FY06 Audited Financial Statements
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AIRPORT COMMISSION CITY AND COUNTY OF SAN FRANCISCO SAN FRANCISCO INTERNATIONAL AIRPORT Financial Statements with Schedule of Passenger Facility Charge Revenues and Expenditures June 30, 2006 and 2005 (With Independent Auditors’ Report Thereon) AIRPORT COMMISSION CITY AND COUNTY OF SAN FRANCISCO SAN FRANCISCO INTERNATIONAL AIRPORT Table of Contents Page Independent Auditors’ Report 1 Management’s Discussion and Analysis 3 Financial Statements: Statements of Net Assets 22 Statements of Revenues, Expenses, and Changes in Net Assets 24 Statements of Cash Flows 25 Notes to Financial Statements 27 Schedule of Passenger Facility Charge Revenues and Expenditures 53 Notes to Schedule of Passenger Facility Charge Revenues and Expenditures 54 Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 55 Report on Compliance with Requirements Applicable to the Passenger Facility Charge Program and on Internal Control over Compliance 56 Schedule of Findings and Questioned Costs 58 Independent Auditors’ Report The Honorable Mayor and Board of Supervisors City and County of San Francisco: We have audited the accompanying financial statements of the Airport Commission, City and County of San Francisco, San Francisco International Airport (the Airport), an enterprise fund of the City and County of San Francisco, California (the City), as of and for the years ended June 30, 2006 and 2005, as listed in the table of contents. These financial statements are the responsibility of the Airport’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Airport’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 1, the financial statements present only the Airport and do not purport to, and do not, present fairly the financial position of the City as of June 30, 2006, and the changes in its financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Airport Commission, City and County of San Francisco, San Francisco International Airport as of June 30, 2006 and 2005, and its changes in financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated October 6, 2006, on our consideration of the Airport’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grants, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. The management’s discussion and analysis on pages 3 through 20 is not a required part of the financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audits were conducted for the purpose of forming an opinion on the basic financial statements of the Airport Commission, City and County of San Francisco, San Francisco International Airport. The accompanying Schedule of Passenger Facility Charge Revenues and Expenditures is presented for purposes of additional analysis as specified in the Passenger Facility Charge Audit Guide for Public Agencies, issued by the Federal Aviation Administration, and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. October 6, 2006 2 AIRPORT COMMISSION CITY AND COUNTY OF SAN FRANCISCO SAN FRANCISCO INTERNATIONAL AIRPORT Management’s Discussion and Analysis June 30, 2006 and 2005 The management of the Airport Commission, City and County of San Francisco, San Francisco International Airport (the Airport or SFO) presents the following narrative overview and analysis of the financial activities of the Airport for the fiscal year ended June 30, 2006 with comparative data for the fiscal year ended June 30, 2005. All amounts are expressed in thousands of dollars unless otherwise indicated. Highlights of Airline Operations at the Airport In light of global economic and political circumstances, the aviation industry continues to restructure. Uncertainty surrounding airline bankruptcies and mergers, airline restructuring, and fuel prices affect demand for air travel. Cost cutting strategies along with increased ticket prices and historically high load factors have increased yields (cents per mile) and recently resulted in positive operating margins for many airlines. However, debt interest and restructuring costs continue to impact the financial condition of several major air carriers (including United Airlines, Delta Air Lines, Northwest Airlines and US Airways Group) at SFO. The number of passenger airline operations at the Airport, which had decreased over the last few years and was relatively flat in fiscal year 2005, showed a positive increase in fiscal year 2006, primarily attributable to short- haul flights using regional jet aircrafts. In some markets, regional jet aircrafts continue to replace larger jet aircrafts as airlines “right size” their fleets. This will continue to affect overall seat capacity at the Airport, which is expected to remain relatively flat to slightly positive over the next fiscal year. Low cost airline competition at Oakland International and Mineta San Jose International will continue to impact domestic passenger demand at SFO. Passenger and Other Traffic Activity In the first four months of fiscal year 2006, passenger activity was flat as compared with the first four months of fiscal year 2005. This reflected continued decreases in scheduled seat capacity at SFO through October 2005 as airlines reduced schedules and aircraft size to improve fiscal operating margins. Moderate increases in seat capacity started in November 2005 and continued through the remainder of the fiscal year, resulting in a slight increase in capacity and improved passenger traffic. Total passenger traffic increased 1.1% between fiscal year 2006 and fiscal year 2005. Total aviation operations increased 2.2% over prior year levels. Aircraft landed weight – which determines revenue generated by landing fees – ended the year nearly flat prior over year levels. 3 (Continued) AIRPORT COMMISSION CITY AND COUNTY OF SAN FRANCISCO SAN FRANCISCO INTERNATIONAL AIRPORT Management’s Discussion and Analysis June 30, 2006 and 2005 The following chart presents a comparative summary of passenger and other traffic at the Airport for the fiscal years ended June 30, 2006, 2005, and 2004: % Change % Change FY 2006 FY 20051 FY 20041 FY 2006 FY 2005 Flight operations 356,556 348,933 346,814 2.2% 0.6% Landing weight (in 000 lbs.) 27,173,862 27,144,395 26,996,625 0.1% 0.5% Total passengers 33,564,798 33,207,241 31,344,758 1.1% 5.9% Total enplaned and deplaned passengers 32,987,672 32,648,635 30,771,464 1.0% 6.1% Enplaned passengers 16,490,345 16,249,093 15,396,139 1.5% 5.5% Deplaned passengers 16,497,327 16,399,542 15,375,325 0.6% 6.7% Domestic passengers 24,799,655 24,800,769 23,438,173 0.0% 5.8% International passengers 8,188,017 7,847,866 7,333,291 4.3% 7.0% Cargo and U.S. mail tonnage (in metric tons) 593,570 587,635 552,118 1.0% 6.4% Parking (cars exited) 3,048,816 3,149,129 3,158,429 (3.2)% (0.3)% 1 Reflects revised Airlines data received subsequent to the fiscal year-ended. Fiscal Year 2006 Passenger Traffic Compared to the previous year, passengers using the Airport in fiscal year 2006 increased by 1.1% from 33.2 million to 33.6 million. The lower growth rate in comparison with fiscal year 2005 reflects flat domestic passenger traffic and a 4.3% increase in international traffic. U.S. airlines reduced capacity (seats) throughout their networks, a trend that affected SFO passenger activity in the second half of fiscal year 2005 and continued through October 2005. Increases in the number of seats through the remainder of the year resulted in flat capacity at SFO.