e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-32599
WILLIAMS PARTNERS L.P.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE
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20-2485124 |
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(State or other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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ONE WILLIAMS CENTER |
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TULSA, OKLAHOMA
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74172-0172 |
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(Address of principal executive offices)
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(Zip Code) |
(918) 573-2000
(Registrants telephone number, including area code)
(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 o No þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
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 issuer had 7,000,000 common units and 7,000,000 subordinated units outstanding as of
October 31, 2005.
WILLIAMS PARTNERS L.P.
INDEX
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this quarterly report, excluding historical information, include
forward-looking statements statements that discuss our expected future results based on current
and pending business operations. We make these forward-looking statements in reliance on the safe
harbor protections provided under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as anticipates, believes,
expects, planned, scheduled, could, continues, estimates, forecasts, might,
potential, projects or similar expressions. Similarly, statements that describe our future
plans, objectives or goals are also forward-looking statements.
Although we believe these forward-looking statements are based on reasonable assumptions,
statements made regarding future results are subject to a number of assumptions, uncertainties and
risks that may cause future results to be materially different from the results stated or implied
in this document. These risks and uncertainties include, among other things:
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We may not have sufficient cash from operations to enable us to pay the minimum
distribution following establishment of cash reserves and payment of fees and expenses,
including payments to our general partner. |
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Because of the natural decline in production from existing wells, our success depends on
our ability to obtain new sources of natural gas supply, which is dependent on factors
beyond our control, including Discoverys ability to complete its Tahiti lateral expansion
project. Any decrease in supplies of natural gas could adversely affect our business and
operating results. |
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Our processing, fractionation and storage business could be affected by any decrease in
the price of natural gas liquids or a change in the price of natural gas liquids relative
to the price of natural gas. |
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Williams revolving credit facility and Williams public indentures contain financial
and operating restrictions that may limit our access to credit. In addition, our ability
to obtain credit in the future will be affected by Williams credit ratings. |
1
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Our general partner and its affiliates have conflicts of interest and limited fiduciary
duties, which may permit them to favor their own interests to the detriment of our
unitholders. |
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Even if unitholders are dissatisfied, they cannot initially remove our general partner without its consent. |
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You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us. |
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Our operations are subject to operational hazards and unforeseen interruptions for which
we may or may not be adequately insured. |
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Lower natural gas liquids prices could adversely affect our fractionation and storage
businesses. |
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We depend on certain key customers and producers for a significant portion of our
revenues and supply of natural gas and natural gas liquids. The loss of any of these key
customers or producers could result in a decline in our revenues and cash available to pay
distributions. |
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If third-party pipelines and other facilities interconnected to our pipelines and
facilities become unavailable to transport natural gas and natural gas liquids or to treat
natural gas, our revenues and cash available to pay distributions could be adversely
affected. |
Additional information about risks and uncertainties that could cause actual results to differ
materially from forward-looking statements is contained under the caption Risk Factors in our
prospectus dated August 17, 2005 as filed with the Securities and Exchange Commission on August 19,
2005 pursuant to Rule 424(b) of the Securities Act of 1933. We refer you to that filing for that
additional information regarding our risks and uncertainties.
The forward-looking statements included in this report are only made as of the date of this
report and we undertake no obligation to publicly update forward-looking statements to reflect
subsequent events or circumstances.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per-unit amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues: |
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Storage |
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$ |
5,409 |
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$ |
4,165 |
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$ |
14,435 |
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$ |
11,075 |
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Fractionation |
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2,386 |
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2,414 |
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7,123 |
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6,544 |
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Gathering |
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649 |
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793 |
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2,295 |
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3,059 |
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Product sales: |
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Affiliate |
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2,726 |
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9,234 |
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Third-party |
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1,976 |
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63 |
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3,536 |
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Other |
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1,006 |
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1,109 |
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2,571 |
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|
3,239 |
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Total revenues |
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12,176 |
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|
10,457 |
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35,721 |
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27,453 |
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Costs and expenses: |
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Operating and maintenance expense: |
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Affiliate |
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2,592 |
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2,554 |
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7,938 |
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7,247 |
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Third-party |
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5,680 |
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|
3,097 |
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8,854 |
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7,311 |
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Product cost |
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2,258 |
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1,445 |
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8,320 |
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2,816 |
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Depreciation |
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|
896 |
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918 |
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2,694 |
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2,696 |
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General and administrative expense: |
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Affiliate |
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1,170 |
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745 |
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2,708 |
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1,838 |
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Third-party |
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385 |
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18 |
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431 |
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56 |
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Taxes other than income |
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194 |
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179 |
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532 |
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537 |
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Total costs and expenses |
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13,175 |
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8,956 |
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31,477 |
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22,501 |
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Operating income (loss) |
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(999 |
) |
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1,501 |
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4,244 |
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4,952 |
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Equity earnings (loss) Discovery Producer Services LLC |
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66 |
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(90 |
) |
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2,969 |
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3,184 |
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Interest expense: |
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Affiliate |
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(1,822 |
) |
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(2,929 |
) |
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(7,439 |
) |
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(9,045 |
) |
Third-party |
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|
(192 |
) |
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(166 |
) |
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(561 |
) |
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(331 |
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Interest income |
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76 |
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76 |
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Net loss |
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$ |
(2,871 |
) |
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$ |
(1,684 |
) |
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$ |
(711 |
) |
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$ |
(1,240 |
) |
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Allocation of 2005 net loss: |
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Net loss |
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$ |
(2,871 |
) |
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$ |
(711 |
) |
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Net loss applicable to the period through August 22, 2005 |
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(2,192 |
) |
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(32 |
) |
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Net loss applicable to the period August 23 through
September 30, 2005 |
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(679 |
) |
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(679 |
) |
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Allocation of Net loss to general partner |
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(423 |
) |
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(423 |
) |
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Allocation of Net loss to limited partners |
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$ |
(256 |
) |
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$ |
(256 |
) |
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Basic and diluted net loss per limited partner unit: |
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Common units |
|
$ |
(0.02 |
) |
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|
$ |
(0.02 |
) |
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|
Subordinated units |
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.02 |
) |
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Weighted average number of units outstanding: |
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Common units |
|
|
7,000,000 |
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|
7,000,000 |
|
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|
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|
Subordinated units |
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|
7,000,000 |
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|
|
|
|
|
|
7,000,000 |
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|
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|
See accompanying notes to consolidated financial statements.
3
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
|
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September 30, |
|
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December 31, |
|
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|
2005 |
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2004 |
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(Unaudited) |
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(Thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
14,482 |
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$ |
|
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Accounts receivable: |
|
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Trade |
|
|
1,444 |
|
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|
2,150 |
|
Other |
|
|
1,992 |
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|
|
1,388 |
|
Gas purchase contract affiliate |
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5,449 |
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Other current assets |
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|
875 |
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|
749 |
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|
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Total current assets |
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24,242 |
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|
4,287 |
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Investment in Discovery Producer Services LLC |
|
|
146,146 |
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|
147,281 |
|
Property, plant and equipment, net |
|
|
67,042 |
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|
67,793 |
|
Gas purchase
contract - noncurrent - affiliate |
|
|
6,076 |
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Total assets |
|
$ |
243,506 |
|
|
$ |
219,361 |
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LIABILITIES AND PARTNERS CAPITAL |
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Current liabilities: |
|
|
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Accounts payable: |
|
|
|
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|
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Trade |
|
$ |
2,069 |
|
|
$ |
2,480 |
|
Affiliate |
|
|
6,076 |
|
|
|
1,980 |
|
Product imbalance |
|
|
4,736 |
|
|
|
1,071 |
|
Deferred revenue |
|
|
6,876 |
|
|
|
3,305 |
|
Accrued
liabilities: |
|
|
|
|
|
|
|
|
Affiliate |
|
|
512 |
|
|
|
317 |
|
Other |
|
|
2,678 |
|
|
|
3,607 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
22,947 |
|
|
|
12,760 |
|
|
|
|
|
|
|
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Advances from affiliate |
|
|
|
|
|
|
186,024 |
|
Environmental remediation liabilities |
|
|
3,964 |
|
|
|
3,909 |
|
Other noncurrent liabilities |
|
|
187 |
|
|
|
|
|
Commitments and contingent liabilities (Note 7) |
|
|
|
|
|
|
|
|
Partners capital |
|
|
216,408 |
|
|
|
16,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital |
|
$ |
243,506 |
|
|
$ |
219,361 |
|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements.
4
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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|
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|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Thousands) |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(711 |
) |
|
$ |
(1,240 |
) |
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
2,694 |
|
|
|
2,696 |
|
Amortization
of gas purchase contract - affiliate |
|
|
581 |
|
|
|
|
|
Undistributed earnings of Discovery Producer Services LLC |
|
|
(2,969 |
) |
|
|
(3,184 |
) |
Cash provided (used) by changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,538 |
) |
|
|
(91 |
) |
Other current assets |
|
|
(126 |
) |
|
|
96 |
|
Accounts payable |
|
|
3,685 |
|
|
|
779 |
|
Accrued liabilities |
|
|
45 |
|
|
|
(65 |
) |
Deferred revenue |
|
|
3,571 |
|
|
|
4,114 |
|
Other, including changes in noncurrent liabilities |
|
|
3,045 |
|
|
|
1,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,277 |
|
|
|
4,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,860 |
) |
|
|
(635 |
) |
Contribution to Discovery Producer Services LLC |
|
|
(24,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(26,260 |
) |
|
|
(635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of common units |
|
|
100,247 |
|
|
|
|
|
Payment of offering costs |
|
|
(4,291 |
) |
|
|
|
|
Distribution to The Williams Companies, Inc |
|
|
(58,756 |
) |
|
|
|
|
Changes in advances from affiliates net |
|
|
(3,735 |
) |
|
|
(3,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
33,465 |
|
|
|
(3,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
14,482 |
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
14,482 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Limited |
|
|
Pre-IPO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Partner Units |
|
|
Owners |
|
|
Limited Partner |
|
|
General |
|
|
Partners |
|
|
|
Common |
|
|
Subordinated |
|
|
Equity |
|
|
Common |
|
|
Subordinated |
|
|
Partner |
|
|
Capital |
|
Balance - January 1,
2005 |
|
|
|
|
|
|
|
|
|
$ |
16,668 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,668 |
|
Accounts receivable
not contributed |
|
|
|
|
|
|
|
|
|
|
(2,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,640 |
) |
Net loss
attributable to
the period through
August 22, 2005 |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of net
assets of
predecessor
companies |
|
|
2,000,000 |
|
|
|
7,000,000 |
|
|
|
(13,996 |
) |
|
|
10,416 |
|
|
|
106,372 |
|
|
|
4,343 |
|
|
|
107,135 |
|
Issuance of units to
public |
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
100,247 |
|
|
|
|
|
|
|
|
|
|
|
100,247 |
|
Offering costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,291 |
) |
|
|
|
|
|
|
|
|
|
|
(4,291 |
) |
Net loss attributable
to the period
August 23, 2005
through
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
(128 |
) |
|
|
(423 |
) |
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -
September 30, 2005 |
|
|
7,000,000 |
|
|
|
7,000,000 |
|
|
$ |
|
|
|
$ |
106,244 |
|
|
$ |
106,244 |
|
|
$ |
3,920 |
|
|
$ |
216,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Unless the context clearly indicates otherwise, references in this quarterly 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
Discovery Producer Services LLC (Discovery), in which we own a 40 percent interest. When we
refer to Discovery by name, we are referring exclusively to its businesses and operations.
