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September 1, 2011

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Highest (and Lowest) Paid CEOs in MLP Sector

Yesterday, the Institute for Policy Studies released a study of the 100 highest paid CEOs among S&P 500 companies and comparing total compensation to actual taxes paid by the corporations they managed.  It turns out that 25 of those 100 companies paid their CEO more than the companies they manage paid in taxes last year.  The study was featured in the New York Times, Washington Post and many other publications (see links below).

It should not be a surprise that higher profits are rewarded, even if gaining those higher profits come from taking advantage of tax code to avoid taxes legally.  I guess the point of the study was not that these companies are evil and should volunteer to pay at least as much tax as their CEOs get paid, but rather to highlight how bad the tax code is and what loopholes might be closed.
In MLP land, such a study is pretty easy, 100% of all the CEOs in the MLP space were paid more than the company paid in federal tax, even Rich Kinder, who was paid $1 in total compensation last year, was paid $1 more than the taxes $KMP paid.  MLPs are playing by the rules set up by the government, just like the corporations that don’t pay taxes because they find loopholes.  The conversations around the internet about how MLPs are in danger of losing their flow through tax status are bogus.  MLPs do more good with their investment in energy than the government is harmed by losing that potential tax revenue.  The rules of the MLP game won’t change soon.  Hopefully the new tax plan (whenever it might come) will focus on getting the companies that are taxed as corporations to actually pay taxes.
Below is a little study of my own, showing the top ten highest paid MLP CEOs.  BPL’s Forrest Wylie is the big winner this year with reported compensation of $10.9 million.  It should be noted that Forrest’s base salary was only $436,538, and he received a $9.9 million unit award related to BPL’s merger with its public general partner, BGH.  Niska Gas Storage former CEO David Pope was the highest paid in 2009 with $6.0 million.  Greg Armstrong of Plains All American ($PAA), John Gibson of Oneok Partners ($OKS) and Mike Creel of Enterprise Products Partners ($EPD) have consistently been near the top of the list over the past several years.

Source: SEC Filings.

On the other end of the spectrum, the 10 least paid MLP CEOs all received less than $1.0 million in total compensation last year.  Lowest of all was Rich Kinder, with just one dollar, followed closely by Kelcy Warren, who has no base salary but received some small amount of other compensation.  MLP founders often hold large amounts of equity in either the MLP or the general partner of the MLP, which means they collect regular distributions and have direct alignment with the ongoing success of the MLP.  For example, Kelcy Warren at ETP/ETE, receives $14.9 million annually in distributions from his 6.0 million unit ($228.0 million value) personal stake in ETE, so he is doing just fine.
The MLP structure has been great for founders, good for hired gun executives, and very good for investors, as shown by the returns generated by the MLPs on the list.  There appears to be limited correlation between CEO pay and returns.
On the list of top 10 highest paid MLP CEOs, most are hired executives, not founders, and so their equity stakes aren’t as large as if they were founders.  High annual compensation of Wylie, Armstrong, Gibson and Creel can be justified in that sense, because each of them was hired as CEO long after the MLPs had established themselves.
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.  

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