March 1, 2002; Kurt Wulff quoted on Kinder Morgan in The Wall Street Journal

Kinder Morgan Worries Investors As Analysts Show Growth Concerns

By THADDEUS HERRICK and ALEXEI BARRIONUEVO
Staff Reporters of THE WALL STREET JOURNAL

During the last five years, 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 Mr. 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% during the day. Kinder Morgan shares were down $5.20, or 11%, 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%, to $28.60 and Kinder Morgan Management was down $2.14, or 6.8%, 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. Mr. 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% 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% 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% 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% of its profit will come from Kinder Morgan Energy distributions this year, up from 25% in 2000.

Last year, Chief Executive and Chairman Mr. 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% stake in Kinder Morgan Energy.

Analysts such as Ms. Coale also fret that Kinder Morgan's growth may be tough to keep up. To keep distributions increasing about 25% a year, the energy partnership must continue to gobble up assets. Kinder Morgan maintains that it can keep growth going by getting more from underused assets and building growing markets.

Mark Easterbrook, analyst with RBC Capital Markets, says the many publicly held pipeline and crude-oil limited partnerships, which have a combined stock market value of $20 billion, may have only two to three years left of "acquisition potential" before the opportunities dry up. That is because Mr. Easterbrook predicts that trends such as big oil companies unloading pipeline-type assets will taper off, leaving Kinder Morgan with fewer chances to buy.

Thursday, in a conference call with analysts, Kinder Morgan officials found themselves defending the companies' structure and accounting, and Mr. Kinder's history with Enron. Officials also affirmed the profit outlook for Kinder Morgan and Kinder Morgan Energy, and set plans to raise the partnership's distribution.

Mr. Kinder , who owns 21% of Kinder Morgan, said the companies' accounting isn't under investigation. Though his name has come up several times in the congressional investigation of Enron, he said his work when he was president there -- from 1990 to 1996 under then-chief executive Kenneth Lay -- isn't the subject of any investigation. Mr. Kinder says he resigned at age 52 because "I wanted to run my own show."

Helping to unnerve investors Thursday was a filing with the Securities and Exchange Commission, made by a trust controlled by Mr. Morgan, to sell one million shares of stock. Mr. Morgan, who has said he will step down in March 2003, has said he would sell some of his stock before that. But he said Thursday that he wouldn't sell at current prices.