We are a Delaware limited partnership that was formed in February 2005, to acquire and own (1)
a 40 percent interest in Discovery; (2) the Carbonate Trend gathering pipeline off the coast of
Alabama; (3) three integrated natural gas liquids (NGL) product storage facilities near Conway,
Kansas; and (4) a 50 percent undivided ownership interest in a fractionator near Conway, Kansas.
Prior to the closing of our initial public offering (the IPO) in August 2005, the 40 percent
interest in Discovery was held by Williams Energy, L.L.C. (Energy) and Williams Discovery
Pipeline LLC (Williams Pipeline); the Carbonate Trend gathering pipeline was held in Carbonate
Trend Pipeline LLC (CTP), which was owned by Williams Mobile Bay Producers Services, L.L.C.; and
the NGL product storage facilities and the interest in the fractionator were owned by Mid-Continent
Fractionation and Storage, LLC (MCFS). All of these are wholly-owned indirect subsidiaries of
The Williams Companies, Inc. (collectively Williams). Williams Partners GP LLC, a Delaware
limited liability company, was also formed in February 2005, to serve as the general partner for
us. Additionally, Williams Partners Operating LLC, an operating limited liability company
(wholly-owned by us) through which all our activities are conducted, was formed.
Initial Public Offering and Related Transactions
On August 23, 2005, we completed our IPO of 5,000,000 common units representing limited
partner interests in us at a price of $21.50 per unit. The proceeds of $100.2 million, net of the
underwriters discount and a structuring fee totaling $7.3 million, were used to:
|
|
|
distribute $58.8 million to Williams, in part to reimburse Williams for capital
expenditures relating to the assets contributed to us and for a gas purchase contract
contributed to us; |
|
|
|
|
provide $24.4 million to make a capital contribution to DPS to fund an escrow account
required in connection with the Tahiti pipeline lateral expansion project; |
|
|
|
|
provide $12.7 million of additional working capital; and |
|
|
|
|
pay $4.3 million of expenses associated with the IPO and related formation transactions. |
Concurrent with the closing of the IPO, the 40 percent interest in DPS and all of the
interests in CTP and MCFS were contributed to us by Williams subsidiaries in exchange for an
aggregate of 2,000,000 common units and 7,000,000 subordinated units. The public, through the
underwriters of the offering, contributed $107.5 million ($100.2 million net of the underwriters
discount and a structuring fee) to us in exchange for 5,000,000 common units, representing a 35
percent limited partner interest in us. Additionally, at the closing of the IPO, the underwriters
fully exercised their option to purchase 750,000 common units from Williams subsidiaries at the
IPO price of $21.50 per unit, less the underwriters discount and a structuring fee.
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 combined
financial statements and notes thereto included in our prospectus dated August 17, 2005 as filed
with the Securities and Exchange Commission on August 19, 2005 pursuant to Rule 424(b) of the
Securities Act of 1933. 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, 2005, and results of operations for the three months and nine
months ended September 30, 2005 and 2004 and cash flows for the nine months ended September 30,
2005 and 2004. All intercompany transactions have been eliminated.
7
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Description of Business
We are principally engaged in the business of gathering, transporting and processing natural
gas and fractionating and storing NGLs. Operations of our businesses are located in the United
States and are organized into two reporting segments: (1) Gathering and Processing and (2) NGL
Services. Our Gathering and Processing segment includes our equity investment in Discovery and the
Carbonate Trend gathering pipeline. Our NGL Services segment includes the Conway fractionation and
storage operations.
Gathering and Processing. We own a 40 percent interest in Discovery, which owns 100 percent of
Discovery Gas Transmission LLC. Discovery owns (1) a 273-mile natural gas gathering and
transportation pipeline system located primarily off the coast of Louisiana in the Gulf of Mexico,
(2) a 600 million cubic feet per day (MMcf/d) cryogenic natural gas processing plant near Larose,
Louisiana, (3) a 32,000 barrels per day (bpd) NGL fractionator near Paradis, Louisiana and (4)
two onshore liquids pipelines, including a 22-mile mixed NGL pipeline connecting the gas processing
plant to the fractionator and a 10-mile condensate pipeline connecting the gas processing plant to
a third-party oil gathering facility. Although Discovery includes fractionation operations, which
would normally fall within the NGL Services segment, it is primarily engaged in gathering and
processing and is managed as such. Hence, this equity investment is considered part of the
Gathering and Processing segment.
Our Carbonate Trend gathering pipeline is an unregulated sour gas gathering pipeline
consisting of approximately 34 miles of pipeline off the coast of Alabama.
NGL Services. Our Conway storage facilities include three integrated underground NGL storage
facilities with 158 active caverns in the Conway, Kansas, area with a storage capacity of
approximately 20 million barrels. The facilities are connected via a series of pipelines. The
storage facilities receive daily shipments of a variety of products, including mixed NGLs and other
hydrocarbons. In addition to pipeline connections, one facility offers truck and rail service.
Our Conway fractionation facility is located near McPherson, Kansas, and has a capacity of
approximately 107,000 bpd. We own a 50 percent undivided interest in these facilities representing
capacity of approximately 53,500 bpd. Williams operates the facility pursuant to an operating
agreement that extends through May 2011. The fractionator separates mixed NGLs into five products:
ethane, propane, normal butane, isobutane and natural gasoline. Portions of these products are
then transported and stored at our Conway storage facilities.
8
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Allocation of Net Income and Distributions
The allocation of net loss between our general partner and limited partners for the period
August 23, 2005 through September 30, 2005 is as follows (in thousands):
|
|
|
|
|
Allocation of net loss to general partner: |
|
|
|
|
Net loss for the period August 23, 2005 through
September 30, 2005 |
|
$ |
(679 |
) |
Charges direct to general partner: |
|
|
|
|
Reimbursable general and administrative costs |
|
|
417 |
|
|
|
|
|
|
|
|
|
|
Loss before direct charges to general partner |
|
|
(262 |
) |
General partners share of net loss |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
General partners allocated share of net loss before
direct charges |
|
|
(6 |
) |
Direct charges to general partner |
|
|
(417 |
) |
|
|
|
|
|
|
|
|
|
Net loss allocated to general partner |
|
|
(423 |
) |
|
|
|
|
|
|
|
|
|
Net loss for the period August 23, 2005 through
September 30, 2005 |
|
|
(679 |
) |
Net loss allocated to general partner |
|
|
(423 |
) |
|
|
|
|
|
|
|
|
|
Net loss allocated to limited partners |
|
$ |
(256 |
) |
|
|
|
|
On October 24, 2005, the board of directors of our general partner declared a cash
distribution of $0.1484 per unit on our outstanding common and subordinated units. The
distribution represents the $0.35 per unit minimum quarterly distribution pro-rated for the 39-day
period following the IPO closing date (August 23, 2005 through September 30, 2005). The $2.1
million distribution will be paid on November 14, 2005 to our general partner and unitholders of
record at the close of business on November 7, 2005.
Note 4. Related Party Transactions
The employees of our operated assets and all of our general and administrative employees are
employees of Williams. Williams directly charges us for the payroll costs associated with the
operations employees and certain general and administrative employees. Williams carries the
obligations for most employee-related benefits in its financial statements, including the
liabilities related to the employee retirement and medical plans and paid time off. Certain of
these costs are charged back to the other Conway fractionator co-owners. Our share of those costs
are charged to us through affiliate billings and reflected in Operating and maintenance expense -
Affiliate in the accompanying Consolidated Statements of Operations.
Williams charges its affiliates, including its Midstream segment of which we are a part, for
certain corporate administrative expenses that are directly identifiable or allocable to the
affiliates. Direct costs charged from Williams represent the direct costs of services provided by
Williams on our behalf. A portion of the charges allocated to the Midstream segment are then
reallocated to us. These allocated corporate administrative expenses are based on a three-factor
formula, which considers revenues; property, plant and equipment; and payroll. Certain of these
costs are charged back to the other Conway fractionator co-owners. Our share of these costs is
reflected in General and administrative expense Affiliate in the accompanying Consolidated
Statements of Operations. In managements estimation, the allocation methodologies used are
reasonable and result in a reasonable allocation to us of our costs of doing business incurred by
Williams. Following the closing of the IPO on August 23, 2005, Williams will give us a quarterly
credit for general and administrative expenses under the terms of an omnibus agreement. The annual
amounts of those credits are as follows: $3.9 million in 2005 ($1.4 million pro-rated for the
portion of the year from August 23 to December 31), $3.2 million in 2006, $2.4 million in 2007,
$1.6 million in 2008 and $0.8 million in 2009.
9
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At September 30, 2005, we have a contribution receivable from our general partner of $0.6
million including $417,000 for the third-quarter 2005 general and administrative expense credit and
other items provided for in the omnibus agreement, which is netted against Partners capital on the
Consolidated Balance Sheets.
We purchase fuel for the Conway fractionator, including fuel on behalf of the co-owners, from
Williams Power Company (Power), a wholly-owned subsidiary of Williams. These purchases are made
at market rates at the time of purchase. In connection with the IPO, Williams transferred to us a
gas purchase contract for the purchase of a portion of our fuel requirements at the Conway
fractionator at a market price not to exceed a specified level. This contract is intended to
mitigate the fuel price risk under one of our fractionation contracts which contains a cap on the
per-unit fee that we can charge, at times limiting our ability to pass through the full amount of
increases in variable expenses to that customer. The gas purchase contract is for the purchase of
a sufficient quantity of natural gas to satisfy our fuel requirements under this fractionation
contract and terminates on December 31, 2007. Our share of these costs is reflected in Operating
and maintenance expense Affiliate in the accompanying Consolidated Statements of Operations. The
carrying value of this contract is reflected as Gas purchase contract affiliate and Gas purchase
contract noncurrent affiliate on the Consolidated Balance Sheets.
In December 2004, we began selling surplus propane and other NGLs to Power, which takes title
to the product and resells it, for its own account, to end users. Revenues associated with these
activities are reflected as Affiliate revenues on the Consolidated Statements of Operations.
Correspondingly, we purchase ethane and other NGLs from Power to replenish deficit product
positions. The transactions conducted between us and Power are transacted at current market prices
for the products.
