I suppose this is the very definition of developer integrity.
I suppose this is the very definition of developer integrity.
In short, they started working on episode 3, and made it about the point where the game development progresses from "here's demos of what could be set pieces in the episode" to putting together the sketch of the game narrative [1] when the developers were pulled to crunch for Left 4 Dead. After Left 4 Dead released, Gabe felt the window for an HL2e3 had closed, so it would be HL3 instead... and that because HL1 and HL2 had both heralded genre shifts, HL3 needed something to push that shift as well. But there weren't any such ideas for that shift (except maybe VR, which hasn't exactly panned out), and Gabe also felt that releasing a HL3 just to complete the story wouldn't cut it, so it never got made.
Which pretty much matches everybody's speculation for the past decade.
[1] About 18-24 months away from being releasable at that point, to give a sense of how far from complete it was.