In a strong signal that The Williams Cos. is on track for recovery, Moody’s Investors Service on Friday placed the Tulsa-based company’s junk-rated debt under review for possible upgrade. Even before the review, however, Moody’s upgraded Williams’ speculative grade liquidity rating to ‘SGL-2’ from ‘SGL-3,’ which “indicates our expectation of good liquidity for the 12 months ending June 30, 2005.”

Moody’s analyst John Diaz said the review “reflects the progress that Williams has made relative to the six signposts we laid out in our Credit Opinion of May 18, 2004.” Currently, Moody’s rates Williams at a “B2” senior implied rating, the fifth highest junk rating. In particular, Moody’s noted the following progress:

Substantially improving its liquidity, primarily through $1.5 billion in new credit facilities closed in April and May;

Using cash from asset sales and cash previously posted as margin to prepay about $1.2 billion of debt through a cash tender offer in June;

Announcing a definitive agreement to sell three straddle plants in Canada to generate about $500 million, net of costs and currency adjustments, which is expected to close in the third quarter; and

Moving to reduce its contingent liabilities through Federal Energy Regulatory Commission approval of the California utilities settlement received earlier in July.

The review will focus on “signposts,” said Diaz, including the company’s ability to generate durable and sustainable operating cash flow and free cash flow (net of capital expenditures) from its core natural gas businesses.

“We will review the company’s second quarter results and work with management to understand its near- to medium-term cash flow from operations, working capital requirements and capital spending plans,” said Diaz. Moody’s will also review the cash flow/cash requirements of Williams’ non-core power business and what impact that may have on the rating.

The SGL-2 upgrade, he said, “reflects improvements in Williams’ liquidity primarily as a result of new bank facilities that closed in the second quarter, which replaced the company’s $800 million cash-collateralized credit facility.”

In April, Williams obtained $500 million senior unsecured, five-year credit facilities supported by institutional investors, which freed up about $500 million in cash, including $400 million that had collateralized letters of credit and $100 million of cash posted as margin. In May 2004, Williams closed a $1 billion secured three-year credit facility, secured by midstream assets and is guaranteed by Williams Gas Pipeline, the holding company for Williams’ FERC regulated natural gas pipelines.

The SGL upgrade also is supported by the company’s “improving operating cash flow offset somewhat by the risk that the company remains free cash flow positive…,” he said. And it considers other risks to liquidity, “in particular Williams’ power business and its enterprise risk management. This includes the company’s potentially large and hard to predict working capital needs related to hedging gas production, gas processing contracts, and power supply contracts.”

Williams has scheduled release of its second quarter earnings for Aug. 5.

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