A summary of the general and administrative expenses directly charged and allocated to us,
fuel purchases from Power and NGL purchases from Power for the periods stated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(Thousands) |
General and administrative expense,
including amounts subsequently
charged
to co-owners: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated |
|
$ |
971 |
|
|
$ |
718 |
|
|
$ |
2,229 |
|
|
$ |
1,734 |
|
Directly charged |
|
|
275 |
|
|
|
100 |
|
|
|
703 |
|
|
|
321 |
|
Operating and maintenance expense,
including amounts subsequently
charged
to co-owners: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel purchases |
|
|
5,911 |
|
|
|
4,503 |
|
|
|
15,711 |
|
|
|
12,198 |
|
Salaries and benefits |
|
|
886 |
|
|
|
855 |
|
|
|
2,546 |
|
|
|
2,609 |
|
NGL purchases |
|
|
2,500 |
|
|
|
|
|
|
|
6,363 |
|
|
|
|
|
The per-unit gathering fee associated with two of our Carbonate Trend gathering contracts was
negotiated on a bundled basis that includes transportation along a segment of a pipeline system
owned by Transcontinental Gas Pipe Line Company (Transco), a wholly-owned subsidiary of Williams.
The fees we realize are dependent upon whether our customer elects to utilize this Transco
capacity. When they make this election, our gathering fee is determined by subtracting the Transco
tariff from the total negotiated fee. The rate associated with the capacity agreement is based on
a Federal Energy Regulatory Commission tariff that is subject to change. Accordingly, if the
Transco rate increases, our net gathering fees for these two contracts may be reduced. The
customers with these bundled contracts must make an annual election to receive this capacity. For
2005, only one of our customers has elected to utilize this capacity.
We historically participated in Williams cash management program; thus, we carried no cash
balance on our Consolidated Balance Sheet at December 31, 2004. Effective with the IPO, we began
maintaining our own bank accounts but continue to utilize Williams personnel to manage our cash
and investments. As of December 31, 2004, our net Advances from affiliate consisted of an
unsecured promissory note agreement with Williams for both advances to and from Williams. The
advances were due on demand; however, Williams did not historically require
10
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
repayment. Therefore, Advances from affiliate at December 31, 2004 were classified as noncurrent.
Prior to the closing of the IPO, Williams forgave the advances due to them at the date the net
assets were transferred to us. Accordingly, the advances balance was transferred to Partners
capital at that date.
Affiliate interest expense is calculated using Williams weighted average cost of debt applied
to the outstanding balance of the advances with Williams. The interest rate on the advances with
Williams was 7.373 percent at December 31, 2004.
Note 5. Investment in Discovery Producer Services LLC
Our 40 percent investment in Discovery is accounted for using the equity method of accounting.
At September 30, 2005, Williams owns an additional 26.67 percent ownership interest in Discovery
through Energy. Of the total 66.67 percent ownership interest owned by Williams prior to the
transfer of 40 percent to us, 16.67 percent was acquired by Williams in April 2005 resulting in a
revised basis used for the calculation of the 40 percent interest transferred to us in connection
with the IPO. As a result, the carrying value of our 40 percent interest in Discovery and
Partners capital decreased $11.0 million during the second quarter of 2005.
On August 22, 2005, Discovery made a distribution of approximately $43.8 million to Williams
and the other member of Discovery. This distribution was associated with Discoverys operations
prior to the IPO; hence, we did not receive any portion of this distribution. The distribution
resulted in a revised basis used for the calculation of the 40 percent interest transferred to us
in connection with the IPO. As a result, the carrying value of our 40 percent interest in
Discovery and Partners capital decreased $17.5 million during the third quarter of 2005.
In September 2005, we made a $24.4 million capital contribution to Discovery for a substantial
portion of our share of the estimated future capital expenditures for the Tahiti pipeline lateral
expansion project.
Williams is the operator of Discovery. Discovery reimburses Williams for actual payroll and
employee benefit costs incurred on its behalf. In addition, Discovery pays Williams a monthly
operations and management fee to cover the cost of accounting services, computer systems and
management services provided to it. Discovery also has an agreement with Williams pursuant to
which Williams markets the NGLs and excess natural gas to which Discovery takes title.
In October 2005, a non-affiliated member of Discovery exercised its option to acquire a 6.67
percent interest in Discovery from Energy. The exercise of this option had no impact on us.
Although after the exercise of this option, we and Williams hold a 60 percent interest in Discovery
on a combined basis, the voting provisions of Discoverys limited liability company agreement give
the other member of Discovery significant participatory rights such that we and Williams do not
control Discovery.
Due to the significance of Discoverys equity earnings to our results of operations, the
summarized financial position and results of operations for 100 percent of Discovery are presented
below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(unaudited) |
|
|
|
|
|
Current assets |
|
$ |
31,913 |
|
|
$ |
67,534 |
|
Noncurrent restricted cash and cash equivalents |
|
|
45,501 |
|
|
|
|
|
Property, plant and equipment |
|
|
347,414 |
|
|
|
356,385 |
|
Current liabilities |
|
|
(20,453 |
) |
|
|
(31,572 |
) |
Non-current liabilities |
|
|
(770 |
) |
|
|
(702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members capital |
|
$ |
403,605 |
|
|
$ |
391,645 |
|
|
|
|
|
|
|
|
11
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(unaudited) |
|
Revenues |
|
$ |
19,100 |
|
|
$ |
20,947 |
|
|
$ |
69,414 |
|
|
$ |
76,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
19,432 |
|
|
|
21,216 |
|
|
|
63,161 |
|
|
|
68,793 |
|
Interest income |
|
|
(498 |
) |
|
|
(153 |
) |
|
|
(1,171 |
) |
|
|
(345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
166 |
|
|
$ |
(116 |
) |
|
$ |
7,424 |
|
|
$ |
8,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Credit Facilities
On May 20, 2005, Williams amended its $1.275 billion revolving credit facility (Williams
facility), which is available for borrowings and letters of credit, to allow us to borrow up to
$75 million under the Williams facility. Borrowings under the Williams facility mature on May 3,
2007. Our $75 million borrowing limit under the Williams facility is available for general
partnership purposes, including acquisitions, but only to the extent that sufficient amounts remain
unborrowed by Williams and its other subsidiaries. At September 30, 2005, letters of credit
totaling $713 million had been issued on behalf of Williams by the participating institutions under
the Williams facility and no revolving credit loans were outstanding.
Interest on any borrowings under the Williams facility is calculated based on our choice of
two methods: (i) a fluctuating rate equal to the facilitating banks base rate plus an applicable
margin or (ii) a periodic fixed rate equal to LIBOR plus an applicable margin. We are also
required to pay or reimburse Williams for a commitment fee based on the unused portion of its $75
million borrowing limit under the Williams facility, currently 0.375 percent annually. The
applicable margin, currently two percent, and the commitment fee are based on Williams senior
unsecured long-term debt rating. Under the Williams facility, Williams and certain of its
subsidiaries, other than us, are required to comply with certain financial and other covenants.
Significant financial covenants under the Williams facility to which Williams is subject include
the following:
|
|
|
ratio of debt to net worth no greater than (i) 70 percent for the period after December
31, 2004 through December 31, 2005, and (ii) 65 percent for the remaining term of the
agreement; |
|
|
|
|
ratio of debt to net worth no greater than 55 percent for Northwest Pipeline
Corporation, a wholly-owned subsidiary of Williams, and Transco; and |
|
|
|
|
ratio of EBITDA to interest, on a rolling four quarter basis, no less than (i) 2.0 for
any period after March 31, 2005 through December 31, 2005, and (ii) 2.5 for the remaining
term of the agreement. |
At the closing of the IPO on August 23, 2005, we entered into a $20 million revolving credit
facility (the credit facility) with Williams as the lender. The credit facility is available
exclusively to fund working capital requirements. Borrowings under the credit facility mature on
May 3, 2007 and bear interest at the same rate as for borrowings under the Williams facility
described above. We pay a commitment fee to Williams on the unused portion of the credit facility
of 0.30 percent annually. We are required to reduce all borrowings under the credit facility to
zero for a period of at least 15 consecutive days once each 12-month period prior to the maturity
date of the credit facility.
Note 7. Commitments and Contingencies
Environmental Matters. 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,
12
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sampling, cleanup and monitoring programs. The costs of such activities will depend upon the
program scope ultimately agreed to by the KDHE.
In 2004, we purchased an insurance policy that covers up to $5 million of remediation costs
until an active remediation system is in place or April 30, 2008, whichever is earlier, excluding
operation and maintenance costs and ongoing monitoring costs, for these projects to the extent such
costs exceed a $4.2 million deductible. The policy also covers costs incurred as a result of third
party claims associated with then existing but unknown contamination related to the storage
facilities. The aggregate limit under the policy for all claims is $25 million. In addition,
under an omnibus agreement with Williams entered into at the closing of the IPO, Williams has
agreed to indemnify us for the $4.2 million deductible (less amounts expended prior to the closing
of the IPO) of remediation expenditures not covered by the insurance policy, excluding costs of
project management and soil and groundwater monitoring. There is a $14 million cap on the total
amount of indemnity coverage under the omnibus agreement, which will be reduced by actual
recoveries under the environmental insurance policy. The benefit of this indemnification will be
accounted for as a capital contribution to us by Williams as the costs are reimbursed. We estimate
that the approximate cost of this project management and soil and groundwater monitoring associated
with the four remediation projects at the Conway storage facilities and for which we will not be
indemnified will be approximately $200,000 to $400,000 per year following the completion of the
remediation work.
At September 30, 2005, we had accrued liabilities totaling $5.5 million for these costs. 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 KDHE and other
governmental authorities and other factors.
Other. We are not currently a party to any legal proceedings but are a party to various
administrative and regulatory proceedings that have arisen in the ordinary course of our business.
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
or other indemnification arrangements, will not have a material adverse effect upon our future
financial position.
Note 8. Segment Disclosures
Our reportable segments are strategic business units that offer different products and
services. The segments are managed separately because each segment requires different industry
knowledge, technology and marketing strategies.
