The Federal Energy Regulatory Commission appointed Bud Earley policy advisor on electric matters. Earley most recently served as director of the electric policy division of the FERC's Office of...
Energy Innovators: Ringing in an Age of Enlightenment
to a certain percentage of the profits. It is based on how much you can raise the distribution.
When we took over from Enron, Enron was getting 2 percent of the profits because they were the lowest sharing bracket of the partnership agreement. We took it to where we now get about 20 or 30 percent of the income, which today amounts to close to $70 million.
At the time, Enron was making its 2 percent of a small number that was $250,000 a year.
What was unique about your partnership?
Kinder: Our concept, which had never been tried before, was that we could increase the distributions over a period of time and get that unit price up and use the equity as currency to make additional acquisitions.
Kinder: We could use MLP currency to buy assets from another corporation that wanted to sell or from individuals that wanted to have a tax-free transaction, but we couldn't buy companies outright. There are certain limitations on the ability of the institutions, mutual funds primarily, to hold MLP units.
So we said, let's go out and create what we call "the second barrel of the shotgun." Let's go out and create C-corp. currency by doing an IPO and then we will have an MLP currency and a C-corp. currency. [C-corporation is the corporate structure that most large companies have. The C-corp. pays taxes on all revenues and any dividends it pays shareholders.]
We can go out and buy a company with C-corp. stock and break it apart in a financial sense and put the assets, most midstream assets, pipelines, plants, terminals - things that fit the MLP tax structure - we can drop those down into our MLP and still keep, in our case, 30 percent of the cash flow.
Why did you acquire KN, which contributed to the doubling of your company from $3 billion to $10 billion?
Kinder: We wanted to stay with our area of expertise. Bill and I brought in several of the managers from Enron and some from other places that had decades of experience between us in the pipeline business.
All those assets qualify for MLP. They tend to have very long-term, stable cash flows with a reasonable amount of growth. They tend to be assets that can be improved if they are managed and costs are reduced.
What is innovative about the structure of your company?
Kinder: The financial structure of having an MLP coupled with a C-corp. We are not unique in that Enron still has two other MLPs. El Paso has an MLP. Duke has an MLP.
However, when we bought what is today Kinder Morgan General Partners from Enron, we were getting 2 percent. We were distributing $1.20 in terms of a year to these unit holders. Today we pay $2.90 two-and-one-half years later. Putting it another way, we have returned 282 percent to our unit holders all in return in that time period. Of all the midstream energy companies the next in terms is Williams over that time period. I think