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
(Registrant’s Telephone Number, Including Area Code)

NO CHANGE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     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 October 28, 2009.

 

 

WILLIAMS PARTNERS L.P.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income — Three and Nine Months Ended September 30, 2009 and 2008			5
Consolidated Balance Sheets — September 30, 2009 and December 31, 2008			6
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2009 and 2008			7
Consolidated Statement of Partners’ Capital from January 1, 2009 to September 30, 2009			8
Notes to Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			40
Part II. Other Information			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 6. Exhibits			43
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,” “will,” 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

WILLIAMS PARTNERS L.P.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues:
Product sales:
Affiliate		$	48,977			$	92,421			$	112,735			$	264,677
Third-party			3,285				6,430				10,754				20,392
Gathering and processing:
Affiliate			10,990				9,480				32,426				28,117
Third-party			48,425				50,721				140,142				146,479
Storage			8,531				8,264				24,993				22,699
Fractionation			2,396				5,484				7,572				13,580
Other			2,549				2,913				8,326				8,376
Total revenues			125,153				175,713				336,948				504,320
Costs and expenses:
Product cost and shrink replacement:
Affiliate			9,066				22,358				25,378				72,077
Third-party			20,937				35,391				45,325				103,779
Operating and maintenance expense (excluding depreciation):
Affiliate			10,352				21,220				32,726				60,901
Third-party			27,232				29,257				87,145				83,192
Depreciation, amortization and accretion			11,288				11,735				33,636				33,963
General and administrative expense:
Affiliate			11,551				10,620				35,017				32,881
Third-party			646				664				2,182				2,341
Taxes other than income			2,586				2,314				7,347				6,986
Other income			(5,019	)			(5,822	)			(3,358	)			(8,300	)
Total costs and expenses			88,639				127,737				265,398				387,820
Operating income			36,514				47,976				71,550				116,500
Equity earnings-Wamsutter			23,642				20,801				57,938				79,475
Discovery investment income			11,058				8,244				16,021				30,435
Interest expense			(15,281	)			(16,437	)			(45,597	)			(50,793	)
Interest income			14				249				75				667
Net income		$	55,947			$	60,833			$	99,987			$	176,284
Allocation of net income:
Net income		$	55,947			$	60,833			$	99,987			$	176,284
Allocation of net income to general partner			921				7,985	(a)			412				21,777	(a)
Allocation of net income to limited partners		$	55,026			$	52,848	(a)		$	99,575			$	154,507	(a)
Basic and diluted net income per limited partner common unit		$	1.04			$	1.00	(a)		$	1.88			$	2.92	(a)
Weighted average number of common units outstanding			52,777,452				52,775,912				52,777,452				52,775,126

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

		September 30,				December 31,
		2009				2008
		(Unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	101,859			$	116,165
Accounts receivable:
Trade			16,364				16,279
Affiliate			20,349				11,652
Other			1,142				2,919
Product imbalance			3,458				6,344
Prepaid expense			7,602				4,102
Other current assets			3,060				3,642
Total current assets			153,834				161,103
Investment in Wamsutter			275,471				277,707
Investment in Discovery Producer Services			193,147				184,466
Gross property, plant and equipment			1,287,209				1,265,153
Less accumulated depreciation			(652,012	)			(624,633	)
Property, plant and equipment, net			635,197				640,520
Other noncurrent assets			25,493				28,023
Total assets		$	1,283,142			$	1,291,819
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade		$	19,974			$	22,348
Affiliate			12,520				11,122
Product imbalance			6,876				8,926
Deferred revenue			9,190				4,916
Accrued interest			10,580				18,705
Other accrued liabilities			9,580				6,172
Total current liabilities			68,720				72,189
Long-term debt			1,000,000				1,000,000
Environmental remediation liabilities			1,874				2,321
Other noncurrent liabilities			14,488				13,699
Commitments and contingent liabilities (Note 9 )
Partners’ capital			198,060				203,610
Total liabilities and partners’ capital		$	1,283,142			$	1,291,819

