WASHINGTON (MarketWatch) -- Kinder Morgan Inc. said Sunday it will create the largest natural-gas pipeline system in the U.S. by buying El Paso Corp. in a $38 billion cash, stock and warrant deal that includes $17 billion in debt.

The agreement values El Paso EP, at $26.87 a share, a 47% premium to the stock’s 20-day average closing price and 37% above where it closed Friday, Kinder Morgan KMI, -0.96% said.

The combined enterprise, which will include Kinder Morgan Energy Partners LP KMP, +1.98% and El Paso Pipeline Partners LP EPB, will have 80,000 miles of pipeline and an enterprise value of $94 billion, the company said.

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The deal follows a jump in natural gas production in Texas, Louisiana and the Northeast. Pipeline operators have also been shifting their routes to reach fast-growing markets in the South.

“The El Paso assets are primarily regulated interstate natural gas pipelines that produce substantial, stable cash flow and have access to key supply regions and major consuming markets,” Kinder Morgan Chairman and Chief Executive Richard Kinder said in a press release. “The natural gas pipeline systems of the two companies are very complementary, as they primarily serve different supply sources and markets in the United States.”

The transaction has been approved by each company’s board of directors and is scheduled to close in the second quarter, Kinder Morgan said. It should also be immediately accretive to earnings, driven in part by a $350 million reduction in annual costs.

Dividend payments by Kinder Morgan are anticipated to jump as result of the acquisition, though an exact amount wasn’t provided. If the deal were to close at the beginning of 2012, the dividend would be $1.45 a share versus $1.20 currently expected, the company said.

Following the closing, El Paso will become a subsidiary of Kinder Morgan, which will sell the firm’s exploration and production assets. It will also sell its natural gas pipeline assets to Kinder Morgan Energy and El Paso Pipeline over the next few years.

By the end of 2015, Kinder Morgan expects its assets to consist almost exclusively of its Kinder Morgan Energy and El Paso Pipeline interests, and the ownership of their respective shares and those of Kinder Morgan Management LLC KMR, -0.35% .

“Kinder Morgan expects to continue to determine dividend payouts based upon this ultimate set of assets and cash flows,” the firm said in a statement. “In the interim, Kinder Morgan will be generating more cash flow than necessary to support the expected dividend stream and will use the excess to pay down debt.”

Evercore Partners EVR, +3.07% and Barclays Capital BCLYF, +1.63% acted as financial advisors to Kinder Morgan, and Weil Gotshal & Manges LLP and Bracewell & Giuliani, LLP acted as legal counsel.