UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-32599

WILLIAMS PARTNERS L.P.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE		20-2485124
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA		74172-0172
(Address of Principal Executive Offices)		(Zip Code)

(918) 573-2000

NO CHANGE

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The registrant had 52,777,452 common units outstanding as of August 5, 2009.

 

 

WILLIAMS PARTNERS L.P.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income — Three and Six Months Ended June 30, 2009 and 2008		5
Consolidated Balance Sheets — June 30, 2009 and December 31, 2008		6
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2009 and 2008		7
Consolidated Statement of Partners’ Capital from January 1, 2009 to June 30, 2009		8
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		42
Item 4. Controls and Procedures		43
Part II. Other Information		44
Item 1. Legal Proceedings		44
Item 1A. Risk Factors		44
Item 6. Exhibits		46
EX-10.1
EX-10.3
EX-31.1
EX-31.2
EX-32

FORWARD-LOOKING STATEMENTS

     Certain matters contained in this report include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

     All statements, other than statements of historical facts, included in this report which address activities, events or developments that we expect, believe or anticipate will exist or may occur in the future, are forward-looking statements. Forward-looking statements can be identified by various forms of words such as “anticipates,” “believes,” “could,” “may,” “should,” “continues,” “estimates,” “expects,” “forecasts,” “intends,” “might,” “objectives,” “planned,” “potential,” “projects,” “scheduled” or other similar expressions. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management and include, among others, statements regarding:

•

Amounts and nature of future capital expenditures;

•

Expansion and growth of our business and operations;

•

Financial condition and liquidity;

•

Business strategy;

•

Cash flow from operations and results of operations;

•

The levels of cash distributions to unitholders;

•

Seasonality of certain business segments; and

•

Natural gas and natural gas liquids prices and demand.

     Forward-looking statements are based on numerous assumptions, uncertainties and risks that could cause future events or results to be materially different from those stated or implied in this report. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. The reader should carefully consider the risk factors discussed below in addition to the other information in this report. If any of the following risks were actually to occur, our business, results of operations and financial condition could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline and unitholders could lose all or part of their investment. Many of the factors that could adversely affect our business, results of operations and financial condition are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:

•

Whether we have sufficient cash from operations to enable us to maintain current levels of cash distributions or to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner;

•

Availability of supplies (including the uncertainties inherent in assessing and estimating future natural gas reserves), market demand, volatility of prices, and the availability and cost of capital;

•

Inflation, interest rates and general economic conditions (including the current economic slowdown and the disruption of global credit markets and the impact of these events on our customers and suppliers);

•

The strength and financial resources of our competitors;

•

Development of alternative energy sources;

•

The impact of operational and development hazards;

•

Costs of, changes in, or the results of laws, government regulations (including proposed climate change legislation), environmental liabilities, litigation and rate proceedings;

•

Changes in maintenance and construction costs;

•

Changes in the current geopolitical situation;

•

Our exposure to the credit risks of our customers;

•

Risks related to strategy and financing, including restrictions stemming from our debt agreements, future changes in our credit ratings and the availability and cost of credit;

•

Risks associated with future weather conditions;

•

Acts of terrorism; and

•

Additional risks described in our filings with the Securities and Exchange Commission (SEC).

     Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.

     In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.

     Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2008, and Part II, Item 1A. “Risk Factors” of this quarterly report on Form 10-Q.

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per-unit amounts)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues:
Product sales:
Affiliate		$	32,886			$	94,134			$	63,758			$	172,256
Third-party			5,178				9,741				7,469				13,962
Gathering and processing:
Affiliate			10,826				9,847				21,436				18,637
Third-party			44,462				49,548				91,717				95,758
Storage			8,101				7,102				16,462				14,435
Fractionation			2,619				4,804				5,176				8,096
Other			2,255				3,069				5,777				5,463
Total revenues			106,327				178,245				211,795				328,607
Costs and expenses:
Product cost and shrink replacement:
Affiliate			7,446				27,686				16,312				49,719
Third-party			13,092				38,323				24,388				68,388
Operating and maintenance expense (excluding depreciation):
Affiliate			10,615				16,548				22,374				39,681
Third-party			31,766				29,984				59,913				53,935
Depreciation, amortization and accretion			11,164				11,002				22,348				22,228
General and administrative expense:
Affiliate			11,879				12,385				23,466				22,261
Third-party			643				749				1,536				1,677
Taxes other than income			2,325				2,167				4,761				4,672
Other (income) expense — net			(18	)			(2,811	)			1,661				(2,478	)
Total costs and expenses			88,912				136,033				176,759				260,083
Operating income			17,415				42,212				35,036				68,524
Equity earnings-Wamsutter			18,975				37,480				34,296				58,674
Discovery investment income			4,151				8,570				4,963				22,191
Interest expense			(15,200	)			(16,683	)			(30,316	)			(34,356	)
Interest income			27				243				61				418
Net income		$	25,368			$	71,822			$	44,040			$	115,451
Allocation of net income:
Net income		$	25,368			$	71,822			$	44,040			$	115,451
Allocation of net income (loss) to general partner			(137	)			7,811	(a)			(509	)			13,792	(a)
Allocation of net income to limited partners		$	25,505			$	64,011	(a)		$	44,549			$	101,659	(a)
Basic and diluted net income per limited partner common unit		$	0.48			$	1.21	(a)		$	0.84			$	1.92	(a)
Weighted average number of common units outstanding			52,777,452				52,774,728				52,777,452				52,774,728

