M A Y 2 8, T E S T I M O N Y B E F O R E T H E P R E S I D E N T ' S C O M M I S S I O N O N T H E U S P S

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1 M A Y 2 8, 2 3 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

2 Management is faced with a number of challenges and inflexibilities Challenges: fixed costs, labor costs and ability to cover future obligations, declining mail volume growth, growing competition from the private sector, electronic diversion, niche markets, new advertising media and international posts Inflexibilities: break-even mandate and limited access to capital, universal service mandate and its growing cost, inflexible pricing 1

3 Overview of the USPS s revenues and expenses Revenue Overview First class mail and advertising mail make up 79% of the USPS s revenue Rate changes must be approved by the PRC, which is a lengthy process Mail consolidation, electronic diversion and competitive pressures threaten the USPS core business Expense Overview 79% of expenses are for labor The USPS s universal service mandate requires expensive infrastructure expansion as the population grows Capital investments may be limited due to restricted debt capacity and a Congressional statute to achieve break-even net income Revenue Revenue composition composition FCM, Std, Other, Priority ($mm) 7, 6, 5, 4, 3, 2, 1, 6,72 4,187 8,322 Source: Company reports Operating Operating expense expense composition composition Source: Company reports 62,726 64,54 65,834 66,463 4,533 4,837 4,916 4,723 8,823 8,994 9,336 9,439 13,72 14,436 15,193 15,75 15,819 33,861 34,933 35,516 35,876 36, FCM & Std Mail growth (%) Comp. & Benefits, Other ($mm) Operating margin (%) 7, 6, 5, 4, 3, 2, 1, 57,786 12,19 13,39 6,642 62,992 65,64 65,234 13,46 14,289 13,677 45,596 47,333 49,532 51,351 51, % -4% 8% 6% 4% 2% % 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% 2

4 Continued declining mail volume growth would result in sustained pressure on USPS s thin margins Financial Financial performance performance relative relative to to mail mail volume volume growth growth Revenue and Expenses ($BN) Net margin and Mail growth¹ (%) Source: Company reports ¹ Consists of First-class and Standard Mail pieces

5 The USPS s investment needs are very large as a result of the universal service mandate ¹ 21 Annual Report and company reports The USPS universal service mandate requires uniform, high quality service at flat prices to an ever growing customer base The USPS: delivers to over 14MM delivery points per day delivers over 2BN pieces of mail per year The USPS needs to invest $6MM every year to accommodate growth in the universal delivery system¹ 1.7MM new address per year over 3,4 new carrier routes per year 1 new delivery facilities per year 4

6 Compensation and benefits represented 79% of the USPS s $65BN operating expense base in 22 The USPS is the second largest employer in the U.S. with 854,376 employees¹ comprising approximately one third of the entire Federal Government civilian workforce By 21, 85% of Postal executives, 74% of Postal managers and supervisors, and 5% of the career workforce will reach retirement eligibility posing significant management challenges and retirement costs² Management and the unionized workforce are required by law to participate in collective bargaining on wages and working conditions and disputes are settled in binding arbitration if an impasse persists 18 days after negotiations commence ¹ Total career employees - 752,949 (22 Annual Report) ² GAO Report: Major Management Challenges and Program Risks (January 21) 5

7 Capital investment management is a necessary challenge ¹ 22 Annual Report The USPS relies on two sources of funds for its capital investment needs Internally generated cash flow Debt The USPS was originally capitalized with roughly $3BN. This capital has since been depleted by losses and its recovery is factored into the rate setting process. Capitalization now stands at ($3BN)¹ The recovery of prior years losses is a slow process with little impact on the business model Continuing to cover related overhead costs that do not vary with volumes could lead to higher prices if the USPS is to fulfill its mission 6

8 Capital expenditures have historically been funded by operating cash flow and debt Capital Capital investment investment vs. vs. operating operating cash cash flow flow Capital investment and operating cash flow ($mm) 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 1, Source: Company reports 1, , , , ,917 3,337 2,961 1,

9 Pricing inflexibility combined with a break-even mandate make revenue management complex The USPS is required by law to break-even over time managing to this goal without dynamic pricing and with a rigid cost structure makes meeting this requirement a complex, multi-year task To change domestic postage rates, the USPS must file a proposal with the independent Postal Rate Commission (PRC) starting a complex process that results in a PRC-recommended decision which must be delivered by law within 1 months Efficiencies achieved can only be enjoyed until the next rate case at which time, cost savings are absorbed in a lower rate than would be set had those cost savings never been realized The recovery of prior years losses to replenish the USPS s original equity is accounted for in rate case filings. The restoration of original equity means that the USPS cannot retain surplus earnings and put that capital to work The impact of the latest rate case will cycle through on June 3th leading to flat or negative revenue growth year over year if volume trends continue 8

10 The USPS is restricted in its borrowing capacity and its investment decisions Borrowing Borrowing history history Under current law, the USPS can only borrow up to a total of $15BN to fund both operations and capital investments with a limit of $1BN per year to defray operating expenses and $2BN per year for capital improvements the USPS requirement to break-even over time hinders its ability to generate cash flow that can be used to finance capital investments current limits should be considered in the context of other financial inflexibilities The Postal Service s investment authority is limited as well varying interpretations of the law related to investments have restricted the USPS in its ability to effectively partner with private sector companies limits potential for efficient strategic alliances to develop new business opportunities Debt limits, a lack of equity and the lengthy rate setting process leave the USPS hard-pressed to defray operating losses in-between rate cycles Long term debt, short term debt and debt ceiling ($mm) 15, 1, 5, 3,633 2,788 Source: 22 Annual Report 6,421 6,917 3,363 6,814 3,554 9,316 2,52 11,315 11, ,564 5,751 3,815 7,3 9

11 This presentation was prepared exclusively for the benefit and internal use of the President's Commission on the USPS and does not carry any right of publication or disclosure to any other party. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan. The information in this presentation is based upon management forecasts and reflects prevailing conditions and our views as of this date, all of which are subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the President's Commission on the USPS or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the President's Commission on the USPS. JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its securities affiliates, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank and its banking affiliates. JPMorgan deal team members may be employees of any of the foregoing entities.

S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Agenda PRAGUE CONFERENCE ROAD TO COPENHAGEN CONTENTS. Page

S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Richard Folland Senior Climate Change and Energy Adviser JPMorgan ROAD TO COPENHAGEN PRAGUE, 23 SEPTEMBER Agenda CONTENTS JPMorgan Environmental