How a scandal-plagued company gave birth to Kinder Morgan

Three years ago, a Wall Street analyst, Kevin Kaiser of Hedgeye Research, called Kinder Morgan a “house of cards,” claiming that the company's bottom line looked healthy because they were skimping on maintenance costs.

Kinder Morgan is the Texas-based company behind the west coast Trans Mountain crude oil pipeline, and boasts 84,000 miles of North American oil and gas pipeline. It was not the first time a company associated with Richard Kinder, one of its founders, had been described using that phrase. The original “house of cards” was Enron where Kinder served as President and COO, expanding its revenues from $5.7 billion in 1991 to $13.3 billion in 1996. Enron collapsed in the 2001 scandal over its questionable accounting methods. It begs the question: does any of Enron’s genetic makeup live on inside Kinder Morgan?

Kinder Morgan Canada, which is now awaiting a federal government decision on its plans to expand Trans Mountain and triple its capacity to 890,000 barrels of oil per day, declined to answer questions from National Observer about its history and current safety oversight, explaining that it didn't have anything to add to previous media articles about these topics.

Kinder, once a lawyer for Rush Limbaugh’s family firm, was at Enron when it was formed in 1985 through a merger between InterNorth and Kinder's employer, Houston Natural Gas. Within five years, Kinder rose to the position of President and COO, helming the company until he was replaced in 1996 by the more charismatic Jeffrey Skilling, now serving a 24-year prison sentence for his role in the Enron scandal.

Kinder capitalized on his ouster. Armed with a $20 million severance package, he joined with another Enron alumnus and university classmate, Bill Morgan, to buy up some pipelines and an Illinois rail-to-barge transfer terminal that Enron was unloading for a price tag of $40 million (the assets were worth $325 million). In 1997, they closed a deal for the Enron Liquids Pipeline Company—an Enron tax shelter — and the entity which would later become Kinder Morgan was formed.

Richard Kinder, a.k.a. 'Doctor Discipline'

Kinder deployed similar management strategies at the new company to the ones he had previously honed at Enron. At Enron, Kinder had been nicknamed “Doctor Discipline” for the steel grip he maintained over cash flow and expenses, and at Kinder Morgan he immediately began slashing costs, laying off employees, and clamping down on corporate luxuries like private jets. Under his watch, the company’s profits grew to $13.92 billion US in 2015, making it America’s largest energy infrastructure company. “We wanted to drive home one culture here: Cheap. Cheap. Cheap," he told Fortune magazine of the early days of Kinder Morgan. “We were tightwads.”

Crucially, Kinder Morgan — described in that Fortune article as the "anti-Enron" — also adopted the business model of the Master Limited Partnership, designed for companies that do not necessarily produce anything, but instead own infrastructure, like pipelines, that generate income in the form of tolls (they charge oil producers to move product through their pipelines, in a similar way to drivers paying fees on tolled highways). What is significant is that MLPs don’t pay corporate taxes, instead distributing most of their profits to investors, who then pay income taxes at their individual rates which is usually much lower than the corporate tax rate. This allowed Kinder Morgan to generate enormous returns, a total of 350 per cent in its first decade, compared with the 83 per cent returns generated by the S&P 500. It also allowed them to buy up existing pipelines from other companies, including the Trans Mountain pipeline in 2006, and made Richard Kinder the richest man in Houston, the city of American oil tycoons.

Kevin Kaiser’s 2013 critique of Kinder Morgan — and MLPs more generally — rested on his claim that their bottom line was heavily dependent on financial strategies for minimizing taxes, at the expense of pipeline maintenance. His report caused an uproar within the industry, but others had made similar arguments in the past. In 2003, the celebrated independent energy analyst Kurt Wulff called MLPs “partnerships of greed,” and speculated that a rupture in one of Kinder Morgan’s Arizona gas pipelines the previous year was a sign of them skimping on maintenance spending.

It is not just energy analysts who claim that Kinder Morgan are skimping on maintenance. In October, Greenville Online reported that three U.S. environmental groups, Savannah Riverkeeper and Upstate Forever and the Southern Environmental Law Center, sued the company for neglecting the upkeep of its Plantation pipeline, which they claim is responsible for a 2014 leak in Belton, South Carolina. Meanwhile, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration found that Kinder Morgan was responsible for 180 accidents along its pipelines across 24 states, from 2003 to 2014, the Athens Banner-Herald reported.

