Has Development Corp. Letter To Texas Attorney General

FRANCIS J. COLEMAN, JR. Attorney at Law 1803 South Boulevard Houston, Texas 77098

713.254.8730 [email protected]

The Honorable Greg Abbott Texas Attorney General P. O. Box 12548 Austin, Texas 78711-2548 Attention: Re:

Open Records Division AG ID# 351739; Texas Public Information request dated May 26, 2009, from Jennifer Peebles for information pertaining to the Houston Airport System, and the Houston Airport System [sic] Development Corporation.

Dear General Abbott: I am General Counsel to HAS Development Corporation, a Texas nonprofit corporation (“HASDC”). My client’s name has been incorrectly referred to in prior correspondence with your office. It is not “Houston Airport System Development Corporation” but “HAS Development Corporation.” I am writing with regard to the captioned request in response to a letter dated June 16, 2009 from the City of Houston Legal Department (“City June 16 Letter”). By a copy of the City June 16 Letter mailed to me, Assistant City Attorney Evelyn W. Njuguna advised me that she had sought your office’s advice as to the exception from public disclosure of certain commercial or financial information of my client, a representative example of which is contained in Exhibit 3 to her letter. I received by mail a copy of the materials included in Exhibit 3 on June 23, 2009 (“Exhibit 3 Data”). By your rules, I understand that I have ten (10) business days, or until July 8, 2009 to respond. As required by section 552.110(b) of the Act, I wish to demonstrate “based on specific factual evidence that disclosure would cause substantial competitive harm to the person from whom the information was obtained.” Because of the complexity of the issues involved, I am including factual evidence in this letter addressing certain statutory exemptions under the Act identified in the City June 16 Letter. In addition, HASDC believes other statutory exceptions may exist under the Act. Accordingly, I wish to reserve the right to supplement this letter until the end of ten (10) business days allowed by law (July 8, 2009). Because of the unique factual structure involved, I have prepared a “Background” section that will aid in understanding the “factual evidence” that follows, as is required by the Act.

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I.

Background

1.HASDC, as a private nonprofit corporation, recognized by the IRS as a 501c-3 organization. HASDC is not a “governmental body” subject to the Act. Although Act’s definition of “governmental body” does include certain nonprofit corporations in clauses (ix), (x), (xi) and (xii), HASDC does not fit any of them. The last clause (regarding publicly supported corporations) does not apply to HASDC as it has not received any public support. All of HASDC’s revenues have come from sales of services and investments. Moreover, rather than receiving public support, HASDC supports the Houston Airport System (the “Airport System”). Over the years, it has paid substantial amounts to the Airport System. HASDC was not created by the Airport System or by City of Houston, and it is not controlled by the Airport System or by the City of Houston. Although the Director of the Airport System sits on its board, the majority of directors of HASDC are appointed by entities other than the City of Houston. A more elaborate description of the reasons that HASDC is not a “governmental body” subject to the Act will be forthcoming to your office under separate cover in response to another TPIA request filed by Jennifer Peebles that was directed to HASDC. 2. Although HASDC is not subject to the Act, there are certain public documents regarding (i) the creation of HASDC and (ii) its relationship with the City of Houston and the Airport System, which are governmental bodies subject to the Act. In the City June 16 Letter, you were provided two such documents, the Articles of Incorporation of HASDC in Exhibit A and certain technical services agreements between HASDC and the City of Houston (on behalf of the Airport System) in Exhibit B. I wish to incorporate those by reference into this letter. Additionally, I would like to submit one more public document available in the public records of the City of Houston (entitled “Agreement-Quito Airport Project”) (a copy of which is attached as Exhibit 1) (“2001 City/ADC Agreement”). Based upon these three public documents, and other publicly available information about the Quito airport project, I would offer the following background information with respect to the matter under review. Because it is drawn from public sources, HASDC offers the following background information without waiving any of its rights to confidentiality of non-public information. 3. In 2001 (before the creation of HASDC), the City of Houston and its Airport System were requested by Airport Development Corporation, a Canadian corporation (“ADC”) to participate with ADC in connection with a proposal to obtain a 35-year concession from the municipality of Quito, Ecuador for the design, construction, financing and operation of a new airport for Quito, which is the capital of Ecuador. After due consideration, the City of Houston’s City Council approved, on behalf of the Airport System, the 2001 City/ADC Agreement. It called for the Airport System to provide certain airport technical services to ADC for agreed upon payments. The Airport System was willing to provide such services directly to ADC during the qualification and bidding phase, when the City deemed the risks to be minimal. However, the 2001 City/ADC Agreement was clear that if ADC’s bid were accepted, the Airport System would cease providing such services directly to ADC and instead require that such services be marketed to ADC through an independent, private nonprofit corporation to be formed for the benefit of the Airport System (referred to in the 2001 City/ADC Agreement as “NPC”). Section 3.a of the 2001 City/ADC Agreement states that the NPC “will have the ability to act as a private non-profit corporation and will have the power to enter into partnerships, ventures and other 2

