5. Cruise Terminals of America

INTERNAL AUDIT REPORT LEASE AND CONCESSION AGREEMENT AUDIT CRUISE TERMINALS OF AMERICA (CTA) January 2013 December 2015 Original i ssue Date May 9, 2016 Report No. 2016 issued report with revised management response March , 201 ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT EXECUTIVE SUMMARY The purpose of the audit was to determine whether 1. Maritime Cruise Operations and Finance monitoring controls were adequate and effective to ensure Cruise Terminals of America completely and accurately reported percentage rent to the Port. Capital and Per Passenger maintenance allowance expenses were reviewed and approved. 2. Lessee compl ied with significant lease provisions, as amended We reviewed and analyzed records for the period January 01 , 2013 December 31 , 2015 Details of our audit’s scope and methodology are on page 6. The Port of Seattle owns cruise terminals at Piers 66 and 91. Cruise Terminals of America (CTA) has entered into a lease agreement with the Port to lease and operate the cruise terminal facilities in exchange for percentage rent payable to the Port. The lease agreement establishes a la ndlord tenant relationship between CTA and the Port. Prior to May 2003, the Port of Seattle contracted with CTA to manage the Port’s cruise operations In 2003, Port anagement and CTA transitioned the m anagement agreement to a lease agreement . 2005, t he Port and CTA entered into a new lease agreement that provided greater financial benefit to the Port in exchange for an extended lease term to CTA. In 2012, the Port and CTA amended the agreement to simplify certain lease provisions , further advance the Port’s financial benefit and extend the term of the lease thru December 31, 2019. In 20 15 , ccor ding to portseattle.org/cruise, cruise ship terminals at Pier 66 and Terminal 91 served seven major cruise lines including Carnival, Celebrity Cruises, Holland America Line, Norwegian Cruise Line, Princess Cruises, Oceania Cruises and Royal Caribbea n. ach ship call brought approximately $2.5 million to the local economy. Overall, the Seattle cruise industry generates approximately 3,647 jobs and $441 million i n annual business revenue. Monitoring controls performed by Maritime Cruise Operations and Finance are designed appropriately and operating effectively . The lessee materially complied with significant provisions of the Lease Agreement. Management’s preventative controls over the lease process are not adequate. See F inding 1. BACKGROUND AUDIT OBJECTIVES AND SCOPE AUDIT RESULT ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT TABLE OF CONTENTS EXECUTIVE SUMMARY TRANSMITTAL LETTER BACKGROUND FINANCIAL HIGHLIGHTS HIGHLIGHTS AND ACCOMPLISHMENTS AUDIT SCOPE AND METHODOLOGY CONCLUSION SCHEDULE OF FINDINGS AND RECOMMENDATIONS 1. ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT TRANSMITTAL LETTER Audit Committee Port of Seattle Seattle, Washington We have completed an audit of Cruise Facility Lease Agreement between the Port of Seattle and Cruise Terminals of America . We reviewed information for the period January 01, 2013 December 31 , 2015 We conducted the 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 Maritime Cruise Department, Maritime Finance & Budget , and Accounting and Financial Reporting for their assistance and cooperation during the audit. Joyce Kirangi, CPA, CGMA Internal Audit, Director AUDIT TEAM RESPONSIBLE MANAGEMENT TEAM Margaret Songtantaruk, Senior Auditor Michael McLaughlin, Director Cruise & Maritime Operations Joseph Anderson, Internal Auditor Marie Ellingson, Cruise Services Manager Rudy Caluza, Director, Accounting and Financial Reporting ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT The Port of Seattle owns cruise terminals at Piers 66 and 91. Cruise Terminals of America (CTA) has entered into a lease agreement with the Port to lease and operate the cruise terminal facilities, in exchange for percentage rent payable to the Port. The lease agreement establishes a la ndlord tenant relationship between CTA and the Port. Prior to May 2003, the Port of Seattle contracted with CTA to manage the Port’s cruise operations. In 2003, Port Management and CTA transitioned the m anagement agreement to a lease agreement . 