Legal battle puts Colorado rail transit P3 at risk
Technology troubles with the nation's first public-private partnership for commuter rail have spurred dueling legal actions that threaten to unravel the P3 and send the tax-exempt bonds issued for the project to junk.
Moody’s Investors Service announced on Oct. 8 that the Baa3 rating on $398 million of tax-exempt private activity bonds Colorado's Regional Transportation District issued in 2010 for the Eagle P3 project is on review for a downgrade that would send the debt into junk-bond status. Moody’s had placed a negative outlook on the rating on April 3.
The rating alert came one day before RTD issued a termination notice to Denver Transit Partners, citing its failure to make a commuter rail line operational by the June 2 date designated in their concession agreement. DTP had filed a lawsuit against RTD in September.
The commuter rail lines that link up with RTD’s light-rail system at Denver's Union Station were approved by voters in 2004 under the FasTracks program.
Two of the three lines promised in the agreement have been open for two and a half years, but they remain plagued by level-crossing safety problems that have kept the third line, which is largely complete, from entering service.
An RTD spokesman said that DTP’s finances are separate from RTD's and that the P3 tussle will not affect RTD’s Aa1 Moody's rating. RTD's senior bonds are rated AAA by S&P Global Ratings and AA by Fitch Ratings.
DTP is 45% owned by Aberdeen Infrastructure Investments with 45% owned by an affiliate of John Laing Investments Ltd. and 10% owned by Fluor Enterprises, Inc. Other team members include Balfour Beatty Rail Inc., ACI, Ames Construction and HDR. DTP was awarded the project on July 9, 2010, followed by financial close on August 12, 2010.
The RTD termination notice allows negotiations to continue but specifies that DTP’s performance under the agreement is a “termination event.”
The notice comes on the heels of a Sept. 20 lawsuit that DTP filed against RTD claiming that the concessionaire was entitled to more time to meet requirements of what it claims were changed laws and regulations and reimbursement for penalties levied for failure to meet the stated deadlines.
Fitch Ratings has maintained a negative watch on its BBB-plus rating for the Eagle P3 bonds since February. On Oct. 2, Fitch said the DTP lawsuit was unlikely to have a rating impact.
“DTP claims breach of contract, violation of the covenant of good faith and fair dealing and declaratory relief against RTD for RTD’s wrongful refusal to accept Change in Law and Force Majeure claims made by DTP under the CA [concession agreement] during the design/build phase of the Project,” the lawsuit states.
“The Concessionaire is required by contract to pursue recovery pursuant to the Dispute Resolution Provision of the CA for the benefit of the bond and equity holders and the Construction and Operations consortiums,” the suit adds.
DTP filed claims in 2017 that changes in law or interpretation of the law required additional work and expense not identified in the original concession agreement.
The conflict involves three commuter rail lines that DTP was created to build, finance and operate through 2045. The overall project was designated Eagle P3 and includes the A Line from downtown Denver to Denver International Airport, and the B Line and G Line serving Denver’s northwest suburbs. The G Line is not yet open to paying riders as required under the concession agreement due to problems with warning systems at the lines' at-grade road crossings.
RTD’s notice reminded DTP of its “ongoing responsibility under the terms of the Concession Agreement to remain in full compliance with its contractual obligations during the course of any dispute, including the litigation DTP has commenced. Any failure by DTP to meet the contractual requirements during the litigation will constitute additional breaches by DTP under the Concession Agreement.”
In April, the Colorado Public Utilities Commission granted RTD’s request for more time to meet specifications for the crossing systems for all A Line and G Line crossings.
RTD told the company that it would end the contract unless DTP fixes issues on the G Line within 30 days, or at least presents a plan within 20 days to fix them.
The A Line opened in April 2016 and the B Line that July. Ridership is exceeding expectations, according to the RTD, but both lines have been hampered by problems with the automated systems that are supposed to trigger the crossing guard gates to block intersecting roads when trains approach.
The G Line is undergoing tests that have found problems with automated crossings. Problems with the safety systems have required RTD to hire flagmen to stop intersecting traffic.
Part of the testing process involves the Federal Railroad Administration and the Colorado Public Utilities Commission evaluating and certifying each rail crossing. RTD is the first commuter rail system in the United States tying new at-grade crossings to positive train control, a complex signaling and communications technology that is required by the FRA to be implemented on all railroads by 2020. PTC implementation requires testing specific to the conditions at each individual crossing before it can be certified.
"RTD and DTP are working closely with our state and federal regulators to complete the certification of the crossings, after which local jurisdictions and RTD can jointly request to the FRA that quiet zones be implemented," RTD said.
DTP missed a June 2 deadline to have all three lines certified and operating, but a mediation agreement extended negotiations to Sept. 30. The agreement gave RTD the option to issue a default or termination event notice if agreement was not reached by that date.
In its termination notice, RTD said it expects the DTP to be responsive to safety compliance issues “with appropriate urgency; keenly aware of how its own conduct affects the owner of the system; and solution-oriented.”
“DTP, including its affiliates Fluor and Balfour Beatty, have not met any of these expectations,” RTD said. “DTP’s lack of responsiveness to safety issues raised by regulators and failure to deliver these critical system elements have resulted in irreparable harm to RTD and the viability of the Eagle Project.”
Moody’s analyst Earl Heffintrayer noted that a termination notice allows time for negotiation.
The rating review “recognizes the ongoing regulatory and legal challenges for DTP to move the entire project into the operating phase, a significant milestone,” Heffintrayer said.
“Moody's review for possible downgrade will consider DTP's ability to achieve the regulatory approvals from the Federal Railroad Administration and the Colorado Public Utility Commission necessary to achieve the revenue service commencement certificate for the G-line, which would remove RTD's right to issue a termination event notification; the ability of the project to withstand further delays in the receipt of service payments on the G-line while still servicing all debt; and potential recovery prospects for bondholders if a project termination were to occur and a termination is due to DTP from RTD,” the analyst explained.
According to RTD’s 2017 financial report, outstanding debt for FasTracks backed by a 0.4% sales tax came to $2.02 billion. Service payments for the Eagle P3 project came to $589.9 million.