Column | Cuomo Shouldn't Bail Out Crestwood
A private equity firm in Greenwich, Conn., could use a helping hand from New York governor Gov. Andrew Cuomo as it weighs options to salvage its disastrous investment in Houston-based Crestwood Midstream Partners and an affiliate company.
Over the past nine months, First Reserve Corp. has wracked up combined paper losses of half a billion dollars in Crestwood’s two New York Stock Exchange-traded stocks. Cuomo is positioned to deliver a regulatory ruling that could ease First Reserve’s pain.
Crestwood seeks approval from New York’s Department of Environmental Conservation to store liquid petroleum gas, or LPG, in abandoned salt caverns next to Seneca Lake. The project is the centerpiece of Crestwood’s plan to develop a regional storage hub for the Northeast for both LPG and natural gas.
The Seneca Lake project was first proposed in 2009 by Inergy, a company Crestwood acquired in 2013. The DEC has taken nearly six years to evaluate whether the unlined caverns in salt and shale rock are suitable for storing volatile hydrocarbons. That’s given project opponents time to build a broad coalition. Dozens of wineries, local businesses and town and county governments now argue that Crestwood’s plan would be both extremely dangerous and a crushing blow to the region’s tourism-based economy.
They note that documents show that a cavern Crestwood plans to use to store pressurized liquid butane was plugged and abandoned in 2003 after an engineer determined that its roof had collapsed and that it was “unusable for storage.” Plus, unlined shale caverns in Todhunter, Ohio, that once stored LPG were indefinitely shut down in 2013 due to dangerous leaks.
In the coming days, an administrative law judge at the DEC is expected to recommend for or against ordering a formal legal proceeding where experts for both Crestwood and its opponents would give sworn testimony that is subject to cross-examination.
Project opponents are pressing for the new hearing, while Crestwood wants no part of it. The final decision rests with DEC Commissioner Joe Martens, but both sides presume that Cuomo, Martens’ boss, will weigh in. If the DEC foregoes the hearing, it’s expected to promptly issue the storage permit.
While the multi-faceted opposition has gone public — more than 250 protestors have been arrested at the gates of Crestwood’s Seneca Lake facility — First Reserve has remained in the background.
It’s not clear what role, if any, First Reserve — or its founder and CEO, billionaire William E. Macaulay — has had in lobbying Cuomo. It’s not even clear exactly how much an LPG storage permit might mean to the fund’s investors. But it’s logical to assume that a permit in hand would substantially raise Crestwood’s market value, which has been collapsing since last fall.
According to its latest SEC filings, the First Reserve GP XI Inc. fund holds 20.7 million shares of Crestwood Midstream Partners LP (stock ticker symbol CMLP) and 49.2 million shares of Crestwood Equity Partners LP (CEQP). The value of that CMLP stake has fallen from $470 million last Sept. 30 to $260 million last week. The CEQP shares worth $520 million nine months ago have slipped to $230 million.
The two Crestwood entities operate under a complicated master limited partnership (MLP) structure that allows oil and gas companies to shelter income from federal taxes. Since last Sept. 30, most MLP stocks have fallen along with world oil prices, as reflected in a 17% decline in the Alerian MLP Index. But First Reserve’s Crestwood investments have plunged 50% since then.
In March, the bond rating firm Moody’s gave a Crestwood debt issue a grade defined as “speculative … subject to high credit risk.”
In April, a former First Reserve executive was installed as chief financial officer of both CMLP and CEQP. A month later, management announced that the two entities would merge in a bid to simplify Crestwood’s structure.
Under the pending deal, each CMLP share would be swapped for 2.75 shares of CEQP. While that was worth $18.75 on May 5 (when CMLP traded for $16.00), today 2.75 shares of CEQP stock are worth less than $13.
Shortly after Crestwood’s May 6 merger announcement, the investment firm Zacks had issued a “sell” recommendation on CMLP shares, and three law firms announced separate efforts to launch a class action lawsuit on behalf of short-changed CMLP shareholders.
One way to salve the wounds of First Reserve investors would be to find a stable buyer to purchase Crestwood at a big premium to its current market value. A Seneca Lake LPG storage permit would certainly help that cause.
So what do you rescue, Gov. Cuomo — the regional tourism economy or the Connecticut billionaire’s private equity fund?
• Peter Mantius is a freelance journalist from Schuyler County who follows shale gas drilling issues. He is a former reporter at the Atlanta Journal-Constitution and former editor of two business weeklies in the Northeast.