"It's like we were called child molesters, like we were called thieves or crooks," says a highly agitated Kelcy L. Warren, "and we didn't do anything wrong." He's referring to a three-year legal battle the feds waged against his company, Energy Transfer, the largest natural gas pipeline owner in Texas. Accused of price manipulation during Hurricane Rita, Warren took it very personally; after all, the company he cofounded and runs has boosted his net worth to an estimated $1.4 billion. When stock analysts, board members, even his own counsel urged him to settle with the Federal Energy Resource Commission by paying half the $167 million fine the government was seeking, Warren fired his lawyers and dug in. "They had the wrong CEO for that," he bristles. In September he finally settled for $5 million (and set aside $25 million for legal claims). His staffers wanted to throw a victory party. Not Warren. "We paid those bastards a [pretty] penny, we spent millions of legal dollars fighting--and you want to celebrate?"  Today Warren, 54, finds himself stymied by a different sort of nemesis: the open market. For the first time ever, he can't find a pipeline company to buy. "We probably tried to do 20 to 30 deals in the last 14 to 18 months," he says, "and failed on all of them." With more players chasing these assets, prices hang too high. Some targets, while doing poorly, have had a boost from the commodities market--or from their bankers, who were more likely to renegotiate loans than to write them down.  Acquisition is the quickest route to expansion for Energy Transfer. Structured as a master limited partnership, the company pays out quarterly distributions of 89 cents to its unit holders (current yield: 8%). Buying a pipeline can be cheaper than building one, a process that usually takes upwards of two years, during which the company is spending cash without raking it in. Beyond that, Warren wants to add to his 17,500 miles of pipeline network, which stretches from the border of southern California to the Mississippi Delta and connects the gas fields of Texas to every market in that state. Access to the East Coast would goose revenue immediately by giving Energy Transfer a chance to compete for more long-term contracts, transport more gas and link to more diversified markets.  Those contracts, typically ten years, provide the bulk of the company's top line and insulate it somewhat from the price volatility of natural gas. (At a recent $5.68 per thousand cubic feet at the wellhead, the price is down 56% from July 2008.) When gas is cheap, production slows and less of it flows into Warren's pipes, resulting in less toll money. Low prices also squeeze margins on Energy Transfer's inventory--including the 1% or so of the gas it gets to keep to push other producers' inventory through its system. A final way the company makes money: trucking propane to customers in 40 states.  Warren has spent 41 years in the pipeline business. At age 13 he started sweeping out warehouses for the Sun Oil pipeline in East Texas, where his dad worked as a supply clerk. Kelcy devoted summers in high school and college to grinding pipeline seams as a welder's assistant, then climbed telephone poles to fix lines that read the volume of fuel held in storage units. After earning a degree in civil engineering at the University of Texas at Arlington, he worked as a pipeline engineer for Lone Star, then switched over to become a gas buyer. Warren liked the expense accounts, the fatter salary and the chance to play golf on company time. Eventually he jumped to a pipeline and oil refining startup called Endevco ( ENDE.OB - news - people ), becoming president after six years. But after oil prices collapsed in the late 1980s, Warren and Endevco's founder disagreed about the future. "Refining is the cocaine of industry," says Warren. "You have this euphoric feeling when times are good, but the downturns are terrible."  By then he'd come to a revelation about pipelines. If you design them well, and keep your customers happy, you can almost sit back and grow rich painlessly. "I like businesses where you can make money when you go to bed," Warren philosophizes. "I hate businesses where you have to be like a lawyer and work billable hours."  It wasn't quite that easy, alas. After Endevco went bankrupt, Warren, along with Ray C. Davis and Ben H. Cook, investors in natural gas--among other things--bought control of the company in 1993, paying $3 million for 37% of the common shares. "I didn't have any money," says Warren, "just a few ideas."  The right ideas. Renamed Cornerstone Natural Gas, Endevco sold off an oil refinery and some pipeline assets to help pay down debt, and trimmed staff to lower operating costs. The threesome also added gas processing and compression units to the remaining 500 miles of pipeline. Meantime, natural gas prices recovered. They flipped Cornerstone three years later to El Paso for $115 million; each partner pocketed $13 million. "The wire hit the bank," says Warren, "and I got in my car, put the top down, drove to this little place I had in East Texas, and I cried."  