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

		Nine Months Ended
		September 30,
		2009				2008
		(In thousands)
OPERATING ACTIVITIES:
Net income		$	99,987			$	176,284
Adjustments to reconcile to cash provided by operating activities:
Depreciation, amortization and accretion			33,636				33,963
Gain on involuntary conversion			(4,034	)			(9,276	)
Equity earnings of Wamsutter			(57,938	)			(79,475	)
Equity earnings of Discovery Producer Services			(11,834	)			(30,435	)
Distributions related to equity earnings of Wamsutter			57,938				78,296
Distributions related to equity earnings of Discovery Producer Services			11,834				30,435
Cash provided (used) by changes in assets and liabilities:
Accounts receivable			(7,005	)			(24,871	)
Prepaid expense			(3,500	)			(1,079	)
Other current assets			1,150				9,504
Accounts payable			(976	)			(11,878	)
Product imbalance			836				(1,173	)
Deferred revenue			4,040				5,544
Accrued liabilities			(5,266	)			(8,544	)
Other, including changes in noncurrent assets and liabilities			2,216				2,539
Net cash provided by operating activities			121,084				169,834
INVESTING ACTIVITIES:
Capital expenditures			(28,087	)			(37,694	)
Cumulative distributions in excess of equity earnings of Discovery Producer Services			2,806				15,165
Cumulative distributions in excess of equity earnings of Wamsutter			3,384				—
Insurance proceeds			5,000				7,718
Insurance proceeds related to affiliate accounts receivable			—				4,483
Proceeds from sale of property, plant and equipment			162				—
Contributions to Wamsutter			(958	)			(2,059	)
Contributions to Discovery Producer Services			(11,486	)			(437	)
Net cash used by investing activities			(29,179	)			(12,824	)
FINANCING ACTIVITIES:
Distributions to unitholders and general partner			(110,011	)			(113,765	)
Proceeds from sale of common units			—				28,992
Redemption of common units from general partner			—				(28,992	)
Contributions per omnibus agreement			3,800				2,328
Other			—				76
Net cash used by financing activities			(106,211	)			(111,361	)
Increase (decrease) in cash and cash equivalents			(14,306	)			45,649
Cash and cash equivalents at beginning of period			116,165				36,197
Cash and cash equivalents at end of period		$	101,859			$	81,846

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

										Accumulated Other				Total
						General				Comprehensive				Partners’
		Common				Partner				Income				Capital
Balance — January 1, 2009		$	1,619,954			$	(1,416,344	)		$	—			$	203,610
Net income			92,303				7,684				—				99,987
Other comprehensive income:
Net unrealized gains on cash flow hedges			—				—				469				469
Net unrealized gains on cash flow hedges — Wamsutter			—				—				214				214
Reclassification of gains into earnings			—				—				(5	)			(5	)
Reclassification of gains into earnings — Wamsutter			—				—				(23	)			(23	)
Total other comprehensive income															655
Total comprehensive income															100,642
Cash distributions			(100,539	)			(9,472	)			—				(110,011	)
Contributions pursuant to the omnibus agreement			—				3,800				—				3,800
Other			19				—				—				19
Balance — September 30, 2009		$	1,611,737			$	(1,414,332	)		$	655			$	198,060

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

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 8-K, filed October 28, 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 September 30, 2009, results of operations for the three and nine months ended September 30, 2009 and 2008 and cash flows for the nine months ended September 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 Securities and Exchange Commission on October 29, 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 August 2009, the Financial Accounting Standards Board issued Accounting Standards Update No. 2009-5, Fair Value Measurements and Disclosures Measuring Liabilities at Fair Value (Topic 820). This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more prescribed techniques. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. Additionally, this Update clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this Update is effective for the fourth quarter of 2009. Application of this Update is not expected to materially impact our Consolidated Financial Statements.

