(Bloomberg) — Kinder Morgan Inc. may boost its shrunken dividend and resume share buybacks after the sale of half its stake in a major U.S. natural gas pipeline helps whittle the company’s $40.2 billion debt burden.

A key measure of Kinder’s ability to pay debts may improve more than previously forecast by the end of this year, thanks to a $1.47 billion deal announced on July 10 to sell 50% of the Southern Natural Gas pipeline network to power producer Southern Co., Kinder executives said during a conference call on Monday.

Shrinking the debt load will free up cash that could be used to expand investor payouts, repurchase shares or pay down additional obligations, Chief Financial Officer Kimberly Dang said during the call. The ratio of the company’s debt to earnings before interest, taxes, depreciation and amortization probably will fall to 5.3 by the end of this year, below Kinder’s previous target of 5.5, she said. Any future joint ventures will only involve proposed projects; stakes in existing assets won’t be up for sale, Kinder Chief Executive Officer Steve Kean said.

The trigger for dividend increases and buybacks is a ratio of 5 or less, Dang said. Kinder, which controls a pipeline system large enough to circle the Earth three times, slashed dividends and canceled billions of dollars in expansion projects earlier this year as the collapse in petroleum and coal markets threatened demand for the shipping and storage services that are the company’s lifeblood. The company’s credit rating flirted with junk status as recently as December and shares are down by about 50% in the past year.

Strategic Rationale

“We are a bit surprised that the company has placed a cash flow generating asset into a JV, so we can only assume there is a strategic rationale behind the move,” Christine Cho, a Barclays analyst, said in a note to clients. Southern’s growing appetite for gas at the expense of coal “should provide growth opportunities” for the pipeline network.

The company founded by Texas billionaire Rich Kinder has sought to dig itself out of a debt hole bigger than the economies of Latvia or Bahrain by curbing spending and selling stakes in existing and yet-to-be-built pipelines. The Southern transaction followed a June 28 deal to sell half the $500 million Utopia pipeline project to private equity giant Riverstone Holdings LLC.

Southern, the second-largest U.S. utility by customers, initially approached Kinder about purchasing a stake in the 7,600-mile (12,000-kilometer) Southern Natural Gas system more than a year ago, before cratering energy markets spooked investors, Kean said during the call.

Lost Income

Although the transaction provides the pipeline giant with cash and shifts $1.2 billion of debt off the company’s books to the joint venture, Kinder is giving up 50% of its share of SNG’s $400 million in annual Ebitda, Bloomberg Intelligence analysts Spencer Cutter and Leon Huang said in a note.

The agreement also commits Kinder and Southern to expand the SNG system and talks are already underway with third parties about such projects, Kean said.

“We would not have done it if it had not had additional opportunities to expand the system over the coming years,” Kinder said during the call. The 71-year-old is the company’s executive chairman and its largest investor with an 11% stake.

SNG connects gas fields across the U.S. Gulf Coast and Gulf of Mexico to markets in the Deep South including some where Southern operates power plants and supplies residential and industrial customers.

“They are a huge customer in a market where demand for natural gas is growing,” Kean said.

Kinder rose 4% to $19.29 at 12:46 p.m. in New York. Southern fell 0.5% to $53.88.

Bloomberg News by Joe Carroll