Crestwood Equity-Con Edison JV overview
Crestwood Equity Partners (CEQP) and Consolidated Edison (ED), or Con Edison, have decided to form a 50-50 JV (joint venture) to own and develop Crestwood Equity’s existing natural gas pipeline and storage assets serving the Northeast market. This comes after Kinder Morgan’s (KMI) announcement that it would remove its $3.3 billion NED (Northeast Energy Direct) project in its 1Q16 earnings release, due to insufficient customer commitment.
Midstream companies including Kinder Morgan (KMI), Energy Transfer Partner (ETP), and Sunoco Logistics Partners (SXL) have formed JVs in past and are looking for more JVs to pursue organic projects in the current challenging price environment.
According to the related press release, Crestwood Equity will transfer “four natural gas storage facilities (Stagecoach, Thomas Corners, Steuben, and Seneca Lake) with a combined storage capacity of approximately 41 Bcf and three natural gas pipelines (MARC I, North-South and the East Pipeline) with a combined throughput capacity of 2,960 Mmcf [million cubic feet] per day” to a new entity, Stagecoach Gas Services.
Con Edison will purchase a 50% interest in the new entity for $975 million. Crestwood Equity expects to use the $975 million proceeds for repaying debt and improving leverage.
Stock price reaction
Crestwood Equity surged by 42.1% in a single trading session on Thursday, April 21, following the above announcement. At the same time, Alerian MLP ETF (AMLP), which comprises of 24-midstream MLP, rose by 0.1%. (We’ll explore the reason behind this surge in the next part.)
Concern for investors?
One potential concern for investors, especially for Con Edison investors, would be the credit exposure of Crestwood’s transferred assets. Although nearly 100% of the system’s capacity is contracted, only 60% of the customers are carrying an investment-grade rating.
Customer bankruptcy is also a major concern for midstream companies in the current environment. Crestwood Equity has faced this in the past with Quicksilver Resources bankruptcy. The recent Sabine Ruling case outcome has increased midstream investor concerns. In addition to the decline in the utilities sector, this could be one reason for a 3.2% decline in ED’s share price on the day of the announcement. Notably, ED makes up 0.21% of the iShares Russell 1000 Value ETF (IWD).