RESTRUCTURING:Houston Looking at Lehman $2.1 billion Deal
By Peter Samuel
Freise says that the Lehman proposal is attractive to the toll road and to the county, though it has to be fleshed out and examined by lawyers to understand the full ramifications, and then approved by the county. But if that goes alright he sees a new toll road authority being formed by the fall and the deal closing financially by the end of the year.
HCTRA would be replaced by a new joint powers toll agency involving other counties and cities in the Houston area. Most likely Fort Bend county to the southwest and Montgomery Co to the north would be brought in, and some cities.
We couldnt get anyone from Lehman to talk directly but it is clear the thrust of the proposal is to extract much more value from the HCTRA assets. HCTRA has not looked to be in a very strong financial position until recently. It never declared a profit until a few weeks ago when preliminary results for fiscal year 1999 (Mar 98 to Feb 99) were released showing a $28m surplus. Bond rating agencies have HCTRA rated in about the middle of their rankings BBB S&P, A3 Moody. But the county accounts are conservative. The past poor results have included large depreciation allowances by toll authority standards despite the fact that a lot of HCTRA pavement looks as though it is built to resist runway cratering bombs from the US Air Force. Much is 16 inches (0.4m) of single pour reinforced concrete! And the financial performance of HCTRA has been improving very rapidly. Toll revenue has almost doubled in the past three years to $180m, and it takes 600k tolls/day, putting it very much in the big league. Leaving out those large depreciation allowances the operation has been generating a rapidly growing operations surplus. (See above)
The HCTRA surplus is on the way to being large enough to service the $2.1b debt in the new toll agency proposed by Lehmans. That would require annual cash flow of about $200m, according to a couple of money men we talked to. Then to support extensions (see later) it would want to support more debt. A combination of leaner operations and more aggressive toll rates could probably get the cash flow up to support $2.5b to $3b capitalization. The leaner operations might involve a stronger push for electronic tolling, which is currently below 50% of transactions and contracting out of more operations functions. Higher toll revenues would require a more commercial approach to where the traffic would bear higher tolls, which would probably mean higher tolls on sections of the Sam Houston and perhaps lower tolls on the Hardy. And time variable tolls?
Once again the arcane workings of the US tax code have a large bearing on how this new toll project is structured. Taking advantage of the tax law and IRS regulation while maintaining some accountability and sound management is difficult. The new agency would have to be substantially independent of the state in order for its debts not to be a county liability (and independence is another word for unaccountable.) On the other hand the local government wants to have a say in some aspects of any new toll agencys policies, perhaps with a minority of places on the board of directors, Freise suggested.
The upside of the scheme for the county is $$$$s their ability to capitalize on the asset they have created in a now successful toll road system. But as with disposing of any asset the owners lose much control.
Freise says the county wants to ensure that planned toll road projects go ahead under the new authority and it wants to make the county completely clear of liability for bailing it out should it go broke. No doubt county officials will progressively develop a wish list of conditions they would like to build into any sale of the authority. Items that make good business sense are no problem.
But the finance people point out that any requirements that involve subsidization, or which otherwise boost the costs of the new toll agency, will detract from the value of the sale and increase the risks to prospective bondholders.
Tolling got off to a dicey start in Houston. Plans for the first toll roads were made in the booming 1970s when the population jumped 40% to 2.4m and an FHWA ranking put Houston as Americas most congested city. Studies suggested construction of a 35km (21.6mi) Hardy Toll Road, a radial to the north from the inner loop freeway I-610 and 45km (28mi) of Loop-8, the Sam Houston Tollway which formed an inverted-L to the northwest and west of the city, approximately the first quarter of a second beltway averaging about 20km (12mi) from the downtown. A 1983 a referendum approved issue of $900m of general obligation bonds to build these two toll roads and the county formed HCTRA. The Hardy, of basically 2x2 lanes with 10 ICs, 2 mainline toll plazas and 12 ramp plazas was completed mid-88 for a cost of $366m. The first stretch of the Sam H (from I-45 north of the city going counter clockwise to US-59 southwest of the city) of 2x3 lanes with 22 ICs, 3 mainline plazas, and 17 ramp plazas was fully opened mid-90 at a cost of $436m.
The pikes were built well under budgeted cost and ahead of schedule, but that was partly because the 70s boom had gone bust. The early 80s were a period of slow growth in Houston. A heap of predicted new developments in the north especially didnt happen and traffic on the Hardy was well below the projections that had been developed in the 70s - 25k tolls/day at 2 plazas in 1989 the first full year (about a quarter of forecast - see TRnl#9 Nov 96 p1), then stagnating for 5 years at 32k tolls/day. Forecasters (WSA) also underestimated competition from the free I-45 parallel to the Hardy and just 2-3mi (3-5km) westward of it, and effect of the Hardys poor connections to the airport and to the CBD. It ends 4mi (7km) short of the CBD on the inner loop I-610 whereas the I-45 sweeps right down into the CBD to form two sides of its inner freeway box whose other sides are I-10, the main east-west hwy and US-59 that goes northeast-southwest across the metro area.