See accompanying notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2009				2008
		(Unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	90,235			$	116,165
Accounts receivable:
Trade			15,048				16,279
Affiliate			12,967				11,652
Other			1,392				2,919
Product imbalance			7,241				6,344
Prepaid expense			9,708				4,102
Other current assets			4,887				3,642
Total current assets			141,478				161,103
Investment in Wamsutter			277,216				277,707
Investment in Discovery Producer Services			193,189				184,466
Gross property, plant and equipment			1,275,794				1,265,153
Less accumulated depreciation			(641,348	)			(624,633	)
Property, plant and equipment, net			634,446				640,520
Other noncurrent assets			26,507				28,023
Total assets		$	1,272,836			$	1,291,819
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade		$	22,270			$	22,348
Affiliate			13,837				11,122
Product imbalance			5,791				8,926
Deferred revenue			14,459				4,916
Accrued interest			18,702				18,705
Other accrued liabilities			6,581				6,172
Total current liabilities			81,640				72,189
Long-term debt			1,000,000				1,000,000
Environmental remediation liabilities			2,085				2,321
Other noncurrent liabilities			13,973				13,699
Commitments and contingent liabilities (Note 9 )
Partners’ capital			175,138				203,610
Total liabilities and partners’ capital		$	1,272,836			$	1,291,819

See accompanying notes to consolidated financial statements.

		Six Months Ended
		June 30,
		2009				2008
		(In thousands)
OPERATING ACTIVITIES:
Net income		$	44,040			$	115,451
Adjustments to reconcile to cash provided by operating activities:
Depreciation, amortization and accretion			22,348				22,228
(Gain)/reversal of gain on involuntary conversion			966				(3,266	)
Equity earnings of Wamsutter			(34,296	)			(58,674	)
Equity earnings of Discovery Producer Services			(776	)			(22,191	)
Distributions related to equity earnings of Wamsutter			34,296				49,307
Distributions related to equity earnings of Discovery Producer Services			776				22,191
Cash provided (used) by changes in assets and liabilities:
Accounts receivable			1,443				(32,860	)
Prepaid expense			(5,606	)			(612	)
Other current assets			(1,170	)			5,679
Accounts payable			2,637				16,751
Product imbalance			(4,032	)			(13,529	)
Deferred revenue			9,380				6,428
Accrued liabilities			93				(1,272	)
Derivative assets and liabilities			79				377
Other, including changes in non current assets and liabilities			1,521				1,925
Net cash provided by operating activities			71,699				107,933
INVESTING ACTIVITIES:
Capital expenditures			(16,952	)			(30,065	)
Cumulative distributions in excess of equity earnings of Discovery Producer Services			2,764				10,209
Cumulative distributions in excess of equity earnings of Wamsutter			1,392				—
Insurance proceeds			—				6,190
Proceeds from sale of property, plant and equipment			162				—
Contributions to Wamsutter			(736	)			(820	)
Contributions to Discovery Producer Services			(11,486	)			(437	)
Net cash used by investing activities			(24,856	)			(14,923	)
FINANCING ACTIVITIES:
Quarterly distributions			(75,814	)			(73,204	)
Proceeds from sale of common units			—				28,992
Redemption of common units from general partner			—				(28,992	)
Contributions per omnibus agreement			3,041				1,636
Other			—				76
Net cash used by financing activities			(72,773	)			(71,492	)
Increase (decrease) in cash and cash equivalents			(25,930	)			21,518
Cash and cash equivalents at beginning of period			116,165				36,197
Cash and cash equivalents at end of period		$	90,235			$	57,715

See accompanying notes to consolidated financial statements.

										Accumulated Other				Total
						General				Comprehensive				Partners’
		Common				Partner				Income				Capital
Balance — January 1, 2009		$	1,619,954			$	(1,416,344	)		$	—			$	203,610
Net income			37,277				6,763				—				44,040
Other comprehensive income:
Net unrealized gains on cash flow hedges			—				—				76				76
Net unrealized gains on cash flow hedges — Wamsutter			—				—				165				165
Total other comprehensive income															241
Total comprehensive income															44,281
Cash distributions			(67,026	)			(8,788	)			—				(75,814	)
Contributions pursuant to the omnibus agreement			—				3,041				—				3,041
Other			20				—				—				20
Balance — June 30, 2009		$	1,590,225			$	(1,415,328	)		$	241			$	175,138

See accompanying notes to consolidated financial statements.

Note 1. Organization and Basis of Presentation

     Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context clearly indicates otherwise, references to “we,” “our,” and “us” include the operations of Wamsutter LLC (Wamsutter) and Discovery Producer Services LLC (Discovery) in which we own interests accounted for as equity investments that are not consolidated in our financial statements. When we refer to Wamsutter or Discovery by name, we are referring exclusively to their businesses and operations.

     We are principally engaged in the business of gathering, transporting, processing and treating natural gas and fractionating and storing natural gas liquids (NGL). Operations of our businesses are located in the United States and are organized into three reporting segments: (1) Gathering and Processing — West, (2) Gathering and Processing — Gulf and (3) NGL Services. Our Gathering and Processing — West segment includes the Four Corners gathering and processing operations and our equity investment in Wamsutter. Our Gathering and Processing — Gulf segment includes the Carbonate Trend gathering pipeline and our 60% ownership interest in Discovery. Our NGL Services segment includes the Conway fractionation and storage operations.