     In January 2009, we adopted new guidance regarding the application of the two-class method to calculate earnings per unit for Master Limited Partnerships, which 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 this guidance, we no longer calculate assumed incentive distributions. 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 nine months ended September 30, 2008 increased from $0.82 per unit to $1.00 per unit and $2.40 per unit to $2.92 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.

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 and nine months ended September 30, 2009 and 2008 is as follows (in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Allocation to general partner:
Net income		$	55,947			$	60,833			$	99,987			$	176,284
Reimbursable general and administrative costs charged directly to general partner			201				514				1,619				1,310
Income subject to 2% allocation of general partner interest			56,148				61,347				101,606				177,594
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			1,122				1,227				2,031				3,552
Incentive distributions paid to general partner*			—				6,765				7,272				16,495
Direct charges to general partner			(201	)			(514	)			(1,619	)			(1,310	)
Net income allocated to general partner*		$	921			$	7,478			$	7,684			$	18,737
Net income		$	55,947			$	60,833			$	99,987			$	176,284
Net income allocated to general partner*			921				7,478				7,684				18,737
Net income allocated to limited partners		$	55,026			$	53,355			$	92,303			$	157,547

Prior to the conversion of the subordinated units into common units in 2008, common and subordinated unitholders 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		$	0.6350			$	33,513				—			$	684			$	—			$	34,197
11/13/2009 (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 2009 general and administrative expenses excluded from segment profit 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 nine months ended September 30, 2009, the total additional general and administrative credit received from Williams was $1.0 million. No additional general and administrative credit was received during the third quarter.

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 68%. 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):

		September 30,				December 31,
		2009				2008
		(Unaudited)
Current assets		$	22,686			$	17,147
Property, plant and equipment, net			390,443				318,072
Non-current assets			820				468
Current liabilities			(24,835	)			(16,960	)
Non-current liabilities			(4,524	)			(4,353	)
Members’ capital		$	384,590			$	314,374

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(Unaudited)
Revenues:
Product sales:
Affiliate		$	29,666			$	31,152			$	66,255			$	117,070
Third-party			1,993				7,612				10,542				21,498
Gathering and processing services			19,758				17,150				59,806				50,495
Other revenues			935				1,906				4,157				6,604
Costs and expenses excluding depreciation and accretion:
Affiliate			9,487				11,031				33,108				61,510
Third-party			13,539				9,487				33,027				27,740
Depreciation and accretion			5,684				5,295				16,687				15,736
Net income		$	23,642			$	32,007			$	57,938			$	90,681
Williams Partners’ interest — equity earnings		$	23,642			$	20,801			$	57,938			$	79,475

Discovery Producer Services LLC

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

		September 30,				December 31,
		2009				2008
		(Unaudited)
Current assets		$	53,467			$	50,978
Non-current restricted cash and cash equivalents			—				3,470
Property, plant and equipment, net			367,448				370,482
Current liabilities			(25,409	)			(45,234	)
Non-current liabilities			(22,924	)			(19,771	)
Members’ capital		$	372,582			$	359,925

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(Unaudited)
Revenues:
Affiliate		$	36,030			$	53,037			$	75,121			$	202,954
Third-party			14,016				8,243				33,646				28,365
Costs and expenses:
Affiliate			8,675				17,249				27,559				87,717
Third-party			22,946				30,224				61,343				93,403
Interest income			(5	)			(143	)			(27	)			(593	)
Other expense			—				208				168				67
Net income		$	18,430			$	13,742			$	19,724			$	50,725
Discovery investment income:
Williams Partners’ interest — equity earnings		$	11,058			$	8,244			$	11,834			$	30,435
Business interruption insurance proceeds			—				—				4,187				—
Discovery investment income		$	11,058			$	8,244			$	16,021			$	30,435

     In the second quarter of 2009, Discovery’s limited liability company 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 September 30, 2009 and December 31, 2008 is as follows:

		Interest				September 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 September 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 second-quarter 2009 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, including certain ratios calculated on a rolling four-quarter basis, 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 September 30, 2009, our ratio of consolidated indebtedness to consolidated EBITDA, as calculated under this covenant, of approximately 3.92 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 September 30, 2009, our ratio of consolidated EBITDA to consolidated interest expense, as calculated under this covenant, of approximately 4.24 is in compliance with this covenant.