The following table reflects total assets by reporting segment.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Thousands) |
|
Segment assets: |
|
|
|
|
|
|
|
|
Gathering & Processing |
|
$ |
165,147 |
|
|
$ |
166,985 |
|
NGL Services |
|
|
66,158 |
|
|
|
52,376 |
|
Unallocated partnership assets |
|
|
15,269 |
|
|
|
|
|
Eliminations |
|
|
(3,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
243,506 |
|
|
$ |
219,361 |
|
|
|
|
|
|
|
|
13
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering & |
|
|
NGL |
|
|
|
|
|
|
Processing |
|
|
Services |
|
|
Total |
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Three months ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
650 |
|
|
$ |
11,526 |
|
|
$ |
12,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
101 |
|
|
|
8,171 |
|
|
|
8,272 |
|
Product cost |
|
|
|
|
|
|
2,258 |
|
|
|
2,258 |
|
Depreciation |
|
|
300 |
|
|
|
596 |
|
|
|
896 |
|
Direct general and administrative expense |
|
|
|
|
|
|
308 |
|
|
|
308 |
|
Other |
|
|
|
|
|
|
194 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income (loss) |
|
|
249 |
|
|
|
(1 |
) |
|
|
248 |
|
Equity earnings |
|
|
66 |
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) |
|
$ |
315 |
|
|
$ |
(1 |
) |
|
$ |
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
248 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(1,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating loss |
|
|
|
|
|
|
|
|
|
$ |
(999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
794 |
|
|
$ |
9,663 |
|
|
$ |
10,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
142 |
|
|
|
5,509 |
|
|
|
5,651 |
|
Product cost |
|
|
|
|
|
|
1,445 |
|
|
|
1,445 |
|
Depreciation |
|
|
300 |
|
|
|
618 |
|
|
|
918 |
|
Direct general and administrative expense |
|
|
|
|
|
|
118 |
|
|
|
118 |
|
Other |
|
|
|
|
|
|
179 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
352 |
|
|
|
1,794 |
|
|
|
2,146 |
|
Equity loss |
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
262 |
|
|
$ |
1,794 |
|
|
$ |
2,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
2,146 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
1,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering & |
|
|
NGL |
|
|
|
|
|
|
Processing |
|
|
Services |
|
|
Total |
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Nine months ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
2,295 |
|
|
$ |
33,426 |
|
|
$ |
35,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
477 |
|
|
|
16,315 |
|
|
|
16,792 |
|
Product cost |
|
|
|
|
|
|
8,320 |
|
|
|
8,320 |
|
Depreciation |
|
|
900 |
|
|
|
1,794 |
|
|
|
2,694 |
|
Direct general and administrative expense |
|
|
|
|
|
|
782 |
|
|
|
782 |
|
Other |
|
|
|
|
|
|
532 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
918 |
|
|
|
5,683 |
|
|
|
6,601 |
|
Equity earnings |
|
|
2,969 |
|
|
|
|
|
|
|
2,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
3,887 |
|
|
$ |
5,683 |
|
|
$ |
9,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
6,601 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(2,357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
4,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
4,009 |
|
|
$ |
23,444 |
|
|
$ |
27,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
404 |
|
|
|
14,154 |
|
|
|
14,558 |
|
Product cost |
|
|
|
|
|
|
2,816 |
|
|
|
2,816 |
|
Depreciation |
|
|
900 |
|
|
|
1,796 |
|
|
|
2,696 |
|
Direct general and administrative expense |
|
|
|
|
|
|
376 |
|
|
|
376 |
|
Other |
|
|
|
|
|
|
537 |
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
2,705 |
|
|
|
3,765 |
|
|
|
6,470 |
|
Equity earnings |
|
|
3,184 |
|
|
|
|
|
|
|
3,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
5,889 |
|
|
$ |
3,765 |
|
|
$ |
9,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
6,470 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(1,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
4,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Recent Accounting Standards
In March 2005, the Financial Accounting Standards Board issued Interpretation 47, Accounting
for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143. This
Interpretation clarifies that the term conditional asset retirement obligation, as used in
Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be within the control of
the entity. This Interpretation also clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. The effective date of this
Interpretation is no later than the end of the fiscal year ending after December 15, 2005. We are
assessing the impact of this Interpretation on our Consolidated Financial Statements and believe
the effect will not be material to our results of operations, financial condition or cash flows.
15
Item 2. Managements 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 historical consolidated financial statements included in Item 1 of this
quarterly report.
General
We are a Delaware limited partnership formed in February 2005 to own, operate and acquire a
diversified portfolio of complementary energy assets. On August 23, 2005, we completed our initial
public offering (IPO) of 5,000,000 common units at a price of $21.50 per unit. Net proceeds from
the sale of the units totaling $100.2 million were used to:
|
|
|
distribute $58.8 million to affiliates of The Williams Companies, Inc. (Williams), the
parent of our general partner, in part to reimburse Williams for capital expenditures
relating to the assets contributed to us and for a gas purchase contract contributed to us; |
|
|
|
|
provide $24.4 million to make a capital contribution to Discovery Producer Services LLC
(Discovery) to fund an escrow account required in connection with the Tahiti pipeline
lateral expansion project; |
|
|
|
|
provide $12.7 million of additional working capital; and |
|
|
|
|
pay $4.3 million of expenses associated with our IPO and related formation transactions. |
Additionally, at the closing of the IPO, the underwriters fully exercised their option to
purchase 750,000 common units at the IPO price of $21.50 per unit from certain affiliates of
Williams.
Prior to the closing of our IPO, our assets were held by wholly-owned subsidiaries of
Williams. Upon the closing of our IPO, these Williams subsidiaries transferred the assets and the
related liabilities to us. The following discussion includes the historical period prior to the
closing of our IPO.
Overview
We are principally engaged in the business of gathering, transporting and processing natural
gas and fractionating and storing natural gas liquids (NGL). We manage our business and analyze
our results of operations on a segment basis. Our operations are divided into two business
segments:
|
|
|
Gathering and Processing. Our Gathering and Processing segment includes (1) our 40
percent ownership interest in Discovery and (2) the Carbonate Trend gathering pipeline
off the coast of Alabama. Discovery owns an integrated natural gas gathering and
transportation pipeline system extending from offshore in the Gulf of Mexico to a natural
gas processing facility and an NGL fractionator in Louisiana. These assets generate
revenues by providing natural gas gathering, transporting and processing services and
integrated NGL fractionating services to customers under a range of contractual
arrangements. Although Discovery includes fractionation operations, which would normally
fall within the NGL Services segment, it is primarily engaged in gathering and processing
and is managed as such. |
|
|
|
|
NGL Services. Our NGL Services segment includes three NGL storage facilities and a 50
percent undivided interest in a fractionator near Conway, Kansas. These assets generate
revenues by providing stand-alone NGL fractionation and storage services using various
fee-based contractual arrangements where we receive a fee or fees based on actual or
contracted volumetric measures. |
Recent Events
In July 2005, Discovery executed an agreement with three producers to construct an
approximately 35-mile gathering pipeline lateral to connect Discoverys existing pipeline system to
these producers production facilities for the Tahiti prospect in the deepwater region of the Gulf
of Mexico. In late August 2005, the Tahiti producers formally decided to proceed with the project.
The Tahiti pipeline lateral expansion is expected to have a design capacity of approximately 200
million cubic feet per day, and its anticipated completion date is May 1, 2007. We expect the
total construction cost of the Tahiti pipeline lateral expansion project to be approximately $69.5
million, of which our 40 percent share will be approximately $27.8 million. In September 2005, we
made a $24.4 million
16
contribution to Discovery to cover a substantial portion of the total expenditures attributable to
our share of these costs. We funded this contribution with proceeds from our IPO.
On August 29, 2005, Hurricane Katrina struck the Gulf Coast area. In anticipation of the
hurricane, the Discovery and Carbonate Trend assets were temporarily shut down on August 27, 2005.
The Discovery assets were off-line for six days and then continued to experience lower throughput
rates until being temporarily shut down for Hurricane Rita on September 21, 2005. The Carbonate
Trend assets were off-line for 10 days and then experienced a gradual return to pre-hurricane
throughput rates by September 19, 2005. We estimate the unfavorable impact of this hurricane on
our third-quarter net income was approximately $0.7 million. This estimate includes $0.1 million
for expenses and an estimated $0.6 million in lost revenue due to decreased throughput volumes.
On September 24, 2005, Hurricane Rita struck the Gulf Coast area. In anticipation of the
hurricane, the Discovery assets, which were already at reduced throughput from Hurricane Katrina,
were temporarily shut down on September 21, 2005. The Discovery assets were off-line for seven
days and then continued to experience lower throughput rates through the end of the third quarter.
We estimate the unfavorable impact of this hurricane on our third-quarter net income was
approximately $0.3 million in lost revenue due to decreased throughput volumes.
As of October 21, 2005, gathering volumes for Discovery were approximately 376,000 million
British Thermal Units per day (MMBtu/d) and exceeded levels experienced prior to hurricanes
Katrina and Rita. This volume includes approximately 77,000 MMBtu/d from multiple customers whose
gas is normally processed at another plant that was severely damaged by Hurricane Katrina.
In October 2005, Discovery conducted two expedited open seasons for firm transportation to
provide outlets for natural gas that has been stranded following damage to third-party facilities
during hurricanes Katrina and Rita. Both of these open seasons were for up to 250,000 MMBtu/d.
The first of these includes the construction of a new receipt point at Texas Eastern Transmission
Companys Larose compressor station in Lafourche Parish, Louisiana. The second is via an existing
interconnection to Tennessee Gas Pipelines Line 500 in Terrebonne Parish, Louisiana. We expect to
begin receiving additional incremental volumes from these receipt points by December 2005 and
anticipate continued throughput for the subsequent three to six months. Shippers will reimburse
Discovery for all capital necessary to establish these connections.
We
and Williams have identified Williams existing gathering and processing assets in the Four Corners
area as the initial asset that we would acquire. We plan to acquire an approximately 25
percent interest in the Four Corners assets. On a 100 percent
basis, the unaudited operating income plus depreciation from these
assets has been $154 million, $151 million and
$165 million for 2002, 2003 and 2004, respectively. The same
measure for the first nine months of 2005 is $136 million. The terms of this proposed transaction, including price,
will be subject to the approval of the boards of directors of both our general partner and
Williams. Assuming such approvals are obtained, we expect that this
transaction would be completed during the second quarter of 2006.
