INTERNAL AUDIT REPORT

SLOA III Airline Agreement
Compliance with Calculation of Rates and Charges

Limited Operational Audit

January 1, 2013  December 31, 2014

ISSUE DATE: February 10, 2015
REPORT NO. 2015-04

SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014


TABLE OF CONTENTS 


TRANSMITTAL LETTER.................................................................................................................................................. 3
EXECUTIVE SUMMARY ................................................................................................................................................. 4
BACKGROUND............................................................................................................................................................... 5
FINANCIAL HIGHLIGHTS.............................................................................................................................................. 6
HIGHLIGHTS AND ACCOMPLISHMENETS .................................................................................................................. 7
AUDIT SCOPE AND METHODLOGY.............................................................................................................................. 7
CONCLUSION ................................................................................................................................................................ 8










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SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014
TRANSMITTAL LETTER 
Audit Committee
Port of Seattle
Seattle, Washington
We have completed an audit of SLOA III  Compliance with Calculation of Rates and Charges. We
reviewed information for the period January 1, 2013  December 31, 2014.
We conducted this performance audit in accordance with Generally Accepted Government Auditing
Standards and the International Standards for the Professional Practice of Internal Auditing. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
We extend our appreciation to the management and staff of the Aviation Finance and Budget (F&B)
Department for their assistance and cooperation during the audit.


Joyce Kirangi, CPA, CGMA
Internal Audit, Director

AUDIT TEAM                    RESPONSIBLE MANAGEMENT TEAM
Brian Nancekivell, Senior Auditor         Borgan Anderson, Director, Aviation F&B
Margaret Songtantaruk, Senior Auditor     Hahn Nguyen, Manager, Aviation F&B
Jack Hutchinson, Manager






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SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014
EXECUTIVE SUMMARY 

AUDIT OBJECTIVES AND SCOPE 
The purpose of the audit was to determine whether management controls are adequate to ensure:
Rates charged are accurate and in accordance with the agreement terms and conditions (2013
actual and 2014 budget).
The 2013 year-end airline reconciliation and settlement, including revenue sharing, was
accurate and in accordance with the agreement terms and conditions.
We reviewed information for the period January 1, 2013  December 31, 2014. Details of our audit's
scope and methodology are on page 6.

BACKGROUND 
The Signatory Lease and Operating Agreement (SLOA III) is a five-year agreement between the Port and
the airlines. The agreement defines the rights and privileges of occupancy and use of the airport. It 
was the result of long and complex negotiations with the airlines, starting in early 2011, and
culminating in final approval and acceptance in late 2013.  The terms of the agreement were
retroactive to January 1, 2013.
During the negotiations, the existing agreement (SLOA II) was extended to 2012. Its rates were used
for billing purposes for January - July 2013. The Port used the rates in Resolution 3677 (set by the
Commission under FAA/DOT policy) for August - December 2013. Actual SLOA III rates were used for
rebilling airlines for 2013 retroactively.
Rates are calculated based on the SLOA III terms and conditions, which provide greater transparency
and detail. Rates are based on a cost recovery methodology, plus:
Activity (e.g., landings, gates, baggage, passengers, ticket counters).
Space (e.g., baggage make up, terminal and office space).
Fixed (e.g., preferential gates, baggage make up percentage, bag claim charge percentage).

AUDIT RESULT
Management controls are adequate to ensure that the rates charged for 2013 actual and 2014 budget
and the 2013 year-end airline reconciliation and settlement, including revenue sharing, were accurate
and in accordance with the agreement terms and conditions.


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SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014

BACKGROUND BACKGROUND 
The Signatory Lease and Operating Agreement (SLOA III) is a five-year agreement between the Port and
the airlines. The agreement defines the rights and privileges of occupancy and use of the airport. It 
was the result of long and complex negotiations with the airlines, starting in early 2011 and
culminating in final approval and acceptance in late 2013.  The terms of the agreement were
retroactive to January 1, 2013.
During the negotiations, the existing agreement (SLOA II) was extended to 2012. Its rates were used
for billing purposes for January - July 2013. The Port used the rates in Resolution 3677 (set by the
Commission under FAA/DOT policy) for August - December 2013. Actual SLOA III rates were used for
rebilling airlines for 2013 retroactively.
Some key changes of SLOA III:
Capital costs of aeronautical assets the time period expanded from 2006 to 1992; amortization
calculated using borrowing costs in year asset placed in service.
Revenue sharing - new - at 50% after meeting 125% of annual debt service.
Space - more transparent costing; Port assumes cost of vacant space.
Airfield - from 1 to 3 cost centers.
Baggage make up1 - more complex calculation.
Federal Inspection Service (FIS) - separate cost center.
Space weighting  changed percentages.
Gates - different cost recovery method.
Year-end reconciliation - for each cost center.
SLOA III rates and charges were implemented primarily by three departments:
Aviation Finance & Budget - calculated estimated and actual rates; performed year end
reconciliation.
Aviation Business Development (Properties group) - input rates into PROPworks for billing
purposes; provided details of estimated and actual activity & space utilization.
Accounting and Financial Reporting - set up new cost centers; prepared actual billings.
Others involved:
o  Corporate Finance & Budget - for data on debt service.
o  Aviation Operations - for data on airlines activity.
o  Airlines - self-reporting activity.
Rates are calculated based on the SLOA III terms and conditions, which provide greater transparency
and detail. Rates are based on a cost recovery methodology, plus:
Activity (e.g., landings, gates, baggage, passengers, ticket counters).
Space (e.g., baggage make up, terminal and office space)
Fixed (e.g., preferential gates, baggage make up percentage, baggage claim charge percentage)

1
Baggage Make Up includes the spaces and devices for sorting and transporting outbound baggage.

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SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014

Estimated rates are based on the following year's budgeted capital costs, operating expenses, and
expected activity by the airlines (e.g., number and type of flights, number of passengers, baggage, and 
use of space).
Actual rates are recalculated based on actual capital costs, operating expenses, airline activity, and
space use.

