Texas speeds ahead with plan to end P3 toll lanes agreement

The end is near for a 52-year public-private partnership that built a managed lanes toll road project in the Houston area, with the Texas Department of Transportation announcing Friday the state intends to take over the project’s operation in October.

The move came after financing for the P3 termination was cleared Thursday by the Texas Bond Review Board, which did not subject it to a formal approval process.  

The Texas Transportation Commission took action in March to end the 2016 comprehensive development agreement with Blueridge Transportation Group, LLC, for a project that included construction of four toll lanes on a 10.3-mile stretch of State Highway 288 in Harris County and was partially financed with private-activity bonds.

In a statement Friday, TxDOT said the $1.7 billion cost of the CDA’s buyout provision is “substantially below the value of future toll revenues on the corridor – even with the anticipated reduction in toll rates.”

The prospect of saving drivers money and obtaining a valuable asset for the state was hailed by Gov. Greg Abbott and Lt. Gov. Dan Patrick, who were in office when the P3 transaction closed in 2016.

“This strategic action demonstrates our commitment to making fiscally responsible decisions and prioritizing the best interests of Texas and its residents,” Patrick said in the statement.

The Blueridge consortium is “deeply disappointed by TxDOT’s decision to expedite the purchase of the SH-288 toll road without fully considering the significant concessions we offered for motorists,” a spokesperson said.

“Throughout this process, we have worked tirelessly to present a solution that would have been the most financially prudent for Texas taxpayers and drivers,” the spokesperson added.

In late July, the transportation commission signed off on financing for the P3 termination through an up to $1.7 billion loan for the non-profit Texas Transportation Finance Corporation, which it created earlier this year to acquire, develop, finance, refinance, reconstruct, expand, operate, and maintain “any toll project with in the state as determined by the commission.”

That loan is in the form of Series 2024 subordinate tier notes expected to be issued in October by the corporation and privately placed with the Texas Department of Transportation, according to a TxDOT spokesman. 

Up to $2.065 billion of taxable, variable-rate notes maturing in 2064 and backed by toll revenue generated by the project were on the agenda for Thursday’s meeting of the state’s bond review board, which took no action to put the financing under a full review by a 5 p.m. Central time deadline.

The notes could eventually be taken out with publicly sold bonds. 

“It is expected that the ‘buy out’ payment of $1.7 billion would be paid off with future toll revenue bonds, ensuring that other planned projects around Texas will proceed on schedule,” TxDOT’s statement said. “Additionally, Texas can pay off debt at least 10 years earlier than the current concession agreement, allowing future tolls to be removed.”

Several current and prospective state lawmakers have raised concerns about the debt and the perpetuity of tolls.

The ability for Texas to terminate the P3 for cause or convenience was included in the project’s CDA.

In 2016, the Texas Private Activity Bond Surface Transportation Corporation issued $272.6 million of tax-exempt senior lien bonds for the project. The debt is structured with term maturities in 2040, 2025, 2050, and 2055 and has a Dec. 31, 2025, first par call date. If the CDA is terminated, the bonds are subject to mandatory redemption in whole, according to the official statement.

In addition to bond proceeds, the financing plan included a $357 million federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to be repaid with toll revenue, $375.3 million in private equity, and $17.1 million of TxDOT funds, according to the Federal Highway Administration.

Fitch Ratings recently affirmed a BBB rating and stable outlook for the bonds and TIFIA loan and noted the termination payment will cover principal and accrued interest in accordance with financing documents.

In April, Fitch noted that TxDOT plans to end the arrangement before the fourth anniversary of service commencement in November, when the fixed termination amount of $1.7 billion would rise to $1.9 billion.

“The fixed payment is much lower than the fair market value of the project, which has significantly outperformed the sponsor’s traffic and revenue forecast at financial close in 2016,” Fitch said.