e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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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 March 31, 2006
OR
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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)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filero
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Accelerated filero
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Non-accelerated filerþ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YesoNoþ
The registrant had 7,006,146 common units and 7,000,000 subordinated units outstanding as of
May 1, 2006.
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
quarterly 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 and competitive
factors, the success of our gathering and transportation businesses depends on our ability
to connect 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 businesses 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. |
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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 currently 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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Lower natural gas and oil 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. |
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Our operations are subject to operational hazards and unforeseen interruptions for which
we may or may not be adequately insured. |
Additional information about risks and uncertainties that could cause actual results to differ
materially from forward-looking statements is contained in Item 1A of our annual report on Form
10-K filed March 3, 2006. 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 INCOME
(Dollars in thousands, except per-unit amounts)
(Unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Revenues: |
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Storage |
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$ |
5,105 |
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$ |
4,388 |
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Fractionation |
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3,953 |
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2,430 |
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Gathering |
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733 |
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880 |
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Product sales: |
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Affiliate |
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6,141 |
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2,829 |
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Third-party |
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63 |
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Other |
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1,131 |
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779 |
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Total revenues |
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17,063 |
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11,369 |
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Costs and expenses: |
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Operating and maintenance expense: |
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Affiliate |
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4,000 |
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2,653 |
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Third-party |
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3,691 |
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3,075 |
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Product cost |
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5,723 |
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2,735 |
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Depreciation and accretion |
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900 |
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905 |
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General and administrative expense: |
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Affiliate |
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1,415 |
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687 |
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Third-party |
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533 |
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19 |
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Taxes other than income |
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207 |
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192 |
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Total costs and expenses |
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16,469 |
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10,266 |
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Operating income |
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594 |
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1,103 |
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Equity earnings Discovery Producer Services |
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3,781 |
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2,212 |
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Interest expense: |
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Affiliate |
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(15 |
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(2,805 |
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Third-party |
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(221 |
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(199 |
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Interest income |
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70 |
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Net income |
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$ |
4,209 |
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$ |
311 |
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Allocation of 2006 net income: |
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Net income |
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$ |
4,209 |
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Allocation of net loss to general partner |
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(689 |
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Allocation of net income to limited partners |
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$ |
4,898 |
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Basic and diluted net income per limited partner unit: |
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Common units |
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$ |
0.35 |
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Subordinated units |
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0.35 |
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Weighted average number of units outstanding: |
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Common units |
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7,006,146 |
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Subordinated units |
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7,000,000 |
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See accompanying notes to consolidated financial statements.
3
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2006 |
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2005 |
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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 |
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$ |
4,315 |
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$ |
6,839 |
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Accounts receivable: |
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Trade |
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1,424 |
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1,840 |
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Other |
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1,524 |
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2,104 |
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Gas purchase contract affiliate |
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5,155 |
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5,320 |
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Product imbalance |
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295 |
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760 |
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Other current assets |
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1,370 |
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1,133 |
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Total current assets |
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14,083 |
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17,996 |
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Investment in Discovery Producer Services |
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149,641 |
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150,260 |
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Property, plant and equipment, net |
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68,239 |
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67,931 |
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Gas purchase contract noncurrent affiliate |
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3,565 |
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4,754 |
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Total assets |
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$ |
235,528 |
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$ |
240,941 |
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LIABILITIES AND PARTNERS CAPITAL
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Current liabilities: |
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Accounts payable: |
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Trade |
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$ |
3,269 |
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$ |
3,906 |
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Affiliate |
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2,378 |
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4,729 |
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Deferred revenue |