commercial relationships and to participate in the formation of and to hold ownership interests in the SPC [a special purpose limited liability company]” and that “NPC will be granted a 5% carried ownership interest in the SPC.” The 2001 City/ADC Agreement further contemplated the creation of, and NPC’s participation in, a consortium to acquire any concession granted for the Quito airport through a “second special purpose limited liability company to be incorporated in Ecuador (‘Holdco’)”. 4. After the ADC group was selected to be awarded the Quito Airport concession, HASDC was formed as the “NPC” contemplated in the Agreement (see Exhibit A to the City June 16 Letter). HASDC was not created by the City of Houston, but by me with three incorporators as permitted under Texas general law for nonprofit corporations. The Houston City Council authorized the Airport System to enter into agreements (see Exhibit B to City June 16 Letter) with HASDC upon the condition that the Airport System be paid on a current basis for all technical services rendered at cost plus 80% plus a future interest in certain net profits. Moreover, the agreement required HASDC to indemnify the Airport System and the City. The agreement for the Quito project is referred to as the “Quito Technical Services Agreement”. This was in fulfillment of the terms of the 2001 City/ADC Agreement which contemplated that Airport System services would be provided through the NPC [HASDC] intermediary once ADC secured the award of the bid for the Quito Airport concession. 5. Also as contemplated in the 2001 City/ADC Agreement, HASDC and a subsidiary of ADC formed a Quito airport management company referred to in the Agreement as SPC (“Management Company”) in which HASDC was granted a 5% carried equity interest (i.e. without payment of a purchase price), and HASDC has also obtained a carried equity interest in an Ecuadorian corporation created by ADC and others, which is referred to in the Agreement as Holdco (“Concession Company”). 6. HASDC’s equity interests in the Management Company and the Concession Company are represented by shares of stock that constitute “securities” within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934 and similar laws of the United States regulating, among other things the release of information with respect to securities. Furthermore, HASDC has reason to believe that such shares of stock also constitute securities, under comparable securities laws of Canada, various jurisdictions within the United Kingdom and perhaps Ecuador. Pursuant to applicable legal exemptions, none of such securities are registered and none trade on public securities exchanges. Nonetheless, antifraud provisions of the United States securities laws (e.g. Rule 10b-5 promulgated by the Securities and Exchange Commission under Section 10b of the Securities Exchange Act of 1934, 15 U.S.C. section 78j(b)) and other similar laws in Canada, the United Kingdom and perhaps Ecuador may similarly apply to the dissemination of information that, as a result of incompleteness or lack of explanation, is materially misleading in connection with any offers for the purchase or sale of securities such as these. As a result, HASDC is concerned that the release of information such as the Exhibit 3 Data could, if deemed incomplete and misleading, be inconsistent with applicable securities laws.. 7. As a private nonprofit corporation, HASDC is able to engage in commercial transactions of a kind not legally available to the Airport System (e.g. such commercially common activities as 3

