2017 MASSACHUSETTS PORT AUTHORITY C O M P R E H E N S I V E A N N U A L F I N A N C I A L R E P O R T Years Ended June 30, 2017 & June 30, 2016 gateway your to the world. NONSTOP FLIGHTS CONNECT BUSINESS TRAVELERS TO OPPORTUNITY, VACATIONERS TO FUN, AND FAMILIES TO HOME. NEW Sao Paulo, BR Madrid, ES Mexico City, MX NEW Montreal-PET, QC, CA Montego Bay, JM Montreal-PET, QC, CA Amsterdam, NL Munich, DE Aruba, AW Nassau, BS Beijing, CN Ottawa, ON, CA Bermuda, BM Panama City, PA Bermuda, BM Paris-De Gaulle, FR Bogota, CO Paris-De Gaulle, FR Bridgetown, BB Cancun, MX Ponta Delgada, PT Cancun, MX Port Au Prince, HT Cancun, MX Providenciales, TC Copenhagen, DK Puerto Plata, DO Doha, QA Punta Cana, DO Dubai, AE Reykjavik, IS Dublin, IE Reykjavik, IS Frankfurt, DE Rome-Da Vinci, IT Grand Cayman, KY Santiago, DO Halifax, NS, CA Santo Domingo, DO Halifax, NS, CA Shanghai, CN Hong Kong, HK Shannon, IE Istanbul, TR Tel Aviv-Yafo, IL Liberia, CR Terceira, PT Lisbon, PT Tokyo-Narita, JP London-Gatwick, EN, GB Toronto, ON, CA London-Heathrow, EN, GB Toronto, ON, CA London-Heathrow, EN, GB Toronto-City, ON, CA London-Heathrow, EN, GB Zurich, CH The world is nonstop at Cover Photo: GATEWAY TO THE WORLD To better serve the needs of New England’s business and leisure travelers, Logan’s international nonstop service has more than doubled in the past 10 years, growing from 26 to 54 destination cities around the world. Designed and Printed by Millennium Printing Corporation | www.mpcprinting.com Designed and Printed by Millennium Printing Corporation | www.mpcprinting.com MASSACHUSETTS PORT AUTHORITY C O M P R E H E N S I V E A N N U A L F I N A N C I A L R E P O R T Years Ended June 30, 2017 & June 30, 2016 Prepared by the Massachusetts Port Authority Administration and Finance Department located in East Boston, MA Table of Contents For Fiscal Years Ended June 30, 2017 and June 30, 2016 MASSACHUSETTS PORT AUTHORITY Introductory Section Pages Letter of Transmittal 1 Certificate of Achievement for Excellence in Financial Reporting 9 List of Authority Board Members 11 Organization Chart 12 Executive Staff 13 Financial Section Report of Independent Auditors 19 Management’s Discussion and Analysis 21 Financial Statements: Statements of Net Position 54 Statements of Revenues, Expenses and Changes in Net Position 55 Statements of Cash Flows 56 Notes To Financial Statements: 1. Summary of Significant Accounting Policies and Practices 57 2. Reconciliation Between Increase in Net Position as Calculated Under GAAP and Net Revenues as Calculated Under Accounting Practices Prescribed by the 1978 Trust Agreement 66 3. Deposits and Investments 67 4. Capital Assets 75 5. Bonds and Notes Payable 77 6. Pension Plan 83 7. Other Postemployment Benefits 89 8. Leases 91 9. Risk Management 92 10. Payments in Lieu of Taxes 93 11. Commitments 94 12. Litigation 94 13. Interagency Agreements 96 14. Subsequent Events 96 Required Supplementary Information: Schedule of OPEB Funding Progress 97 Schedule of Pension Contributions 98 Schedule of Changes in the Net Pension Liability and Related Ratios 99 Supplementary Schedules: I. Combining Schedule of Net Position as of June 30, 2017 100 II. Combining Schedule of Revenues, Expenses, and Changes in Net Position for the year ended June 30, 2017 101 III. Combining Schedule of Net Position as of June 30, 2016 102 TABLE OF CONTENTS Ta b l e o f C o n t e n t s ( C o n t i n u e d ) Supplementary Schedules (Continued): Pages IV. Combining Schedule of Revenues, Expenses, and Changes in Net Position for the year ended June 30, 2016 103 Statistical Section S-1 Revenues, Expenses and Changes in Net Position 108 S-2 Most Significant Revenues and Related Rates and Charges 110 S-3 Historical Principal Operating Revenue Payers 113 S-4 Conversion of GAAP Revenues and Expenses to the 1978 Trust Agreement Revenues and Expenses 114 S-5 Calculation of Net Revenues Pledged Under the 1978 Trust Agreement 115 S-6 Calculation of Total PFC Revenue Pledged Under the PFC Trust Agreement and Calculation of Total CFC Revenue Pledged Under the CFC Trust Agreement 118 S-7 Calculation of Debt Service Coverage Under the 1978 Trust Agreement, the PFC Trust Agreement