Kinder Morgan worries investors as stocks fall

During the last five years, Cape Girardeau native Richard Kinder has built a small energy empire out of the sleepy business of natural-gas pipelines and fuel terminals, creating some of the fastest-growing companies and hottest stocks in the oil patch.

Thursday, the complexity of the enterprise caught up with Kinder, who is a former Enron Corp. president.

Analyst Carol Coale of Prudential Securities raised questions about the intertwined relationship between Kinder Morgan Inc., the original company, and Kinder Morgan Energy Partners LP, a publicly held master limited partnership, and whether the companies could sustain their rapid growth.

Though the companies tried to dispel concerns, investors in search of simplicity in the wake of the Enron scandal dumped the stocks of Kinder Morgan, Kinder Morgan Energy and a third related company, Kinder Morgan Management LLC, sending them all down at least 10 percent during the day. Kinder Morgan shares were down $5.20, or 11 percent, to $41 at 4 p.m. in New York Stock Exchange composite trading Thursday, while Kinder Morgan Energy shares were down $3.30, or 10 percent, to $28.60. Kinder Morgan Management was down $2.14, or 6.8 percent, to $29.56.

John Olson, an analyst at Sanders Morris Mundy, attributed the reaction to "a hyper-sensitive market looking for an accident to avoid."

Unlike Enron, which had a raft of off-balance sheet partnerships unseen by investors, the Kinder Morgan companies are all publicly held. Rather than rely on energy trading, as Enron did, the Kinder Morgan companies are built on hard assets that deliver fuel to many parts of the country. Kinder, left Enron in December 1996. He founded Kinder Morgan Inc. the next year when he and longtime friend William Morgan bought control of an Enron pipeline for $40 million.

Still, a few analysts have been raising questions about the structure of the three Kinder Morgan companies, led by Kinder Morgan Inc., the parent company of sorts. A Kinder Morgan unit is general partner of Kinder Morgan Energy and Kinder Morgan owns about 18.7 percent of the energy partnership.

As a master limited partnership, Kinder Morgan Energy pays out most of its free cash flow as distributions to unitholders, who also receive certain tax benefits. Such partnerships were popular in the 1980s for oil and natural gas properties, but disappeared when low energy prices reduced the distributions. In recent years, companies have used the structure for slow-growing, cash-cow businesses like pipelines. Williams Cos. has one, as does El Paso Corp.

In the last year or two, Kinder Morgan has been selling pipeline assets to its affiliate, Kinder Morgan Energy, and relying on Kinder Morgan Energy's distributions for an increasing share of its profit.

In a practice that has become common, the Kinder Morgan unit that is the general partner of the energy partnership owns just a 2 percent stake, but collects a disproportionate share of the distributions. Kinder Morgan Energy last year paid out distributions of about $473 million. The general partner received $181.2 million, or 38 percent of the total.

"This is Enron's 'asset-lite' strategy. The limited partners own the assets and the general partner gets the profits," says Kurt Wulff, who owns a small equity research firm in Needham, Mass.

Michael Morgan, CFO and president of Kinder Morgan and William Morgan's son, said Kinder Morgan rewards its limited partners as well as the general partner. He said the structure of the company may be confusing to some, but "this is all widely disclosed and publicly available stuff." Kinder Morgan has become reliant on the energy partnership's distributions. Kinder Morgan estimates that 46 percent of its profit will come from Kinder Morgan Energy distributions this year, up from 25 percent in 2000.

Last year, chief executive and chairman Kinder and William Morgan, who is vice chairman, created Kinder Morgan Management as a financing vehicle. Kinder Morgan Management, whose stock is held by institutions which avoid partnership units, owns an 18 percent stake in Kinder Morgan Energy.