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222 |
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3,552 |
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Accrued liabilities |
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2,718 |
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2,373 |
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Total current liabilities |
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8,587 |
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14,560 |
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Environmental remediation liabilities |
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3,964 |
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3,964 |
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Other noncurrent liabilities |
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763 |
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762 |
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Commitments and contingent liabilities (Note 5) |
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Partners capital |
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222,214 |
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221,655 |
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Total liabilities and partners capital |
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$ |
235,528 |
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$ |
240,941 |
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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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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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(Thousands) |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
4,209 |
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$ |
311 |
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Adjustments to reconcile to cash provided (used) by operations: |
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Depreciation and accretion |
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900 |
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905 |
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Amortization of gas purchase contract affiliate |
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1,354 |
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Distributions in excess of / (undistributed) equity earnings of
Discovery Producer Services |
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619 |
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(2,212 |
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Cash provided (used) by changes in assets and liabilities: |
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Accounts receivable |
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996 |
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678 |
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Other current assets |
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(237 |
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(45 |
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Accounts payable |
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(3,028 |
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(1,495 |
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Accrued liabilities |
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345 |
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(209 |
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Deferred revenue |
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(3,330 |
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(3,200 |
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Other, including changes in noncurrent liabilities |
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567 |
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1,212 |
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Net cash provided (used) by operating activities |
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2,395 |
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(4,055 |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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(1,165 |
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(212 |
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Net cash used by investing activities |
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(1,165 |
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(212 |
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FINANCING ACTIVITIES: |
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Distributions to unitholders |
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(5,002 |
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Contributions per omnibus agreement |
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1,248 |
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Changes in advances from affiliates net |
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4,267 |
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Net cash provided (used) by financing activities |
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(3,754 |
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4,267 |
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Decrease in cash and cash equivalents |
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(2,524 |
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Cash and cash equivalents at beginning of period |
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6,839 |
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Cash and cash equivalents at end of period |
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$ |
4,315 |
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$ |
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See accompanying notes to consolidated financial statements.
5
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Unaudited)
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Total |
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Limited Partners |
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General |
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Partners |
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Common |
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Subordinated |
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Partner |
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Capital |
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(Thousands) |
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Balance January 1, 2006 |
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$ |
108,526 |
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$ |
108,491 |
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$ |
4,638 |
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$ |
221,655 |
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Net income (loss) attributable to the period January 1,
2006 through March 31, 2006 |
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2,449 |
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2,449 |
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(689 |
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4,209 |
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Cash distributions ($.35 per unit) |
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(2,452 |
) |
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(2,450 |
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(100 |
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(5,002 |
) |
Contributions pursuant to the Omnibus Agreement |
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1,248 |
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1,248 |
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Other |
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|
104 |
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104 |
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Balance March 31, 2006 |
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$ |
108,627 |
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$ |
108,490 |
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$ |
5,097 |
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$ |
222,214 |
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See accompanying notes to consolidated financial statements.
6
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 formed by The Williams Companies, Inc. (Williams) in
February 2005. On August 23, 2005, we completed our initial public offering (IPO) of common
units. We 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. Williams Partners GP LLC, a Delaware limited liability company and an
indirect wholly owned subsidiary of Williams, serves as the general partner for us and owns all of
our two percent general partner interest. All of our activities are conducted through Williams
Partners Operating LLC (Williams OLLC), an operating limited liability company (wholly owned by
us).
On April 6, 2006, we entered into a Purchase and Sale Agreement (the Purchase Agreement)
with Williams Energy Services, LLC (WES), Williams Field Services Group, LLC (WFSG), Williams
Field Services Company, LLC (WFSC), Williams OLLC and our general partner. Pursuant to the
Purchase Agreement, WES, WFSG, WFSC and our general partner will contribute to us a 25.1 percent
membership interest in Williams Four Corners LLC (Four Corners) for aggregate consideration of
$360 million. Prior to or at closing, WFSC will contribute to Four Corners its natural gas
gathering, processing and treating assets in the San Juan Basin in New Mexico and Colorado. The
closing of the Purchase Agreement is subject to the satisfaction of a number of conditions,
including our ability to obtain financing and the receipt of all necessary consents. We expect
closing to occur in the second quarter of 2006. Please read our Form S-1 filing, as filed with the
Securities and Exchange Commission on April 7, 2006, for more information related to this
transaction.
The accompanying interim consolidated financial statements do not include all the notes in our
annual financial statements and, therefore, should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2005. 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 March 31, 2006, and results of operations and cash flows for the three
months ended March 31, 2006 and 2005. All intercompany transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Note 2. Recent Accounting Standards
In January 2006, Williams, adopted Statement of Financial Accounting Standards (SFAS) No.