More recently, Robyn Allan, the economist who walked out of the National Energy Board’s Trans Mountain pipeline hearings in 2015, has argued that the company “drains financial wealth from our economy and does not pay its fair share of taxes.” Allan has outlined, how Trans Mountain is owned by a “myriad of entities” in Canada, including Unlimited Liability Companies that minimize taxes for U.S. parent companies.

Today, Kinder Morgan is no longer an MLP. It abandoned the model in 2014 when it consolidated its holdings under one corporation in a move the company praised to investors for its “tax advantages,” the Wall Street Journal reported. But Allan has highlighted that Enron alumni remain well-represented among Kinder Morgan’s leadership. The current President and COO, Steven J. Kean, was Enron’s former senior Vice President of Government Affairs. Jordan H. Mintz, Kinder Morgan’s chief tax officer and a board member on several of their Canadian subsidiaries, was Vice-President of Enron’s tax division from 1996 to 2000, and also the target of a 2007 lawsuit by the US Securities and Exchange Commission for his role in the Enron scandal, the Washington Post reported. Both the vice president of corporate development, Dax Sanders, and the vice president of finance and investor relations, David P. Michels, hail from Enron too, the Tyee has reported.

Kinder Morgan says it's committed to improving the Trans Mountain expansion project

Does this amount to anything more than guilt by association? After all, commentators have drawn a hard distinction between Enron’s Kinder era, which was focused on the company’s hard assets like pipelines, and the Skilling era, when Enron’s focus apparently shifted toward the kind of financial accounting that led to the company’s collapse. But Allan has shown that the US federal investigation into Enron’s collapse found that company executives were overstating their profits and fudging tax returns as early as 1992. A similar U.S. Joint Committee on Taxation report also claims that Kinder helped to usher in some of the tax avoidance strategies that eventually brought down the company (namely, the 1995 transaction known as “Project Tanya”).

There is also no evidence that Kinder Morgan has cheated on its taxes and expenditures in the way that Enron did, although, as Bloomberg reported, the company paid $27.5 million US last year to settle a lawsuit by shareholders over their accounting practices. But as Allan has shown, they have reaped enormous profits from the low taxes they have paid since 1997, not only through its MLP structure in the U.S., but also through tax refunds in Canada.

“It’s not uncommon for a company to not highlight failed ventures from their board members,” said Joshua Fershee, a professor at West Virginia University who focuses on energy and business law. It is also not uncommon for companies to try to minimize their taxes, he explained, and while one could reasonably argue that Kinder Morgan aren’t paying their fair share of taxes, that is more an issue of how tax payments are structured in the US and Canada than about Kinder Morgan’s business practices. “It’s a legitimate policy question,” said Fershee, “but it’s not a legitimate question about the entity, Kinder Morgan, itself.”

In a recently published opinion piece, Lizette Parsons Bell, the lead for the company's stakeholder engagement and communications for the Trans Mountain expansion, said that if the project was approved, it would generate $150 million in new spending on safety measures and that the company was committed to engaging with local communities to make its project stronger.

"Successful engagement isn’t about finding agreement on every issue or changing someone’s opinion," Parsons Bell said. "It’s about honesty, openness and a willingness to listen and learn. It’s this approach that has made our project stronger and has laid the foundation for us to build and operate the expanded pipeline in consideration of the many and varied interests we have heard."

Last year, Richard Kinder described the Trans Mountain pipeline expansion as a “public good” and noted that he was “astounded” by opposition to it. “We intend to get it built,” he said at a Houston conference. In October, a group of doctors across Canada disagreed, warning of the potential health effects—asthma, cancer, fire and contaminated water sources—of an accident along the Trans Mountain pipeline expansion. So who is benefiting?

The pipeline expansion is expected to generate jobs and $300 million Canadian in tax revenue for B.C. But it is also expected to generate far greater revenues for the US toll-taker: $850 million US a year from its Canadian subsidiaries once Trans Mountain is in operation, Kinder Morgan Canada president Ian Anderson said in testimony to the National Energy Board. And profits will not only accrue from the Trans Mountain pipeline. In fact, oil from Eagle Ford shale in Texas, which is too light for local refineries, will be shipped to Alberta via Kinder Morgan’s Cochin pipeline system, where it will be used to thin out the oil sands. Some of that oil will then flow through the Trans Mountain pipeline, where it can be exported to Asia or the West Coast. But some of it could also flow back to Texas refineries. And all along the way, Kinder Morgan will be collecting tolls.