     The accompanying interim consolidated financial statements do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K, filed February 26, 2009, for the year ended December 31, 2008. The accompanying consolidated financial statements include all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position at June 30, 2009, and results of operations for the three and six months ended June 30, 2009 and 2008 and cash flows for the six months ended June 30, 2009 and 2008. We eliminated all intercompany transactions and reclassified certain amounts to conform to the current classifications. We have evaluated our disclosure of subsequent events through the time of filing this Form 10-Q with the SEC on August 6, 2009.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2. Recent Accounting Standards

     In January 2009, we adopted the Emerging Issues Task Force (EITF) Issue No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships.” EITF Issue No. 07-4 states, among other things, that the calculation of earnings per unit should not reflect an allocation of undistributed earnings to the incentive distribution right (IDR) holders beyond amounts distributable to IDR holders under the terms of the partnership agreement. Previously, under generally accepted accounting principles, we calculated earnings per unit as if all the earnings for the period had been distributed, which resulted in an additional allocation of income to the general partner (the IDR holder) in quarterly periods where an assumed incentive distribution exceeded the actual incentive distribution. Following the adoption of the guidance in EITF Issue No. 07-4, we no longer calculate assumed incentive distributions. We have retrospectively applied EITF Issue No. 07-4 to all periods presented. The retrospective application of this guidance decreased the income allocated to the general partner and increased the income allocated to limited partners for the amount that any assumed incentive distribution exceeded the actual incentive distribution calculated during that period. Certain of our historical periods’ earnings per unit have been revised as a result of this change. Earnings per unit for the three and six months ended June 30, 2008 increased from $0.92 per unit to $1.21 per unit and $1.58 per unit to $1.92 per unit, respectively. Adoption of this new standard only impacts the allocation of earnings for purposes of calculating our earnings per limited partner unit and has no impact on our results of operations, allocation of earnings to capital accounts, or distributions of available cash to unitholders and our general partner.

     In the second quarter of 2009, we adopted the Financial Accounting Standards Board (FASB) Staff Position FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1) that amended existing guidance to require disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements. An entity is required to disclose the fair value of all financial instruments, whether recognized or not recognized in the statement of financial position, along with the related carrying amount. An entity is also required to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption.

     In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (SFAS No. 168). This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles to be applied in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP). SEC registrants must also follow the rules and interpretative releases of the SEC. We will apply SFAS No. 168 in the third quarter of 2009, and it will not have an impact on our Consolidated Financial Statements.

Note 3. Allocation of Net Income and Distributions

     The allocation of net income between our general partner and limited partners, as reflected in the Consolidated Statement of Partners’ Capital, for the three months and six months ended June 30, 2009 and 2008 is as follows (in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Allocation to general partner:
Net income		$	25,368			$	71,822			$	44,040			$	115,451
Reimbursable general and administrative costs charged directly to general partner			658				398				1,418				796
Income subject to 2% allocation of general partner interest			26,026				72,220				45,458				116,247
General partner’s share of net income			2.0	%			2.0	%			2.0	%			2.0	%
General partner’s allocated share of net income before items directly allocable to general partner interest			521				1,444				909				2,325
Incentive distributions paid to general partner*			—				5,499				7,272				9,730
Direct charges to general partner			(658	)			(398	)			(1,418	)			(796	)
Net income (loss) allocated to general partner*		$	(137	)		$	6,545			$	6,763			$	11,259
Net income		$	25,368			$	71,822			$	44,040			$	115,451
Net income (loss) allocated to general partner*			(137	)			6,545				6,763				11,259
Net income allocated to limited partners		$	25,505			$	65,277			$	37,277			$	104,192

(Williams) waived the incentive distribution rights related to 2009 distribution periods. The IDRs paid in February 2009 relate to the fourth-quarter 2008 distribution.

Common and subordinated unitholders have always shared equally, on a per-unit basis, in the net income allocated to limited partners.

We paid or have authorized payment of the following cash distributions during 2008 and 2009 (in thousands, except for per unit amounts):

														General Partner
																		Incentive
		Per Unit				Common				Subordinated								Distribution				Total Cash
Payment Date		Distribution				Units				Units				2%				Rights				Distribution
2/14/2008		$	0.5750			$	26,321			$	4,025			$	706			$	4,231			$	35,283
5/15/2008		$	0.6000			$	31,665				—			$	758			$	5,498			$	37,921
8/14/2008		$	0.6250			$	32,984				—			$	811			$	6,765			$	40,560
11/14/2008		$	0.6350			$	33,513				—			$	832			$	7,272			$	41,617
2/13/2009		$	0.6350			$	33,513				—			$	832			$	7,272			$	41,617
5/15/2009		$	0.6350			$	33,513				—			$	684			$	—			$	34,197
8/14/2009 (a)		$	0.6350			$	33,513				—			$	684			$	—			$	34,197

Note 4. Related Party Transactions

     In 2009, our omnibus agreement with Williams was amended to increase the aggregate amount of the credit we can receive related to certain general and administrative expenses for 2009. Consequently, for 2009, Williams will provide up to an additional $10.0 million credit, in addition to the $0.8 million annual credit previously provided under the original omnibus agreement, to the extent that all 2009 non-segment profit general and administrative expenses exceed $36.0 million. We will record total general and administrative expenses (including those expenses that are subject to the credit by Williams) as an expense, and we will record any credits as capital contributions from Williams. Accordingly, our net income will not reflect the benefit of the credit received from Williams. However, the costs subject to this credit will be allocated entirely to our general partner. As a result, the net income allocated to limited partners on a per-unit basis will reflect the benefit of this credit. For the six months ended June 30, 2009, the total general and administrative credit received from Williams was $1.0 million.

Note 5. Equity Investments

Wamsutter

     Wamsutter allocates net income (equity earnings) to us based upon the allocation, distribution, and liquidation provisions of its limited liability company agreement applied as though liquidation occurs at book value. In general, the agreement allocates income in a manner that will maintain capital account balances reflective of the amounts each membership interest would receive if Wamsutter were dissolved and liquidated at carrying value. The income allocation for the quarterly periods during a year reflects the preferential rights of the Class A member interest to any distributions made to the Class C member interest until the Class A member interest has received $70.0 million in distributions for the year. The Class B member receives no income or loss allocation. As the owner of 100% of the Class A membership interest, we will receive 100% of Wamsutter’s net income up to $70.0 million. Income in excess of $70.0 million will be shared between the Class A member and Class C member, of which we currently own 65%. For annual periods in which Wamsutter’s net income exceeds $70.0 million, this will result in a higher allocation of equity earnings to us early in the year and a lower allocation of equity earnings to us later in the year. Wamsutter’s net income allocation does not affect the amount of available cash it distributes for any quarter.

