Contractor to Sever O.C. Toll Collection Pact

In the latest in a series of mounting problems for Orange County’s toll roads, the project’s largest contractor--the company responsible for all toll collections on the 52 miles of roads--plans to quit with two years left on its contract, saying lower-than-projected traffic is costing it too much money.

The exit of Lockheed Martin IMS would leave toll road officials with the massive task of collecting all automated and manual tolls on the roads by next spring, according to memos exchanged by the two sides. Lockheed made about $15 million from its contract for the fiscal year that ends this month and was on track to make $12 million to $15 million a year for each of the final two years, according to toll road officials.

The move, which could be formalized as soon as next week, comes after a year of contentious discussions between Lockheed Martin and the Transportation Corridor Agencies, which have each lobbed complaints of ineptitude at the other.

For their part, toll road officials say their dissatisfaction with Lockheed’s performance has grown, reaching a peak late last year. Toll road officials say Lockheed, which has had a contract since 1992, has delivered poor customer service and incomplete financial reports and has been lax in going after toll violators.

Lockheed officials, in letters sent to the toll road agencies’ chief executive officer as well as board members, say bad traffic projections for the roads have diminished the value of their transaction-based fee for their work. The contract, which included the possibility of extensions to 2018, could have earned the company hundreds of millions of dollars, depending on the success of the roads.

But in a letter dated May 22, John Brophy, president and chief executive officer of Lockheed Martin IMS, called the business relationship “untenable.” Brophy said recent admissions by toll road officials that traffic on the San Joaquin Hills toll road will continue to lag far behind projections “greatly troubled” Lockheed officials who had “relied heavily and in good faith on those projections in determining our fee for our services.” He said Lockheed had serious concerns about the success of the Foothill/Eastern corridor as well.

Grossly inaccurate traffic forecasts for the San Joaquin Hills toll road, which still lags nearly 20% behind revised figures done when the road was refinanced in 1998, have caused a host of serious problems for the toll road.

Just this week, board members approved an unscheduled fare hike for ramps on the road starting July 10, with some fees doubling. Earlier this year, after toll road officials acknowledged that traffic was unlikely to ever catch up with the projections, the board took the unprecedented step of setting aside nearly $40 million in savings to guarantee that promises made to investors could be kept at least for the next seven years.

Despite those unusual steps, the major Wall Street bond ratings agencies warned investors in February that the financial prognosis for the San Joaquin Hills toll road had shifted from positive to negative.

One of the major bond ratings agencies, Fitch IBCA, issued a report to investors late last month that portrayed a troubled future for toll roads not backed by state or local governments. Orange County’s toll roads, for example, were financed through private bond offerings paid back through developer fees and tolls.

Lockheed Cites $50-Million Deficit

Lockheed’s reasons for wanting to bail out of the project are obvious: The company is currently operating at a $50-million deficit, according to company correspondence to toll road officials. The company had planned to invest a large amount of money up front in anticipation of earning significant profits in future years.

But by late last year, company officials were becoming concerned that earnings were suffering because traffic was falling well below projections on the San Joaquin Hills tollway. A company official who asked not to be identified said they instead “came to the conclusion that it would be better to just wind things down.”

The agencies’ two other toll roads are closer to, or exceeding, forecasts.

Lockheed has 125 employees, either on staff or under contract, who work directly on the Orange County project, toll road spokesman Mike Stockstill said. Lockheed also is a major tenant for the Transportation Corridor Agencies, sharing the Irvine office building the agencies moved into at the beginning of the year.

Stockstill said toll road staff members have considered possible strategies for the transition of services from Lockheed, but nothing concrete has yet been worked out.

Over the next two weeks, the agencies will be negotiating the details of Lockheed’s exit. Mission Viejo Councilwoman Susan Withrow, who chairs the Foothill/Eastern board, said she hopes for a smooth transition but would not dismiss the possibility of a lawsuit by Lockheed against the agency.

“I do believe it will be an invisible transition,” she said. “The public’s not going to notice anything different. There is motivation on both sides to make it a smooth transition.”

Supervisor Todd Spitzer, chairman of the San Joaquin Hills toll road board, said he and the other board members are working toward an “amicable” parting of the ways with Lockheed.

Spitzer said he and board members Supervisor Tom Wilson and Withrow recently traveled to Washington, D.C., to meet with Brophy after hearing about the company’s problems. During that meeting, Spitzer said, he told Brophy that it was “in everybody’s best interest” to have a smooth separation, especially for customer service.