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, 2005, compared to the three and nine months ended
September 30, 2004. The results of operations by segment are discussed in further detail following
this consolidated overview discussion.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
2005 |
|
|
2004 |
|
|
from 2004 (1) |
|
|
2005 |
|
|
2004 |
|
|
from 2004 (1) |
|
|
|
(Thousands) |
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Revenues |
|
$ |
12,176 |
|
|
$ |
10,457 |
|
|
|
+16% |
|
|
$ |
35,721 |
|
|
$ |
27,453 |
|
|
|
+30% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
expense |
|
|
8,272 |
|
|
|
5,651 |
|
|
|
-46% |
|
|
|
16,792 |
|
|
|
14,558 |
|
|
|
-15% |
|
Product cost |
|
|
2,258 |
|
|
|
1,445 |
|
|
|
-56% |
|
|
|
8,320 |
|
|
|
2,816 |
|
|
|
-195% |
|
Depreciation |
|
|
896 |
|
|
|
918 |
|
|
|
+2% |
|
|
|
2,694 |
|
|
|
2,696 |
|
|
|
|
|
General and administrative
expense |
|
|
1,555 |
|
|
|
763 |
|
|
|
-104% |
|
|
|
3,139 |
|
|
|
1,894 |
|
|
|
-66% |
|
Taxes other than income |
|
|
194 |
|
|
|
179 |
|
|
|
-8% |
|
|
|
532 |
|
|
|
537 |
|
|
|
+1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
13,175 |
|
|
|
8,956 |
|
|
|
-47% |
|
|
|
31,477 |
|
|
|
22,501 |
|
|
|
-40% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(999 |
) |
|
|
1,501 |
|
|
|
NM |
|
|
|
4,244 |
|
|
|
4,952 |
|
|
|
-14% |
|
Equity earnings (loss)
Discovery Producer
Services LLC |
|
|
66 |
|
|
|
(90 |
) |
|
|
NM |
|
|
|
2,969 |
|
|
|
3,184 |
|
|
|
-7% |
|
Interest expense |
|
|
(2,014 |
) |
|
|
(3,095 |
) |
|
|
+35% |
|
|
|
(8,000 |
) |
|
|
(9,376 |
) |
|
|
+15% |
|
Interest income |
|
|
76 |
|
|
|
|
|
|
|
NM |
|
|
|
76 |
|
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,871 |
) |
|
$ |
(1,684 |
) |
|
|
-70% |
|
|
$ |
(711 |
) |
|
$ |
(1,240 |
) |
|
|
+43% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
+ = Favorable Change; - = Unfavorable Change; NM = A percentage
calculation is not meaningful due to change in signs, a zero-value
denominator or a percentage change greater than 200. |
Three months ended September 30, 2005 vs. three months ended September 30, 2004
Revenues increased $1.7 million, or 16 percent, due primarily to higher revenues in our NGL
Services segment, reflecting higher storage revenues and increased product sales volumes created
through our product optimization activities.
Operating and maintenance expense increased $2.6 million, or 46 percent, due primarily to a
larger lower of cost or market inventory valuation adjustment recognized by our NGL Services
segment in the third quarter of 2005 as compared to 2004.
Product cost increased $0.8 million, or 56 percent, directly related to the sale of surplus
propane volumes created through our product optimization activities.
General and administrative expense increased $0.8 million, or 104 percent, due primarily to
the increased costs of being a publicly-traded partnership. These costs included $0.4 million for
business development and technical support and $0.4 million for various other fees including audit
fees, tax return preparation, director fees, and registration and transfer agent fees. We also
expect a further increase in 2006 that reflects a full year as a publicly-traded partnership. In
an omnibus agreement entered into in connection with the closing of our IPO, Williams has agreed to
provide a five-year credit for general and administrative expenses incurred on our behalf. The
amount of credit in 2005 will be $3.9 million ($1.4 million pro-rated for the period from August
23, 2005 through year end). The amount of credit will be $3.2 million in 2006 and will decrease by
approximately $800,000 in each subsequent year. These credits will be reflected as capital
contributions from Williams and will not reduce the amount of General and administrative expense
reflected in our financial statements. At September 30, 2005, we have a contribution receivable
from our general partner which includes $417,000 for the third-quarter 2005 credit.
18
Operating income (loss) decreased $2.5 million, to a $1.0 million loss, due primarily to
increased lower of cost or market inventory valuation adjustment in our NGL Services segment and
higher general and administrative expense, partially offset by higher NGL Services storage
revenues.
Equity earnings from Discovery Producer Services LLC increased $0.2 million. This increase is
discussed in detail in the Results of Operations Gathering and Processing section.
Interest expense decreased $1.1 million, or 35 percent, due to the forgiveness of the advances
from Williams in conjunction with the closing of the IPO on August 23, 2005, slightly offset by the
commitment fees on our $75 million borrowing capacity under Williams revolving credit facility and
our $20 million working capital revolving credit facility with Williams.
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
Revenues increased $8.3 million, or 30 percent, due primarily to higher revenues in our NGL
Services segment reflecting increased product sales volumes and higher storage revenues, slightly
offset by lower revenue in our Gathering and Processing segment.
Operating and maintenance expense increased $2.2 million, or 15 percent, due primarily to a
larger lower of cost or market inventory valuation adjustment recognized by our NGL Services
segment in 2005 as compared to 2004.
Product cost increased $5.5 million, or 195 percent, directly related to the increase in
product sales volumes in our NGL Services segment.
General and administrative expense increased $1.2 million, or 66 percent, due primarily to the
increased costs of being a publicly-traded partnership. These costs
included $0.8 million for
business development and technical support and $0.4 million for various other costs, including audit fees, tax return
preparation, director fees, and registration and transfer agent fees.
Operating income decreased $0.7 million, or 14 percent, due primarily to higher operating and
maintenance expense in our NGL Services segment, lower revenues in our Gathering and Processing
segment and higher general and administrative expenses, partially offset by higher storage revenues
in our NGL Services segment.
Equity earnings from Discovery Producer Services LLC decreased $0.2 million. This decrease is
discussed in detail in the Results of Operations Gathering and Processing section.
Interest expense decreased $1.4 million, or 15 percent, due to the forgiveness of the advances
from Williams in conjunction with the closing of the IPO on August 23, 2005.
Results of operations Gathering and Processing
The Gathering and Processing segment includes the Carbonate Trend gathering pipeline and our
40 percent ownership interest in Discovery.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Segment revenues |
|
$ |
650 |
|
|
$ |
794 |
|
|
$ |
2,295 |
|
|
$ |
4,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
101 |
|
|
|
142 |
|
|
|
477 |
|
|
|
404 |
|
Depreciation |
|
|
300 |
|
|
|
300 |
|
|
|
900 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
401 |
|
|
|
442 |
|
|
|
1,377 |
|
|
|
1,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
249 |
|
|
|
352 |
|
|
|
918 |
|
|
|
2,705 |
|
Equity earnings (loss) |
|
|
66 |
|
|
|
(90 |
) |
|
|
2,969 |
|
|
|
3,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
315 |
|
|
$ |
262 |
|
|
$ |
3,887 |
|
|
$ |
5,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbonate Trend
Three months ended September 30, 2005 vs. three months ended September 30, 2004
Segment revenues decreased $144,000, or 18 percent, due primarily to a 26 percent decline in
average gathered volumes between 2005 and 2004. Average gathered volumes for 2004 of approximately
40,500 MMBtu/d were negatively impacted by Hurricane Ivan in September 2004. The 2005 average
gathered volumes of approximately 30,000 MMBtu/d were negatively impacted by Hurricane Dennis in
July 2005 and Hurricane Katrina in August 2005. The Carbonate Trend pipeline was off-line five
days and 10 days for hurricanes Dennis and Katrina, respectively.
As of October 21, 2005, the Carbonate Trend gathering pipeline has returned to service and the
daily gathered volume has increased to approximately 39,300 MMBtu/d, which represents a nine
percent increase from the second-quarter 2005 average daily gathered volume of approximately 36,000
MMBtu/d. This increase is due primarily to the second-quarter 2005 successful recompletion of an
existing well.
The decline in gathered volumes was partially offset by a $65,000 increase in gathering
revenue resulting from an 11 percent higher average gathering rate. The increase in the average
gathering rate was due to a customers annual election in 2005 under a bundled rate provision
within its contract.
Operating and maintenance expense decreased $41,000, or 29 percent, due primarily to painting
expenses incurred in 2004.
Segment operating income decreased $103,000, or 29 percent, due primarily to the lower
revenues discussed above.
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
Segment revenues decreased $1.7 million, or 43 percent, due primarily to the absence of
$950,000 of income from the settlement of a contractual volume deficiency payment recognized in
2004 and a 32 percent decline in average daily gathered volumes between 2005 and 2004.
The decline in average daily gathered volumes was caused by normal reservoir depletion,
reduced capacity experienced at a third-party onshore treating plant in April 2005 and the
temporary shutdowns for Hurricane Dennis in July 2005 and Hurricane Katrina in August 2005. The
overall impact of this decline in gathered volumes on gathering revenue was approximately $1.0
million. This decline in gathered volumes was partially offset by a 10
20
percent higher average gathering rate causing a $200,000 increase in gathering revenue. The
increase in the average gathering rate was due to a customers annual election in 2005 under a
bundled rate provision within its contract.
Operating and maintenance expense increased $73,000, or 18 percent, due primarily to increased
costs for inhibitor chemicals and internal pipeline corrosion inspection. This inspection is
conducted once every three years. These increases were offset partially by increased painting
expense in 2004.
Segment operating income decreased $1.8 million, or 66 percent, due primarily to the lower
revenues discussed above.
Discovery Producer Services
Discovery is accounted for using the equity method of accounting. As such, our interest in
Discoverys net operating results is reflected as equity earnings in the Consolidated Statements of
Operations. Due to the significance of Discoverys equity earnings to our results of operations,
the following discussion addresses in greater detail the results of operations for 100 percent of
Discovery.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Revenues |
|
$ |
19,100 |
|
|
$ |
20,947 |
|
|
$ |
69,414 |
|
|
$ |
76,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses, including interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel and shrink replacement |
|
|
7,763 |
|
|
|
9,441 |
|
|
|
28,598 |
|
|
|
36,071 |
|
Other operating and maintenance expense |
|
|
4,583 |
|
|
|
5,840 |
|
|
|
14,709 |
|
|
|
14,686 |
|
Depreciation and accretion |
|
|
6,127 |
|
|
|
5,671 |
|
|
|
18,366 |
|
|
|
16,991 |
|
Interest income |
|
|
(498 |
) |
|
|
(153 |
) |
|
|
(1,171 |
) |
|
|
(345 |
) |
Other expense, net |
|
|
959 |
|
|
|
264 |
|
|
|
1,488 |
|
|
|
1,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
18,934 |
|
|
|
21,063 |
|
|
|
61,990 |
|
|
|
68,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
166 |
|
|
$ |
(116 |
) |
|
$ |
7,424 |
|
|
$ |
8,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williams Partners 40 percent interest |
|
$ |
66 |
|
|
$ |
(46 |
) |
|
$ |
2,969 |
|
|
$ |
3,314 |
|
Capitalized interest amortization |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings (loss) per our Consolidated
Statements of Operations |
|
$ |
66 |
|
|
$ |
(90 |
) |
|
$ |
2,969 |
|
|
$ |
3,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 vs. three months ended September 30, 2004
Revenues decreased $1.8 million, or nine percent, due primarily to lower product sales and
transportation revenue, partially offset by higher gathering and fractionation revenue. The
significant components of this decrease include the following.
|
|
|
NGL sales volumes decreased from approximately 14.1 million gallons in 2004 to 4.4
million in 2005 with a resulting $7.1 million decrease in product sales revenues. This
decline was due primarily to the temporary shutdown of the Discovery assets for
hurricanes Dennis in July 2005, Katrina in August 2005 and Rita in September 2005.
