Getting What You Pay For: How Top Distribution Growers Reward Their CEOs

| About: EnLink Midstream (ENLK)

By Maria Halmo

Wanna Make a Minimum of $500,000 Per Year?
Americans are pretty tight-lipped about how much they make. The social taboo against discussing salaries, bonuses, and compensation has led to some pretty surprising discrepancies, but to many people's surprise, the compensation of the executive suite of public companies is publicly available. (That's how we know Rex Tillerson, CEO of Exxon (NYSE:XOM), made $27.3 million last year.) It's listed in 10-k filings, or at worst, in the proxy statements-all of which are legally required to be filed with the SEC.

The executive compensation section will also list how compensation is determined. Not only is compensation broken out by salary vs bonus vs other, and cash vs units [1], the metrics used for awarding bonuses are also listed. Here at Alerian, we are delighted (and impressed) that both EnLink Midstream Partners (NYSE:ENLK) and Amerigas Partners (NYSE:APU) use the Alerian MLP Index (AMZ) as a comparative metric in determining how well their stock has done in comparison to peers, which is directly linked to how much their executives should be paid.

Privately, I use this data to wonder about how to get a job as an MLP executive (and dream about the vacation homes I will buy), but pertinently, in a year when the AMZ fell more than 30% even on a total return basis, how much did those CEOs make? Are they fat cats working for Daddy's company who get paid regardless of company performance or how much golf they play on company time? Or, are they titans of industry appropriately making themselves rich as they make investors rich? This week, we'll focus on those MLPs which outperformed in 2015, and see how much their CEOs were compensated for finding success in such a difficult environment.

Outperform Your Peers on Distribution Growth
Investors are often surprised to realize that in 2015, despite persistent headlines about distribution cuts, the companies in the AMZ grew their distributions by 5.1%. This is a weighted average number which Karyl Patredis explains in great detail. To determine individual MLP growth, we used the simpler method of how much total 2015 distributions grew for a company compared to 2014 distributions. Using this method, at least a dozen MLPs grew their distributions by double digits. However, the faraway champion of 2015 distribution growth was Tallgrass Energy Partners (NYSE:TEP), which increased payments to unitholders by 52.8%!

TEP's President and CEO, David Dehaemers Jr, received the same salary in 2014 as in 2015 (namely, $300,000). But his bonus in 2015 was $601,000, over twice his salary. On a total compensation metric, he got paid 59.5% more in 2015 than in 2014. [As a side note, the other TEP executives had total compensation increases of around 6% for 2015, but each of their 2014 bonuses was double Dehaemers'. Full details can be found in TEP's 10-k.]

Salaries are typically paid in cash (well, direct deposit, I'm assuming) and are designed to be industry competitive, but stable over time. Bonuses (cash or equity) and long-term incentive plans [2] are performance-driven and often form the majority of a successful team's compensation. The amounts are often decided by some combination of metrics laid out in the 10-k, the CEO, the board, or a compensation consultant. Frequently, there is a peer group listed in the 10-k to be sure the executive is being paid in line with industry standards. Or, the peer group will be used as a comparison, to see how well the company (and CEO) has done comparatively.

The above paragraph lists only general trends and should in no way lull you into believing that CEO compensation metrics are standardized by any means. The chart below shows only the total compensation, but each form of compensation varies significantly between companies.

The CEO of EQT Midstream Partners (NYSE:EQM), David Porges, is also the CEO of all the other EQT entities, and the compensation listed below is his total compensation, not just the EQM portion. That's why it looks like he earned more than double any other listed CEO. (The 10-k is fascinating in its breakout not only of forms of compensation, but it turns out that being an executive really does come with perks like the company paying for your country club dues.)

In regards to the lack of reported compensation by Phillips 66 Partners (NYSE:PSXP): due to its relationship with Philips 66 (NYSE:PSX), CEO Greg Garland devotes only a small part of his working time to the MLP. As such, his compensation from the MLP is not material to his overall compensation. Like PXSP, the executive officers of Valero Energy Partners (NYSE:VLP), including CEO Joseph Gorder, spend only a portion of their time working for the MLP. Ditto for Delek Logistics Partners (NYSE:DKL). However, executives of VLP and DKL are eligible to receive MLP-unit-based awards under the long term incentive plan, although no awards were granted in 2015.

Is that unfair? Potentially. But one reason (perhaps even the main reason) all but one of the ten listed companies have been able to increase their distributions so much is because of the drop-down relationship with their parent companies. If the MLP has been engineered, even before IPO, in such a way as to grow the distribution by double digits via scheduled dropdown assets from the parent, should a CEO get credit for that growth?