     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 September 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 nonperformance risk in estimating fair value.

     Energy derivatives. 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. Many contracts have bid and ask prices that can be observed in the market. Our policy is to use a mid-market price (the mid-point price between bid and ask prices) convention to value individual positions and then adjust on a portfolio

level to a point within the bid and ask range that represents our best estimate of fair value. For offsetting positions by location, the mid-market price is used to measure both the long and short positions.

Carrying amounts and fair values of our financial instruments

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
Asset (Liability)		Amount				Value				Amount				Value
						(In thousands)
Cash and cash equivalents		$	101,859			$	101,859			$	116,165			$	116,165
Long-term debt			(1,000,000	)			(993,987	)			(1,000,000	)			(825,289	)
Energy derivative assets			566				566				—				—
Energy derivative liabilities			(103	)			(103	)			—				—

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.

     The following table presents, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis.

     Fair Value Measurements Using:

		September 30, 2009
		Level 1				Level 2				Level 3				Total
						(In thousands)
Assets:
Energy derivatives		$	—			$	536			$	30			$	566
Liabilities:
Energy derivatives		$	—			$	8			$	95			$	103

     Energy derivatives include commodity-based contracts with Williams Gas Marketing, Inc. (WGM), a wholly-owned subsidiary of Williams, that resemble similar exchange-traded contracts and Over-the-Counter (OTC) contracts. Exchange-traded contracts could include futures, swaps and options. OTC contracts could include forwards, swaps and options.

      Contracts for which fair value can be estimated from executed transactions or broker quotes corroborated by other market data are generally classified within Level 2. These broker quotes are based on observable market prices at which transactions could currently be executed. In certain instances where these inputs are not observable for all periods, relationships of observable market data and historical observations are used as a means to estimate fair value. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Our natural gas swaps are included in Level 2.

     Certain instruments trade in less active markets with lower availability of pricing information requiring valuation models using inputs that may not be readily observable or corroborated by other market data. These instruments are classified within Level 3 when these inputs have a significant impact on the measurement of fair value. Our commodity-based NGL financial swap contracts are included in Level 3.

     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 nine months ended September 30, 2009 and 2008.

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

		Net Derivative Asset (Liability)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Beginning balance		$	(3	)		$	(11,978	)		$	—			$	(2,487	)
Realized and unrealized gains (losses):
Included in net income			121				(5,095	)			42				(6,711	)
Included in other comprehensive income			(141	)			15,253				(65	)			6,139
Purchases, issuances, and settlements			(42	)			5,458				(42	)			6,697
Transfers in/(out) of Level 3			—				—				—				—
Ending balance		$	(65	)		$	3,638			$	(65	)		$	3,638
Unrealized gains (losses) included in net income relating to instruments still held at September 30		$	—			$	164			$	—			$	(14	)

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

     All of these derivatives utilized for risk management purposes have been designated as cash flow 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.

Volumes

     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 September 30, 2009.

		Period				Volumes
Designated as hedging instruments:
NGL sales — ethane (million gallons)		October—December 2009					11.3
NGL sales — normal butane (million gallons)		October—December 2009					1.6
NGL sales — isobutane (million gallons)		October—December 2009					1.0
NGL sales — natural gasoline (million gallons)		October—December 2009					1.0
Natural gas purchases (million British thermal units per day)		October—December 2009					7,000
Natural gas purchases (million British thermal units per day)		November—December 2009					5,000

Financial Statement Presentation

     The fair value of our energy commodity derivatives designated as hedging instruments is presented in our Consolidated Balance Sheet as Other current assets of $0.6 million and Other accrued liabilities of $0.1 million as of September 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.

