When I was a kid we had this family joke that my brother and I could always go to the “Bank of Dad” to bail us out when we were short on funds. Not only that, but our dad was also great about co-signing on loans for us so that we were able to establish credit early on. The support of our parents proved to be very beneficial to our success in life.
In the past, Loews Corporation (NYSE:L) has helped Boardwalk Pipeline Partners, LP (NYSE:BWP) to grow its business by using its financial firepower to acquire stakes in the assets Boardwalk Pipeline Partners, LP (NYSE:BWP) wants to acquire. This enables Boardwalk to move quickly to acquire an asset it wants without having to worry about funding. When it’s in a better position it can acquire the stake that Loews Corporation (NYSE:L) took.
For example, last year Loews Corporation (NYSE:L) helped Boardwalk Pipeline Partners, LP (NYSE:BWP) on a $625 million deal whereby a wholly owned subsidiary of Loews Corporation (NYSE:L) took a 67% stake in the asset. Shortly thereafter Boardwalk purchased the remaining interest. It’s this arrangement with Loews Corporation (NYSE:L) that enables Boardwalk to grow faster than it would if it was on its own.
Not only that, but Loews is now going the extra mile to ensure that an important project Boardwalk is working on is a success. Earlier this year, Boardwalk signed a joint venture agreement with Williams Companies, Inc. (NYSE:WMB) surrounding the Bluegrass Pipeline. The proposed project would take natural gas liquids from the Marcellus and Utica to the Gulf Coast. It’s the second such project as it follows in the footsteps of Enterprise Products Partners L.P. (NYSE:EPD) ATEX Express, but as the following chart shows, there is more than enough room for both projects.
Source: Williams Investor Presentation (link opens a PDF)
The key here is that Loews will be paying 90% of Boardwalk’s $150 million share of the initial development costs to get the project off the ground. This is key for two reasons, first it mitigates Boardwalk’s risk on the project. Boardwalk CEO Stanley Horton pointed this out on the company’s most recent earnings conference call:
Loews has offered to fund 90% of the development costs. If, for some reason, the project did not go, Loews loses most of the money, not Boardwalk. So we’re somewhat insulated from that. They’re taking the development risk on the project. And as the CEO of Boardwalk, I think that is a great deal for Boardwalk and my unitholders.
In addition, it frees up Boardwalk’s capital to pursue projects that will more quickly affect the bottom line. Bluegrass wouldn’t start generating income until late 2015, so Boardwalk would have expended this capital, paid additional interest on the debt incurred, and not benefited from this capital spending until 2015 if at all. While Boardwalk is initially giving up 90% of its share of Bluegrass, if the past is any indication, it can eventually buy this asset back from Loews when it will have a positive effect on its bottom line.
I’m typically not a fan of meddling parent companies or expensive general partners. That’s why I’ve personally chosen to invest in Enterprise Products Partners L.P. (NYSE:EPD); I like the fact that the company doesn’t answer to anyone but its unit holders. That being said, Enterprise Products Partners L.P. (NYSE:EPD) is all grown up now and doesn’t need the help. Boardwalk, on the other hand, clearly benefits from the relationship it has with Loews. It’s important for investors to see that this relationship really is a competitive advantage.
The article Why a Supportive Parent Company Is Key to Success originally appeared on Fool.com and is written by Matt DiLallo.
Fool contributor Matt DiLallo owns shares of Enterprise Products (NYSE:EPD) Partners L.P. The Motley Fool recommends Enterprise Products Partners L.P. and Loews. The Motley Fool owns shares of Loews.
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