was the case in 2007, for 2008 we do not expect cash flow from operations to supply adequate cash to fund our capital investments and P.L.109-435 payment requirements. Consequently, we anticipate increasing debt next year by approximately $1 billion.

The majority of our revenue is earned in cash. The majority of our cash outflow is to support our biweekly payroll. Consequently, we are dependent on our ability to continue to generate cash from operations to satisfy our liquidity requirements. Cash flow from operations is at a seasonal peak in our first quarter and seasonal low in our fourth quarter. We make significant cash payments in the fourth quarter for workers’ compensation and retiree health benefits. Consequently we incurred $4.2 billion debt at the end of 2007 to fund approximately $6.3 billion in payments. This debt will be repaid in the first half of 2008 from operating cash receipts. It should also be noted that $3.9 billion of the current liabilities on our balance sheet at September 30, 2007, represents items for which we have already collected cash, but have a remaining obligation to perform a future service.

The following table illustrates our major cash flow obligations in future years.