Opinion ID: 163762
Heading Depth: 3
Heading Rank: 2

Heading: The CU Cogen Contract

Text: The plaintiffs allege that Kinder-Morgan also improperly accelerated the recognition of income related to its twelve-year contract to provide natural gas to -9- the University of Colorado cogeneration facility. Rather than simply book the present value of the future income from this contract as it did with the three Bushton contracts, Kinder-Morgan realized the present value of the CU Cogen profits by entering into an undisclosed contract with Enron. Under the terms of the deal, Enron paid Kinder-Morgan $6 million, which represented the estimated profit Kinder-Morgan was to realize during the four years that remained in the term of the CU Cogen contract. Enron made the one-time payment to KinderMorgan in the first quarter of 1998, and Kinder-Morgan recorded it as income during that quarter. The deal with Enron involved the creation of a “dummy” corporation called Red Rock LLC. Enron owned 100% of the Class A shares of Red Rock, entitling Enron to all of Red Rock’s dividends. Kinder-Morgan owned all of the Class B or C shares of Red Rock. The complaint alleges that Kinder-Morgan assigned the CU Cogen contract to Red Rock to create the appearance that it was not legally liable to provide the gas to the University of Colorado. In fact, Kinder-Morgan was still obligated to provide the gas required by the CU Cogen contract for the contract’s duration. The complaint alleges, however, that when the CU Cogen plant paid Kinder-Morgan for the gas supplied, Kinder-Morgan forwarded these payments to Red Rock. Enron then would remove the payments from Red Rock as a dividend. Thus, the transaction permitted Kinder-Morgan to record - 10 - $6 million of income in the first quarter of 1998 without having completed its obligations under the CU Cogen contract as required by GAAP. Arthur Andersen LLP, Kinder-Morgan’s independent auditor, examined the CU Cogen transaction and questioned whether it complied with GAAP. The issue was resolved, the complaint alleges, when Kinder-Morgan management pressured Arthur Andersen to approve the transaction, and the auditor acquiesced. As a result of the improper booking of profits from the CU Cogen contract, KinderMorgan inflated the net income it reported for the first quarter of 1998 in its filings with the SEC. The $6 million profit recorded as a result of the Enron deal represented 27% of the $22.5 million in net income reported by Kinder-Morgan for the first quarter of 1998. Without the alleged improper income recognition, Kinder-Morgan would have reported net income of only $16.4 million for the first quarter of 1998.