2005, t he Port and CTA entered into a new lease agreement that provided greater financial benefit to the Port in exchange for an extended lease term to CTA. In 2012, the Port and CTA amended the agreement to simplify certain lease provisions , further advance the Port’s financial benefit and extend the term of the lease thru December 31, 2019. Internal Audit conducted a limited scope review of the CTA management services agreement with the Port of Seattle in 2008 . The report noted the Port ’s monitoring system was inadequate. We performed a second audit of the CTA agreement in 2011 of the period beginning January 1, 2009, through December 31, 2010. The report noted: Lessee did not report g ross revenue in accordance with the lease agreement. Lessee contracted shuttle and parking services to its affiliates without seeking Port approval Port of Seattle management did not properly administer the terms of the agreement with CTA due to the agreements complex provisions In 20 15 , ccor ding to port seattle.org/cruise, cruise ship terminals at Pier 66 and Terminal 91 served seven major cruise lines including Carnival, Celebrity Cruises, Holland America Line, Norwegian Cruise Line, Princess Cruises, Oceania Cruises and Royal Caribbea n. ach ship call brought approximately $2.5 million to the local economy. Overall, the Seattle cruise industry generates approximately 3,647 jobs and $441 million in annual business revenue. Maritime Cruise Operations, in conjunction with Maritime Finance & Budget, and Ac counting and Financial Reporting (AFR), ha primary responsibility at the Port of Seattle for administering and monitoring the agreement to ensure compliance by CTA. BACKGROUND ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT FINANCIAL HIGHLIGHTS AGREEMENT YEAR PERCENTAGE RENT PAID T91 FACILITY CHARGE TOTALS $11,575,806 $1,235,469 $12,811,275 $11,491,310 $1,146,758 $12,638,068 $12,998,190 $1,093,904 $14,092,094 TOTAL $36,065,306 $3,476,131 $39,541,437 Data Source: PeopleSoft Financials During the course of the audit, we noted that Maritime Cruise Operations and Finance achieved the following significant accomplishments. mended and simplified key provisions within the Cr uise Facility Lease Agreement , which liminate the need for the P ort of Seattle to monitor CT A’s detailed accounting records uilt and maintain strong working relationships with Cruise Terminals of America management through the establishment of weekly and quarterly operations and finance meeting We revi ewed information for the period January 1, 2013 December 31, 2015 . We utilized a risk based audit approach from planning to testing. We gathered information through document requests, interviews, observation, and data analysis, for Internal Audit to obtain a complete understanding of the significant provisions of the ag y) at specified amount FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS FINANCIAL GHLIGHTS HIGHLIGHTS AND ACCOMPLISHMENTS AUDIT SCOPE AND METHODOLOGY ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT Lessee materially remitted all Percentage Rent payments timely Lessee timely provided its annual plan to the Port of Seattle Maritime Operations appropriately administered the Maintenance Allowance Monitoring co ntrols performed by Maritime Cruise Operations and Finance are designed appropriately and operating effectively . The lessee materially complied with significant provisions of the Lease Agreement. Management’s preventative control over the lease process are not adequate. See Finding 1. CONCLUSION ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT SCHEDULE OF FINDINGS AND RECOMMENDATIONS ��Cruise Terminals of America January 01 2013 December 31, 2015 INTERNAL AUDIT Revised Management Response Management agrees wit h Internal Audit recommendation . In the future, before lease agreements are presented to commission for approval, management will include a key control process that ensures proposed agreements are only approved when risk is set to an acceptable level an d the Port is in compliance with applicable Laws ad Port policies or procedures and any deviations are documented and explicitly presented to decision makers. In addition, as a result of this audit finding a formal process will be performed and documented before the start of each remaining cruise season through the remaining term of the CTA lease to evaluate any risk to the port. Although the annual rent the port receives from the cruise business is greater than 14million the concern of risk to the Port sho uld be based on a month’s rent for which CTA pays the port during the cruise season. CTA collects the Ports per passenger tariff fees from the cruise lines for each ship call during a particular month May through Sept. CTA retains roughly 12% of those fees and forwards balance to the port by the 15 of the following month . CTA’s lease, restated as a result of the NCL agreement at P66, now only pertains to T91 cruise operations.

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