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
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