participating in partnerships, granting indemnifications, and entering into confidentiality and non-disclosure agreements). This was recognized by the City of Houston and its City Council. In the 2001 City/ADC Agreement, the City agreed to the creation of an NPC [which is HASDC] which “will have the power to enter into partnerships, ventures and other commercial relationships and to participate in the formation of and to hold ownership interests in the SPC [which is the Management Company].” Commercial relationships commonly include agreeing to confidentiality and non-disclosure agreements. 8. The Concession Company secured financing for the New Quito International Airport, a project that will cost over US$600 million. Much of that amount was secured by financing from a consortium led by United States Overseas Private Investment Corporation, U.S Import-Export Bank, Inter-American Development Bank and Canada’s Economic Development Corporation. HASDC is the sole American company in the Concession Company, and therefore was requested to be the United States sponsor of the loan. Without the sponsorship of HASDC, the American lenders could not have participated in the financing. The financial closing for the New Quito International Airport occurred in 2006 and construction has been underway since then and should be complete in late 2010/early 2011. 9 Pending completion of the New Quito International Airport, the Concession Company has been charged with managing the operations of the existing Mariscal Sucre Airport in Quito, which will be closed when the New Quito International Airport opens. The Concession Company has in turn charged the Management Company with managing operations at the Mariscal Sucre Airport pending completion of the New Quito International Airport, when the Management Company will begin managing that airport. Successful management of the existing Mariscal Sucre Airport is critical to the overall financial planning for the New Quito International Airport and is also critical to the various Ecuadorean concession interests and government regulators. 10. The Airport System and the City of Houston were never asked to enter into any obligation or liability in connection with the construction, financing, management or operation of the Quito airport project except to honor the Airport System’s obligation to provide certain airport technical services under the Quito Technical Services Agreement with HASDC, for which HASDC pays the Airport System on a current basis at cost plus a mark-up of 80%. The Quito Technical Services Agreement, which was collaterally assigned to the lenders to secure their loans for the project (as permitted in the agreement), recognizes that the Airport System’s commitment to provide such technical services “shall at all times be subordinate to its primary obligation of operating [the Airport System].” Neither the City nor the Airport System has been asked to take on any other obligation or liability in connection with the Quito airport project. 11. In contrast to the Airport System and the City, HASDC has a vital interest in the ongoing financial and operational affairs of the Quito Airport project—both in managing operations at the existing Mariscal Sucre Airport and in the construction of the New Quito International Airport. As the owner (through unregistered securities) of equity interests in the Concession Company and the Management Company, HASDC receives and monitors much data, including the Exhibit 3 Data, on a regular basis. As is common practice in corporations, certain of such data has been shared with the board of directors of HASDC, which includes the Director of the Airport System. The Exhibit 3 Data was apparently in the files of the former Director of the Airport System 4

solely because of his role as a member of the board of HASDC. For the reasons described below, the Exhibit 3 Data was all subject to confidentiality agreements pursuant to which it could properly be received by officers and directors of HASDC but not others. The former Director held the Exhibit 3 Data in his capacity as a director of HASDC, but not in his capacity as Director of the Airport System. Neither the Airport System nor the City has any right to such Exhibit 3 Data.

II.

Factual Evidence Presented Under 552.110.b.

The Exhibit 3 Data contains three reports, which contain data about the operations at the existing Mariscal Sucre Airport and construction of the New Quito International Airport. The first report is a monthly operating report by the Management Company (through its Ecuadorean subsidiary), the second is a monthly management report of the Concession Company and the third is a monthly financial report of the Concession Company. The Exhibit 3 Data included in such reports can be summarized as follows for purposes of Section 552.110.b of the Act: The Management Company’s monthly operating report focuses upon operations at the existing Mariscal Sucre Airport. It includes financial data and analyses of such financial data, traffic statistics, operating data, environmental, health and safety summaries, human resources information, information about planning and construction and maintenance (including some about the New Quito International Airport), a report on information and technology and a final report of transition planning to the New Quito International Airport. Such data is in its entirety a mixture of commercial and financial information as contemplated in Section 552.110.b. The Concession Company’s monthly report addresses both the operations at the existing Mariscal Sucre Airport and the construction of the New Quito International Airport. It contains financial information, especially about the status of funding for ongoing construction costs of the New Quito International Airport. It includes very sensitive summaries of legal matters that include claims, insurance claims and lawsuits. Also included are summaries of political and governmental regulatory matters of a very sensitive nature, descriptions of public health matters regarding influenza (also very sensitive), traffic forecasts, commercial negotiations with airlines and commercial tenants and a construction update. All information in this monthly report is commercial and financial information as contemplated in Section 552.110.b. The Concession Company monthly financial report is entirely financial information within the meaning of Section 552.110.b. Release of the above-described Exhibit 3 Data, for the reasons and evidence enumerated below (which may be supplemented as herein discussed), would cause substantial competitive harm to HASDC (as well as to many others).