     The summarized financial position and results of operations for 100% of Wamsutter are presented below (in thousands):

		June 30,				December 31,
		2009				2008
		(Unaudited)
Current assets		$	19,224			$	17,147
Property, plant and equipment, net			360,230				318,072
Non-current assets			774				468
Current liabilities			(18,150	)			(16,960	)
Non-current liabilities			(4,476	)			(4,353	)
Members’ capital		$	357,602			$	314,374

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
						(Unaudited)
Revenues:
Product sales:
Affiliate		$	18,212			$	40,903			$	36,589			$	85,918
Third-party			5,524				8,851				8,549				13,886
Gathering and processing services			20,664				18,331				40,048				33,345
Other revenues			777				2,137				3,222				4,698
Costs and expenses excluding depreciation and accretion:
Affiliate			11,010				17,277				23,621				50,491
Third-party			9,636				10,251				19,488				18,240
Depreciation and accretion			5,556				5,214				11,003				10,442
Net income		$	18,975			$	37,480			$	34,296			$	58,674
Williams Partners’ interest — equity earnings		$	18,975			$	37,480			$	34,296			$	58,674

Discovery Producer Services LLC

     The summarized financial position and results of operations for 100% of Discovery are presented below (in thousands):

		June 30,				December 31,
		2009				2008
		(Unaudited)
Current assets		$	63,400			$	50,978
Non-current restricted cash and cash equivalents			—				3,470
Property, plant and equipment, net			370,704				370,482
Current liabilities			(39,734	)			(45,234	)
Non-current liabilities			(21,718	)			(19,771	)
Members’ capital		$	372,652			$	359,925

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
						(Unaudited)
Revenues:
Affiliate		$	26,300			$	71,911			$	39,091			$	149,917
Third-party			12,387				10,972				19,630				20,122
Costs and expenses:
Affiliate			11,814				32,222				18,884				70,468
Third-party			20,241				36,559				38,397				63,179
Interest income			(14	)			(186	)			(22	)			(450	)
Loss on sale of operating assets			—				2				—				2
Foreign exchange loss (gain)			—				4				168				(143	)
Net income		$	6,646			$	14,282			$	1,294			$	36,983
Discovery investment income:
Williams Partners’ interest — equity earnings		$	3,987			$	8,570			$	776			$	22,191
Business interruption proceeds			164				—				4,187				—
Discovery investment income		$	4,151			$	8,570			$	4,963			$	22,191

     In the second quarter of 2009, Discovery’s LLC agreement was amended to calculate available cash based on cash on hand at the end of the month preceding the end of each calendar quarter (e.g. May 31 for the second quarter) and to require distribution of available cash by the end of each calendar quarter. Prior to this amendment, Discovery calculated available cash based on cash on hand at the end of each calendar quarter and made the related distribution within 30 days of the end of each calendar quarter. The change in distribution timing will result in an extra distribution in 2009 to us from Discovery.

Note 6. Long-Term Debt and Credit Facilities

Long-Term Debt

     Long-term debt at June 30, 2009 and December 31, 2008 is as follows:

		Interest				June 30,				December 31,
		Rate				2009				2008
		(In millions)
Credit agreement term loan, adjustable rate, due 2012			(a	)		$	250			$	250
Senior unsecured notes, fixed rate, due 2017			7.25	%			600				600
Senior unsecured notes, fixed rate, due 2011			7.50	%			150				150
Total Long-term debt						$	1,000			$	1,000

     Credit Facilities

     We have a $450.0 million senior unsecured credit agreement (Credit Agreement) with Citibank, N.A. as administrative agent, comprised initially of a $200.0 million revolving credit facility available for borrowings and letters of credit and a $250.0 million term loan. The parent company and certain affiliates of Lehman Brothers Commercial Bank, who is committed to fund up to $12.0 million of this credit facility, filed for bankruptcy in September 2008. We expect that our ability to borrow under this facility is reduced by this committed amount. The committed amounts of the other participating banks remain in effect and are not impacted by this reduction. However, debt covenants may restrict the full use of the credit facility. We must repay borrowings under the Credit Agreement by December 11, 2012. At June 30, 2009, we had a $250.0 million term loan outstanding under the term loan provisions and no amounts outstanding under the revolving credit facility. As a result of the Fitch Ratings downgrade of our senior unsecured debt rating from BB+ to BB, our applicable margin on the $250.0 million term loan increased 0.25% to 1.0% and the commitment fee on the unused capacity of our revolver increased 0.05% to 0.175%.

     The Credit Agreement contains various covenants that limit, among other things, our, and certain of our subsidiaries’, ability to incur indebtedness, grant certain liens supporting indebtedness, merge, consolidate, sell all or substantially all of our assets or make distributions or other payments other than distributions of available cash under certain conditions. Significant financial covenants under the Credit Agreement include the following:

•

We are required to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1.00 as of the last day of any fiscal quarter. This ratio may be increased in the case of an acquisition of $50.0 million or more, in which case the ratio will be 5.50 to 1.00 for the fiscal quarter in which the acquisition occurs and three fiscal quarter-periods following such acquisition. At June 30, 2009, our ratio of consolidated indebtedness to consolidated EBITDA, as calculated under this covenant, of approximately 3.83 is in compliance with this covenant.

