From a modest office in the Kinder Morgan building in downtown Houston, Richard Kinder presides over one of the greatest success stories of the midstream industry. The MLP he and former partner Bill Morgan raised from the ashes of Enron Corp. less than 20 years ago is among the newly anointed “midstream majors.” And with opportunities across the continent to move hydrocarbons from parts previously unknown, Kinder—both the man and the company—show little sign of slowing down. He recently took a few minutes to talk with Midstream Business about what sets the midstream titan apart from its competition and where the industry goes from here.

MIDSTREAM: What’s your management style and how has it evolved during your career?

KINDER: First of all, I’m a believer in three things. One [is] that you have to have hands-on management. You have to understand what’s really going on in your company, and that’s more difficult the larger it becomes.

The other side of the equation, which may sound a little contradictory, is that I’m a believer in that old saying, “There’s no limit to what can be accomplished if you don’t care who gets the credit.” I think what you want to try to do is, while staying on top of your business, you also want to give the people who work with you as much authority as possible. And when they succeed, give them the credit. I guess you would call it management by walking around, and I think we practice a lot of that around here.

The other really important thing is, you have to get the bad news out on the table as quickly as you get the good news. Human nature is to tell somebody, particularly if that person is your boss, the good news, but not share the bad news. If there’s a problem, let’s get it out because I’ve found the longer you let a problem fester, the worse it gets.

MIDSTREAM: Is this an approach that you just sort of innately knew would work, or is it something that you developed over time?

KINDER: I think everybody develops over the years, and I’m as old as dirt. So when you get to be my age, I think you’ve kind of figured out part of what life’s all about.

The other thing I would say is that the dirtiest word in the lexicon of leadership is hubris—the idea that if you’ve been relatively successful at something, you won’t make mistakes and you don’t have to relearn lessons.

I think leadership is all about never getting cocky, never feeling you have all the answers and asking for input from all your people. But somebody has to be the leader. Somebody has to drive the bus.

MIDSTREAM: What’s been your growth strategy at Kinder Morgan?

KINDER: When we started in 1997, the enterprise value of the company was about $325 million and we had about 175 employees. Today, the enterprise value of the companies, if you put them all together, is over $100 billion, and we have more than 11,000 employees. So it’s been quite a growth trajectory.

We felt early on that there was room for a company that focused on assets, with almost tunnel vision. At that time, the flavor of the day was trading and moving beyond assets—assets were just to be used to trade around. And I guess my partner, Bill Morgan, and I, maybe we weren’t smart enough to trade around it. We thought very quickly that, No. 1, we could just focus on asset ownership and management and, No. 2, that we could do that in an MLP structure.

Up until that time, MLPs had not been growth entities. They were very small offshoots of a lot of pipeline companies [that] wanted to take some money out of some slow-growing assets without a lot of potential, but wanted to still keep control of them. So they would sell off 50%, 60%, 70% and still keep the general partner and the management, but they weren’t growing, and they usually put second-tier people in charge of them.

And we said, “If we had one of those MLPs …,” if we focused on it—we could grow the cash flow and therefore the distributions, and then we would have a currency to use in acquiring other assets. That was the genesis of what we did. What’s the old saying? Even a blind pig finds a mushroom once in a while.

MIDSTREAM: At this point, do you think MLPs are in their midgame?

KINDER: I think MLPs still make a lot of sense. It’s a tax-effective way to manage and own assets that have very solid, predictable cash flow, and hopefully, have a modest amount of growth.

But the important thing in our view is the assets themselves. I’m a little fearful that on the MLP front, if you have assets in an MLP that don’t really fit that methodology, then you could have some difficulties. We like midstream assets, and we’re kind of agnostic about what we move or where we move it. We are just a gigantic toll road, and we want to get paid for handling other people’s [hydrocarbons], whether it’s natural gas—which is our biggest segment—or crude oil or condensate or, on the bulk side, coal or steel.

MIDSTREAM: What about growth from here? Have all the big acquisitions been made, and now will you focus on organic growth?

KINDER: I think it’s a combination of both. We think there’s a lot of organic growth. We just announced our quarterly earnings, and our backlog of projects is now more than $16 billion.

A great portion of that is natural gas. We have 80,000 miles of pipelines and 180 terminals. Of that 80,000, roughly 70,000 is natural gas pipelines. We’re by far the largest natural gas transporter and storage operator in North America. Having that network just gives us the advantage—I think, a huge advantage—to grow in the future off of that footprint.

We do have some opportunities to make acquisitions, but we have such a big footprint today that I think we will grow largely from an organic standpoint.

MIDSTREAM: Kinder Morgan recently got into shipping with the acquisition of several Jones Act vessels. Tell us about that decision.

KINDER: There are various ways to move crude and refined products around. You can do it by rail. You can do it by pipeline, or you can do it by waterborne. And in waterborne, there are two ways to do it. You can move it by barge or you can move it by a tanker, and we had the opportunity to buy these Jones Act tankers. They’re contracted out, including the new builds, for extended periods of time. We think there’s some upside in the rates.

You could debate all day whether the Jones Act is right or not, but it’s a political and economic reality.

MIDSTREAM: Kinder Morgan Inc.—the general partner in the MLP—has come under some scrutiny as critics have suggested it takes too much cash from the partnership. How does the MLP model work for Kinder Morgan and its investors?

KINDER: It has a partnership agreement, just like all the MLPs do, spelled out where the general partner starts with a low level of incentive [distribution rights]. And as it improves, so does the distributions to limited partners, and then [the general partner’s] percentage goes up.

