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Fortnightly 40 Best Energy Companies

Superior asset management, exceptional cost discipline, and magnificent growth opportunities define the winners of our second annual financial ranking.

Fortnightly Magazine - September 2006

of our assets.”

He and his company have been quite serious about extending this ethos to corporate management. “This has been discussed about us before. Rich Kinder earns $1 per year. He takes no bonus, no options, no restricted stock, and no other form of compensation. Our management salaries have a cap of $200,000 per year. We do not advertise. We don’t name stadiums. We don’t fly first class or own corporate air craft.” Furthermore, this tight discipline on expenses not only is observed in the C-suite, but even in the development of new projects.

Shaper says that the master limited partenership (MLP) structure imposes a stricter discipline on Kinder Morgan Energy Partners (KMP) than on other companies.

KMP is obligated to return its cash that it generates to its partners. Shaper says that this obligation puts management’s focus on generating cash and earning a return on that cash for investors. But because the MLP distributes all of its available cash to investors, when KMP want to make an investment, the company must go back to those investors and make a convincing case.

“We have to go back to investors, and say essentially, ‘Hey, we want to make another investment. This is what the investment is. This is how much it will cost. This is the return that we expect it to generate. Won’t you please give us the capital to do it?’” says Shaper. He believes this requires a much different discipline than management teams that retain cash for new investment.

“I think that that discipline, that requirement to go and raise capital for your investments leads to better investments, because you only do it when you are convinced that you are actually going to earn a reasonable return,” he says.

The company does have a few attractive projects in the pipeline that may keep it in the upper ranks of the F40 for some years to come. Even if the management buyout of Kinder Morgan Inc. would occur, which had not been decided by the company’s board of directors at press time, KMP still would remain a public company and be traded on the New York Stock Exchange.

“Looking forward, we are going to get some tremendous growth from some of these natural-gas pipeline expansions. Rockies Express being the largest, it’s over $4.4 billion dollars in total investment, and we will be owning about half of that. It is a fully subscribed project (1.8 bcf per day) running from Colorado ultimately all the way to the Eastern edge of Ohio. That will drive tremendous growth,” he says.

Then there is the Louisiana pipeline, which will connect to some LNG facilities in Texas and Louisiana, and which the company believes will grow earnings significantly.

But will the earnings be enough to retain the top spot in 2007? We won’t bet against Kinder Morgan. But C Three’s Rollins points out that many companies that endured heavy losses from the merchant meltdown will have worked off all of their losses by 2007.

Just look at TXU, Rollins says. It rocketed to the top