The physical transformation of Koch Fertilizer’s plant in Enid, Oklahoma, involved the largest capital project in Koch’s history and nearly three years of effort. But it took a different kind of transformation – one that led to the creation of virtuous cycles – to position the plant for long-term success. This required new visions, major changes to the plant’s organization and culture, the application of Koch’s risk philosophy and many more years of effort. Enid’s story demonstrates how Principle Based Management™ can, over time, transform not only a facility but an entire business.

In 1997, Koch Fertilizer’s* U.S. assets were limited to an ammonia plant in Sterlington, Louisiana, and an ammonia pipeline system with 28 terminals running from the Gulf Coast to the Upper Midwest. Koch Fertilizer’s leaders reported to Jeff Gentry, then-CEO of Koch Minerals, who recalled: “The whole thing was breakeven at the time because Sterlington was losing money.” That plant was a poor performer and poorly positioned, hundreds of miles away from the Midwestern farmers who used ammonia fertilizer.     

The next four years brought tough times for those farmers. They were hammered by a combination of bad weather (115-degree heat with lingering drought in the wheat belt and too much rain in the corn belt), low crop prices (down as much as two-thirds for both corn and wheat), and high fertilizer prices (caused by a quadrupling of the price for natural gas, the primary feedstock for ammonia-based nitrogen fertilizers). Many farmers couldn’t or wouldn’t buy fertilizer under those circumstances, resulting in a glut of unsold fertilizer.

Rather than looking to exit the business, Koch Fertilizer’s leaders regarded the situation as an opportunity. “The way we saw it,” said Gentry, “the fundamental economics for fertilizer production couldn’t get any worse. So we developed a strategy of buying extremely distressed fertilizer assets based on our belief the market would turn around.”  Although the current valuations said it was a great time to buy, “it took some guts to want to enter the U.S. fertilizer market when the industry was on its back.” 

Believing that opportunities were greatest in the Midwest, leaders started evaluating various assets in that region. They were looking for advantaged locations with the ability to not only produce ammonia but upgrade it into higher-value products. The most likely prospects were a pair of publicly traded companies and two farmer-owned cooperatives. One of the public companies was too expensive and the other was unwilling to sell. The smaller of the two co-ops had too many disadvantaged assets. That left Kansas City-based Farmland Industries.

When Koch Fertilizer reached out to Farmland, it was the largest agricultural co-op in North America, with 1,700 locations and 600,000 farmer-owners. It was also the biggest producer of nitrogen fertilizer in the U.S., with seven plants producing a total of 4 million tons annually. Enid, the largest of those plants, produced more than a million tons of ammonia, which was distributed by rail or truck to nearby customers and by pipeline to those farther away. 

At first, Farmland was only willing to discuss a 50/50 joint venture encompassing its entire fertilizer business, including unprofitable and uneconomic facilities. As discussions progressed, Koch Fertilizer could see that Farmland was in serious trouble. It lost almost $30 million in 2000 and nearly $100 million in 2001. A large inventory of unsold fertilizer made things look even worse in 2002. Following several site visits, it became apparent that Farmland had a dysfunctional culture that led to its burden of unprofitable contracts, inefficient business practices and significant debt. It tried to remain solvent by idling plants and firing employees, but without success. Joint venture negotiations ended in May 2002 when Farmland let Koch Fertilizer know the co-op would be filing for bankruptcy.

The bankruptcy court voided Farmland’s unprofitable contracts and was willing to sell its assets individually, making an acquisition much more appealing to prospective buyers. At the auction of Farmland’s fertilizer assets on May 20, 2003, Koch Nitrogen outbid competitors to acquire Enid and three smaller fertilizer plants, twelve terminals and a half-interest in an ammonia plant in the Republic of Trinidad and Tobago for a total of $293 million. Of that, $188 million was for the assets and $105 million was for assumed liabilities. “We paid about 4% of the replacement value for those U.S. assets and 67% for our interest in Trinidad,” said Brock Nelson, a member of the due diligence and negotiation teams.

The acquisition exceeded expectations almost immediately. “We made $70 or $80 million in NIAT (net income after tax) right out of the gate,” explained Scott Flucke, Koch Nitrogen’s former general counsel, “because we bought a lot of their inventory at a very low cost right before fertilizer prices rebounded.”   

Unfortunately, other things turned out worse than expected – especially operations. Due to our misguided Rapid Transformation initiative, intended to lower costs and improve processes, many plant employees were let go before Koch Fertilizer knew who the essential contributors were. (This mistake would soon be repeated with similar consequences at INVISTA and Georgia-Pacific.) “We could have been more successful if we had taken more time on employee selection,” admitted Larry Angell, a former vice president of operations. 

“Before the acquisition in 2003, plant reliability was not a concern,” recalled Nelson. But after we let dozens of plant employees go that summer, plant managers were left with bare-bones staffing. They no longer had the resources to be successful. “That,” said Nelson, “was when we started experiencing frequent unplanned outages.” 

Those outages, some of which shut down Enid completely the following year, were brutally expensive in terms of lost revenue and repair costs. Repeated outages also increased safety risks and put added stress on employees, who never had time for continuous improvement.