We crossed into the top percentage in Kinder Morgan, I believe in ’98 or ’99, so we’ve been a full payer of IDR for a long time, which means the general partner receives a significant part of the cash flow that’s produced down in the MLP.

The whole idea behind this arrangement was that you incentivize the general partner, who is the manager of it. In an MLP, by law, the limited partners cannot exercise any control over it, or they lose the tax advantages of the master limited partnership arrangement. So you have to have a general partner. Historically, the way it was compensated—if the general partner was managed well, and the test was if it increased the distributions to the limited partners—then it received more.

And that’s worked out very well for most MLPs. In our case, the compound annual return to an investor, if you started when we took over the MLP in the beginning of 1997, has had a 23% compound annual return. That’s Warren Buffett-style for that period of time.

You can’t keep up that growth rate when you get to be the size we are now. We’ve [established that] at the MLP level, we’re going to grow 5% or 6% a year down there, which translates into 8% or 9% growth up at KMI [the general partner].

We’ve done better than that in the past. We’ve said for the next three years—using ’13 as a base year, which was a very good year for us—that KMP [the MLP] would grow 5% and KMI would grow 8%, compound, over those years. That’s a pretty nice growth rate when KMP is yielding 7% and KMI is yielding 5%.

You put all that together, the growth rate and the dividend and it works out to be, we think, a pretty solid investment for people with a huge backlog of massive assets.

So that’s the strategy. Can you do it in a different way? Sure. But that’s the way we’re set up.

MIDSTREAM: How do you answer the critics?

KINDER: That’s all fine if you want to throw mud at the wall. But the truth is that we have followed the partnership agreement. It has been very well-disclosed exactly how the partnership agreement is structured, and we have delivered strong returns to both KMI shareholders and KMP unitholders.

We always look for ways to improve things. If there’s a way to change that around and make it more beneficial for KMI and KMP, we’d do it. I don’t think there are any silver bullets, but we continue to look at things.

One of the complaints is, “Well, you can’t afford to do all these projects.” Our average return is usually in the mid-teens. In fact, the overall return on invested capital at Kinder Morgan and KMP is north of 13% and our cost of capital is about 9%.

So we do not suffer for the ability to do all these expansions, to make acquisitions. I don’t know if there’s any reason to change anything, but it’s easy to criticize.

MIDSTREAM: Jim Cramer at CNBC says you have one of the best-run companies in the U.S.

KINDER: I don’t know if Jim is right or not. He’s a smart guy, but I don’t know that there’s anything magic. We pay a lot of attention to detail. We try to run things the right away. We try to be open and honest. I think we’re the only Fortune 500 company that publishes a detailed budget in January and says, “This is what we expect for the year.” And whether you’re an investor or an employee or a reporter, you could go on there and figure out exactly—not just what the overall targets are—but what each business unit has projected and is supposed to produce for the year.

So I laugh when somebody says, “Well, they didn’t meet my expectations or they outperformed my expectations.” We lay it all out. We pride ourselves on being transparent. I think that’s very important, too. Nobody likes hidden agendas.

MIDSTREAM: You do a few other things differently, too, like your $1 annual salary and the no-private-jets policy.

KINDER: Since 1999, I’ve taken a dollar a year. The reason for that is that I’m fortunate enough to own a big part of the company, and I thought way back then that management should be aligned with the shareholders. And now Steve Kean, our chief operating officer, works for a dollar a year, too. So the two of us, I think, are pretty good safekeepers or harbor masters.

We’re not going to inflate people’s bonuses so we get a bigger bonus because we don’t receive a bonus. We’re not going to try to grow the company so we can have a bigger air fleet, because we don’t have corporate airplanes.

It’s not possible in all cases, but I think having a dollar-a-year CEO is a pretty good idea, and that’s worked pretty well here. I think that has meaning to investors and also to employees. I don’t think anybody minds if the founders of companies or the CEO is making good money if they produce good results. The only way I make money is if we pay good dividends and distributions, which goes to the shareholders and unitholders. There’s no separation of interests. I think that’s important in the long term.


MIDSTREAM: What do you make of the concept of “midstream majors?” What does it mean for the industry?

KINDER: I think there is something to be said for recognizing that some midstream companies have a lot more assets than others. That could be good or bad. The growth rate is usually not as fast, the bigger you are. On the other hand, I think you have a lot more protection in the event of a downturn, a lot more ability to weather storms in one area of your business.

There are newer, faster-growing MLPs, midstream players that can produce faster growth in the short term. They may be one-trick players. They may just be in one producing basin or they may just have one product. Not that there can’t be a lot of money made on those as an investor, but I think there’s also something to be said for big, quality companies that have a broad, diversified set of assets, and that would certainly be true of Kinder Morgan and some others.

MIDSTREAM: You believe in pipelines?

KINDER: I do.

MIDSTREAM: Why? What makes them special?

KINDER: Well, I think people think when they turn on their heat or air conditioning or flip the light switch, that it’s somehow magical. But if you can’t get the natural gas or other forms of energy to end-use markets, the way we live our lives changes dramatically and becomes much more difficult. The midstream energy business—particularly pipelines—is just a wonderful way, and the most efficient way, of moving products from one place to another.

The producing basins are much more diverse today. For example, no one had heard of the Bakken, the Eagle Ford or the Marcellus/Utica a few years ago. Those three basins combined have revolutionized the supply sources of natural gas, crude oil and NGLs in this country.

You have to have all kinds of pipeline infrastructure built to go from these basins to where the demand centers are located. And that’s where Kinder Morgan comes in.

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