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Kinder Morgan Faces Class Action Lawsuit

Kinder Morgan Faces Class Action Lawsuit

A class action lawsuit alleging that KN Energy Inc., now Kinder Morgan Inc., violated federal securities laws, committed fraud and misrepresented itself has been filed in U.S. District Court for the District of Colorado by a Denver law firm. Dyer & Shuman LLP said it had filed the lawsuit on March 8 on "behalf of persons who purchased or otherwise acquired the shares of KN Energy Inc...between March 19, 1997 and March 9, 1999."

Allegedly, KN Energy made "material misrepresentations and/or omissions of material fact" concerning the "extraordinary risks" in connection with its gas processing plant in Bushton, KS in 1997. According to the lawsuit, KN entered into "keep-whole" contracts with third parties, which compensated the third parties for the Btu value of natural gas liquids removed from the gas during processing at the Kansas facility.

The lawsuit also charges that the company disseminated "misleading financial information" by reporting as income proceeds from "extraordinary transactions, to bolster the company's financial results in order to facilitate certain securities offerings," without disclosing an increased exposure to future loss risks created by the transactions.

Last month, the court denied Dyer & Shuman's motion to be appointed lead plaintiff as "premature" because the law firm failed to comply with the mandate that other class members be notified of their right to move the court to serve as lead plaintiff. The court's order does not state whether (and, if so, when) the court will entertain new motions for appointment of lead plaintiff. However, by denying the original motion for lead plaintiff "without prejudice," the court suggests that it would consider appointing other shareholders to serve as lead plaintiff.

Denver-based Dyer & Shuman, LLP has extensive experience in securities class action litigation, and has played lead roles in major securities fraud cases in Colorado and throughout the nation, resulting in the recovery of hundreds of millions of dollars to investors.

KN's financial and stock price woes are well known. Kinder Morgan picked up KN when it was in the industry basement in terms of financial performance and stock price last year, according to observers at the time of the merger. KN had just suffered through the cancellation of its proposed $6 billion merger with Sempra Energy (in June 1999) in what one observer described as one of the first "blunders" among energy mergers (see NGI, June 28, 1999). The two companies said that as they were studying the integration process, they discovered the combined company "would not be able to realize the business objectives they originally anticipated." At the time, many observers blamed the cancellation on KN's financial woes. Just prior to the announcement, KN had warned investors that warm temperatures, high storage levels, poor processing margins and reduced gas transportation throughput during the first quarter took a bite out of earnings and could continue to plague the company for the rest of the year (see NGI, April 24). KN said its first quarter earnings were expected to come in up to 7 cents below recently estimates of about 20 cents per share, before considering costs of 3 cents per share incurred relevant to a proposed merger with Sempra Energy.

Many observers said KN's problems dated back to its costly purchases in 1997, which included the $4 billion MidCon Corp. purchase from Occidental Petroleum in December 1997 and the purchase of the Bushton processing complex and related gathering assets in the Hugoton Basin from Enron in February 1997.

Richard Kinder, CEO of Kinder Morgan, vowed to get KN "out of the ditch" and back down the highway when Kinder merged with KN last September in what many observers called a slam dunk deal. Merrill Lynch analyst Donato Eassey said it was the transaction of the decade because it essentially had KN buying Kinder Morgan for $654 million while Richard Kinder, a KN board member, and Bill Morgan took control of the remaining company (see NGI, July 12, 1999). They promptly cleaned house, selling off hundreds of millions of dollars in assets and laying off hundreds of employees (see NGI, Sept. 20, 1999). The gutting of the company included the sale of more than $700 million in assets late last year and earlier in 2000 (see NGI, Dec. 27). The Bushton Complex was sold to ONEOK earlier this year.

A Kinder Morgan spokesman said the lawsuit had no basis in fact, and said he expected the company to prevail on the issues. Kinder Morgan Inc. stock was trading on Friday at $34.25. It traded as low as about $13/share last summer following the KN merger.

Carolyn Davis, Houston

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