123(R), Share-Based Payment. Accordingly, payroll costs charged to us by our general partner
reflect additional compensation costs related to the adoption of this accounting standard. These
costs relate to Williams common stock equity awards made between Williams and its employees. For
the first quarter of 2006 there is approximately $100,000 of cost related to Williams share-based
payment plan reflected in our general and administrative expense on the Consolidated Statements of
Income. The cost is charged to us through specific allocations of certain employees if they
directly support our operations, and through an allocation methodology among all Williams
affiliates if they provide indirect support. These allocated costs are based on a three-factor
formula, which considers revenues; property, plant and equipment; and payroll.
7
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Note 3. Allocation of Net Income and Distributions
The allocation of net income between our general partner and limited partners for the period
January 1, 2006 through March 31, 2006 is as follows (in thousands):
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Allocation to general partner: |
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Net income |
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$ |
4,209 |
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Charges direct to general partner: |
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|
|
Reimbursable general and administrative costs |
|
|
789 |
|
|
|
|
|
|
|
|
|
|
Income before direct charges to general partner |
|
|
4,998 |
|
General partners share of net income |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
General partners allocated share of net income before
direct charges |
|
|
100 |
|
Direct charges to general partner |
|
|
(789 |
) |
|
|
|
|
|
|
|
|
|
Net loss allocated to general partner |
|
$ |
(689 |
) |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,209 |
|
Net loss allocated to general partner |
|
|
(689 |
) |
|
|
|
|
|
|
|
|
|
Net income allocated to limited partners |
|
$ |
4,898 |
|
|
|
|
|
We paid or have authorized payment of the following cash distributions during 2005 and
2006 (in thousands, except for per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit |
|
Common |
|
Subordinated |
|
General |
|
Total Cash |
Payment Date |
|
Distribution |
|
Units |
|
Units |
|
Partner |
|
Distribution |
11/14/2005 (a)
|
|
$ |
0.1484 |
|
|
$ |
1,039 |
|
|
$ |
1,039 |
|
|
$ |
42 |
|
|
$ |
2,120 |
|
2/14/2006
|
|
$ |
0.3500 |
|
|
$ |
2,452 |
|
|
$ |
2,450 |
|
|
$ |
100 |
|
|
$ |
5,002 |
|
5/15/2006 (b)
|
|
$ |
0.3800 |
|
|
$ |
2,662 |
|
|
$ |
2,660 |
|
|
$ |
109 |
|
|
$ |
5,431 |
|
|
|
|
(a) |
|
This 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). |
|
(b) |
|
The board of directors of our general partner declared this cash distribution on April
27, 2006 to be paid on May 15, 2006 to unitholders of record at the close of business on
May 8, 2006. |
8
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Note 4. Investment in Discovery Producer Services LLC
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):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Current assets |
|
$ |
62,700 |
|
|
$ |
70,525 |
|
Noncurrent restricted cash and cash equivalents |
|
|
41,859 |
|
|
|
44,559 |
|
Property, plant and equipment |
|
|
340,935 |
|
|
|
344,743 |
|
Current liabilities |
|
|
(27,475 |
) |
|
|
(45,070 |
) |
Non-current liabilities |
|
|
(1,146 |
) |
|
|
(1,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members capital |
|
$ |
416,873 |
|
|
$ |
413,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Revenues |
|
$ |
62,120 |
|
|
$ |
27,289 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
53,294 |
|
|
|
22,042 |
|
Interest income |
|
|
(626 |
) |
|
|
(284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,452 |
|
|
$ |
5,531 |
|
|
|
|
|
|
|
|
Note 5. 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, sampling, cleanup and
monitoring programs. The costs of such activities will depend upon the program scope ultimately
agreed to by the KDHE and are expected to be paid over the next two to nine years.
We have 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 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. There is also a three-year time limitation from the IPO closing date, August 23,
2005. 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.
