When Kelcy Warren and his partner, Ray Davis, started Energy Transfer Partners LP, a Dallas-based natural pipeline business in 1995, they were fortunate to not know what they were getting into.
“If we had known what we were tackling, we would have been completely intimidated by it and probably would not have been successful,” says Warren, the company’s chairman and CEO. “We attacked it with energy because we didn’t realize it was a mountain that few had ever climbed before. I’m very pleased with that. Our naive approach to business has been quite a strength for us.”
Energy Transfer, which reported revenue of $7.9 billion in fiscal 2006, was one of many energy companies that benefited from the collapse of energy giant Enron in 2002. Energy Transfer had a great team and was happily small but began to see great opportunity in 2002.
“When we began to see these wonderful assets flood into the market because of these financial failures ... we were able to seize upon that, and I’m very proud of what we’ve done,” Warren says.
Little did he know at the time just how big the company would become by gobbling up similar companies and combining their assets with Energy Transfer’s own to fuel its growth. Since 1995, Warren has been involved in six major acquisitions, helping build Energy Transfer into the company it is today.
Here’s how Warren navigated his way through the challenges that acquisitions can bring.
Finding the right target
Energy Transfer is constantly in acquisition mode, and it has a staff of four people who look for those opportunities. That staff networks within the industry and looks for leads from banks and sometimes competitors about what businesses could be on the market. Additional staff, which includes engineers and financial analysts, is often asked to look at a potential acquisition when Energy Transfer gets fairly far into the process.
Warren says the first things he wants to know about any company up for sale are summed up in three questions: “How are they operating today? How much of the capacity is being utilized today? And what are they charging for that service?”
In other words, what’s the untapped potential?
As an example, Warren cites the company’s purchase of a pipeline built to supply TXU Fuel Co.’s power plant.
“We looked at it and said, ‘Here’s a pipeline built to transport natural gas and charge maximum rates,’” he says. “‘We don’t care if it goes to a power plant or a brick manufacturer.’ We began to analyze that asset and realized there was a tremendous amount of unused potential.”
After Energy Transfer has determined that a company has potential, Warren examines the culture of the company he wants to acquire. Energy Transfer’s culture is dress-down, jeans-to-the-office casual, but the employees work hard.
“We have a definite social environment here, and we have merged several cultures,” Warren says. “I’ve had some concerns that some would not be adaptable, and we’ve been pretty lucky here. Most have adjusted to the way we do business.”
Part of what’s helped smooth those transitions is a move the company makes every time it acquires another company. Energy Transfer sends one of its top employees to help the company it bought through its early transition stages. For one recent acquisition of an interstate pipeline business, Warren sent someone who had worked with him for 30 years, even though he didn’t have interstate pipeline experience. That executive is running the acquired business from its Houston office.
“He’s completely loyal to me, and understands the way I think and what is important to me,” says Warren.
Acquisitions can be a quick route to scaling up, but Warren says executives who want to make acquisitions need to make sure they’re doing them for the right reasons.
“No. 1, be patient,” Warren says. “No. 2, exercise discipline. Don’t let your emotions take over. Don’t feel like because you lost the last three you need to be more aggressive. Remain disciplined in your approach. ... We routinely come in third, fourth, fifth and sixth in contests for assets we really want, but we preach this every day to our M&A department, ‘Don’t make mistakes. These assets will, in fact, come back to us.’ We think some of them will, anyway, because we believe mistakes are being made in our sector right now.”
Davis, who served as co-CEO along with Warren until Davis’ recent retirement, says acquisitions at Energy Transfer have been carefully planned and targeted. One acquisition took 12 years to complete, and another took five years.
“Every acquisition we’ve made has been a very strategic, targeted acquisition,” Davis says. “We’ve always tried to make acquisitions when one and one would make three or four. We weren’t just making acquisitions to grow. It had to have a strategic fit into our business plan.”
