METROPOLITAN WASHINGTON AIRPORTS AUTHORITY COMPREHENSIVE ANNUAL FINANCIAL REPORT YEAR ENDED DECEMBER 31, 2004 BOARD OF DIRECTORS Norman M. Glasgow, Jr., Chairman Mame Reiley, Vice Chairman* Robert Clarke Brown Honorable H.R. Crawford Anne Crossman Mamadi Diané Honorable John Paul Hammerschmidt William A. Hazel Weldon H. Latham David T. Ralston, Jr. Charles D. Snelling Honorable David G. Speck Jeffrey Earl Thompson EXECUTIVE STAFF James E. Bennett, President and Chief Executive Officer Margaret E. McKeough, Executive Vice President and Chief Operating Officer Lynn Hampton, CPA, Vice President for Finance and Chief Financial Officer Anne M. Field, CPA, Controller * Became Chairman January 1, 2005 Prepared by the Office of Finance METROPOLITAN WASHINGTON AIRPORTS AUTHORITY Comprehensive Annual Financial Report for the Year Ended December 31, 2004 TABLE OF CONTENTS Introductory Section Page Transmittal Letter ................................................................. 1 2003 Certificate of Achievement .................................................... 10 Organization Chart............................................................... 11 Financial Section Report of Independent Auditors..................................................... 13 Management’s Discussion and Analysis.............................................. 15 Financial Statements Statements of Net Assets ...................................................... 27 Statements of Revenues, Expenses and Changes in Net Assets ........................ 29 Statements of Cash Flows..................................................... 30 Notes to Financial Statements.................................................. 33 A. Summary of Significant Accounting Policies............................... 33 B. Deposits and Investments.............................................. 38 C. Interest Rate Swap.................................................... 41 D. Accounts Receivable .................................................. 42 E. Restricted Assets ..................................................... 42 F. Changes in Capital Assets .............................................. 44 G. Accounts Payable .................................................... 46 H. Pension Plans ....................................................... 46 I. Postemployment Benefits and Deferred Compensation Plan................... 52 J. Capital Debt ........................................................ 53 K. Airport Use Agreement and Premises Lease ................................ 61 L. Net Assets .......................................................... 62 M. Lease Commitments .................................................. 63 N. Other Commitments and Contingencies................................... 65 O. Government Grants................................................... 65 P. Litigation ........................................................... 67 Q. Passenger Facility Charges ............................................. 67 R. Risk Management.................................................... 67 S. Fair Value of Financial Instruments ...................................... 68 T. Reclassification ................................................... 68 U. Subsequent Events ................................................... 69 i METROPOLITAN WASHINGTON AIRPORTS AUTHORITY Comprehensive Annual Financial Report for the Year Ended December 31, 2004 TABLE OF CONTENTS (continued) Statistical Section Exhibit Page S - 1 Operating Expenses by Function ......................................... 71 S - 2 Revenues by Source ................................................... 72 S - 3 Ronald Reagan Washington National Airport Revenues ....................... 73 S - 4 Washington Dulles International Airport Revenues........................... 74 S - 5 Airports Authority Employee Strength..................................... 75 S - 6 Population Trends ..................................................... 76 S - 7 Aircraft Operations by Airport ........................................... 77 S - 8 Landed Weights at Reagan National.................................... 78-79 S - 9 Landed Weights at Washington Dulles.................................. 80-81 S -10 Enplanements at Reagan National......................................... 82 S -11 Enplanements at Washington Dulles....................................... 83 S -12 Enplanement Market Share at Reagan National ........................... 84-85 S -13 Enplanement Market Share at Washington Dulles......................... 86-87 S -14 Cargo Market Share Enplaned at Reagan National......................... 88-89 S -15 Cargo Market Share Enplaned at Washington Dulles....................... 90-91 S - 16 Passenger Facility Charges .............................................. 92 S - 17 Revenue Bond Coverage ................................................ 93 S -18 Insurance Program for Operations ........................................ 94 S -19 Insurance Program for Construction....................................... 95 ii March 29, 2005 To the Board of Directors and The President and Chief Executive Officer of the Metropolitan Washington Airports Authority The Comprehensive Annual Financial Report (CAFR) of the Metropolitan Washington Airports Authority (the Authority) for the year ended December 31, 2004, is submitted herewith. The Office of Finance prepared this report. Responsibility for both the accuracy of the presented data and completeness and fairness of the presentation, including all disclosures, rests with the Authority. To the best of our knowledge and belief, this report fairly presents and fully discloses the Authority’s financial position, results of operations, and cash flows in accordance with accounting principles generally accepted in the United States of America. It includes disclosures necessary to enable the reader to gain an understanding of the Authority’s financial activities included within the CAFR. The report of the independent auditors on the financial statements is included on page 13. This report was prepared following the guidelines recommended by the Government Finance Officer's Association of the United States and Canada (GFOA). The GFOA awards Certificates of Achievement to those governments whose annual financial reports are judged to conform substantially with the high standards of public financial reporting, including accounting principles generally accepted in the United States of America, promulgated by the Governmental Accounting Standards Board (GASB). The management of the Authority is responsible for establishing and maintaining an internal control structure that is designed to ensure that the assets of the Authority are safeguarded. In addition, as a recipient of federal financial assistance, the Authority is responsible for ensuring that an adequate internal control structure is in place to ensure compliance with general and specific laws and regulations related to the Airport Improvement Program (AIP) and the Aviation Safety and Capacity Expansion Act. The objectives of an internal control structure are to provide management with reasonable assurance that the resources are safeguarded against waste, loss, and misuse, and reliable data are recorded, maintained, and fairly disclosed in reports. The current internal controls provide the Authority with a solid base of reliable financial records from which the financial statements are prepared. These accounting controls ensure that accounting data are reliable and available to facilitate the preparation of financial statements on a timely basis. Inherent limitations should be recognized in considering the potential effectiveness of any system of internal control. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgment by management. The Authority’s Office of Audit functions include oversight of the annual financial statement audit performed by external auditors as well as internal audits of internal controls. The Office of Audit conducts internal audits to provide the Authority’s management and the Board of Directors (the Board) with reasonable assurance that, 1) risks Metropolitan Washington Airports Authority 2004 Comprehensive Annual Financial Report are being managed; 2) management and delivery capacity are being maintained; 3) adequate control is being exercised; and, 4) appropriate results are being achieved. The Office of Audit operates under the direction of Valerie Holt, CPA, Vice President for Audit. This position has dual reporting responsibilities to the President and Chief Executive Officer and the Audit Committee of the Board. The Audit Committee of the Board has an important role in the oversight of the financial reporting to ensure the Authority’s financial reports are reliable, consistent and of high quality. As required by the Acts of the District of Columbia and the Commonwealth of Virginia, a firm of independent certified public accountants is retained each year to conduct an audit of the financial statements of the Authority in accordance with auditing standards generally accepted in the United States of America and to meet the requirements of the Federal Single Audit Act of 1984 (pursuant to OMB Circular A-133). The Authority selected the firms of PricewaterhouseCoopers LLP and Bert Smith and Company, respectively, to perform these audit services. The opinion of the financial