By the time Sam Houston (SH) opened the economy was better and development out its way on the west boomed. It was much more successful and remains so today. [The original 45km of the SH garners $80m/yr in tolls vs $20m for the 35km Hardy. Tolls are now 520k/day and $160m on the whole of the Sam Houston and 80k/day on the Hardy.]
Much of the rest of the Sam Houston beltway was being partially developed as surface frontage roads leaving a wide right of way for the future toll road. But a high toll bridge over the Houston Ship Channel on the eastside built too far ahead of traffic in 1982 was a major lossmaker for the Texas Turnpike Auth. In 1994 HCTRA bought the bridge because it formed part of the unbuilt section of the peripheral beltway. At the same time HCTRA got $90m ISTEA federal funds and state commitment to build $260m-worth of major ICs and raised its own $340m in order to construct another 29mi (46km) of the Loop-8 as the Sam Houston Tollway from its terminus at US-59 south across the south of the metro area and up the east side to the ship channel bridge. Opening fully in May 97 this 46km of 2x2 lanes with 27 ICs, 3 mainline plazas and 21 ramp plazas together with a few miles of bridge (with its own mainline plaza) approaches produced a 98km (61mi) three-quarters beltway, from 3 oclock to nearly midnight by clockface position.
All the mainline plazas are equipped for full highway speed electronic tolling (they call it EZ TAG, and it comes from Amtech) as well as automatic coin and manual payment to collectors. It is an extremely successful and well patronized facility.
The toll roads added some 615 lane-km (384 lane-mi) to 2260 lane-km (1410 lane-mi) of pre-existing area freeway and despite the revival of the area economy, congestion declined markedly (from a TTI congestion index of nearly 1.25 to 1.12) with the one-fifth addition to area motorway standard lanage. The vigorous toll road program made the Houston area one of two out of 50 US metro areas that saw marked reductions in congestion between the early-1980s and now. (The other congestion reducer was Phoenix AZ that pursued a vigorous freeway program.)
HCTRA has a number of expansions under way or in study. Opening at the end of the year will be an eastward spur off the Hardy into Houstons major airport. Also in study are the options to improve the Hardys connections to the central business district south of its present terminus at the I-610 Loop. HCTRA says it will only commit $15m to this project, the amount its studies show will be supported by increased tolls, and the effort is to find developers and perhaps the city to ante up the other $30m or so needed for the 7km (4mi) project. A third enhancement of the Hardy would be an extension about 30km (18mi) north to just beyond Conroe in Montgomery county.
Another project that has been studied is the Westpark toll road (see TR#28 Jun 98 p9), a proposed new radial heading west just south of the classy Galleria commercial center near the interchange of the I-610 West Loop and US-59. It is to extend for 23km (14.3mi) along the right-of-way of an SP rail line (to be removed) as far as the outer arterial TX-6. The pike would cross the western leg of the Sam Houston Tollway (Loop-8) about 8.5km (5mi) before its initial western terminus. Its main competition would be surface arterials, especially the wellknown Westheimer Road which is located just 2km to 3km (c1.5mi) to the north. Another route 5km (3mi) north is I-10, the Katy Fwy.
The pike is being pushed by business and other local groups in west Houston and by the Harris Co chief exec Robert Eckels.
But major opposition comes from pro-transit groups. The right of way is owned by the Houston transit agency Metro which was very advanced with plans to build a busway down the corridor when the toll road idea was seriously advanced. A new Houston city mayor is intrigued by the possibility of rail, so the project is stalled, but could well be taken up again by the new toll agency.
A Grand Parkway (TX-99) is a project being pushed for tolling by a major collection of local interests and business groups in the west. In its complete form it is a 200km (120mi) third beltway around the Houston area at a 40km to 50km radius (25mi to 30mi) from the CBD. A southwestern piece is already built to arterial standard and a section in the northwest is considered worth a traffic and revenue study as a 2x2-lane tollroad. With another stretch eastward to US-59/north this might constitute the Houston-area portion of I-69, the planned NAFTA highway from Toronto through Indianapolis and down the Mississippi valley to Memphis TN, into Louisiana picking up US-59 somewhere northeast of Houston following US-59 to Laredo and into Monterrey Mexico.
As an unabashed fringe development package the Grand Pkwy/TX-99/I-69 toll proposal is almost calculated to send the sprawl-buster crowd into frenzied hysterics. And though Texans do seem to be able to build highway at a fraction of the costs of similar road in the west and northeast, it is far from clear this is financable.
Fort Bend County on the southwestern boundary of Harris County has had a Fort Bend Parkway (TRnl#13 March 97 p3) under study as a toll road in its first stage a 10km (6mi) spur south off the Sam Houston toll road from an interchange in Hillcroft. This would serve a new development of 7k acres called Sienna Plantation. It would later be extended further south to TX-99, and north from the Sam Houston to Alt-90, a radial arterial. Fort Bend Co formed its own toll road authority in 1997 but there has been little progress. The project could be under consideration by a new multi-county agency. (Contacts: Wesley Freise HCTRA 281 875 1400x420; Steve Clayborne, Lehman 713 236 2484)