Total NGL volumes sold in the 2004 period were negatively impacted by an interruption
of service because of an accidental influx of seawater in a lateral while putting in
place a subsea connection to the Front Runner prospect. This decrease was partially
offset |
21
|
|
|
by a $1.7 million increase in product sales revenues associated with a 53 percent
increase in average sales prices. |
|
|
|
Fee-based revenues from transportation services decreased $0.3 million due primarily
to $0.7 million from a lower average natural gas transmission rate and $0.1 million
from lower condensate transportation volumes, partially offset by $0.5 million from
higher natural gas transmission volumes. Average gas transmission volumes for 2004 of
approximately 131,000 MMBtu/d were negatively impacted by a temporary interruption of
service because of an accidental influx of seawater in a lateral while putting in place
a subsea connection to the Front Runner prospect. The 2005 average gas transmission
volumes of approximately 149,000 MMBtu/d were negatively impacted by hurricanes Dennis
in July 2005, Katrina in August 2005 and Rita in September 2005. |
|
|
|
|
Product sales also decreased $0.4 million due to lower sales of excess fuel and
replacement gas in the third quarter of 2005 than 2004. |
Largely offsetting these decreases were the following:
|
|
|
Product sales were also impacted by two processing customers elections to have
Discovery market their NGLs. Discovery sells these NGLs and distributes the proceeds
to them less a marketing fee. The sales related to these two contracts generated an
additional $3.2 million of revenue in the third quarter of 2005. This increase was
offset by a related increase in fuel and shrink replacement discussed below. |
|
|
|
|
Fee-based revenues from gathering services increased $0.4 million due primarily to a
14 percent increase in the average gathering rate and a 14 percent increase in
gathering volumes. This average rate increase resulted from higher gathering rates
associated with the new volumes from the Front Runner, Rock Creek and Tarantula
prospects which came on-line in late 2004. Gathered volumes for 2004 were negatively
impacted by the seawater influx incident discussed above. |
|
|
|
|
Processing and fractionation revenues increased $0.9 million due primarily to higher
fractionated volumes in 2005 as compared to 2004. The increase in fractionated volumes
was due primarily to the new volumes from Front Runner. |
Fuel and shrink replacement decreased $1.7 million, or 18 percent, due primarily to $4.3
million lower costs related to the reduced processing activity that resulted from the temporary
shutdowns for hurricanes Dennis, Katrina and Rita discussed
previously and $0.4 million lower costs
related to the sales of excess fuel and replacement gas. These decreases were partially offset by
$3.2 million purchase costs for the two processing customers who elected to have Discovery market
their NGLs.
Other operating and maintenance expense decreased $1.3 million, or 22 percent, due primarily
to $1.3 million in repair costs related to the accidental influx of seawater in 2004.
Depreciation and accretion increased $0.5 million, or eight percent, due primarily to the
completion of a pipeline connection to the Front Runner prospect in late 2004.
Interest income increased $0.3 million, from $0.2 million, due primarily to increasing
interest-bearing cash balances during the 2005 period as cash flows from operations were retained.
Other expense, net increased $0.7 million, from $0.3 million, due primarily to a non-cash
foreign currency transaction loss from the revaluation of restricted cash accounts denominated in
Euros. These restricted cash accounts were established from contributions made by Discoverys
members, including us, for the construction of the Tahiti pipeline lateral expansion project.
Discovery used a portion of the amounts contributed by its members to purchase Euros for
construction costs that are contractually required to be paid in Euros.
Net income (loss) for the period improved $0.3 million, from a loss of $0.1 million, due
primarily to the absence of $1.3 million in repair costs incurred in 2004, $0.9 million higher
processing and fractionation revenues,
22
and
$0.3 million higher interest income, partially offset by $0.9 million lower gross processing
margins, $0.5 million higher Depreciation and accretion expense and $0.7 million foreign currency
transaction loss.
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
Revenues decreased $7.3 million, or 10 percent, due primarily to lower product sales and
transportation volumes, partially offset by higher fractionation revenue and average per-unit NGL
sales prices. The significant components of this decrease include the following.
|
|
|
Increasing gas prices during the first half of 2004 made it more economical for
Discoverys customers to bypass the processing plant rather than to process the gas,
leaving Discovery with higher levels of excess fuel and replacement gas in 2004 than
2005. This excess natural gas was sold in the market and generated $10.7 million
higher Product sales revenues in the first nine months of 2004. |
|
|
|
|
Total NGL volumes sold in the 2004 period were approximately 45 million gallons as
compared to 35 million gallons in 2005, which resulted in a $7.2 million decrease in
revenues between the two periods. This decrease is primarily related to the
third-quarter 2005 decline discussed previously. This decrease was partially offset by
a $5.0 million revenue increase associated with a 20 percent increase in average sales
prices. |
|
|
|
|
Fee-based revenues from transportation services decreased $2.7 million due primarily
to $2.1 million from a lower average natural gas transmission rate and $0.6 million
from lower condensate transportation volumes, partially offset by $0.5 million from
higher natural gas transmission volumes. |
|
|
|
|
Other revenues declined $1.2 million due largely to lower platform rental fees. |
Partially offsetting these decreases were the following:
|
|
|
Fee-based revenues from gathering increased $0.8 million due primarily to a 32
percent increase in the average gathering rate associated with new volumes from the
Front Runner, Rock Creek and Tarantula prospects which came on-line in late 2004. |
|
|
|
|
Processing and fractionation revenues increased $2.0 million due primarily to an
increase in fractionated volumes in 2005 from 2004 related primarily to the new volumes
from Front Runner. |
|
|
|
|
Product sales also increased $5.3 million for the NGL sales related to two
processing customers election to have Discovery market their NGLs for a fee under an
option in their contracts as discussed above. This increase was offset by a related
increase in fuel and shrink replacement discussed below. |
|
|
|
|
In 2005, Discovery received a $1.4 million volume threshold deficiency payment
related to a volume shortfall under a transportation contract. |
Fuel and shrink replacement decreased $7.5 million, or 21 percent, due primarily to $10.7
million lower costs related to the sales of excess fuel and replacement gas and $4.7 million lower
costs related to reduced processing activity primarily in the third quarter of 2005, partially
offset by $5.3 million of purchase costs for the two processing customers who elected to have
Discovery market their NGLs and $2.6 million resulting from 15 percent higher average per-unit
natural gas prices.
Depreciation and accretion expense increased $1.4 million, or eight percent, due primarily to
the completion of a pipeline connection to the Front Runner prospect in late 2004.
Interest income increased $0.8 million, from $0.3 million, due primarily to increasing
interest-bearing cash balances during the 2005 period as cash flows from operations were retained.
23
Other expense, net increased $0.4 million, or 42 percent, due primarily to a foreign non-cash
currency transaction loss from the revaluation of restricted cash accounts denominated in Euros
discussed previously.
Net
income decreased $0.9 million, or 10 percent, due primarily
to $1.2 million lower other revenues,
$1.4 million higher depreciation and accretion and
$0.4 million higher Other expense, net.
Partially offsetting these were a $1.4 million volume threshold deficiency payment received in
2005 and $0.8 million higher Interest
income.
Outlook
We currently estimate that we will incur $3.4 million to $4.6 million of incremental
maintenance expenditures for Carbonate Trend within the next six months for restoration activities
related to the partial erosion of the pipeline overburden caused by Hurricane Ivan in September
2004. In an omnibus agreement entered into in connection with the closing of our initial public
offering, Williams agreed to reimburse us for the cost of these restoration activities. In
connection with these restoration activities, the Carbonate Trend pipeline may experience a
temporary shut down. We estimate that this shut down could reduce our cash flows from operations,
excluding the maintenance expenditures, by approximately $200,000 to $300,000.
Throughput volumes on Discoverys pipeline system and our Carbonate Trend pipeline are an
important component of maximizing our profitability. Pipeline throughput volumes from existing
wells connected to our pipelines will naturally decline over time. Accordingly, to maintain or
increase throughput levels on these pipelines and the utilization rate of Discoverys natural gas
plant and fractionator, we and Discovery must continually obtain new supplies of natural gas.
|
|
|
We anticipate recompletions and workovers to partially offset production declines from
the wells currently connected to the Carbonate Trend pipeline. |
|
|
|
|
Following Hurricane Katrina, Discoverys Larose plant was one of the first large-scale
gas processing facilities to return to service in that area of Louisiana. In October 2005,
Discovery conducted two expedited open seasons for firm transportation to provide outlets
for natural gas that has been stranded following damage to third-party facilities during
hurricanes Katrina and Rita. Both of these open seasons were for up to 250,000 MMBtu/d.
The first of these includes the construction of a new receipt point at Texas Eastern
Transmission Companys Larose compressor station in Lafourche Parish, Louisiana. The
second is via an existing interconnection to Tennessee Gas Pipelines Line 500 in
Terrebonne Parish, Louisiana. We expect to begin receiving additional incremental volumes
from these receipt points by December 2005, and anticipate continued throughput for the
subsequent three to six months. Shippers will reimburse Discovery for all capital
necessary to establish these connections. |
|
|
|
|
With the current oil and gas price environment, drilling activity across the shelf and
the deepwater of the Gulf of Mexico has been robust. However, the availability of
specialized rigs necessary to drill in the deepwater areas, such as those in and around
Discoverys gathering areas, limits producers ability to bring identified reserves to
market quickly. This will prolong the timeframe over which these reserves will be
developed. We expect Discovery to be successful in competing for a portion of these new
volumes. |
|
|
|
|
We expect continued growth in the average volumes of natural gas gathered by Discovery
attributable to new production from the Front Runner, Rock Creek and Tarantula prospects,
which we expect to offset natural declines in production from existing connected wells. |
|
|
|
|
Late in the fourth quarter of 2005, Discovery expects to connect a new well with an
estimated initial volume of 35,000 MMBtu/d. Capital to connect this new well will be
provided by others. |
|
|
|
|
In July 2005, Discovery executed an agreement with three producers to construct an
approximately 35-mile gathering pipeline lateral to connect Discoverys existing pipeline
system to these producers production facilities for the Tahiti prospect in the deepwater
region of the Gulf of Mexico. In late August 2005, the Tahiti producers formally decided
to proceed with the project. The Tahiti pipeline lateral expansion is expected to have a
design capacity of approximately 200 million cubic feet per day, and its anticipated
completion date is May 1, 2007. |
24
Results of operations NGL Services
The NGL Services segment includes our three NGL storage facilities near Conway, Kansas and our
undivided 50 percent interest in the Conway fractionator.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Segment revenues |
|
$ |
11,526 |
|
|
$ |
9,663 |
|
|
$ |
33,426 |
|
|
$ |
23,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
8,171 |
|
|
|
5,509 |
|
|
|
16,315 |
|
|
|
14,154 |
|
Product cost |
|
|
2,258 |
|
|
|
1,445 |
|
|
|
8,320 |
|
|
|
2,816 |
|
Depreciation |
|
|
596 |
|
|
|
618 |
|
|
|
1,794 |
|
|
|
1,796 |
|
General and administrative expense direct |
|
|
308 |
|
|
|
118 |
|
|
|
782 |
|
|
|
376 |
|
Taxes other than income |
|
|
194 |
|
|
|
179 |
|
|
|
532 |
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
11,527 |
|
|
|
7,869 |
|
|
|
27,743 |
|
|
|
19,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) |
|
$ |
(1 |
) |
|
$ |
1,794 |
|
|
$ |
5,683 |
|
|
$ |
3,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 vs. three months ended September 30, 2004
Segment revenues increased $1.9 million, or 19 percent, due primarily to higher storage
revenues and product sales. The significant components of this increase include the following.
