



Dear CFO Hartmann,



We read with interest your comments appearing in the Aug. 30th Lantern article https://www.thelantern.com/2017/08/how-ohio-state-energy-partners-could-impact-university-in-coming-years/

Of particular note was the paragraph in which you responded to issues of transparency:



"When asked about transparency concerns, Hartmann said she wasn’t sure of their validity because she said Engie (sic) had engaged with Ohio State for more than two years and 'lots of input has come into this.' ”



For the record: "transparent" would be about the last word one might use to describe the reviewing process of this deal that reached completion during the previous academic year; it was anything but.



And one should probably not interpret the University Senate vote on 4/4/2017 of 44-22 in favor of approving the deal as in any way representing broader faculty opinion on this matter. In fact, a multi-college survey taken immediately following the Senate debate, in which faculty had access to both i) the Senate resolution and ii) the Full Concession Agreement (a document not made publicly available by OSU until the day after the Senate vote, and only then in response to legal action), recorded a faculty "vote" on the same Senate resolution of 89.1% against to 10.9% for (432 responding). Details of that survey may be found at https://ascfacultysurvey.wordpress.com .



The purpose of this letter, however, is not to relitigate the recent past, but rather - moving forward - to bring to your attention various financial concerns which have become more pronounced as a consequence of our review of documents i) recently recorded with the Franklin County Recorder's Office; ii) released by OSU via Public Records request within the past two months; iii) describing the agreement and currently posted on the osu energy management website. For ease of reference as well as access, following are the items in question (with permalinks to copies in our document repository):





D1 . First Lien Open-Ended Leasehold Mortgage (OSEP as Mortgagor, MUFG Bank NA as Mortgagee), for the amount of $460M (recorded 7/6/2017; linked here )

D2 . Second Lien Open-Ended Leasehold Mortgage (OSEP as Mortgagor, MUFG Bank NA as Mortgagee), for the amount of $390M (recorded 7/6/2017; linked here )

D3 . OSEP Investment Model Structure (internal OSU/OSEP 50-year projection of OSEP costs and income; linked here )

D4 . CEMP Fact Sheet (osu.edu energy management posting; linked here )

D5 . Concession Agreement Summary (osu.edu energy management posting: linked here )

D6 . Concession Agreement and Sch. 1 (osu.edu energy management posting; linked here ) (Note: This seems to correspond to the first 205 pages of the 2655-page FCA date 4/10/2017)



This is a somewhat preliminary list of concerns; undoubtedly others will arise upon further investigation into the particulars of the OSEP partnership.





Item 1. Anticipated Capital Expenditures (including non-utility). Referring to D3 , we see listed the estimated Capital Expenditure (Capex) costs beginning in FY 2018. There are some unexplained big-ticket items, such as the $155.6M expenditure scheduled for FY 2021, and $203.4M planned for FY 2051. More to the point, the 50-yr total (FY2018 - FY2067) for the projected costs - as listed on this IMS spreadsheet - is $1.7764 Billion Dollars . This expenditure, which OSU will be repaying to OSEP at an effective interest rate of over 7%, is completely separate from the O&M and Debt-repayment costs for which OSU is also responsible.



In OSU's presentations regarding the estimated costs to be incurred for capital improvements, the number used repeatedly was $250M - see, for example, the Fact Sheet D4 (Sustainability Costs, estimated). The D3 spreadsheet indicates these estimated 50-yr Capex costs to be roughly 7 times those advertised by the OSU administration during the course of their "transparent" discussions of the financials associated with this deal. And if one restricts just to the first 5-yr period FY2018 - FY2022 (that presumably will fall under the first 5-yr plan to be approved), OSU is already scheduled to incur Capex debt totaling $313M.



Q1 . What OSU projects, if any, will the additional $1.5B+ in planned capital expenditures pay for that are not related to utilities, energy, and sustainability?



Q2 . Given that the Capex estimates appearing in D3 were certainly known (at least roughly) to ENGIE as well as the OSU administration months before its July release due to a Public Records request, and certainly before the April 4th Senate vote on the CEMP agreement, why weren't these estimated costs publicly acknowledged earlier?



Q3 . Is the $1.7764B 50-yr estimate an accurate approximation of what OSU's Capex costs will be, or could they grow even further? And if so, what is a realistic upper bound on these costs?





Item 2. Equity Lines and Financing. On June 30th, 2017, OSEP secured a first and second mortgage with MUFG Bank NA on the OSU property detailed in the FCA, and also listed in the mortgage documents themselves ( D1 , D2 ). The first mortgage for $460M is a 30-year note, while the second one matures in 20 years. In both cases, it seems these notes are collateralized by the utility facilities being "purchased" by OSEP that reside on the land being leased - this is the description of the transaction at least for the purpose of tax assessment that appears in the Concession Agreement Summary D5 (Article 2, Section 2.6), and we would assume also for the purpose of securing the afore-mentioned mortgages.



"Open-ended" of course means that they are not fixed mortgages but rather lines of credit, not unlike an equity line of credit on a personal residential property. So OSEP has established an $850M line of credit with an effective borrowing rate almost certainly at or near prime; somewhere around 4.5%. The payments are interest-only, and fully tax-deductible at the marginal corporate federal tax rate of 35%, yielding an effective after-tax borrowing rate of about 3%. It is natural to conclude that



OSU administration proclamations to the contrary, OSEP has no need (and seems unlikely) to use its own capital for these expenditures. Moreover, the almost certainly substantial spread between the borrowing rate for these open-ended mortgages and OSU's effective interest rate on OSEP's Capex provides a powerful financial incentive for OSEP to maximize its spending on capital improvement, regardless of actual need.