1. Confidentiality and Non-Disclosure Agreements. 5

There are innumerable agreements that document the Quito airport transaction and virtually all of them are subject to confidentiality provisions, either directly by their terms or indirectly through incorporation of other documents or as a result of cross-default provisions. The primary confidentiality agreements to which HASDC is bound are contained in the following major contracts and agreements that impose confidentiality obligations on HASDC and others with regard to the Exhibit 3 Data. a. The Concession Contract for the Quito Airport Project is the fundamental contract upon which the entire Quito airport project rests. It is the source of the concession granted to the Concession Company, in which HASDC (and others) own an equity interest. The Concession Contract is the contractual underpinning for the construction of the New Quito International Airport by the Concession Company. The Concession Company does not own the New Quito International Airport, but only a concession interest in it. Therefore, the Concession Contract also is the primary source of security for the hundreds of millions of dollars of loans advanced to the Concession Company by the lending group led by U.S Overseas Private Investment Corporation, U. S. Export-Import Bank, Inter-American Development Bank and Canada’s Economic Development Corporation.. The Concession Contract contains the following provision with respect to confidentiality: 23.3 Confidentiality Each Party shall keep in confidence all drawings, records, data, books, reports, documents and information, whether technical, commercial or financial in nature, supplied to it by or on behalf of another Party relating to the Project and shall not disclose the same in any manner otherwise than for the purpose of seeking financial assistance (whether by way of debt or equity) for the Concessionaire [ the Concession Company], or for Airport Developments or the operation of the Airports, for the purpose of performing its obligations hereunder, or as it may necessarily be required to disclose pursuant to the laws or orders of appropriate regulatory authorities or pursuant to any Loan Agreement or as may be required by CORPAQ [the Airport and Free Trade Zone Corporation of the Metropolitan District of Quito] or the Lenders in connection with procuring a Substituted Entity, or, in the case of CORPAQ, as may be reasonably deemed to be in the public interest; provided that nothing in this Clause 23.3 shall limit CORPAQ’s right to use such documents and information in circumstances where this Concession Contract has been terminated in accordance with Clause 18.2 or as a result of the operation of Clause 18.4.

b. The agreement between the Concession Company and the Management Company (HASDC is an equity owner in both) contains the following provision with respect to confidentiality: 30.1.1 Any information (including, without limitation, all drawings, records, data, books, reports, documents and information, whether technical, commercial or financial in nature) provided to[the Management Company] by [the Concession Company] or created by [the Management Company] during the Term of this Agreement shall be confidential and [the Management Company] agrees to bold in confidence any such information that is proprietary or commercially sensitive, identified as such in writing by [the Concession Company] (the "Confidential Information") for a period of five (5) years from the termination date of this Agreement. 6

c. The agreement between the Management Company and HASDC contains the following provision with respect to confidentiality: 15.3 Confidentiality Each of [the Management Company] and HASDC shall keep in confidence all drawings, records, data, books, reports, documents and information, whether technical, commercial or financial in nature, supplied to it by or on behalf of the other party relating to this Agreement and the management, maintenance and operation of the Airports and shall not disclose the same in any manner otherwise than for the purpose of seeking financial assistance in connection with the Project or for the purpose of performing its obligations hereunder, or as it may necessarily be required to disclose pursuant to the laws or orders of appropriate regulatory authorities or pursuant to any agreement by which it may be bound.

2. Third Party Beneficiaries of Confidentiality Agreements. Each of the documents identified above has been collaterally assigned to (or for the benefit of) lenders (U.S. Overseas Private Investment Corporation, U.S. Export-Import Bank, InterAmerican Development Bank and Canada’s Economic Development Corporation) to secure their loans in connection with the project. 3. Events of Default and Remedies. Every loan made in connection with the transaction includes provisions for default and remedies. The loans include not only the main construction loans for the New Quito International Airport, but also the loans to HASDC for its carried interest in the Concession Company. In each case events of default include violations of covenants by the borrowing party (in this case HASDC). Remedies include the right to accelerate the loans, foreclose and, in the case of HASDC’s carried equity loans, stop the funding of such carried equity and foreclose on advances made to date. As an example, pursuant to the loan agreement of the lead lender, U.S. Overseas Private Investment Corporation, any breaches or defaults by any major project participants (which includes HASDC) under any major project document (which include the three referred to above containing confidentiality provisions) can be declared events of default. Remedies available to U.S. Overseas Private Investment Corporation as a result of such an event of default include termination of its funding obligations, declaring all loans immediately due and payable and directing the foreclosure on collateral. Included within the collateral pledged to secure the various lenders in the transaction are all of HASDC’s shares representing its equity interests in the Concession Company and the Management Company. 4. Potential Impact of Release of Exhibit 3 Data on Potential Sales and Purchases By Others of Shares in Concession Company.