|
|
|
Storage revenue increased $1.2 million due to higher contracted storage volumes and
a slightly higher average per-unit storage rate. Volumes in the third quarter of 2004
were initially lower due to the 67 percent increase in the one-year storage rate on
April 1, 2004 primarily reflecting the pass through of increased costs to comply with
Kansas Department of Health and Environment (KDHE) regulations. Subsequently, the
volumes returned to more normal levels. |
|
|
|
|
Product sales of surplus propane volumes created through our product optimization
activities increased $0.8 million due to increased volumes and higher average sales
prices. We actively manage the fractionation process to optimize the resulting mix of
products. This increase was offset by the related increase in Product cost. |
The following table summarizes the major components of operating and maintenance expense which
are discussed in detail below.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Thousands) |
|
Operating and maintenance expense: |
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
697 |
|
|
$ |
675 |
|
Outside services and other |
|
|
2,484 |
|
|
|
2,199 |
|
Fuel and
power costs |
|
|
2,801 |
|
|
|
2,235 |
|
Product imbalance adjustments |
|
|
2,189 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating and maintenance expense |
|
$ |
8,171 |
|
|
$ |
5,509 |
|
|
|
|
|
|
|
|
Outside services and other increased $0.3 million due primarily to increased cavern
workovers in the third quarter of 2005 as compared to 2004. In 2004, a greater number
of these workovers were completed in the second quarter.
25
Fuel and power costs increased $0.6 million due to a 50 percent increase in the
average per-unit price of natural gas. We are generally able to pass through increases
in fuel and power costs to our customers through prospective rate increases with the
exception of one long-term agreement. At the closing of our IPO on August 23, 2005
Williams transferred a gas purchase contract to us that mitigates the fuel price risk
under the one of our fractionation contracts that contains a cap on the per-unit fee
that we can charge, at times limiting our ability to pass through the full amount of
increases in variable expenses to that customer. Hence, our annual fuel expense
associated with this contract does not change significantly as the price of natural gas
changes.
Product imbalance adjustments increased $1.8 million due primarily to a $2.4 million
larger lower of cost or market inventory valuation adjustment recognized in the third
quarter of 2005 as compared to 2004, partially offset by the
$1.1 million difference
between gains experienced from the emptying of caverns in 2005 versus 2004. A
significant portion of our inventory activity relates to our management of the
fractionation process to optimize the resulting mix of products. Generally, this
process leaves us with a surplus of propane volumes and a deficit of ethane volumes as
well as smaller amounts of other purity components. We account for the inventory
related to these activities at the lower of cost or market. As a result we typically
experience unfavorable inventory adjustments when ethane prices are increasing, which
has been the case during 2005. During 2005, the value of propane also increased;
however, under generally accepted accounting principles we continue to carry those
volumes at cost, which is lower than market value. Increases in the
market value of our surplus
propane and other product volumes ($1.8 million as of September 30, 2005) are
recognized when the propane and other products are sold.
Product cost increased $0.8 million, or 56 percent, directly related to the increased sales of
surplus propane volumes created through our product optimization activities.
General and administrative expense direct increased $0.2 million, or 161 percent, due
primarily to increased technical support charges for these assets.
Segment
profit (loss) decreased $1.8 million, or 100 percent, due
primarily to the $2.7 million
higher operating and maintenance expense, partially offset by $1.2 million higher storage revenue.
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
Segment revenues increased $10.0 million, or 43 percent, due primarily to higher product sales
and storage revenues. The significant components of the increase include the following.
|
|
|
Product sales were $5.8 million higher due primarily to the sale of surplus propane
volumes created through our product optimization activities. This increase was offset
by the related increase in Product cost. |
|
|
|
|
Storage revenues increased $3.4 million due primarily to higher average per-unit
storage rates for the first quarter of 2005 and higher storage volumes in the second
and third quarters. The published rate for one-year storage contracts increased 67
percent on April 1, 2004, primarily reflecting the pass through of increased costs to
comply with KDHE regulations. The storage volumes in the second and third quarters of
2004 initially declined due to these higher storage rates. Subsequently, the volumes
returned to more normal levels. |
|
|
|
|
Fractionation revenues increased $0.6 million due primarily to a 12 percent increase
in the average fractionation rate. |
26
The following table summarizes the major components of operating and maintenance expense which
are discussed in detail below.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Thousands) |
|
Operating and maintenance expense: |
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
2,014 |
|
|
$ |
2,060 |
|
Outside services and other |
|
|
5,305 |
|
|
|
6,418 |
|
Fuel and
power costs |
|
|
7,387 |
|
|
|
6,173 |
|
Product imbalance adjustments |
|
|
1,609 |
|
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating and maintenance expense |
|
$ |
16,315 |
|
|
$ |
14,154 |
|
|
|
|
|
|
|
|
Outside services and other decreased $1.1 million due primarily to fewer cavern
workovers in early 2005 as compared to 2004 and higher insurance expense in 2004
related to a pollution liability policy reducing operating and maintenance expense by
$0.7 million in 2005. Also our estimated asset retirement obligation for the storage
caverns was adjusted in 2005 reducing our operating expense by
$0.5 million.
Fuel and power costs increased $1.2 million due primarily to a 25 percent increase
in the average per-unit price for natural gas, which we are generally able to pass
through to our customers as discussed previously.
Product
imbalance adjustments increased $2.1 million due primarily to $3.0 million
larger lower of cost or market inventory valuation adjustments discussed above,
partially offset by the $0.5 million difference between gains and losses experienced
when emptying caverns in 2005 as compared to 2004.
Product cost increased $5.5 million, or 195 percent, directly related to increased the sales
of surplus propane volumes created through our product optimization activities.
General and administrative expense direct increased $0.4 million, or 108 percent, due
primarily to increased operational and technical support charges for these assets.
Segment profit increased $1.9 million, or 51 percent, due primarily to the $4.0 million higher
storage and fractionation revenues, partially offset by $2.1 million higher operating and
maintenance expense.
Outlook
We expect volumes fractionated for our customers at the Conway fractionator to meet or exceed
volumes from last year. Currently, commodity values in the Mid-Continent remain strong relative to
Mont Belvieu, which minimizes the potential for volumes to be directed to the Mont Belvieu market.
We expect storage revenues for the fourth quarter of 2005 at the Conway storage facilities to
continue to exceed storage revenues from previous years due to an increase in the demand for
short-term storage capacity at the facility.
We expect outside service costs to increase over the prior year due to the large number of
cavern workovers planned for the fourth quarter of 2005. We expect outside service costs to
continue near these levels throughout 2006 and 2007 to ensure that we meet the regulatory
compliance requirement to complete cavern workovers by 2008.
27
Financial condition and liquidity
Liquidity and Capital Resources Williams Partners L.P.
Historically, our sources of liquidity included cash generated from operations and funding
from Williams. Through August 22, 2005, our cash receipts were deposited in Williams bank
accounts and all cash disbursements were made from these accounts. Thus, historically our
financial statements have reflected no cash balances. Cash transactions handled by Williams for us
were reflected in affiliate advances between Williams and us. In August 2005, we established our
own bank accounts; however, we will continue to utilize Williams personnel to manage our cash and
investments.
In addition to the retention of some proceeds from our IPO, we expect our ongoing sources of
liquidity to include cash generated from operations, cash distributions from Discovery, borrowings
under Williams credit facility up to our $75 million borrowing limit, borrowings under our $20
million working capital facility with Williams, issuance of additional partnership units, debt
offerings and capital contributions from Williams. Capital contributions from Williams required
under the omnibus agreement consist of the following.
|
|
|
Indemnification of environmental and related expenditures for a period of three years
(for certain of those expenditures) up to $14 million, which includes between $3.4 million
and $4.6 million for the restoration activities due to the partial erosion of the
Carbonate Trend pipeline overburden by Hurricane Ivan, approximately $3.1 million for
capital expenditures related to KDHE-related cavern compliance at our Conway storage
facilities, and approximately $1 million for our 40 percent share of Discoverys costs for
marshland restoration and repair or replacement of Paradis emission-control flare. |
|
|
|
|
An annual credit for general and administrative expenses of $3.9 million in 2005 ($1.4
million pro-rated for the portion of the year from August 23 to December 31), $3.2 million
in 2006, $2.4 million in 2007, $1.6 million in 2008 and $0.8 million in 2009. |
|
|
|
|
Up to $3.4 million to fund our 40 percent share of the expected total cost of
Discoverys Tahiti pipeline lateral expansion project in excess of the $24.4 million we
contributed during September 2005. |
|
|
|
|
Reimbursement of our 40 percent share of any amounts the Federal Energy Regulatory
Commission requires Discovery to refund to shippers for retained gas gains or
over-recovery of lost and unaccounted for gas in excess of a specified amount. |
We believe that cash generated from these sources will be sufficient to meet our short-term
working capital requirements, long-term capital expenditure requirements, capital contribution
obligations to Discovery and expected quarterly cash distributions.
