CenterPoint's CEO rings up big payday; shareholders, Minnesota customers have reservations

CenterPoint CEO David Lesar took home one of the biggest paydays in the utility industry last year: $37.8 million.

Yet CenterPoint — Minnesota's largest natural gas provider — saw its top executives' pay roundly rebuked by its own shareholders this spring. And CenterPoint's customers are fuming over huge bill increases stemming from a mammoth February 2021 storm.

Lesar's pay was anchored in a $25.2 million non-performance-based stock award that vests within 2¹⁄₂ years. In other words, he's due a lot of compensation for sticking around, a CEO pay strategy frowned on by some corporate compensation experts.

On a "say-on-pay" vote, only 22% of CenterPoint's shareholders supported the compensation of Lesar and other top executives. That's one of the worst showings in any say-on-pay vote this year at a publicly traded U.S. company.

At least shareholders get a say; customers don't. And scores of them have complained to Minnesota utility regulators about the $660 million in extra natural gas costs they're stuck with from the February 2021 storm.

Many of those beefs are aimed at Houston-based CenterPoint and Minneapolis-based Xcel Energy. Xcel is Minnesota's second largest gas provider (and the biggest electricity provider). Xcel's retired CEO, Ben Fowke, pulled in $22.3 million last year, placing him sixth in the Star Tribune's annual CEO pay ranking.

CEO compensation can be counted in different ways, and if CenterPoint's Lesar was included in the Star Tribune list, he would rank 31st at $4.89 million. That's because Lesar's big stock award hasn't been realized, and the Star Tribune doesn't count such grants until they are cashed out.

The Energy and Policy Institute, a utility watchdog group, includes unvested stock awards, and Lesar topped its CEO pay ranking of 16 peer utilities; Fowke ranked seventh.

Institutional Shareholder Services, which advises institutional shareholders on corporate governance, found that Lesar's total 2021 compensation was 4.2 times the median of CenterPoint's peers. Glass Lewis, another governance adviser, concluded that Lesar reeled in significantly more than his peers' median pay.

Glass Lewis gave CenterPoint an F grade this year for the compensation of its top executives. ISS had a "high concern level, indicating a misalignment between CEO pay and company performance."

Lesar did deliver for his shareholders. CenterPoint posted strong earnings, and its total share return of 32.4% far outpaced the S&P utilities index's 17.7 %.

Despite that, both Glass Lewis and ISS recommended that CenterPoint's shareholders vote no on the company's say-on-pay vote at this year's annual meeting. Publicly traded companies are required to have such advisory votes at least every three years.

Say-on-pay votes rarely fail. Through July 14, shareholders had shot down only 66, or 3.3%, of say-on-pay votes at companies in the Russell 3000 stock index, according to executive compensation firm Semler Brossy consulting group.

Corporate governance experts say companies should be concerned even if a say-on-pay vote garners less than 70% to 80% of shareholder support. Ninety-four percent of Xcel's shareholders approved a say-on-pay vote this year.

CenterPoint's 22% support was tied for the ninth worst showing of companies (in the Russell 3000) whose say-on-pay votes failed, according to Semler Brossy.

In a statement, CenterPoint defended Lesar's compensation, saying he has helped transform the company. Under Lesar, CenterPoint has refocused its core utilities business; established and is executing a long-term growth strategy; and has outlined a "clean energy future" with a net-zero carbon emissions goal by 2035.

CenterPoint's executive compensation committee and its independent directors took in various stakeholder views, including strong support for Lesar's leadership as "a highly experienced CEO," the statement said. Also, nearly 90% of his 2021 total compensation is equity-based, the company said.

A key problem with CenterPoint's compensation package, according to ISS and Glass Lewis, was the big restricted stock award to Lesar. (The two advisory firms alsotook issue with a $28 million cash payment to Milton Carroll, CenterPoint's former executive chairman, upon his exit from the company).

In 2020, CenterPoint hired Lesar, former CEO of oilfield services giant Halliburton, bestowing him a time-based restricted stock grant valued at $25.2 million. It vests over 2¹⁄₂ years, starting in 2022, regardless of the company's performance.

Such time-based stock grants reward a CEO's performance up to a point; after all, their value rises only if the company's share value increases. But most stock-based compensation is tied to corporate performance goals like earnings per share or total shareholder return.

"The argument for performance-based shares and against time-based shares is that they provide a stronger relationship between an executive's pay and the performance of the company," said Nan Li, an assistant professor at the University of Minnesota's Carlson School of Management.

Glass Lewis found Lesar's restricted stock grant to be excessive, and that CenterPoint's shareholders "should take issue with the lack of performance-based vesting conditions tied to the award." Glass Lewis also criticized the grant's relatively short vesting time.

While 2021 was a good year for CenterPoint's and Xcel's CEOs, it was not so hot for some of their customers in Minnesota and other states.

A massive February storm in Texas and the southwest severely curtailed production in the nation's biggest natural gas fields.

Wholesale gas prices rocketed in the Midwest, rising at least 4,500 % at one point. CenterPoint rang up $409 million in extraordinary gas costs from the storm; Xcel, $179 million.

In Minnesota and other states, wholesale costs of natural gas are passed directly to consumers.

The Minnesota Public Utilities Commission (PUC) has allowed gas companies to begin collecting those costs from customers. But the PUC still is investigating whether it will allow them to recover the entire $660 million.

The Minnesota Department of Commerce and the Minnesota Attorney General concluded that the PUC shouldn't allow full recovery, saying the gas companies made critical mistakes before and during the storm.

However, this spring, two administrative law judges ruled that the utilities' strategies were sound and the entire $660 million in extra costs were prudently incurred. The PUC is expected to rule on the matter next month.

The PUC's consumer affairs office received more than 200 calls expressing concerns with the gas price spike; 34 against Xcel and 27 against CenterPoint resulted in opening informal complaints.

In addition, dozens of consumers filed critical comments directly into the PUC's investigative dockets for the gas price spike.

Consumers in Minnesota pay only a percentage of a utility CEO's pay and benefits, and the PUC limits or prohibits ratepayer money from covering incentives like Lesar's big stock award.

CenterPoint said that Minnesota ratepayers paid for less than $250,000 of Lesar's 2021 compensation.

Still, the fairness of Lesar's compensation is questionable given the storm-related gas costs shouldered by ratepayers, said Annie Levenson-Falk, head of the Citizens Utility Board of Minnesota, a ratepayer advocacy group.

"The most generous way I can put it is that CenterPoint is out of touch with its customers," she said.

Staff writer Patrick Kennedy contributed to this report.