•

Our ratio of consolidated EBITDA to consolidated interest expense (each as defined in the Credit Agreement) must be not less than 2.75 to 1.00 as of the last day of any fiscal quarter, unless we obtain an investment grade rating from Standard and Poor’s Ratings Services or Moody’s Investors Service and the rating from the other agency is not less than Ba1 or BB+, as applicable. At June 30, 2009, our ratio of consolidated EBITDA to consolidated interest expense, as calculated under this covenant, of approximately 4.26 is in compliance with this covenant.

     Inasmuch as the ratios are calculated on a rolling four-quarter basis, these ratios do not reflect a full-year impact of the lower earnings we experienced in the fourth quarter of 2008 and the first two quarters of 2009. In the event that, despite our efforts, we breach our financial covenants causing an event of default, the lenders could, among other things, accelerate the maturity of any borrowings under the facility (including our $250.0 million term loan) and terminate their commitments to lend. There are no cross-default provisions in the indentures governing our senior unsecured notes; therefore, a default under the Credit Agreement would not cause a cross default under the indentures governing the senior unsecured notes.

     We also have a $20.0 million revolving credit facility with Williams as the lender. The facility is available exclusively to fund working capital requirements. Borrowings under the credit facility mature June 20, 2010 with four one-year automatic extensions unless terminated by either party. We are required to and have reduced all borrowings under this facility to zero for a period of at least 15 consecutive days once each 12-month period prior to the maturity date of the facility. We pay a commitment fee to Williams on the unused portion of the credit facility of 0.125% annually. Interest on borrowings under the facility will be calculated upon a periodic fixed rate equal to a base rate plus an applicable margin, or the Eurodollar rate plus an applicable margin. As of June 30, 2009, we had no outstanding borrowings under the working capital credit facility.

Note 7. Financial Instruments and Fair Value Measurements

Financial Instruments

     We used the following methods and assumptions to estimate the fair value of financial instruments.

     Cash and cash equivalents. The carrying amounts reported in the balance sheets approximate fair value due to the short-term maturity of these instruments.

     Long-term debt. The fair value of our publicly traded long-term debt is valued using indicative end-of-period traded bond market prices. We base the fair value of our private long-term debt on market rates and the prices of similar securities with similar terms and credit ratings. We consider our non-performance risk in estimating fair value.

     Energy commodity swap agreements. We base the fair value of our swap agreements on prices of the underlying energy commodities over the contract life and contractual or notional volumes with the resulting expected future cash flows discounted to a present value using a risk-free market interest rate.

Carrying amounts and fair values of our financial instruments

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
Asset (Liability)		Amount				Value				Amount				Value
		(In thousands)
Cash and cash equivalents		$	90,235			$	90,235			$	116,165			$	116,165
Long-term debt			(1,000,000	)			(934,869	)			(1,000,000	)			(825,289	)
Energy commodity derivative assets			76				76				—				—
Energy commodity derivative liabilities			(79	)			(79	)			—				—

Fair Value Measurements

     Fair value is the amount received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement considered from the perspective of a market participant. We use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily observable, market corroborated, or unobservable. We primarily apply a market approach for recurring fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

     The fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). We classify fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•

Level 2 — Inputs are other than quoted prices in active markets included in Level 1, that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.

•

Level 3 — Includes inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value. Our Level 3 consists of instruments valued with valuation methods that utilize unobservable pricing inputs that are significant to the overall fair value.

     In valuing certain contracts, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.

     At June 30, 2009 all of our derivative assets and liabilities which are valued at fair value are included in Level 3 and include $0.1 million of energy commodity derivative assets and $0.1 million of energy commodity derivative liabilities. At June 30, 2008 our

derivative liabilities include $12.0 million of energy commodity derivative liabilities. These derivatives include commodity-based financial swap contracts.

     The determination of fair value for our assets and liabilities also incorporates the time value of money and various credit risk factors which can include the credit standing of the counterparties involved, master netting arrangements, the impact of credit enhancements (such as collateral posted and letters of credit), and our nonperformance risk on our liabilities.

     The following table sets forth a reconciliation of changes in the fair value of net derivatives classified as Level 3 in the fair value hierarchy for the three and six months ended June 30, 2009 and 2008.

Level 3 Fair Value Measurements Using Significant Unobservable Inputs
Three and Six Months Ended June 30, 2009 and 2008
(In thousands)

		Net Derivative Asset (Liability)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Beginning balance		$	—			$	(33	)		$	—			$	(2,487	)
Realized and unrealized gains (losses):
Included in net income			(79	)			(1,621	)			(79	)			(1,616	)
Included in other comprehensive income			76				(11,568	)			76				(9,114	)
Purchases, issuances, and settlements			—				1,244				—				1,239
Transfers in/(out) of Level 3			—				—				—				—
Ending balance		$	(3	)		$	(11,978	)		$	(3	)		$	(11,978	)
Unrealized gains (losses) included in net income relating to instruments still held at June 30		$	(79	)		$	(377	)		$	(79	)		$	(377	)

     Realized and unrealized gains (losses) included in net income are reported in revenues in our Consolidated Statement of Income.

Note 8. Energy Commodity Derivatives

Risk Management Activities

     We are exposed to market risk from changes in energy commodity prices within our operations. Our Four Corners operation receives NGLs as compensation for certain processing services and purchases natural gas to satisfy the required fuel and shrink replacement needed to extract these NGLs. To reduce exposure to a decrease in revenues from fluctuations in NGL market prices or increases in costs and operating expenses from fluctuations in natural gas market prices, we may enter into NGL or natural gas swap agreements, financial or physical forward contracts, and financial option contracts to mitigate these commodity price risks.