and the CFC Trust Agreement 120 S-8 Debt Metrics Under the 1978 Trust Agreement, the PFC Trust Agreement and the CFC Trust Agreement 122 S-9 Largest Private Sector Employers 125 S-10 Demographics and Employment Data 126 S-11 Number of Employees by Facility 128 S-12 Logan International Airport Traffic Metrics 130 S-13 Logan International Airport Market Share of Total Passenger Traffic 132 S-14 Logan International Airport Passenger Markets 135 S-15 Port of Boston Cargo and Passenger Activity 136 S-16 Port of Boston Principal Customers 139 S-17 Tobin Memorial Bridge 140 S-18 Insurance Coverage 141 S-19 Physical Asset Data 142 Annual Disclosure Section Annual Disclosure Document – 1978 Trust Agreement 145 Annual Disclosure Document – CFC Trust Agreement 157 Appendices Appendix CFC-1-Total Enplaned Passengers, By Type of Passenger CFC-1 Appendix CFC-2-Debt Service Coverage – Rate Covenant CFC-2 Introduction T e r m i n a l E I m p r o v e m e n t s The Terminal E Renovation and Enhancement project, completed in June 2017, modified three gates at Terminal E to allow flexibility in accommodating larger aircraft. It also improved the passenger experience for international travelers, with modern amenities and an additional 95,000 sq. feet of terminal space. Massachusetts Port Authority November 28, 2017* One Harborside Drive, Suite 200S East Boston, MA 02128-2090 Telephone (617) 568-5000 www.massport.com To the Members of the Massachusetts Port Authority: The past year has been one of extraordinary progress for Massport and our efforts to fulfill our mission to be “a world-class organization that moves people and goods and connects Massachusetts and New England to the world safely and securely while being a good neighbor to people who live near our facilities.” Our most significant accomplishments did not come without great effort. We have succeeded with strategy, planning, and a strong partnership of government, the private sector, labor, non-profit advocacy, and our neighboring communities. Achieving our goals has required collaboration, creativity, optimism, intuition, tenacity and a willingness to explore new ideas. We are pleased to submit the Comprehensive Annual Financial Report (“CAFR”) of the Massachusetts Port Authority (the “Authority” or “Massport”) for the fiscal year ended June 30, 2017. This report was prepared by the Authority’s Administration and Finance Department, and presents our financial results for the year as well as selected highlights to illustrate our approach to tackling some of our most complex challenges. Meeting the challenges of 2017 -- selected highlights Staying ahead of security threats Safety and security continue to be Massport’s number one priority, and we are constantly adapting security measures to address new and emerging threats from terrorist attacks and gun violence. This includes making investments in new technology, training, people – and even dogs. At Logan Airport, trained law enforcement officials are using “vapor wake” dogs specially trained to detect vapors in the air from explosives hidden in baggage and cargo. During the past five years, Massport has conducted over 300 Authority-wide exercises, drills and training events. These events have focused on aviation and maritime security, fire-rescue and life safety, preparing and responding to hostile events, and resiliency. We don’t simply talk about security threats – we practice and prepare for them on a continual basis. In September 2017, Massport conducted the Logan Emergency Access Plan, its largest scale exercise to date, to simulate an Active Shooter incident in a Logan Airport terminal. This training exercise involved more than 1,300 law enforcement, fire rescue, emergency medical services, airport operations personnel and volunteers. Law enforcement participants included the Massachusetts State Police, Massport Police, MBTA Police, Boston Police, Chelsea and Winthrop Police, the FBI, Customs and Border Patrol, and others. Fire rescue and emergency services included Massport Fire Rescue, Boston Fire, Boston EMS and MEMA (Massachusetts Emergency Management Agency). Airport operations personnel included Massport employees, TSA (Transportation Security Administration) and staff from all of the major airlines serving Logan Airport. All involved agreed that this exercise, and especially the interaction/collaboration between all of the various participants, was extremely beneficial. Since September 11, 2001, Massport security officials, airline representatives and members of all federal, state and local agencies working at the airport have conducted daily briefings to share safety and security information, an approach which has become a model for airport (and transportation) security across the United States. * The information derived from the Authority’s audited financial statements is as of the date of such audit, September 29, 2017. INTRODUCTION 1 Transforming Logan Airport terminals for the future During the past 10 years, international non-stops from Logan Airport have more than doubled from 26 to 54. And since 2012, Massport has secured non-stop service to 12 international destinations including Tokyo, Beijing, Shanghai, Hong Kong, Tel Aviv, Dubai, Doha, Istanbul, Mexico City, Panama City, Bogota and Sao Paolo. It has been estimated that the annual economic impact to the New England Region from these 12 routes is $1.5 Billion. After operating since 1974 with 12 gates designed to serve 1.5 million passengers, Logan Airport’s International Terminal E is on the verge of a modernization project which will enable Massport to better serve the more than seven million international passengers who traveled through Logan during fiscal year 2017. In late March 2017, Massport completed a $170 million renovation, allowing Terminal E to better accommodate the recent growth in international passengers. This renovation to Terminal E was certified LEED Gold by the U.S. Green Building Council in the fall of 2017. In 2018, Massport will begin phase 1 of the Terminal E Modernization project, which includes the addition of seven gates in two phases (three gates were approved in the late 1990s and never built). The modernization includes an indoor connection between Terminal E and the MBTA Blue Line aimed at encouraging more travelers to take the T. Following a rigorous 120-day review, the Terminal E Modernization project was certified by the Massachusetts Environmental Policy Act (MEPA) in late 2016. Making Terminal B passenger-friendly. With its horseshoe shape, Terminal B has always operated more like two terminals than one. But when its two principal airlines, American Airlines and U.S. Airways merged in 2013, the layout of Terminal B became an obstacle to customer service and airline operations because the airlines were located on opposite sides of the terminal. In 2017, Massport began a $200 million project to consolidate the gates, baggage operations and passenger checkpoints of the merged airlines to enable a more efficient operation. Addressing the Logan Airport parking shortage without harming the environment For the past three years, as the number of Logan passengers has dramatically increased to a record high of 37.5 million in fiscal year 2017, the airport has been plagued with a chronic parking shortage during busy travel periods. In a survey, 12% of passengers reported they missed their flight because they could not find parking. Based on an in-depth assessment, Massport concluded that an additional 5,000 spaces at the airport will alleviate this issue, and has been working diligently to amend the parking freeze that has been in place since 1975. In addition to improving customer service, Massport determined that the additional spaces will be beneficial to the environment. The current parking shortage is actually increasing auto emissions at Logan as it is resulting in more vehicle pick-up and drop-offs, and thus the addition of 5,000 parking spaces will reduce harmful vehicle emissions (CO, VOCs, and NOx) by 23 percent as a customer who parks equates to two trips (one arriving, one departing) while one who is dropped off and then picked up equates to four. In July 2017, after a rigorous review and comment period, the Massachusetts Department of Environmental Protection (DEP) amended the Logan Airport parking freeze to permit the addition of 5,000 spaces. 2