Questions related to this concern (Q5 & Q6) appear below.





Item 3. Computation of Cost for Capital Improvements. In this partnership OSU is a captive customer; there is absolutely no opportunity for competitive bidding or for market forces to keep a lid on costs. Article 4, Section 4.3 of the concession agreement D6 contains a general discussion of the approval procedure, and indicates the options that exist if a particular proposed expenditure is not agreed upon. However, there is little discussion of precisely how costs will be contained or controlled, as a practical matter.



Q4. How will OSU avoid overpricing on proposed capital improvements, or paying for unnecessary ones?



There is no independent panel of experts OSU can turn to in order to answer these questions, experts that do not have a vested interest in maximizing profit for OSEP and ENGIE. In fact, the stated premise used by OSU to proceed with the OSEP arrangement was precisely that it felt the need for outside expertise in meeting its sustainability goals for the future, expertise now being provided by ENGIE through OSEP.



It would seem you believe in the importance of transparency and accountability in order to make this OSEP partnership succeed in the long run. To that end



Q5. Will you, on the behalf of ENGIE and OSEP, commit to full transparency regarding the cost and necessity of proposed capital improvements?



Q6. Will you, on behalf of ENGIE and OSEP, commit to involving the OSU faculty as full partners in the evaluation of proposed OSEP capital improvements?





Item 4. Joint Appointments and Conflict of Interest. There is discussion in the concession agreement D6 regarding anticipated academic interactions of OSU faculty with OSEP. However, there does not seem to be any mention of exactly how OSU administrators will be allowed to interact. There are scenarios which would represent clear conflicts of interest or violate ethical guidelines; two examples come to mind (there certainly are others):



*) An OSU administrator having a joint appointment with OSEP, in which they might be involved - even indirectly - with negotiations between OSU and OSEP regarding proposed capital improvements or any other activity involving a cost to OSU;



*) An OSU administrator receiving compensation from OSEP for services rendered, unless such services have been unambiguously determined as not representing any conflict of interest.



As there inevitably will be cooperation between OSEP and the OSU community on various endeavors, it would seem prudent to establish an ethics review board that applies to administrators as well as faculty and staff, that will provide independent oversight and will be authorized to evaluate any joint activity that might represent a potential conflict of interest.



Q7. Will you, on behalf of ENGIE and OSEP, commit to the establishment of such an ethics review board in which faculty will be fully represented and will act as equal partners in all oversight activities and potential conflict of interest reviews, including those of administrators?





As you may surmise from the subject line, this is an open letter, which will also be published on our AboutOSU website www.aboutosu.zohosites.com . We would certainly welcome any response to this letter that you or ENGIE might offer. In any event, regardless of whether or not you choose to respond directly, please consider the above suggestions and questions in the constructive manner in which they were intended to be taken.



Respectfully,



S. Major

Managing Editor, AboutOSU



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A cautionary chronology : MUFG Bank is owned (through MUFG Americas Holding Corp.) by The Bank of Tokyo-Mitsubishi UFJ (BTMU), who established 100% ownership in Nov. 2008. Prior to that it was the Union Bank of California Inter., the primary subsidiary of UnionBankCal Corp. The following is a (possibly incomplete) list of fines, penalties, sanctions and warnings targeting these institutions over the last 13 years:



1. Oct. 2004 . The Federal Reserve executes a Written Agreement with Union Bank Calif. addressing money-laundering compliance issues (copy of the agreement linked here ). The money laundering concerns centered around Union Bank's business relationship with a large number of Russian banks, with whom the bank severed its financial ties in 2004 as part of this Written Agreement.



2. Sept. 2007 . Union Bank Calif. settles with US Dept. of Justice and the US Treasury Dept. after its implication in an extensive money-laundering scheme involving a network of Mexican drug cartels operating through the Mexican exchange house Ribadeo Casa de Cambio. The amount in penalties and forfeitures totaled $31.6M (Forbes article on this settlement linked here ).



In 2008, as indicated above, Union Bank Calif. is purchased by the Bank of Tokyo-Mitsubishi (BTMU) - a wholly owned subsidiary of the Mitsubishi Financial UFJ Group (MUFG) - which has had its own issues with compliance.



3. Dec. 2012 . BTMU pays a settlement of $8,571,634 to the US Treasury as a penalty for financial dealings with sanctioned countries (copy of consent order detailing money-laundering offenses linked here ).



4. June 2013 . Bank of Tokyo-Mitsubishi UFJ settles with the State of New York after regulators identify a total of 28,000 transactions with internationally sanctioned countries (including Iran) totaling $100 Billion dollars from 2002 - 2007. BTMU pays $250M as part of their money-laundering settlement with the State of New York (description of charges against the bank and terms of settlement detailed in WaPo article linked here ).



5. Nov. 2014 . Previous penalty of $250M paid by BTMU to State of New York in 2013 increased by an additional $315M due to discovery that BTMU had improperly pressured PricewaterhouseCoopers during their preparation of a report on BTMU's financial misdeeds (articles describing the details of this additional penalty linked here ; also here ). The total fines and penalties incurred by BTMU for the money-laundering activities detailed in the original NY complaint, and their subsequent efforts to mislead investigators, reaches $565M.



6. Jan 2016 . Japanese "information" magazine Sentaku publishes an article explaining the serious financial straits in which BTMU/MUFG currently finds itself, due in significant part to the state of the Japanese bond market and the debilitating impact of negative interest rates (article linked here ). It concludes:



" Buds of growth are scarce in MUFG's domestic operations. The only hope for growth was in overseas operations, including those in the United States. If MUFG's business abroad hits a snag, the group will have nowhere else to turn."







7. July 2017 . MUFG's "overseas operations" now include OSU.



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