Kinder Morgan Inc. made a splash Monday, saying it would consolidate all four companies under its control, and the euphoria among investors was universal, as all four stocks shot up.

The pipeline operator KMI, -1.58% announced it would acquire all the outstanding equity of Kinder Morgan Energy Partners LP US:KMP, Kinder Morgan Management LLC US:KMR and El Paso Pipeline Partners LP US:EPB by the end of 2014, subject to shareholder votes and regulator approvals.

For convenience, we’re referring to the limited partnerships by their ticker symbols.

Shares of Kinder Morgan Inc. KMI, -1.58% were up 7% from Friday’s close, at $36.12. KMP was up 16% to $92.25, KMR was up 23% to $94.40, and EPB was up 20% to $40.22.

Kinder Morgan Inc. founder and CEO Richard Kinder on Monday said he believed the combined company will be “a valuable acquisition currency and have a significantly lower hurdle for accretive investments in new energy infrastructure.” This is very important to the owners of KMP, who have relied on a generous and growing dividend for many years, which has required constant investments in new pipeline capacity by the partnership.

Here’s how the consolidation deal breaks down:

KMP limited partners will receive $10.77 in cash for each unit, plus 2.1931 KMI shares. KMR limited partners will receive 2.4849 KMI shares for each unit. EPB partners will receive $4.65 in cash plus 0.9451 KMI shares for each unit.

The sweetener for KMP investors was very important, in order to limit any sour feelings over a dividend cut. KMP’s most recent quarterly distribution was $1.39, for an annual dividend yield of 6.92%, based on Friday’s closing price. Richard Kinder said he expected the combined company to pay $2 a share in dividends during 2015. That would come to a significantly lower yield of 5.54%, based on Friday’s closing price.

Among the three LPs to be consolidated, KMP is the largest by far, with a market capitalization at Friday’s close of $26.1 billion, while KMR was valued at $10 billion and EPB was valued at $7.8 billion.

Richard Kinder’s windfall

One easy way to see what this deal means for investors is to look at the most recently reported holdings of Richard Kinder, using data provided by FactSet.

Kinder owns 243.1 million shares of Kinder Morgan Inc., or about 23.7% of the company’s common shares. His shares are worth about $9.43 billion today, increasing by about $647 million following the consolidation announcement. KMI currently pays a quarterly dividend of 43 cents a share. With the dividend expected to go up to $2 a share in 2015, Kinder’s annual income for this portion of his KMI holdings will increase by $68.1 million to $486.2 million.

Kinder owns 333,774 KMP units, and the value of these units rose in value by $4.1 million to $30.8 million in the first 45 minutes of trading Monday. His annual dividend income from KMP, based on the most recent quarterly payout of $1.39, is $1,855,783. He will receive 2.1931 KMI shares for each KMP unit, for roughly 732,000 shares in the combined company. With a $2 dividend in 2015, his annual income from the investment will be $1,464,000, so he’s losing almost $400,000 in income.

That is why the cash payout is so important to KMP limited partners. In Kinder’s case, the cash payout of $10.77 per KMP unit comes to $3,594,746. That makes the dividend cut easy to swallow.

Kinder holds 344,183 KMR units, which rose in value by about $6 million to $32.5 million today. This partnership doesn’t make cash distributions.

Kinder owns 128,000 units of EPB, which rose in value by $847,360 to $5.1 million today. Based on the most recent quarterly payout of 65 cents per unit and Friday’s closing price of $33.60, EPB’s dividend yield is a very attractive 7.74%. Richard Kinder’s annual income from his EPB holdings is $332,800. He’s receiving roughly 120,972 KMI shares in lieu of his EPB units, and following the consolidation, based on the expected KMI dividend of $2 a share in 2015, his annual income from this investment will be about $241,944. The lost income will be more than made up by a cash payout of $595,200.

So Richard Kinder’s investments grew in value by about $656 million. Meanwhile, “lost” dividends on his KMP and EPB holdings will be offset by large cash distributions, and his dividend income on annual KMI holdings will increase by $68.1 million.

It appears the long-term Kinder Morgan story is alive and well, and the simplification of the company’s operations, with the eliminations of LPs, along with the high dividend payout of the consolidated company, bode well for the stock. Income-seeking investors who have shied away from limited partnerships will no longer be facing that barrier.

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