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HASDC has reason to believe that one or more persons (other than HASDC) is exploring the possibility of offering to make a private equity purchase of shares in the Concession Company from one or more of the current owners of such shares (other than HASDC). The release of confidential information such as the Exhibit 3 Data could adversely affect such a transaction, especially if the Exhibit 3 Data is misleading as a result, for instance, of being incomplete, unrepresentative, inadequately explained, unadjusted for seasonal or other variations or stale. The release of such confidential data could harm innocent third party investors interested in the private equity purchase or sale of unregistered securities in the Concession Company. 5. Potential Impact of Release of Exhibit 3 Data on Dealings with Ecuadorian Regulators. The Concession Company and Management Company are subject to constant review and scrutiny by various Ecuadorean regulatory bodies, including the grantor of the airport concession. Various public statements by Ecuadorean officials indicate their desire to renegotiate various terms of the concession adverse to the interests of the Concession Company (including HASDC). While the construction of the New Quito International Airport is in progress, the Exhibit 3 Data includes reports as to the progress of construction and site preparation, and includes confidential comments about applicable environmental requirements, public health matters and labor issues. The release of such information, intended to represent candid confidential communications among those responsible for constructing the New Quito International Airport, was not intended to be available to Ecuadorean regulatory bodies. Nor was the candid confidential information contained in the Exhibit 3 Data meant to be available to Ecuadorean authorities who might use it to attempt to renegotiate the concession adversely to the interests of HASDC. 6. Potential Impact of Release of Exhibit 3 Data Upon Third Party Commercial Dealings Airport development and operation is a very complex commercial transaction, in which the Concession Company and Management Company must enter into scores if not hundreds of leases and agreements with third parties which will use the airport in different ways. These third parties include airlines, food, beverage and retail concessionaires in the terminals, rental car companies, utilities and service providers and ground transportation links. They also include a myriad of contractors, subcontractors and suppliers for the airport. In some cases there are disputes that are already reduced to claims, insurance claims or lawsuits. Communications as to matters in litigation or pre-litigation are obviously very sensitive. Release of confidential data containing information of the kind in Exhibit 3 could adversely impact negotiations about commercial dealings with such third parties or undermine claims, counterclaims, defenses or positions taken in litigation or other disputes. 7. Potential Harm to HASDC. If the confidentiality/non-disclosure covenants in the foregoing agreements are deemed to have been breached through the release of the Exhibit 3 Data, it could give many of the other parties to the Quito transaction, including the lenders, the right to declare a default, which could lead to the exercise of remedies available under the relevant agreements. HASDC’s equity interests in the Quito project could be substantially jeopardized and even become subject to foreclosure. If other investors in the Quito Airport Concession Company believe that the release of confidential information such as the Exhibit 3 Data impairs their ability to enter into private purchases and

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sales of their interests it could substantially harm HASDC since those other investors are HASDC’s lenders for its carried equity interest in the Concession Company. Additionally, the release of such data could adversely impact HASDC (as an owner of equity interests in the Concession Company and the Management Company) in negotiations with Ecuadorean regulators, in third party commercial dealings regarding the use of the airport and in litigation or other disputes. It could also harm HASDC if the release of such confidential data is used by Ecuadorean officials in an effort to renegotiate terms of the concession or impose additional regulatory burdens that might not otherwise occur. III. Public Policy Considerations The prelude to the Act (section 552.001) emphasizes the public’s right to “complete information about the affairs of government and the official acts of public officials and employees.” HASDC submits that the Exhibit 3 Data falls well outside the “affairs of government” (in this case the affairs of the City of Houston and its Airport System). Moreover, none of the Exhibit 3 Data has any bearing on the “official acts of public officials and employees” of the City and its Airport System. The City and the Airport System have their own records of the affairs of the City and the Airport System and their public officials and employees, which (except to the extent excepted under the Act) are available to the public. The Exhibit 3 Data is not data of the City or its Airport System, nor of its public officials or employees. It is third party commercial and financial information, outside the Act by reason both of its letter (section 552.110.b) and policy (section 552.001) IV. Other Statutory Bases For Exception. In addition to the commercial/financial exception provisions of 552.110 (b) of the Act, HASDC believes that additional bases for exception may also apply. Prior to the expiration of HASDC’s ten (10) day reply period, it reserves the right to supplement this letter to discuss the applicability of any such additional statutory exceptions. Very truly yours,

Francis J. Coleman, Jr. General Counsel HAS Development Corporation cc.

Jennifer Peebles Deputy Editor, Texas Watchdog 5535 Memorial Drive. Suite F, #601 Houston, TX 77007 (with Exhibit 1) via email: [email protected] (w/o Exhibit 1)

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Beverly Roach Public Information Officer Houston Airport System 16930 John F. Kennedy Boulevard Houston, TX 77032-6020 (with Exhibit 1)

Randy Rivin Evelyn W. Njuguna City of Houston Legal Department P.O. 368 Houston, TX 77001-0368 (with Exhibit 1)

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