9
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
At March 31, 2006, we had accrued liabilities totaling $5.3 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.
Hurricane Costs. At March 31, 2006, Williams had an insurance receivable of $965,000 for
costs incurred to assess property damage caused by Hurricane Ivan in 2004 to the Carbonate Trend
pipeline. Although Williams believes these costs to be recoverable under its property damage
insurance, it has not received approval from its insurer and it is reasonably possible that the
insurer will deny some or all of this claim. If Williams is unable to recover these costs from
insurance we will recognize a loss for these costs as they relate to the Carbonate Trend pipeline.
This loss will be fully allocated to our general partner.
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.
10
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Note 6. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering & |
|
|
NGL |
|
|
|
|
|
|
Processing |
|
|
Services |
|
|
Total |
|
|
|
(Thousands) |
|
Three Months Ended March 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
733 |
|
|
$ |
16,330 |
|
|
$ |
17,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
242 |
|
|
|
7,449 |
|
|
|
7,691 |
|
Product cost |
|
|
|
|
|
|
5,723 |
|
|
|
5,723 |
|
Depreciation and accretion |
|
|
300 |
|
|
|
600 |
|
|
|
900 |
|
Direct general and administrative expense |
|
|
2 |
|
|
|
301 |
|
|
|
303 |
|
Taxes other than income |
|
|
|
|
|
|
207 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
189 |
|
|
|
2,050 |
|
|
|
2,239 |
|
Equity earnings |
|
|
3,781 |
|
|
|
|
|
|
|
3,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
3,970 |
|
|
$ |
2,050 |
|
|
$ |
6,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
2,239 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(1,117 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
880 |
|
|
$ |
10,489 |
|
|
$ |
11,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
107 |
|
|
|
5,621 |
|
|
|
5,728 |
|
Product cost |
|
|
|
|
|
|
2,735 |
|
|
|
2,735 |
|
Depreciation and accretion |
|
|
300 |
|
|
|
605 |
|
|
|
905 |
|
Direct general and administrative expense |
|
|
|
|
|
|
203 |
|
|
|
203 |
|
Taxes other than income |
|
|
|
|
|
|
192 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
473 |
|
|
|
1,133 |
|
|
|
1,606 |
|
Equity earnings |
|
|
2,212 |
|
|
|
|
|
|
|
2,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
2,685 |
|
|
$ |
1,133 |
|
|
$ |
3,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
1,606 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
1,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
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 Part I of
this quarterly report.
Overview
We are a Delaware limited partnership formed in February 2005. On August 23, 2005, we
completed our initial public offering (IPO) of common units. We are principally engaged in the
business of gathering, transporting and processing natural gas and fractionating and storing
natural gas liquids (NGLs). We manage our business and analyze our results of operations on a
segment basis. Our operations are divided into 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 integrated 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
On April 6, 2006, we entered into a Purchase and Sale Agreement (the Purchase Agreement)
with Williams Energy Services, LLC (WES), Williams Field Services Group, LLC (WFSG), Williams
Field Services Company, LLC (WFSC), Williams Partners GP LLC, our general partner, and Williams
Partners Operating LLC, our operating subsidiary (Williams OLLC). Pursuant to the Purchase
Agreement, WES, WFSG, WFSC and our general partner will contribute to us a 25.1 percent membership
interest in Williams Four Corners LLC (Four Corners) for aggregate consideration of $360 million.
Prior to or at closing, WFSC will contribute to Four Corners its natural gas gathering, processing
and treating assets in the San Juan Basin in New Mexico and Colorado. The closing of the Purchase
Agreement is subject to the satisfaction of a number of conditions, including our ability to obtain
financing and the receipt of all necessary consents. We expect closing to occur in the second
quarter of 2006. Please read our Form S-1 filing, as filed with the Securities and Exchange
Commission on April 7, 2006, for more information related to this transaction.
In
May 2006, Williams replaced its $1.275 billion secured
credit facility with a $1.5 billion unsecured credit
facility. The new facility contains substantially similar terms and covenants.