Not long after, he, Davis and Cook pooled their resources and got Energy Transfer off the ground. Jealousy was a driver. "I really struggled with the fact that I wasn't stacking up against my peers," says Warren of buddies who worked at Enron. "It was eating me inside." Hiring 30 employees from Cornerstone, the partners hit up gas producers, offering to build pipeline systems. No takers. Ben Cook died. With no revenue, the company watched its cash pile disappear. Warren put his house in Dallas on the market in case he had to make payroll (it never sold, partly because Warren was too proud to put a "For Sale" sign in his driveway). The two partners finally brought in some cash by launching and selling small gas service companies.  Enron's collapse in 2001 proved Warren's bounty. In the wreckage was Oasis pipeline, a unit of the wounded power and natural gas distributor Aquila. Energy Transfer lacked capital and reputational heft. So Warren and Davis leaned on old acquaintances to raise $100 million-plus from funds either founded or controlled by billionaires Richard Rainwater and Warren Stephens, among others. They also enlisted giant utility TXU, which ended up pulling out of the bidding. Still, Davis and Warren won 50% of Oasis, and other assets, for $265 million. Two months later Energy Transfer bought the other half from Dow Chemical ( DOW - news - people ) for $85 million.  A merger in 2004 with Heritage Propane gave Energy Transfer $300 million in cash, control of a publicly traded company (renamed Energy Transfer Partners ( ETP - news - people )) and a new line of business. To raise relatively cheap capital and avoid tax at the corporate level, the company reorganized as a master limited partnership. Like similar flow-through entities (real estate investment trusts, for example), MLPs are compelled to distribute their net income; if they comply they are not obliged to pay corporate income tax. Energy Transfer is split into two publicly traded entities: Energy Transfer Partners, which holds the assets, and Energy Transfer Equity, which operates ETP for a fee and also holds a 39% share in ETP. Exploiting this baroque arrangement, Warren draws no salary. Instead, he owns 19% of ETE; the more he hands out to investors via that company, the bigger his payday. Together the two companies have a market value of $14.4 billion.  Warren was one of the first to exploit the potential value of the Barnett Shale, north of Dallas--which was little appreciated at the time but contains, perhaps, the richest reserves of onshore natural gas in the U.S. (ExxonMobil ( XOM - news - people )'s recent $31 billion grab of XTO Energy ( XTO - news - people ) gave a big boost to shale gas.) Warren paid $500 million for TXU ( TXU - news - people )'s pipeline that connected the Barnett to a power plant. Everyone thought he'd overpaid. "I'd walk into the Petroleum Club, where there'd be loud talking, and suddenly the place would get quiet," Warren recalls with a laugh. But he kept building, shelling out $865 million to buy, from AEP, the Houston pipeline, linking his network to the industrial Gulf region. Over the last six years Energy Transfer has spent $8.9 billion (raised from bank loans, unit offerings and bonds) to acquire assets and improve its pipelines.  Warren is far from done. With access to very deep pockets--energy billionaire Dan L. Duncan owns 18% of ETE--Warren wants not just a lane to the eastern seaboard but a piece of the Marcellus Shale, a large gas field stretching from West Virginia up through Pennsylvania. So far, having approached a host of companies (including NiSource ( NI - news - people ), Regency Energy Partners ( RGNC - news - people ) and Southern Union ( SUG - news - people )) to buy East Coast assets, Warren came up empty-handed. Plan B? Keep expanding what he has--and merge with smaller pipelines. "I have three guys down the hall working on models and scrubbing numbers right now," Warren says. "Of course, the other companies don't know we're investigating them."  With Congress likely to tackle climate change at some point, natural gas is likely to get renewed attention. Per unit of energy, it spits 44% less carbon into the atmosphere than coal and 25% less than gasoline. Like gas billionaires T. Boone Pickens and Aubrey McClendon, Warren is betting on a future with natural gas cars and trucks. "Just make me king for five years," he says. "I'll get it done."  Pipeline Networks It's a small world, the natural gas business. Over 14 years Kelcy Warren has tapped a tight group of energy billionaires to help build from scratch his $14 billion pipeline.  Warren Stephens ($3 billion) Richard Rainwater ($2.5 billion) Their funds infused cash during Energy Transfer's early days, making Oasis pipe purchase possible.  George Lindemann ($1.5 billion) Sold Warren the Transwestern pipeline. Energy Transfer recently bid on some East Coast assets; Lindemann isn't selling.  Dan L. Duncan ($8 billion) Pipeline prince owns 18% of Energy Transfer Equity.  Richard Kinder ($3.2 billion) Kinder Morgan chief in 50-50 joint venture on the Fayetteville Express pipeline.  Aubrey McClendon ($1 billion) His Chesapeake Energy ( CHK - news - people ) ships shale gas through Warren's network; signed 15-year contract to use Warren's Tiger pipeline.  Special Offer: Free Trial Issue of Forbes
Building the largest pipeline system in Texas, Kelcy Warren has taken on naysayers and the feds. Now he's itching to buy something new.