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

		Three months				Nine months
		ended				ended
		September 30,				September 30,
		2009				2009				Classification
		(In thousands)
Net gain recognized in other comprehensive income (effective portion)		$	393			$	469			AOCI
Net gain reclassified from accumulated other comprehensive income into income (effective portion)		$	5			$	5			Revenues
Gain recognized in income (ineffective portion)		$	—			$	—
Other unrealized gain included in income		$	—			$	—

     Based on recorded values at September 30, 2009, $0.5 million of net gains will be reclassified into earnings within the next twelve months. These recorded values are based on market prices of the commodities as of September 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 twelve months 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 for the volumes associated with the underlying hedged transactions.

Credit-Risk-Related Features

     Our NGL financial swap contracts and our natural gas purchase contracts are with WGM. 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 September 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 September 30, 2009, we had accrued liabilities totaling $3.1 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 September 30, 2009, approximately $7.0 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 on September 18, 2009, the court denied plaintiffs’ most recent motion to certify the class. On October 2, 2009, the plaintiffs filed a motion for reconsideration of the denial. 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 under the False Claims Act against Williams, certain of its subsidiaries (including us) and approximately 300 other energy companies. 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. On October 5, 2009, the United States Supreme Court denied Grynberg’s petition for a writ of certiorari requesting review of the Tenth Circuit Court of Appeals ruling. This matter is concluded.

     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 September 30, 2009:
Segment revenues		$	109,843			$	350			$	14,960			$	125,153
Costs and expenses:
Product cost and shrink replacement			28,059				—				1,944				30,003
Operating and maintenance expense			32,189				124				5,271				37,584
Depreciation, amortization and accretion			10,375				33				880				11,288
Direct general and administrative expense			2,348				—				860				3,208
Other, net			(2,968	)			326				209				(2,433	)
Segment operating income (loss)			39,840				(133	)			5,796				45,503
Investment income			23,642				11,058				—				34,700
Segment profit		$	63,482			$	10,925			$	5,796			$	80,203
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	45,503
General and administrative expenses:
Allocated-affiliate															(8,459	)
Third party-direct															(530	)
Combined operating income														$	36,514
Three Months Ended September 30, 2008:
Segment revenues		$	155,217			$	537			$	19,959			$	175,713
Costs and expenses:
Product cost and shrink replacement			53,902				—				3,847				57,749
Operating and maintenance expense			42,129				148				8,200				50,477
Depreciation, amortization and accretion			10,811				153				771				11,735
Direct general and administrative expense			2,188				—				631				2,819
Other, net			(3,703	)			—				195				(3,508	)
Segment operating income			49,890				236				6,315				56,441
Investment income			20,801				8,244				—				29,045
Segment profit		$	70,691			$	8,480			$	6,315			$	85,486
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	56,441
General and administrative expenses:
Allocated-affiliate															(7,908	)
Third party-direct															(557	)
Combined operating income														$	47,976