Mike Kleis, who had worked at Pine Bend refinery before becoming manager of the smaller, newly acquired fertilizer plant in Ft. Dodge, Iowa, became Enid’s plant manager in 2009. That was a challenging time for the global economy and most Koch companies.  But the Great Recession was not what worried Kleis most. He realized the entire workforce at Enid was worn out. Employees were quitting after working endless overtime or being asked to cancel their vacations. “We needed to treat people better,” said Kleis.

Beginning in 2011, a combination of factors prompted Koch Fertilizer’s leaders – Steve Packebush, Chase Koch and Scott McGinn – to re-evaluate that business. “On the plus side,” McGinn said, “the margins for nitrogen were more than doubling as the ethanol boom drove increased fertilizer demand.” The team spent the next year and a half working through where and how to further invest in Koch Fertilizer’s assets to take advantage of what appeared to be a long-term opportunity.

Their initial focus was on the Fort Dodge, Iowa, and Beatrice, Nebraska, plants, both of which were in the corn belt. “But the more we studied the situation, the more we became convinced that Enid might be a better option for further investment,” McGinn said. Enid had good access to natural gas, scalability and was the only U.S. facility serviced by two major railroads, meaning “we could have flexibility in shipping products at favorable rates anywhere west of the Mississippi River.”

However, Enid also presented its own challenges. It had significantly higher transportation costs and declining demand for its ammonia output, which was Enid’s primary product. There was also concern regarding the future availability of the ammonia pipeline serving Enid. As McGinn explained, “We felt Enid needed a different product mix—one that included differentiated and higher-value products such as urea,” which was safer, had growing demand and cost less to transport.

By early 2013, Koch Fertilizer’s leadership had upgraded the vision and made the decision to go all-in with Enid. The next six months were devoted to the initial engineering work necessary to determine the plant’s needs and estimate the capital required. Then EPC (engineering, procurement and construction) specialists were consulted to challenge those assumptions and ensure they were correct.

Their analysis confirmed that it would take a major investment for Enid to become competitive long term. Its transformation would require a massive new urea unit, as well as an expansion of the existing ammonia units, construction of an enormous storage facility, installation of specialized high-capacity loading equipment, and a water treatment plant capable of processing billions of gallons of partially treated municipal wastewater annually. The total cost for all of this: a staggering $1.3 billion.

When that proposal request was brought before the board, it was the largest single capital request in Koch’s history (not counting acquisitions). It was approved on July 31, 2014.

Following that decision, Kleis, who had already spent five years struggling to manage Enid with only mixed success, found the prospect of wrestling with an even bigger facility unappealing. He decided to transfer back to Fort Dodge.

After almost a year of planning and permitting, construction began on May 5, 2015. It took more than two years to complete the work. At one point, there were 2,800 construction workers on a site that normally held fewer than 150 employees.

During the expansion, the existing ammonia plant was plagued by unplanned outages, totaling hundreds of days in 2016 and 2017. A turnaround (a planned shutdown for regular maintenance) that was supposed to take 83 days required 104 days, and even then, it ran fitfully. According to Jed Redman, who came to Enid in a safety role, “we had reliability issues across the board.”

The expansion was completed in October 2017. On paper, Enid could now produce up to 900,000 tons of urea a year and fill a 110-unit train with up to 100 tons per unit in less than 24 hours. But when it was time to start the new equipment, employees didn’t know how to make it run. Enid couldn’t operate.

“Whenever you build something new, it never works quite like you thought it would,” admitted Kleis. But this was a worst-case scenario. Enid’s billion-dollar expansion was running poorly. To make matters worse, a severe ice storm in November froze the instrumentation for the new units, pushing the start-up back by four months.

Meanwhile, Enid’s production costs per ton of fertilizer had become among the highest in the industry. The plant also continued to rack up massive downtime, an average of 112 unplanned days per unit per year. All of this was disheartening for plant employees. Turnover rose to almost 30%, which meant dozens of new people had to be hired, complicating things even more. Enid ended the year losing money. Its return on capital consumed (ROCC) for 2017 was minus 5%.

In January 2018, when Mark Luetters became the president of Koch Fertilizer, the new equipment at Enid was still not running properly. “We had a sizeable investment that wasn’t paying off, the legacy plant wasn’t running well and our cost structure was uncompetitive,” he said. “Leadership was overwhelmed and exhausted. No one was thinking long term or prioritizing. And we had high turnover because there was no organizational confidence.” 

This was when Mike Kleis re-entered the picture. “Mike wanted to return to Enid,” explained Luetters, “because he had succeeded in turning around Fort Dodge. He grew a lot there.” Luetters called Kleis’ return “a lifesaver.”

Kleis and Luetters agreed that Enid’s reorganization needed to begin at the top. “You can’t run your business like ‘Animal Farm,’ where there’s one set of rules for the leaders and another set for everyone else,” said Luetters. Kleis and his team drew up a list of behaviors expected of each leader and presented them at town hall meetings, telling employees: “This is what you should expect from us. We need to lead more and manage less. No more top-down. We need to earn your trust and be credible. We need to give you opportunities to prosper. And you need to hold us accountable for making you more successful.” 