Unifying the team
Because Energy Transfer was built with acquisitions, the company now has a lot of offices in cities far away from Dallas. Davis says communicating to all employees is important, especially those in remote locations.
Energy Transfer’s management has periodic meetings in which the management staff from the remote offices comes to one location, and they talk about the company’s goals and issues, and the company’s management accepts questions from those location managers at the meetings.
“If you don’t have a chance to get answers to your questions directly, if you feel like they’re being filtered, you’ll think the worst,” Davis says. “If you can look at the people who are making the decisions in the eye and ask them questions and get a response, it’s a lot more meaningful.”
Davis says great management is crucial to managing remote locations. Energy Transfer has two offices, one in Cincinnati and one in Jacksonville, Fla., that he has never visited. But he saw the managers often. His hands-off approach is to keep an eye on what the offices are doing, to be available for questions, but, for the most part, to let the managers do their jobs. Watching the numbers coming out of the offices tells Davis and Warren much of what they need to know about the offices’ performance.
To get to the point Energy Transfer is at today a large company that grew quickly Warren and Davis had to do some reckoning back in 2002. Both realized quickly that the company would have to be willing to take on some debt to take advantage of the opportunities in front of them. Both were the company’s sole owners, and they decided that in the interest of growth, that could no longer be true. First, they brought in investors, and then they went public.
“We had to suffer some dilution to play in bigger leagues,” Warren says. “We brought in some financial partners, and that’s been very rewarding for them and for us. ... I own between 17 and 18 percent of the company today, and at one time, I owned 50 percent.”
Energy Transfer went public in 2004. That has forced the company to refocus its energy on the financial principles that kept the company in good standing with organizations that create investment ratings, such as Standard & Poor’s.
“It’s important for us to have investment-grade credit ratings,” Warren says.
According to Warren, going public is “horrifying” because of the amount of regulation it introduces into the business. Sarbanes-Oxley, the 2002 legislation governing the conduct of publicly held companies, is a complicated piece of legislation that has made it much more difficult for companies to be publicly traded.
“That’s swinging a sledgehammer to kill a gnat,” Warren says. “But it is what it is, and at the same time, we must be in compliance. The cost to companies like us and the distractions to companies like us are amazing. The way I tend to handle it is I surround myself with good people and say, ‘Handle it.’ I end up delegating the things I don’t enjoy.”
Warren says that also leaves him free to do the work he needs to do within the company. He says he is fortunate to have people working around him who are loyal and whom he trusts, which is vital to any company’s survival.
“I realize where my strength lies, and I’ve taken the burden off of me, and it allows me to go do what I do well,” Warren says.
Besides providing a much-needed infusion of capital, becoming publicly traded is a great reward for employees, especially those who have been with the company a long time. When a company is privately held, stock can be given to employees, but it’s tough to sell. Public stock is much easier.
“Going public is wonderful for the people who have believed in the plan for so long because now they can call their stockbroker, and they can begin to see the benefits of all of their hard work,” Warren says.
Energy Transfer, though, isn’t the highest-paying company around, Warren says, and that’s on purpose.
“If anything, we underpay our people, but we greatly reward them with equity,” Warren says. “The way our plan works, we compare ourselves against our peer group, which is our competitors. If we perform at a high ranking against our peer group, then we issue new units to our employees. It’s been a good plan. It’s worked quite well.”
Ultimately, employees who are invested in the company financially tend to stay, Warren says.
“You vest over a period of time,” Warren says. “It’s very punitive financially if you walk away from that vesting. ... I would expect that our turnover rate, for a company our size, is the lowest in our industry.”
Warren says that with its strong staff and available capital, Energy Transfer is in the perfect position to grow.
“I love our future,” Warren says. “(Our industry) has gone back to fundamentals. I am really, really excited. For this nation to address its energy needs, we need to lay a lot of pipeline in the future. We intend to be a major player in that arena.”
HOW TO REACH: Energy Transfer Partners LP, www.energytransfer.com