						Gathering &
		Gathering &				Processing -				NGL
		Processing - West				Gulf				Services				Total
						(In thousands)
Nine Months Ended September 30, 2009:
Segment revenues		$	292,285			$	1,295			$	43,368			$	336,948
Costs and expenses:
Product cost and shrink replacement			65,574				—				5,129				70,703
Operating and maintenance expense			101,166				1,274				17,431				119,871
Depreciation, amortization and accretion			30,997				125				2,514				33,636
Direct general and administrative expense			6,809				—				2,380				9,189
Other, net			3,035				326				628				3,989
Segment operating income (loss)			84,704				(430	)			15,286				99,560
Investment income			57,938				16,021				—				73,959
Segment profit		$	142,642			$	15,591			$	15,286			$	173,519
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	99,560
General and administrative expenses:
Allocated-affiliate															(26,276	)
Third party-direct															(1,734	)
Combined operating income														$	71,550
Nine Months Ended September 30, 2008:
Segment revenues		$	446,113			$	1,650			$	56,557			$	504,320
Costs and expenses:
Product cost and shrink replacement			162,492				—				13,364				175,856
Operating and maintenance expense			119,699				1,191				23,203				144,093
Depreciation, amortization and accretion			31,246				457				2,260				33,963
Direct general and administrative expense			6,176				—				1,875				8,051
Other, net			(1,899	)			—				585				(1,314	)
Segment operating income			128,399				2				15,270				143,671
Investment income			79,475				30,435				—				109,910
Segment profit		$	207,874			$	30,437			$	15,270			$	253,581
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	143,671
General and administrative expenses:
Allocated-affiliate															(25,416	)
Third party-direct															(1,755	)
Combined operating income														$	116,500

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) 68% 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 third quarter of 2009 demonstrate significant continued improvement from difficult circumstances experienced during the last quarter of 2008 and the first half of 2009 when low NGL commodity prices and hurricane-related damages significantly decreased the profitability of our gathering and processing businesses. Net income for the third quarter of 2009 improved approximately 121% over the second quarter of 2009. As discussed further below, Williams, which owns our general-partner interest, continues to provide us with significant, additional support for 2009 which has assisted us in maintaining a higher level of cash retention and a stronger overall liquidity position. We maintained our third-quarter unitholder distribution at $0.635 per unit which equaled our first and second-quarter 2009 distribution.

Recent Events

     On June 3, 2009, a pipeline ruptured at our Ignacio gas processing plant. We expanded the scope of our investigation beyond the repair of the damaged pipes to ensure that other plant piping was appropriately inspected and repaired as necessary. During the outage, we re-routed approximately 250 MMcf/d of the plant’s normal gas throughput 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).

     In 2009, Williams waived the incentive distribution rights (IDRs) related to the 2009 distribution periods. These IDRs represent approximately $29.0 million, on an annual basis, at our 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 2009 general and administrative expenses excluded from segment profit 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 nine months ended September 30, 2009, the total additional general and administrative credit received from Williams was $1.0 million. No additional general and administrative credit was received during the third quarter.

Results of Operations

Consolidated Overview

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

		Three months ended												Nine months ended
		September 30,								% Change from				September 30,								% Change from
		2009				2008				2008(1)				2009				2008				2008(1)
		(Thousands)												(Thousands)
Financial Results:
Revenues		$	125,153			$	175,713				-29	%		$	336,948			$	504,320				-33	%
Costs and expenses:
Product cost and shrink replacement			30,003				57,749				+48	%			70,703				175,856				+60	%
Operating and maintenance expense			37,584				50,477				+26	%			119,871				144,093				+17	%
Depreciation, amortization and accretion			11,288				11,735				+4	%			33,636				33,963				+1	%
General and administrative expense			12,197				11,284				-8	%			37,199				35,222				-6	%
Taxes other than income			2,586				2,314				-12	%			7,347				6,986				-5	%
Other income			(5,019	)			(5,822	)			-14	%			(3,358	)			(8,300	)			-60	%
Total costs and expenses			88,639				127,737				+31	%			265,398				387,820				+32	%
Operating income			36,514				47,976				-24	%			71,550				116,500				-39	%
Equity earnings — Wamsutter			23,642				20,801				+14	%			57,938				79,475				-27	%
Discovery investment income			11,058				8,244				+34	%			16,021				30,435				-47	%
Interest expense			(15,281	)			(16,437	)			+7	%			(45,597	)			(50,793	)			+10	%
Interest income			14				249				-94	%			75				667				-89	%
Net income		$	55,947			$	60,833				-8	%		$	99,987			$	176,284				-43	%