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Kinder Morgan ManAŞement, Ltd. Şti. Message Board

  • philippians4and13 philippians4and13 Oct 6, 2004 11:41 PM Flag

    KMR execs' compensation

    I'm considering buying KMR for a 401k account. But Mr. Morgan and Mr. Shaper according to Yahoo Finance each make over $6.4 million/yr in compensation. Plus the Return on Equity of less than 5% and the PEG ratio and P/Sales ratio of about twice the industry average cause me pause.

    The "industry" is misc financial services, so it may be an unfair comparison. Reactions?

    Also, can someone explain why exec compensation to these 2 execs was so high last year? Thanks.

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    • You've asked 2 separate questions. The officers compensation question is answered simply. Yahoo has the numbers wrong. In fact, KMR does not pay its officers any compensation.

      There are 3 KMx companies - KMI, KMP and KMR. If you check the Yahoo pages for these companies, you will see essentially the same people on all 3 pages, because they are officers of all 3 companies. They are paid by either KMI or KMP, but not by KMR which has no operations. KMI consolidates KMP in its financial statements, which is why KMP's numbers show up there as well. I can't figure out any reason why Yahoo would show these officers as being paid by KMR, because they're not.

      BTW, the amount of compensation shown on Yahoo is also wrong. The offcers have salaries of $ 200,000 each, and 2003 bonuses of $ 875,000 each. They got restricted stock awards in 2003 that were fairly large (worth around $ 6 million if they stay long enough), but this was the first award they had received in a few years. The comparable award for 2002 was zero. Finally, some of them exercised some options in 2003, resulting in additional compensation. I can't figure out what combination of these amounts Yahoo used.

      As to the low return on capital, there are 2 answers, but they get complicated. First of all, return on capital equals earnings divided by net equity. KMR only owns an interest in KMP, and reports its share of KMP's income (which is much less than cash flow or dividends) as its own income. Then, as a corporation, KMR records a noncash deferred tax expense that reduces this income by about 35%. (See lots of earlier posts on this; the tax is never expected to be paid, and if it comes due, KMI has indemnified KMR for most or all of it. Nonetheless GAAP accounting requires the noncash expense to be recorded.) So KMP earned $ 2 per unit in 2003, but KMR reported only about $ 1.30 (the same $ 2 less the deferred tax expense).

      Just looking at this, you would expect KMR's return on equity to be 35% lower than KMP's. It's actually a bit lower than this because its book value (per share) is higher. In essence, however, KMP's return on equity is untaxed, while KMR includes a tax expense. You would expect KMR's number to be lower.

      Finally, KMP has a bit lower leverage than the other pipeline MLPs I follow, which also reduces return on equity. I don't think this is bad.

      None of this makes any difference. KMR owns a set number of i-units in KMP, and this forms the basis of its valuation.

    • You picked the two extremes to the max side of the equation. Mr. Morgan is one of the founder and most of the compensation was in the form of options. I have no problems with founders if (and it is) stated in SEC filings.

      Now Park is another story. It seems that within the pipeline industry he is within the guidelines but again most of it is from options. I don�t like to see this level of total compensation for any one employee and I question why he was offer the options at this level but that is now history. I don�t believe looking forward we will see one employee get that kind of compensation but I will not rule out the possibility of average compensation, and KMR is way under that number.

      As far as return on Equity goes it is unjust. Look at KMP and read the SEC fillings and you will soon learn that KMR is the same as KMP. The different in return is due to Mr. Market selling KMR at a discount. The different may never close or it may catch up making KMR the better investment. To me it is worth the risk.

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