Kinder Morgan will pay $38 billion to purchase El Paso Corporation, creating a new giant in the lucrative business of moving energy supplies to market.

The $94 billion combined company will own roughly 80,000 miles of pipelines and become the fourth largest energy company in the US. The deal announcement is rife with precedent-setting statistics; the new Kinder Morgan will include the largest natural gas pipeline system in the US, the largest independent transporter of petroleum products and the largest independent terminal owner and operator in the country.

Kinder Morgan intends to sell the exploration and production assets of El Paso, preserving its focus on transportation assets. The company does own production, but remains transport-focused; it is currently the second-largest oil producer in the state of Texas but the largest owner and operator or natural gas pipelines and storage assets in North America.

Kinder Morgan is not a company most Americans are aware of; the firm does not have a retail customer brand, and it does not have the profile of an ExxonMobil. But the company’s growth over its 14 year history into a behemoth at the intersection of energy markets has been remarkable in an industry generally dominated by large, established players.

The company has expanded rapidly over the past decade, and says it has delivered a compound average annual return of 26 percent to investors over its history by focusing on transportation and storage businesses with reliable cash flow. Although demand for Kinder Morgan’s services rises and falls with demand for energy products, it deliberately seeks to avoid exposure to volatility inherent in owning the underlying commodity.

Long Natural Gas

Purchasing El Paso’s pipeline network firmly entrenches the company at the heart of the fast-growing domestic US natural gas business.

“We believe that natural gas is going to play an integral role in North America,” Kinder Morgan Chairman and CEO Richard Kinder said in announcing the deal on October 16. “With the recent development of shale resources, there are now abundant domestic supplies of natural gas…If America is serious about reducing carbon emissions to benefit the environment, and reducing its dependence on foreign oil, natural gas is absolutely the best readily available option.

Kinder said the company expects domestic US natural gas supply and demand to grow “at attractive rates for years to come.” The company will be expanding its role as part of a growing network of pipeline and storage assets bringing domestic natural gas from new fields to power plants and, potentially, even export terminals.

The El Paso deal still requires the approval of both firm’s shareholders, although both company’s boards of directors have already approved it, and Kinder Morgan said it expects the transaction to close in the second quarter of 2012. The company has a commitment letter from Barclays Capital underwriting the full amount of cash required for the transaction.

While the company said it was assuming “a significant amount of incremental debt” with the purchase, CEO Richard Kinder said the quality of the assets and the stability of cash flow generated would allow for fast paydown of the debt over the next several years. Kinder called the debt levels from the deal “conservative.”

For more on the transforming effect the boom in natural gas development is having on the energy industry, read our latest industry coverage here.