Excerpt:
Kinder IPO to Awaken ‘Sleepy’ Pipelines for Goldman, Carlyle
By - Nov 23, 2010 10:42 PM MT
The Kinder Morgan, Inc. Rockies Express natural gas pipeline runs for 1,679 miles from Colorado to Ohio. Photographer: Matthew Staver/Bloomberg News
McGill dug out the daily report sent to top managers and realized a number had been transposed. He explained the typo, and a satisfied Kinder hung up. McGill never forgot the lesson.
“He knew every morning what every pipeline was doing, what every power plant was generating, what every processing plant was producing,” said McGill, now senior vice president of natural-gas operations and engineering for Enbridge Inc.’s North American unit.
Kinder’s attention to detail may be his most valuable asset as he prepares an initial public offering of Kinder Morgan Inc., operator of the second-largest U.S. pipeline network, said Jim Murchie, founder of Energy Income Partners LLC in Westport, Connecticut. Just three years ago Kinder participated in a $22 billion leveraged buyout to take the company private.
Now investors who backed that buyout, including Goldman Sachs Group Inc. and Carlyle Group, plan to raise as much as $1.5 billion in the stock sale while Kinder, 66, holds on to his 31 percent stake and is given the power to name five of the company’s 13 directors.
After quitting Enron in 1996 when he didn’t get the chief executive officer’s job, Kinder and a group of investors bought what he called “sleepy, old pipelines” from the Houston-based company that was shifting its focus to higher-profit trading in gas and electricity. That $40 million investment blossomed into a $27.2 billion empire.
Divergent Paths
Kinder’s departure from Enron marked the beginning of diverging paths for the two businesses. Enron, the product of the 1985 merger of InterNorth Inc. and Houston Natural Gas Corp., was on its rocket-ride up as one of America’s most successful companies.
Enron’s transformation involved shifting its focus to trading gas and power like stocks and currency, according to regulatory filings. By 2000, pipelines accounted for just 15 percent of its pretax earnings, down from 46 percent in 1996.
Five years after Kinder left, Enron was in cinders, consumed by accounting fraud investigations that sent CEO Jeff Skilling and finance boss Andrew Fastow to prison, obliterating the retirement nest eggs of thousands of employees.
$1 Salary
As he built his own business, Kinder paid himself a $1 salary and eschewed corporate jets and big bonuses to concentrate on hard assets that generate steady profits. Fourteen years after he started his new venture, Kinder Morgan’s annual return to investors averages 26 percent, outpacing the 5.3 percent gains in the Standard & Poor’s 500 Index.
Kinder’s personal wealth has grown to about $3.6 billion, according to an estimate by Forbes Magazine this year.
Enron’s shareholders were wiped out almost nine years ago when the company filed for bankruptcy protection.
In a quest to find deals and build projects that will fuel growth for decades, Kinder announced $1.18 billion in acquisitions this year, eclipsing his original $450 million target. The largest was an $875 million agreement to buy a 50 percent stake in Petrohawk Energy Corp.’s gas-gathering network in the Haynesville Shale, a gas deposit that straddles the Louisiana-Texas border.
Kinder’s deal making signals a shift to pipelines serving the gas-drenched shale formations in the southern and eastern U.S. after focusing in recent years on hauling gas from the Rocky Mountains to the Midwest and Northeast. The 1,679-mile (2,702-kilometer) Rockies Express conduit between Colorado and Ohio, co-owned with Sempra Energy and ConocoPhillips, began operating last year.
Pipeline Boom
“A lot of people like to count Rich out and say that he has peaked; how much can he grow?” said Kevin McCarthy, CEO of the Kayne Anderson MLP closed-end funds, the second- largest investor in Kinder Morgan Management LLC, the limited partner that manages the pipeline partnership. “He always seems to pull a rabbit out of the hat and continue to grow.”
New drilling techniques that made formerly impenetrable gas deposits accessible will spark a boom in pipeline construction over the next two decades, according to the Interstate Natural Gas Association of America. Pumping all of the gas from new wells in places like Texas and Pennsylvania to urban markets will require as much as $210 billion in new pipes and gas-processing plants, the association said.
Counting Pennies
The 37,000 miles of pipeline and 180 storage terminals operated by Kinder Morgan and its parent make it the largest transporter of fuels such as gasoline and jet fuel outside of the major oil companies and refiners.
To make money in these so-called midstream businesses, the company charges a fee for pumping natural gas or motor fuels through its system. Kinder Morgan’s Plantation pipeline, which it owns with Exxon Mobil Corp., collects about 3 cents on every gallon of gasoline shipped on its network from Louisiana to Washington D.C.
“These are assets where you pick up pennies at the margin,” said Haag Sherman, co-founder of money manager Salient Partners LP and a Kinder Morgan investor. “Kinder really understands the intricacies of the pipeline system and where value can be reaped.”
Kinder also understands the value of meticulous note- taking. The University of Missouri-trained lawyer carries a yellow legal pad into every meeting to jot down projections, estimates and ratios. His recall of seemingly mundane points months later can intimidate some, said Enbridge’s McGill.
Taking Notes
In presentations at Enron, McGill resorted to having co- workers take notes any time they saw Kinder writing something down. That way McGill would know what interested Kinder and where he might follow up.
“I don’t have any sympathy for CEOs that say, ‘Well I’m just a big picture guy; I don’t know what is going on,’” Kinder said in an April interview in his 10th floor office in downtown Houston.
Kinder Morgan Inc. operates the second-biggest U.S. pipeline network by volume through its control of Kinder Morgan Energy Partners LP, a master limited partnership, or MLP.
Part of the partnership’s secret to success lies in the MLP structure that shields cash from the taxes imposed on corporations. MLP’s distribute cash to unitholders, who are taxed, leaving the parent with lower costs of capital and more money to fund expansion, said Jerry Swank, founder of Dallas-based Swank Group LLC, which manages about $865 million.
The Modern MLP
“Rich is the guy who made the image of the modern MLP,” Swank said. “He went out and proved you could make accretive acquisitions in this midstream space that added value to the shareholders substantially.”
In 2009, Kinder Morgan Energy Partners had $1.2 billion in cash available to distribute to its unitholders. This year the partnership plans to raise its distributions, or cash payments, to investors by 4.8 percent, placing it in the middle of the 30 competitors listed on the Cushing 30 MLP index.
Kinder’s focus on the nuts-and-bolts of daily operations, and aversion to risk-taking, are what make the company a desirable investment, said Fayez Sarofim, president of Houston-based Fayez Sarofim & Co., the second-largest holder of Kinder units. Kinder said he buys just one in every three or four of the assets on which he bids.
“In this fragile world you should” play it safe, said Sarofim, 81, who has $20 billion under management. “One wish is to make money. The other is not to lose it.”
‘Risk Averse’
Bill Morgan, who founded the company with Kinder and retired in 2003, said their cautious approach was informed by their stakes in the enterprise, which meant they stood to lose personally from any missteps.
“Early on, people said we needed to be more like Enron,” Morgan said. “Companies that were driven by earnings looked at things one way. We were driven by cash.”
“I guess that is risk averse in some people’s mind,” Kinder said. “But to us, it’s the only way to run a railroad.”
To contact the reporter on this story: Jordan Burke in New York at jburke29@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net.
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