The natural gas gathering, processing and transportation, and NGL fractionation and storage
businesses are capital-intensive, requiring investment to upgrade or enhance existing operations
and comply with safety and environmental regulations. The capital requirements of these businesses
consist primarily of:
|
|
|
maintenance capital expenditures to replace partially or fully depreciated assets in
order to maintain the existing operating capacity of our assets and to extend their useful
lives; and |
|
|
|
|
expansion capital expenditures, such as those to acquire additional assets to grow our
business, to expand and upgrade plant or pipeline capacity, and to construct new plants,
pipelines and storage facilities. |
Discussed below are our significant expected capital requirements.
|
|
|
We require cash in order to provide services to our storage customers who prepaid their
annual storage contracts in April 2005. The storage year for customer contracts at our
Conway storage facility runs from April 1 of a year to March 31 of the following year. We
typically receive payment for these one-year contracts in advance in April after the
beginning of the storage year and recognize the associated revenue |
28
|
|
|
over the course of the storage year. As of September 30, 2005, our deferred storage revenue
is $6.9 million. We retained a portion of the proceeds from our IPO for working capital
purposes associated with this deferred revenue. |
|
|
|
We expect to make minimum quarterly distributions of $5 million ($0.35 per common and
subordinated unit and a two percent payment on the general partner interest) to our
unitholders and our general partner to the extent we have sufficient cash from operations
after establishment of cash reserves and payment of fees and expenses. On October 24,
2005, the board of directors of our general partner declared a cash distribution of $0.1484
per unit for the period from the closing of our initial public offering, August 23, 2005,
through September 30, 2005. The $0.1484 per unit amount is pro-rated based on a quarterly
distribution amount of $0.35 per unit. We intend to pay the quarterly distribution of $2.1
million on November 14, 2005. |
|
|
|
|
Maintenance capital expenditures for Conway assets are estimated to be approximately
$5.4 million for 2005, of which approximately $1.9 million has been spent through September
30, 2005. The amount of estimated maintenance capital expenditures for the Conway assets
includes approximately $1.9 million to be spent in connection with the installation of
wellhead control equipment and well meters and KDHE-related cavern compliance costs. In
the omnibus agreement, Williams agreed to reimburse us for the cost of these expenditures
as previously discussed. |
Liquidity and Capital Resources Discovery
Historically, cash distributions by Discovery to its members required unanimous consent and no
such distributions were made. Discoverys limited liability company agreement was amended at the
closing of our IPO to provide for quarterly distributions of available cash. We expect Discoverys
future cash requirements for working capital and maintenance capital expenditures to be funded from
its cash on hand and from its internally generated cash flows from operations. We expect capital
expenditures for future growth or expansion for Discovery to be funded by cash calls to its members
(which require unanimous consent of the members except in limited circumstances), from proceeds of
debt issuances or from internally generated funds.
As disclosed previously, Discovery historically retained all its cash generated from
operations. Prior to our IPO, Discovery made a distribution of approximately $43.8 million on
August 22, 2005 to its existing members, representing about 75 percent of this retained cash. This
distributed cash was associated with Discoverys operations prior to our IPO and, accordingly, we
did not receive any portion of this distribution. After this distribution, Discovery had
approximately $15.3 million of cash on hand which it will use to fund the following expected or
potential expenditures:
|
|
|
potential shipper refunds that may be required by the Federal Energy Regulatory
Commission for retained system gas gains and the over-recovery of lost and unaccounted-for
gas up to a specified amount, |
|
|
|
|
$1 million of compressor modifications at the Larose gas processing plant, |
|
|
|
|
and working capital needs. |
As discussed above, the omnibus agreement provides for reimbursement by Williams for our share
of any required capital contributions to Discovery related to the Federal Energy Regulatory
Commission ordered refunds to shippers for retained gas gains or over-recovery of lost and
unaccounted for gas in excess of a specified amount. Prospectively, Discovery expects to make
quarterly distributions of available cash to its members instead of retaining all cash from
operations. Accordingly, on October 28, 2005, pursuant to the terms of its limited liability
company agreement, Discovery made a $3.2 million distribution of available cash to its members.
Our 40 percent share of this distribution was $1.28 million.
In July 2005, Discovery entered into an agreement for the construction of the Tahiti pipeline
lateral expansion project. Total construction costs of this project are expected to be
approximately $69.5 million and will be funded by contributions from Discoverys members, including
us. In September 2005, Discoverys members made contributions totaling $48.3 million to Discovery
for these expenditures. The contributions from Williams and us covered a substantial portion of
the total expenditures attributable to Williams and our share of these costs.
29
Discovery deposited this $48.3 million into an escrow account that is restricted for use on this
project. Discovery used a portion of the $48.3 million to purchase Euros for construction costs
that will be paid in Euros.
Cash Flows and Capital Expenditures Williams Partners L.P.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
|
|
2005 |
|
2004 |
|
|
(Thousands) |
Net cash provided by operating activities |
|
$ |
7,277 |
|
|
$ |
4,294 |
|
Net cash used provided by investing activities |
|
|
(26,260 |
) |
|
|
(635 |
) |
Net cash provided (used) by financing activities |
|
|
33,465 |
|
|
|
(3,659 |
) |
The increase of $3.0 million in Net cash provided by operating activities for the first nine
months of 2005 as compared to the first nine months of 2004 is due primarily to $1.4 million lower
interest expense and a $4.0 million improvement in NGL Services
earnings excluding product imbalance adjustments,
partially offset by lower Carbonate Trend earnings and higher general and administrative expenses.
The 2005 use of cash associated with the change in accounts receivable is related to the trade
accounts receivable at August 22, 2005 that were not included in the contribution of net assets to
us. The 2005 source of cash associated with the change in accounts payable is due primarily to an
increase in amounts due to Power, including two months of fuel purchases.
Net cash used by investing activities in the first nine months of 2005 and 2004 includes
maintenance capital expenditures in our NGL Services segment. In addition, 2005 includes our
capital contribution of $24.4 million to Discovery discussed previously.
Net cash provided (used) by financing activities in 2005 includes the cash flows related to
our IPO on August 23, 2005. These cash flows consisted of $100.2 million in net proceeds from the
sale of the units, a $58.8 million distribution to Williams and the payment of $4.3 million in
expenses associated with our IPO. Net cash provided (used) by financing activities for 2005 and
2004 also includes the pass through of $3.7 million and $3.7 million, respectively, of net cash
flows to Williams prior to August 23, 2005, under its cash management program. Following the
closing of our IPO on August 23, 2005, we no longer participate in Williams cash management
program, and our net cash flows no longer pass through to Williams.
Cash Flows and Capital Expenditures Discovery
As previously disclosed, cash distributions from Discovery will be a significant source of our
liquidity. Due to the significance of Discoverys cash flows to our ability to make cash
distributions, the following discussion addresses in greater detail the cash flow activities for
100 percent of Discovery for the nine months ended September 30, 2005 and 2004.
30
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,424 |
|
|
$ |
8,284 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
18,366 |
|
|
|
16,991 |
|
Cash provided (used) by changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
4,083 |
|
|
|
(2,828 |
) |
Inventory |
|
|
(235 |
) |
|
|
69 |
|
Other current assets |
|
|
143 |
|
|
|
1,311 |
|
Accounts payable |
|
|
(915 |
) |
|
|
3,956 |
|
Other current liabilities |
|
|
(516 |
) |
|
|
(678 |
) |
Accrued liabilities |
|
|
534 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
28,884 |
|
|
|
28,434 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(9,327 |
) |
|
|
(33,604 |
) |
Change in accounts payable capital expenditures |
|
|
(10,224 |
) |
|
|
2,002 |
|
Increase in restricted cash and cash equivalents |
|
|
(45,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(65,052 |
) |
|
|
(31,602 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Contributions from members |
|
|
48,303 |
|
|
|
|
|
Distributions to members |
|
|
(43,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(31,629 |
) |
|
$ |
(3,168 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities for the first nine months of 2005 as compared to the
first nine months of 2004 remained fairly stable. The 2005 source of cash related to accounts
receivable reflects a lower accounts receivable balance at September 30, 2005 following Hurricane
Katrina. The 2004 use of cash related to accounts receivable reflects an extra month of accounts
receivable balance outstanding at September 30, 2004 for liquid sales to Power. The 2004 source of
cash related to accounts payable reflects an unusually high accounts payable balance at September
30, 2004 due, in part, to repair costs associated with the accidental influx of seawater.
During 2005, Net cash used by investing activities consisted of $45.5 million to fund escrow
accounts for the Tahiti pipeline lateral project, $19.6 million of capital expenditures for the
completion of the Front Runner and market expansion projects and the initial expenditures for the
Tahiti project as well as the purchase of leased compressors at the Larose processing plant.
During 2004, Net cash used by investing activities was primarily used for the construction of a
gathering lateral to connect Discoverys pipeline system to the Front Runner prospect.
During 2005, Net cash provided by financing activities includes capital contributions from
Discoverys members for the construction of the Tahiti pipeline lateral expansion and the
distribution of cash retained associated with Discoverys operations prior to our IPO.
31
Contractual Cash Obligations Williams Partners L.P.
Prior to the closing of our IPO on August 23, 2005, we had advances due to Williams. Williams
forgave these advances in conjunction with the closing of our IPO.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices. The
principal market risk to which we are exposed is commodity price risk for natural gas and NGLs. We
are also exposed to the risk of interest rate fluctuations. Our future borrowings will bear
interest at variable-market based rates.
Commodity Price Risk
Certain of Discoverys processing contracts are exposed to the impact of price fluctuations in
the commodity markets, including the correlation between natural gas and NGL prices. In addition,
price fluctuations in commodity markets could impact the demand for Discoverys services in the
future. Carbonate Trend and our fractionation and storage operations are not directly affected by
changing commodity prices except for product imbalances, which are exposed to the impact of price
fluctuation in NGL markets. Price fluctuations in commodity markets could also impact the demand
for storage and fractionation services in the future. In connection with the IPO, Williams
transferred to us a gas purchase contract for the purchase of a portion of our fuel requirements at
the Conway fractionator at a market price not to exceed a specified level. This physical contract
is intended to mitigate the fuel price risk under one of our fractionation contracts which contains
a cap on the per-unit fee that we can charge, at times limiting our ability to pass through the
full amount of increases in variable expenses to that customer. We and Discovery do not currently
use financial derivatives to manage the risks associated with these price fluctuations.
Interest Rate Risk
We previously had interest rate exposure related to our advances from Williams. These
advances were due on demand. However, as previously discussed, prior to the closing of our IPO on
August 23, 2005, Williams forgave these advances.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15(d) (e) of the Securities Exchange Act)
(Disclosure Controls) was performed as of the end of the period covered by this report. This
evaluation was performed under the supervision and with the participation of our general partners
management, including our general partners Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, our general partners Chief Executive Officer and Chief Financial
Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Our management, including our general partners Chief Executive Officer and Chief Financial
Officer, does not expect that our Disclosure Controls or our internal controls over financial
reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within the partnership have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected. We monitor our
Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this
regard is that the Disclosure Controls and the Internal Controls will be modified as systems change
and conditions warrant.
32
There were no changes in our internal controls over financial reporting that occurred during
the fiscal quarter ended September 30, 2005 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information required for this item is provided in Note 7, Commitments and Contingencies,
included in the Notes to Consolidated Financial Statements included under Part I, Item 1, which
information is incorporated by reference into this item.
Item 6. Exhibits.
The exhibits listed below are filed or furnished as part of this report:
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Exhibit 32 Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
WILLIAMS PARTNERS L.P. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By: Williams Partners GP LLC, its general partner |
|
|
|
|
|
|
|
/s/Ted T. Timmermans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ted. T. Timmermans |
|
|
|
|
Controller (Duly Authorized Officer and Chief Accounting Officer) |
|
|
|
|
|
November 1, 2005 |
|
|
|
|
34
EXHIBIT INDEX
|
|
|
Exhibit Number |
|
Description |
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
32
|
|
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
35