     Certain of these derivatives utilized for risk management purposes have been designated as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” while other derivatives have not been designated as hedges. Our cash flow hedges are expected to be highly effective in offsetting cash flows attributable to the hedged risk during the term of the hedge. However, ineffectiveness may be recognized primarily as a result of location differences between the hedging derivative and the hedged item. Changes in the fair value of our cash flow hedges, to the extent effective, are deferred in other comprehensive income and are reclassified into earnings in the same period or periods in which the hedged forecasted purchases or sales affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period.

     Additionally, we have elected the normal purchases and normal sales exception for certain short-term physical natural gas purchases executed to hedge our fuel and shrink replacement costs. Under this exception, any change in the fair value of these derivatives is not reflected on the balance sheet since we made the election at the inception of these contracts.

     Our energy commodity derivatives are comprised of both contracts to purchase natural gas and contracts to sell NGLs at a fixed location price. The following table depicts the notional volumes in our commodity derivatives portfolio as of June 30, 2009.

		Period				Volumes
Designated as hedging instruments:
NGL sales — ethane (million gallons)		July-September 2009					16.4
Not designated as hedging instruments:
Natural gas purchases (million British thermal units per day)		July-September 2009					12,500

     All of the derivatives that are not designated as hedging instruments are accounted for under the normal purchase normal sales exception discussed above.

     The following table presents the fair value of our energy commodity derivatives designated as hedging instruments and presented in our Consolidated Balance Sheet as Other current assets and Other accrued liabilities as of June 30, 2009. There are no derivatives recognized on the Consolidated Balance Sheet that have not been designated as hedging instruments. The fair value amounts are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements.

		Assets				Liabilities
		(In thousands)
NGL swaps		$	76			$	79

     The following table presents gains and losses for our energy commodity derivatives designated as cash flow hedges. There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness.

		Three months				Six months
		ended				ended
		June 30, 2009				June 30, 2009				Classification
						(In thousands)
Net gain recognized in other comprehensive income (effective portion)		$	76			$	76
Net (loss) reclassified from accumulated other comprehensive income into income (effective portion)		$	—			$	—
(Gain) recognized in income (ineffective portion)		$	—			$	—
Other unrealized loss included in income		$	(79	)		$	(79	)		Revenues

     Based on recorded values at June 30, 2009, $0.1 million of net gains will be reclassified into earnings within the next year. These recorded values are based on market prices of the commodities as of June 30, 2009. Due to the volatile nature of commodity prices and changes in the creditworthiness of counterparties, actual gains or losses realized within the next year will likely differ from these values. These gains or losses are expected to substantially offset net losses or gains that will be realized in earnings from previous unfavorable or favorable market movements associated with underlying hedged transactions.

Credit-Risk-Related Features

     Our NGL financial swap contracts and our natural gas purchase contracts are with Williams Gas Marketing, Inc., a wholly owned subsidiary of Williams. These agreements do not contain any provisions that require us to post collateral related to net liability positions.

Note 9. Commitments and Contingencies

     Environmental Matters-Four Corners. Current federal regulations require that certain unlined liquid containment pits located near named rivers and catchment areas be taken out of use, and current state regulations required all unlined, earthen pits to be either permitted or closed by December 31, 2005. Operating under a New Mexico Oil Conservation Division-approved work plan, we have physically closed all of our pits that were slated for closure under those regulations. We are presently awaiting agency approval of the closures for 40 to 50 of those pits. We are also a participant in certain hydrocarbon removal and groundwater monitoring activities associated with certain well sites in New Mexico. Of nine remaining active sites, product removal is ongoing at four and groundwater monitoring is ongoing at each site. As groundwater concentrations reach and sustain closure criteria levels and state regulator approval is received, the sites will be properly abandoned. We expect the remaining sites will be closed within four to seven years.

     In April 2007, the New Mexico Environment Department’s Air Quality Bureau (NMED) issued a Notice of Violation (NOV) that alleges various emission and reporting violations in connection with our Lybrook gas processing plant’s flare and leak detection and repair program. In December 2007, the NMED proposed a penalty of approximately $3 million. In July 2008, the NMED issued an NOV that alleged air emissions permit exceedances for three glycol dehydrators at one of our compressor facilities and proposed a penalty of approximately $103,000. We are discussing the proposed penalties with the NMED.

     In March 2008, the Environmental Protection Agency (EPA) proposed a penalty of $370,000 for alleged violations relating to leak detection and repair program delays at our Ignacio gas plant in Colorado and for alleged permit violations at a compressor station. We met with the EPA and are exchanging information in order to resolve the issues.

     We have accrued liabilities totaling $1.4 million at June 30, 2009 for these environmental activities. It is reasonably possible that we will incur losses in excess of our accrual for these matters. However, a reasonable estimate of such amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by governmental authorities, negotiations with the applicable agencies, and other factors.

     Environmental Matters-Conway. We are a participant in certain environmental remediation activities associated with soil and groundwater contamination at our Conway storage facilities. These activities relate to four projects that are in various remediation stages including assessment studies, cleanups and/or remedial operations and monitoring. We continue to coordinate with the Kansas Department of Health and Environment (KDHE) to develop screening, sampling, cleanup and monitoring programs. The costs of such activities will depend upon the program scope ultimately agreed to by the KDHE and are expected to be paid over the next two to six years. At June 30, 2009, we had accrued liabilities totaling $3.2 million for these costs. It is reasonably possible that we will incur costs in excess of our accrual for these matters. However, a reasonable estimate of such amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by KDHE and other governmental authorities and other factors.

     Under an omnibus agreement with Williams entered into at the closing of our initial public offering, Williams agreed to indemnify us for certain Conway environmental remediation costs. At June 30, 2009, approximately $7.1 million remains available for future indemnification. Payments received under this indemnification are accounted for as a capital contribution to us by Williams as the costs are reimbursed.