The leadership then began addressing the serious need for more employee accountability. “No one felt responsible for anything,” observed Duane McGregor, Koch Fertilizer’s PBM coach. “Instead, people stood around, blaming others and waiting to be told what to do.”

Throughout the rest of 2018 and the following year, supervisors began working with each employee to “recalibrate” their role based on the division of labor by comparative advantage. This resulted in opportunities to do things that were off-limits before, which, in turn, led to personal transformations. “That was the biggest change we made,” said Kleis, “to get people thinking in terms of who should own what. We needed the person closest to a problem with the best knowledge to be the one we listened to. Changing the organization and empowering our people is what set us on the right path.”

Tying all this together was a simple but powerful new vision – to be the best fertilizer plant in North America, one that operated consistently and in accordance with Koch’s proven principles.

“Within months, we were recognizing positive contributions,” said Redman. “A new review process was set up so everyone could discuss and challenge what worked well and what didn’t.” The goal was to motivate all employees to contribute to Enid’s long-term success. “We kept building on those little successes,” said Kleis, “but it took a year before everyone bought in.”

Because employees had spent the past two years supervising contractors rather than building the capability to run Enid’s new equipment, “we had become very reliant on contractors,” admitted Kleis. After nine months of concerted effort, plant employees had turned the corner and could do most of the work themselves. By the end of 2019, the number of contractors had declined from 120 to 50 as employees stepped up to the task.

As they were reducing their reliance on contractors, the Enid team actively sought help from other Koch companies. “When we were struggling to run,” said Redman, “other Koch companies stepped up to help. The operations excellence team from Flint Hills Resources really jumped in and supported us.”

FHR shared knowledge about implementing advanced process controls, better leveraging wireless technology and using drones for monitoring. “Employees like this new technology because they no longer have to focus on the mundane stuff,” said Redman. “It frees them to come up with more beneficial things for us to work on.”

Some of FHR’s most valuable assistance had nothing to do with technology. “They helped us better apply the Human Action model,” said Redman. “We were already dissatisfied with our present state.  What they did was to help us envision a better state and create a path we believed could get us there over time through a lot of entrepreneurial effort.”

“We also began talking with everyone about what it takes to earn superior returns,” said McGregor. “Every person in every job needs to understand how they can improve our ROCC.”

Success with all these initiatives led to further expansions at Enid, including a revamp of the UAN plant in 2020 and a significant capacity increase in 2022. Daily urea production from the new unit was boosted by 40%. Enid’s 300 employees now produce nearly 1.8 million tons of upgraded ammonia derivatives, including urea, UAN, diesel exhaust purification fluid and Koch’s SUPERU^TM fertilizer, which increases nitrogen delivery to crops rather than losing it to the environment.

In 2022, the plant created a Rising Supervisor Program designed for front-line employees interested in and capable of becoming supervisors. “We try to help them get ready quicker by discussing things supervisors need to do,” said Redman. Of the 19 employees who have completed the program, 10 are now supervisors. “We used to be a talent importer. Now, we can provide mutual benefit as a talent exporter.”

By the end of 2022, Enid had grown production four years in a row and was producing record returns – all while improving employee retention and safety measures. It earned the EPA’s ENERGY STAR® certification three years in a row and was the first facility of any kind in Oklahoma to win a Water for 2060 Excellence Award for its efficiency and conservation efforts.  

For Jed Redman, now Enid’s plant manager, the contrast with his earlier days is stark: “At my first leadership team meeting in November 2018, we were celebrating just being in the black” after losing money the year before. Enid’s net income is now up substantially, boosting its ROCC to an average of 26%, compared to 1% in 2018.

“But,” warned Kleis, “you can’t get complacent and think you’re better than you are.” He points to an unexpected freeze that hit Enid during his last month as plant manager. When bitterly cold winds forced their way past the old insulation around water valves, those valves froze and caused the whole plant to shut down. “People had walked by them every day without thinking they needed to be reinsulated,” Kleis said. “We got complacent and that cost us.”

“Five years ago,” said Luetters, “we never dreamed we’d be doing this well.  Back then, we hoped most of the assets were running on any particular day. We’ve seen the performance and organization grow as people expect more of themselves. I knew we had made a step change when I saw us working proactively on things instead of fighting the challenge of the day. That was a significant milestone for us.”

Despite such improvements, Redman agrees the plant can’t afford to rest on its laurels. “Yes, we’ve improved. We’ve closed a lot of gaps. But we also know we’re not the best fertilizer plant in North America. Not yet. We have a lot more to do to continue creating virtuous cycles well into the future.”
 

* For simplicity, Koch Fertilizer is used throughout this story, even though that business had other names

For discussion:

1.    Creating virtuous cycle of mutual benefit involves continually building capabilities that create value for others. What examples do you see in this story?

2.    Employees applied Koch’s principle of assessing risk at several points during the story. In which cases would Koch’s risk philosophy differ from your own?

3.    Enid made many changes to the way their plant operated, both with technology and with culture. Which changes do you think made the biggest difference? Which changes could you apply in your group?