FINANCIAL HIGHLIGHTS 
FINANCIAL HIGHLIGHTSFINANCIAL HIGHLIGHTS 
SLOA III REVENUE (in thousands) 
2013         2014 
% of         % of
Actual         Budget
Total          Total
Landing Fees                                $ 69,679   32%   $ 74,590   31% 
Ramp Tower Fees                              1,006  0.5%     1,119  0.5% 
Apron Fees                                   6,158    3%     8,000    3% 
Terminal Rentals
Preferential Leased Gate Charges                     56,969         56,755 
Common Use Baggage Make-Up (BMU) Fees            20,006        21,245 
Baggage Claim Fees                           14,990         18,034 
Public-Access. Office Rents                          10,720          12,361 
Non-Public-Access. Office Rents                       7,988          9,612 
Common Use Gate Fees                         7,310         6,407 
Baggage Make-Up (BMU) Preferential. Space Rents          6,533          7,419 
Other (ticket counter, space rents, loading bridge fees, etc.)     10,305          12,559 
Total Terminal Rentals                             134,821   61%    144,392   61% 
Federal Inspection Services (FIS) Fees                     7,525    3%     8,618    4% 
Remaining Overnight (RON) Fees                       745  0.5%     1,095  0.5% 
Open Storage Space Rents                           189    0%      249    0% 
Total                                       $ 220,123        $ 238,063 
OTHER ADJUSTMENTS
Revenue Sharing                              (9,773)         (6,136) 
Leasehold Tax                                   274 
NET REVENUE                         $ 210,624      $ 231,927 
Data Source: Aviation F&B 


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SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014

HIGHLIGHTS AND ACCOMPLISHMENETSHIGHLIGHTS AND ACCOMPLISHMENTS 
During the course of the audit, we noted the following highlights and accomplishments. The
Department:
Implemented numerous complex rate calculations.
Performed year-end settlement on schedule.
Accomplished myriad tasks within a compressed time frame.

AUDIT SCOPE AND METHODLOGYAUDIT SCOPE AND METHODOLOGY 
We reviewed information for the period January 1, 2013  December 31, 2014. We utilized a risk-based
approach from planning to testing. We focused on Article 8  Calculation of Rates and Charges  as the 
highest risk section of the agreement. We gathered information through research, interviews,
observations, and data analysis, in order to obtain a complete understanding of the applicable terms
and conditions. We assessed significant risks and identified controls to mitigate those risks. We
evaluated whether the controls were functioning as intended.
We applied additional detailed audit procedures to areas with the highest likelihood of significant
negative impact as follows:
1. To determine whether management controls are adequate to ensure rates charged are accurate and
in accordance with the agreement terms and conditions.
For the 2013 actual and 2014 budget rates, we tested the calculation methods for the following
rates, which account for about 88% of total SLOA revenue:
Landing fees.
Gate rates and fees  preferential and common use.
Baggage claim rate.
Baggage make up system space rate and fees.
Baggage make up system fees.
Terminal rental rates for Group A (gates), Group B (ticket counters, baggage claim, baggage
make up, publicly-accessible offices, security checkpoint areas and VIP lounges) and Group C
(non-publicly-accessible offices).
We reviewed the management process for checking and verifying the accuracy of rate calculations.
We verified that the rate calculation methods agreed with the agreement terms and conditions.
We reviewed the calculation of allocable capital costs by rate category. We reviewed the debt
service and amortization models used to allocate capital costs. We traced debt service costs to the
source data from Corporate Finance.

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SLOA III  Compliance with Calculation of Rates                               INTERNAL AUDIT 
and Charges
2013-2014

We traced allocable operating and maintenance expenses by rate category to source data from
PeopleSoft and reconciled to cost center reports.
We traced airline activity data used in the various rate calculations to applicable source data from
Properties.
2. To determine whether the 2013 year-end airline reconciliation and settlement, including revenue
sharing, was accurate and in accordance with the agreement terms and conditions:
We traced approved billing rates to tariff, to PROPworks billing rule, and to PeopleSoft invoicing.
We reviewed management's process for gathering information from various sources and observed
staff entering information into PROPworks and PeopleSoft.
We reconciled and validated approximately 37% the allocated costs of landing fees and common use
airlines payments.
We recalculated and validated the year-end true up. 
We recalculated and validated the revenue sharing for the top 6 of 33 signatory airlines.

CONCLUSION 
CONCLUSION 
Management controls are adequate to ensure that the rates charged for 2013 actual and 2014 budget
and the 2013 year-end airline reconciliation and settlement, including revenue sharing, were accurate
and in accordance with the agreement terms and conditions. 








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