Energy Transfer Partners is one of four master limited partnerships over which Warren has effective control. MLPs, used primarily by energy companies, don’t pay income taxes. Instead, investors holding units—the rough equivalent of shares—pay taxes on the quarterly cash distributions they receive.
That gives MLPs a lower cost of capital for acquisitions and construction projects. But they have to crank out those cash payments to keep unitholders happy, which means they must keep acquiring new properties or expanding existing ones. “You must grow until you die,” Warren says. He touched on the topic during Energy Transfer’s quarterly earnings conference call earlier this month. He said he was “a little frustrated right now” because he had expected that cheap oil and narrow natural gas processing margins would have created more takeover bargains.
Energy Transfer is developing a $9.6 billion export-import facility for liquefied natural gas on the Gulf Coast with partner BG Group, the U.K. gas producer that’s agreed to sell itself to Royal Dutch Shell. With oil prices down about 40 percent from a year ago, BG has yet to commit to its part of the investment, and Energy Transfer expects the facility won’t be in service until 2020, a year later than planned. “I’m not happy about it,” Warren says.
Generally, MLPs are overseen by one entity encompassing a general partner responsible for the operating units and strategy. In Energy Transfer’s case, that’s Energy Transfer Equity. ETE holds a 1.1 percent share of Energy Transfer Partners in addition to incentive distribution rights, essentially claims on the operating unit’s cash flow.
In theory, these claims give top managers an incentive to grow cash payouts to unitholders in the limited partnerships. As those distributions grow, the general partner’s share of the cash grows disproportionately. Payouts of IDRs can be enormous. Last year, Energy Transfer Partners paid ETE $504 million. Warren, who’s also chairman of ETE, has much of his wealth tied up in that entity.
Critics of MLP structures say the arrangement benefits the general partner at the expense of limited partners. Kevin Kaiser, an analyst at Hedgeye Risk Management, a Stamford, Connecticut, investment advisory firm, says limited partners’ relative benefit can shrink as the general partner’s share of the cash payouts balloons. “The more complex you make the MLP structure, the less obvious it is where these fees are going,” Kaiser says. “What [limited partners] pay that fee for is up for debate.”
In Energy Transfer’s case, says Bellamy of Robert W. Baird, they’re paying for the smarts and guile of one of the world’s top pipeline managers: Warren. Investors baffled by the complexity of Energy Transfer’s structure often park their money alongside Warren in publicly traded ETE. That entity’s total return to investors was more than 250 percent during the past three years, according to Baird.
For all of his success, Warren remains a small-town sort of guy who likes to have buddies to his Dallas mansion on Wednesdays for beers, shuffleboard, and chain yanking. “He’s just a normal cat,” says Jimmy LaFave, the Austin singer- songwriter who co-founded Music Road Records with Warrenin 2007. LaFave was playing a Dallas pub 20 years ago when Warren’s brother introduced them because Warren, barely a millionaire then, was too nervous to approach the singer. “For all I knew, he was a plumber,” LaFave says.
Warren started playing guitar after a friend gave him an acoustic for his 40th birthday. He now has more than 30 guitars, including a 1943 Martin D-28 “that just sounds incredible,” he says. He co-wrote a song, “Talk to an Angel,” on LaFave’s new album. “All you’ve got to do to get some bullshit you wrote on a record is invest in a record company,” Warren jokes.
The music business has hardly been a pipeline of profits. Music Road has released 18 albums, including a collection of songs written by a Warren favorite, Jackson Browne, as performed by Bruce Springsteen, Bonnie Raitt, and others. “Some of our projects make money; others don’t,” Warrensays while chatting with LaFave, Ramsey, and Harris at the old Austin farmhouse that’s home to his Cedar Creek Recording studio. “It’s a hard business.”