Crestwood joins with Con Edison

SCHUYLER COUNTY--Crestwood Equity Partners, owners of U.S. Salt in Reading, agreed last week to sell a 50 percent stake in its New York natural gas pipeline and storage business to Consolidated Edison Inc. for $975 million.
As part of the deal, Crestwood's natural gas storage facility on Seneca Lake, along with three other Southern Tier gas storage facilities and three gas pipelines, will be transferred to a new joint venture company called Stagecoach Gas Services. Crestwood will manage the new company and share ownership of it equally with Con Ed.
The agreement was announced Thursday, April 21 in tandem with a long-anticipated cut in Crestwood's quarterly dividend to shareholders. The new payout of 60 cents per share, set for May 13, represents a 56 percent reduction in the dividend.
Several securities analysts said the combination of the Con Ed joint-venture and the dividend cut would help Crestwood pay down its high debt.
The announcements provided welcome relief for Crestwood's stock, which had fallen by 75 percent in 2015, then by another 60 percent in the first two months this year.
Last Thursday, the stock (ticker symbol CEQP on the New York Stock Exchange) rocketed from $12.78 to an interday high of $19.64, a gain of more than 50 percent. At the close of trading Monday, the shares had slipped to $17.76.
Crestwood CEO Robert G. Phillips said last week that the Con Ed joint venture and the dividend cut would "substantially strengthen our balance sheet and broaden our appeal to investors."
However, the news did not impress the bond rating agency Moody's Investors Service. It reaffirmed Crestwood's Corporate Family Rating of Ba3 for $1.8 billion of debt, while maintaining its negative outlook (which suggests a potential downgrade to come). Bonds rated Ba3 -- Moody's third highest speculative grade or "junk" bond -- are judged to have "significant credit risk."
Phillips went on to say the joint venture would "reposition Crestwood's Northeast pipeline and storage assets to more effectively compete for future expansion opportunities as Northeast demand for natural gas increases."
But an opponent of natural gas storage at the U.S. Salt property in Reading criticized the deal.
"At a time when Gov. Andrew Cuomo has struck a bold course on climate, a New York energy giant is investing nearly a billion dollars to tie a fossil fuel ball and chain to downstate residents while putting upstate lives at risk -- along with drinking water and climate," said Sandra Steingraber, a member of the steering committee of We Are Seneca Lake, a group organized to prevent storage of natural gas or liquid petroleum gas next to the lake.
Steingraber and several hundred others have been arrested in civil disobedience to protest storage at the Reading site. U.S. Sens. Kirsten Gillibrand and Chuck Schumer recently made an unsuccessful plea to the Federal Energy Regulatory Commission (FERC) to open public hearings related to expanded gas storage in Reading.
The Seneca Lake gas storage facility is by far the smallest of the four that will comprise the Crestwood-Con Ed joint venture. It now holds up to 1.45 billion cubic feet of gas, and in May 2014, FERC granted it permission to add 0.55 bcf more.
But Crestwood has not moved forward on the Reading storage expansion. Its request for an extension of the approval prompted the request letter from the New York senators. But FERC recently informed Gillibrand and Schumer that there would be no public hearing.
The other three storage gas sites hold up to a combined 39 bcf, mostly at the Stagecoach facility in Tioga County south of Oswego. In addition, the Thomas Corners facility west of Corning holds 7.0 bcf, while Steuben Gas Storage a few miles away, holds 6.2 bcf.
The joint venture will also own three Crestwood pipelines: the MARC I, the North/South and the East Pipeline.
Crestwood says the storage sites and pipelines are strategically located between fracking sites in the Marcellus Shale in Pennsylvania and major urban centers in the region, including New York City.
Manhattan-based Con Ed is an electric and natural gas utility with more than 3.4 million customers in New York City and Westchester County. The value of the company's stock (ticker symbol ED on the NYSE) is roughly $21 billion, compared to Crestwood's market value of $1.24 billion.
Con Ed's announcement of the joint venture came one day after the company had settled a federal bribery and kickback investigation for $171 million. Under an agreement announced by the state Public Service Commission, Con Ed is obligated to pay that amount to its customers, though the company did not admit wrongdoing.
Earlier last week, analysts at Deutsche Bank issued a report to investors that downgraded shares of Con Ed from a "hold" rating to a "sell."
The bank's analysis said Con Ed was currently overvalued. (The stock closed Monday at $72.25). It also cited concerns that the company may face liability for a 2014 explosion in Harlem that killed eight people and leveled a pair of five-story buildings.