     Will Price. In 2001, we were named, along with other subsidiaries of Williams, as defendants in a nationwide class action lawsuit in Kansas state court that had been pending against other defendants, generally pipeline and gathering companies, since 2000. The plaintiffs alleged that the defendants have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs and sought an unspecified amount of damages. The

defendants have opposed class certification and a hearing on the plaintiffs’ second motion to certify the class was held on April 1, 2005. We are awaiting a decision from the court. The amount of any possible liability cannot be reasonably estimated at this time.

     Grynberg. In 1998, the U.S. Department of Justice (DOJ) informed Williams that Jack Grynberg, an individual, had filed claims on behalf of himself and the federal government in the United States District Court for the District of Colorado against Williams, certain of its subsidiaries (including us) and approximately 300 other energy companies. Grynberg alleged violations of the False Claims Act in connection with the measurement, royalty valuation and purchase of hydrocarbons. The claims sought an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys’ fees and costs. In 1999, the DOJ announced that it would not intervene in any of the Grynberg cases. Also in 1999, the Panel on Multi-District Litigation transferred all of these cases, including those filed against us, to the federal court in Wyoming for pre-trial purposes. The District Court dismissed all claims against Williams and its subsidiaries, including us. On March 17, 2009, the Tenth Circuit Court of Appeals affirmed the District Court’s dismissal, and on May 4, 2009, the Tenth Circuit Court of Appeals denied Grynberg’s request for a rehearing. Grynberg has filed with the United States Supreme Court a petition for a writ of certiorari requesting review of the Tenth Circuit Court of Appeal's ruling.

     GEII Litigation. General Electric International, Inc. (GEII) worked on turbines at our Ignacio, New Mexico plant. We disagree with GEII on the quality of GEII’s work and the appropriate compensation. GEII asserts that it is entitled to additional extra work charges under the agreement, which we deny are due. In 2006 we filed suit in federal court in Tulsa, Oklahoma against GEII, GE Energy Services, Inc., and Qualified Contractors, Inc. We alleged, among other claims, breach of contract, breach of the duty of good faith and fair dealing, and negligent misrepresentation and sought unspecified damages. In 2007, the defendants and GEII filed counterclaims in the amount of $1.9 million against us that alleged breach of contract and breach of the duty of good faith and fair dealing. Trial has been set for January 2010.

     Other. We are not currently a party to any other legal proceedings but are a party to various administrative and regulatory proceedings that have arisen in the ordinary course of our business.

     Summary. Litigation, arbitration, regulatory matters and environmental matters are subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the ruling occurs. Management, including internal counsel, currently believes that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, insurance coverage, recovery from customers or other indemnification arrangements, will not have a material adverse effect upon our future liquidity or financial position.

Note 10. Segment Disclosures

     Our reportable segments are strategic business units that offer different products and services. We manage the segments separately because each segment requires different industry knowledge, technology and marketing strategies.

						Gathering &
		Gathering &				Processing -				NGL
		Processing - West				Gulf				Services				Total
						(In thousands)
Three Months Ended June 30, 2009:
Segment revenues		$	91,664			$	459			$	14,204			$	106,327
Product cost and shrink replacement			19,054				—				1,484				20,538
Operating and maintenance expense			35,963				575				5,843				42,381
Depreciation, amortization and accretion			10,278				60				826				11,164
Direct general and administrative expense			2,300				—				764				3,064
Other, net			2,194				—				113				2,307
Segment operating income (loss)			21,875				(176	)			5,174				26,873
Investment income			18,975				4,151				—				23,126
Segment profit		$	40,850			$	3,975			$	5,174			$	49,999
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	26,873
General and administrative expenses:
Allocated-affiliate															(8,935	)
Third party-direct															(523	)
Combined operating income														$	17,415
Three Months Ended June 30, 2008:
Segment revenues		$	158,563			$	546			$	19,136			$	178,245
Product cost and shrink replacement			61,144				—				4,865				66,009
Operating and maintenance expense			36,677				519				9,336				46,532
Depreciation, amortization and accretion			10,136				151				715				11,002
Direct general and administrative expense			2,058				—				700				2,758
Other, net			(750	)			—				106				(644	)
Segment operating income (loss)			49,298				(124	)			3,414				52,588
Equity earnings			37,480				8,570				—				46,050
Segment profit		$	86,778			$	8,446			$	3,414			$	98,638
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	52,588
General and administrative expenses:
Allocated-affiliate															(9,846	)
Third party-direct															(530	)
Combined operating income														$	42,212

						Gathering &
		Gathering &				Processing -				NGL
		Processing - West				Gulf				Services				Total
						(In thousands)
Six Months Ended June 30, 2009:
Segment revenues		$	182,442			$	945			$	28,408			$	211,795
Product cost and shrink replacement			37,515				—				3,185				40,700
Operating and maintenance expense			68,977				1,150				12,160				82,287
Depreciation, amortization and accretion			20,622				92				1,634				22,348
Direct general and administrative expense			4,461				—				1,520				5,981
Other, net			6,003				—				419				6,422
Segment operating income (loss)			44,864				(297	)			9,490				54,057
Investment income			34,296				4,963				—				39,259
Segment profit		$	79,160			$	4,666			$	9,490			$	93,316
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	54,057
General and administrative expenses:
Allocated-affiliate															(17,817	)
Third party-direct															(1,204	)
Combined operating income														$	35,036
Six Months Ended June 30, 2008:
Segment revenues		$	290,896			$	1,113			$	36,598			$	328,607
Product cost and shrink replacement			108,590				—				9,517				118,107
Operating and maintenance expense			77,570				1,043				15,003				93,616
Depreciation, amortization and accretion			20,435				304				1,489				22,228
Direct general and administrative expense			3,988				—				1,244				5,232
Other, net			1,804				—				390				2,194
Segment operating income (loss)			78,509				(234	)			8,955				87,230
Equity earnings			58,674				22,191				—				80,865
Segment profit		$	137,183			$	21,957			$	8,955			$	168,095
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	87,230
General and administrative expenses:
Allocated-affiliate															(17,508	)
Third party-direct															(1,198	)
Combined operating income														$	68,524

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Please read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements included in Item 1 of Part I of this quarterly report.

