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Upstart analyst says Kinder 'starves' assets for investors

By Anna Driver

HOUSTON (Reuters) - An analyst who has drawn criticism from Wall Street for making incendiary comments about Kinder Morgan claimed on Tuesday the U.S. pipeline company has cut maintenance work to boost cash distributed to investors in its partnerships.

In a 45-page note to clients, Kevin Kaiser, a 26-year-old analyst with independent research firm Hedgeye Risk Management, cited several examples in which he said the Houston company had reduced maintenance spending. A copy of the note was seen by Reuters.

"Our research suggests that Kinder Morgan's high-level business strategy in its pipeline segments is to starve the assets of routine maintenance expenses and capex in order to maximize DC (distributable cash flow)," he wrote in an analysis of numbers provided to investors by the company and companies it has acquired.

Shares of the four publicly-traded entities that comprise Kinder Morgan -- including Kinder Morgan Inc , Kinder Morgan Energy Partners , El Paso Pipeline Partners LP and Kinder Morgan Management LLC -- shrugged off the report and each rose more than 1 percent.

"Our business units perform a bottom up review of maintenance capital needs and operating expenses, with the objective being to increasingly reduce risk and improve safety for the benefit of the public and the environment," Kinder Morgan said in a statement provided to Reuters. The company did not address the details of Kaiser's report.

Last week, shares of Kinder Morgan Inc fell 6 percent after Kaiser sent an email to clients that urged them to short the company. The same email promised a bombshell report - the one released on Tuesday - that would expose Kinder Morgan as "a house of cards.

Wall Street analysts who have a favorable view of the company said some of the issues Kaiser raised about Kinder Morgan's treatment of maintenance have been raised in years past. They and other investors have criticized Kaiser as a relative newcomer to the industry, with about three years of experience.

Jason Stevens, an analyst with Morningstar who follows Kinder Morgan, said in a note last week that he found that the company's "maintenance capex is broadly in line with MLP industry practices."

According to Kaiser, Kinder has cut nearly in half the amount of maintenance capital it spends on the pipeline assets it acquired in its $30 billion purchase of El Paso Corp in 2012. Kinder did not comment on this example

El Paso previously had forecast it would need $91 million of maintenance capex for 2012, while Kinder spent $46 million on the same assets in 2012, according to Kaiser's research report. Kinder did not comment on this example.

"Not only did Kinder Morgan sharply reduce maintenance capex on the former El Paso subsidiaries, but also maintenance expenses," the analyst wrote.

Kinder Morgan reports capital expenditures for both growth and maintenance for its individual business units in annual presentations to analysts.

Kinder is comprised of master limited partnerships (MLPs), a structure favored by energy companies for tax efficiency and a lower cost of capital. Income is not taxed and paid out to investors is paid to investors in the form of a quarterly payout.

Those payouts, or distributions, are important in part because they are used by many investors to determine the equity value of an MLP.

(Reporting By Anna Driver; Editing by Terry Wade)

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