6/18/07

by Richard Williamson, The Bond Buyer

DALLAS — A bidding process that one participant described as “almost otherworldly” will come to its second conclusion in four months today when the North Texas Regional Transportation Council chooses a public or private developer for a $5 billion tollway.

The council, made up of 39 representatives from local governments in the region, last week heard presentations from the two bidders, Cintra/JPMorgan and the North Texas Tollway Authority, on financing the State Highway 121 toll project north of Dallas.

The council also heard presentations from the Texas Department of Transportation and PriceWaterhouseCoopers, which both rated the private developer Cintra’s proposal as a better value for the region.

Cintra, or Cintra, Concessiones Infraestruturas de Transporte, which teamed with JPMorgan Asset Management to pitch the deal, was named the winner of the project in February after competing with two other corporate finalists. However, during the Texas Legislature’s session in March, state Sen. John Carona, R-Dallas, intervened, asking the council to seek a bid from the NTTA.

In less than a month, the NTTA submitted an 800-page proposal that appeared to offer about $100 million more to the region’s transportation system than the Cintra offer. However, under TxDOT’s analysis of payment sequences and adjusted interest rates, Cintra edged out the NTTA in terms of total net value.

“We would say, given our observation of both models and the submissions that we’ve had available to us, that we would support the Cintra model,” TxDOT chief financial officer James Bass said. Bass cautioned that TxDOT’s analysis did not constitute a recommendation. Bad blood has developed between TxDOT and the NTTA over previous interpretations of data contained in a rough sketch of the NTTA’s plan for the project in a letter to Carona.

The winner of next week’s selection must also pass muster with the Texas Transportation Commission, TxDOT’s governing board. In February, Cintra won the TTC’s approval as well as the RTC’s.

In rating Cintra’s bid higher than the NTTA’s, Price Waterhouse Coopers isolated the SH 121 project from the other toll roads in the NTTA system, analyst Arthur Baines said.

In the final analysis, PWC valued the NTTA’s proposal at $3.2 to $3.4 billion, compared to $3.8 billion for Cintra. The overall cost of the project is estimated to be about $5 billion. The accounting firm also analyzed an upside case in which toll revenues run 15% higher than projected and a downside case in which revenues are 20% below projections.

In the upside case, the NTTA and Cintra were rated as almost dead even. In the downside scenario, Cintra surpassed the NTTA by $300 million to $500 million.

Choosing a private developer would insulate the project from possible ratings downgrades. All three ratings agencies have warned that the NTTA would likely see its ratings slip if it wins the project. But they added that the ratings would likely remain in the “A” category. The NTTA is rated A-plus by Fitch Ratings and Standard & Poor’s and A1 by Moody’s Investors Service.

The NTTA, which is supporting the SH 121 bid with its entire system of 64 miles of toll roads, claims an advantage because of its lower cost of borrowing using tax-exempt bonds. However, Cintra cautioned that bylaws governing the NTTA require toll increases systemwide to support bond debt that could increase if ratings change. Under Cintra’s proposal, tolls could not increase beyond those spelled out in the agreement.

Glenn Muscosky, vice president of acquisitions for JPMorgan Asset Management, said that by taking on SH 121, the NTTA would reduce its bonding capacity for other projects by $1.5 billion. Allowing Cintra to develop SH 121 would leave the NTTA free to develop other projects, such as the proposed Loop 9 around the Dallas-Fort Worth area, he said.

However, NTTA board chairman Paul Wageman said that awarding the most lucrative projects, such as 121, to private developers would impede development of other NTTA projects. “The system is what drives the projects,” Wageman said. “You cannot saddle us only with projects that are financially unfeasible.”

NTTA executive director Jerry Hiebert claimed the analysis by TxDOT and PWC were flawed because they overestimated costs such as operations and maintenance and the likely interest rate the NTTA might have to pay on late-stage payments.

“That wasn’t a haircut, that was a buzz cut,” Hiebert said.

Wageman called the bidding process and analysis “almost otherworldly. This is taking a silk purse and turning it into a sow’s ear.”

Jose Lopez, Cintra’s U.S. director, said his company has developed 1,240 miles of toll roads compared to NTTA’s 64. Cintra builds 150 miles of toll road per year, he said, with successful projects in much of the world. The company already has agreements in place to start construction immediately and complete the project by 2010, he added.

“We are absolutely ready to go. All we are waiting for is one signature,” Lopez said. “The message you are about to send the market next week will be heard around the world.”