While the dropdown stories have all shown remarkable distribution increases, few of them have been rewarded in the market. Part of that is changing forward expectations for the entire energy space, but at the same time, communication with the markets and investors is one of the (unwritten) responsibilities of the CEO. This makes it all the more unfortunate that VLP and DKL (the companies with positive equity performance) do not have pure MLP compensation information.

The only non-dropdown story is Sunoco Logistics Partners (NYSE:SXL), although its general partner is owned by Energy Transfer Partners (NYSE:ETP). The growth projects it pursued have been nearly entirely organic, and while it has partnered with other companies, including ETP, the success has not relied on the relationship with the parent.

Far from having a hands-off GP, in the case of Rose Rock Midstream Partners (NYSE:RRMS), executive compensation is decided by the parent company, SemGroup (NYSE:SEMG), although the MLP does decide the unit-based awards. The compensation for CEO Carlin Conner in 2014 involves his $108k signing bonus, as he began work in April of that year, as well as SemGroup stock issued to him. Unfortunately, the 10-k provides no further details as to the decrease in his overall compensation, but the percentage change is quite similar to the drop in the price of RRMS units.

As implied above, the chart cannot include all relevant details without being footnoted into oblivion. The CEO of Sunoco LP (NYSE:SUN), Bob Owens, appears to have been given a stunning raise, but for the purposes of reporting SUN compensation, he was only CEO of SUN for part of 2014, due to the merger of Susser Holdings (former ticker: SUSS) that year with ETP. It's all a little confusing [3], but the important point is that Owens' reported 2014 compensation does not represent a full year's compensation.

The Plural of Anecdote Is Not Data
I could go on, explaining MPLX (NYSE:MPLX)'s easy-to-follow, yet still quite complicated formulaic method of determining performance-based awards, or how the executives of Western Refining Logistics (NYSE:WNRL) earn a salary even lower than Rich Kinder's famous $1/year. All of these stories may be intriguing, in a trivial sort of way, but without a large study, or at least a standardized compensation method across the industry, they remain simply anecdotes [4].

At the end of the day, CEO compensation is negotiated between a CEO and the company. With billions of units outstanding, even a difference of ten million dollars is unlikely to affect individual unitholders. However, like in all companies, the CEO's vision, performance, and motivations will absolutely change the course of the MLP over time. There is so much variation in the compensation structures and incentives provided for MLP CEOs that the well-educated investor would be wise to be sure she invests in those MLPs with an incentive structure that suits her portfolio needs.

Just one final example: TEP, while also having the advantages of a parent, also pursued organic growth and third-party acquisitions in 2015. Performance awards (bonuses) for 2015 were based on meeting specific EBITDA, DCF, coverage, and distribution growth goals, all of which were achieved. The specificity of these metrics no doubt contributed to their achievement.

Footnotes:

[1] Unit-based compensation is valued according to FASB ASC Topic 718. To massively simplify the accounting, it’s an aggregate of fair values on the grant dates. If the units have grown since the grant date, the compensation would obviously be more than this.

[2] This means, generally, giving units to executives. Often there is some kind of vesting method in place, and the units may be restricted, phantom, or unit appreciation units—each has a slightly different definition. It’s designed to align the interests of the executive and the company. Different MLPs award units differently, but it may be done on the basis of distribution growth, unit price growth, or completion of particular projects.

[3] To start, SUN used to be Susser Petroleum Partners (former ticker SUSP), and SUSP’s parent was SUSS. Before the merger, Sam Susser was CEO of SUSP, and Bob Owens was CEO of Sunoco Inc. As part of the integration of the companies, Owens became CEO of SUSP, and Sam Susser remained on only as Chairman. Later that year, SUSP changed name and tickers to become SUN. Also, Energy Transfer Equity (NYSE:ETE) is now the parent of SUN.

[4] The best example of this is that coworker who finds out that you or a relative of yours has been diagnosed with a chronic illness. With the best of intentions, your coworker will tell you about a cousin’s brother-in-law who had the same diagnoses, but cured it by drinking turmeric tea standing on his head. That’s great for the cousin’s brother-in-law, but science doesn’t actually support upside-down tea drinking as a data-driven cure for anything other than looking too reserved.

Disclosure: © Alerian 2016. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Maria Halmo is the Director of Research at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Halmo leads the firm's research efforts, which include examining MLP regulatory filings, monitoring legislative activity, and investigating industry developments. She also oversees Alerian's public communications strategy through investor and media outreach. Ms. Halmo is a former Associate at SteelPath Capital Management LLC, a Dallas-based MLP investment manager, where she conducted valuation analyses of petroleum transportation partnerships and researched macro-level energy issues. Ms. Halmo graduated with a Bachelor of Arts in Astrophysics from Barnard College at Columbia University. She is also a contributing author to Midstream Business, a monthly publication addressing the need for business market intelligence on North American energy infrastructure.

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