Overview

     We are principally engaged in the business of gathering, transporting, processing and treating natural gas and fractionating and storing natural gas liquids (NGLs). We manage our business and analyze our results of operations on a segment basis. Our operations are divided into three business segments:

•

Gathering and Processing — West (West). Our West segment includes Four Corners and ownership interests in Wamsutter, consisting of (i) 100% of the Class A limited liability company membership interests and (ii) 65% of the Class C limited liability company membership interests (together, the Wamsutter Ownership Interests). We account for the Wamsutter Ownership Interests as an equity investment.

•

Gathering and Processing — Gulf (Gulf). Our Gulf segment includes (1) our 60% ownership interest in Discovery and (2) the Carbonate Trend gathering pipeline off the coast of Alabama. We account for our ownership interest in Discovery as an equity investment.

•

NGL Services. Our NGL Services segment includes three integrated NGL storage facilities and a 50% undivided interest in a fractionator near Conway, Kansas.

Executive Summary

     Our results for the second quarter of 2009 demonstrate continued improvement from difficult circumstances experienced during the previous two quarters where low NGL commodity prices and hurricane-related damages significantly decreased the profitability of our gathering and processing businesses. Net income for the second quarter of 2009 improved about 36% over the first quarter of 2009 despite the unfavorable effects of the incident at our Ignacio gas processing plant described below. Given the current energy commodity price and NGL margin environment, together with our cash balance, we expect to maintain our current level of cash distributions throughout 2009. As discussed further below, Williams, which owns our general-partner interest, will provide us with significant, additional support for 2009 which will enable us to maintain a higher level of cash retention and a stronger overall liquidity position. We maintained our second-quarter unitholder distribution at $0.635 per unit which equaled our first-quarter 2009 distribution.

Recent Events

     On June 3, 2009, a pipeline ruptured at our Ignacio gas processing plant. We expanded the scope of the investigation beyond the repair of the damaged pipes to ensure that any similarly situated piping was thoroughly inspected and repaired as necessary. During the outage, we re-routed approximately 250 MMcf/d of the plant’s normal production capacity to other facilities in the San Juan Basin. The plant was returned to service on June 19. We estimate the incident reduced second-quarter 2009 cash flows by approximately $7.0 million as a result of reduced NGL equity sales volumes of 5 million to 6 million gallons, reduced gathering volumes of 3 to 4 trillion British thermal units (TBtus) and estimated repair costs (including capital expenditures) of approximately $3.0 million.

     In 2009, Williams waived the incentive distribution rights (IDRs) related to 2009 distribution periods. The IDRs represent approximately $29.0 million, on an annual basis, at the partnership’s current per-unit cash distribution level.

     In 2009, our omnibus agreement with Williams was amended to increase the aggregate amount of the credit we can receive related to certain general and administrative expenses for 2009. Consequently, for 2009, Williams will provide up to an additional $10.0 million credit, in addition to the $0.8 million annual credit previously provided under the original omnibus agreement, to the extent that all 2009 non-segment profit general and administrative expenses exceed $36.0 million. We will record total general and administrative expenses (including those expenses that are subject to the credit by Williams) as an expense, and we will record any credits as capital contributions from Williams. Accordingly, our net income will not reflect the benefit of the credit received from

Williams. However, the costs subject to this credit will be allocated entirely to our general partner. As a result, the net income allocated to limited partners on a per-unit basis will reflect the benefit of this credit.

Results of Operations

Consolidated Overview

     The following table and discussion is a summary of our consolidated results of operations for the three and six months ended June 30, 2009, compared to the three and six months ended June 30, 2008. The results of operations by segment are discussed in further detail following this consolidated overview discussion.

		Three months ended												Six months ended
		June 30,								% Change from				June 30,								% Change from
		2009				2008				2008(1)				2009				2008				2008(1)
		(Thousands)												(Thousands)
Financial Results:
Revenues		$	106,327			$	178,245				-40	%		$	211,795			$	328,607				-36	%
Costs and expenses:
Product cost and shrink replacement			20,538				66,009				+69	%			40,700				118,107				+66	%
Operating and maintenance expense			42,381				46,532				+9	%			82,287				93,616				+12	%
Depreciation, amortization and accretion			11,164				11,002				-1	%			22,348				22,228				-1	%
General and administrative expense			12,522				13,134				+5	%			25,002				23,938				-4	%
Taxes other than income			2,325				2,167				-7	%			4,761				4,672				-2	%
Other (income) expense — net			(18	)			(2,811	)			-99	%			1,661				(2,478	)		NM
Total costs and expenses			88,912				136,033				+35	%			176,759				260,083				+32	%
Operating income			17,415				42,212				-59	%			35,036				68,524				-49	%
Equity earnings — Wamsutter			18,975				37,480				-49	%			34,296				58,674				-42	%
Discovery investment income			4,151				8,570				-52	%			4,963				22,191				-78	%
Interest expense			(15,200	)			(16,683	)			+9	%			(30,316	)			(34,356	)			+12	%
Interest income			27				243				-89	%			61				418				-85	%
Net income		$	25,368			$	71,822				-65	%		$	44,040			$	115,451				-62	%