This revolving credit facility is available for borrowings and letters of credit and will continue
to allow us to borrow up to $75 million for general partnership purposes, including acquisitions,
but only to the extent that sufficient amounts remain unborrowed by Williams and its other
subsidiaries.
Results of operations
Consolidated Overview
The following table and discussion is a summary of our consolidated results of operations for
the three months ended March 31, 2006, compared to the three months ended March 31, 2005. The
results of operations by segment are discussed in further detail following this consolidated
overview discussion.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
% Change |
|
|
|
2006 |
|
|
2005 |
|
|
from 2005 (1) |
|
|
|
(Thousands) |
|
|
|
|
|
Revenues |
|
$ |
17,063 |
|
|
$ |
11,369 |
|
|
|
+50 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
7,691 |
|
|
|
5,728 |
|
|
|
-34 |
% |
Product cost |
|
|
5,723 |
|
|
|
2,735 |
|
|
|
-109 |
% |
Depreciation and accretion |
|
|
900 |
|
|
|
905 |
|
|
|
+1 |
% |
General and administrative expense |
|
|
1,948 |
|
|
|
706 |
|
|
|
-176 |
% |
Taxes other than income |
|
|
207 |
|
|
|
192 |
|
|
|
-8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
16,469 |
|
|
|
10,266 |
|
|
|
-60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
594 |
|
|
|
1,103 |
|
|
|
-46 |
% |
Equity earnings Discovery |
|
|
3,781 |
|
|
|
2,212 |
|
|
|
+71 |
% |
Interest expense |
|
|
(236 |
) |
|
|
(3,004 |
) |
|
|
+92 |
% |
Interest income |
|
|
70 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,209 |
|
|
$ |
311 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 March 31, 2006 vs. three months ended March 31, 2005
Revenues increased $5.7 million, or 50 percent, due primarily to higher revenues in our NGL
Services segment reflecting higher fractionation and storage revenues and increased product sales
volumes. These increases are discussed in detail in the Results of Operations NGL Services
section.
Operating and maintenance expense increased $2.0 million, or 34 percent, due primarily to our
NGL Services segment where fuel and power costs and cavern workover projects increased, partially
offset by a decrease in product imbalance adjustments.
Product cost increased $3.0 million, or 109 percent, directly related to increased product
sales volumes discussed above.
General and administrative expense increased $1.2 million, or 176 percent, due primarily to
the increased costs of being a publicly-traded partnership. These costs included $0.4 million for
audit fees, tax return preparation and director fees, $0.3 million for charges allocated by
Williams for accounting, legal, and other support, and $0.3 million for conflict committee activity
associated with our potential acquisition of an interest in Four Corners.
Operating income decreased $0.5 million, or 46 percent, due primarily to higher general and
administrative expense and higher operating and maintenance expense, partially offset by higher NGL
Services fractionation and storage revenues.
Equity earnings from Discovery increased $1.6 million, or 71 percent. This increase is
discussed in detail in the Results of Operations Gathering and Processing section.
Interest expense decreased $2.8 million, or 92 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.
13
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.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Segment revenues |
|
$ |
733 |
|
|
$ |
880 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
242 |
|
|
|
107 |
|
Depreciation |
|
|
300 |
|
|
|
300 |
|
General and administrative expense direct |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
544 |
|
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
189 |
|
|
|
473 |
|
Equity earnings Discovery |
|
|
3,781 |
|
|
|
2,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
3,970 |
|
|
$ |
2,685 |
|
|
|
|
|
|
|
|
Carbonate Trend
Three months ended March 31, 2006 vs. three months ended March 31, 2005
Segment revenues decreased $147,000, or 17 percent, due primarily to a 20 percent decline in
average daily gathered volumes between 2006 and 2005 caused by normal reservoir depletion.
Operating and maintenance expense increased $135,000, or 126 percent, due to $44,000 in
increased costs for inhibitor chemicals and internal pipeline corrosion inspection, and $91,000
related to insurance costs.
Segment operating income decreased $284,000, or 60 percent, due primarily to the items
discussed above.
14
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
Income. 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 |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Revenues |
|
$ |
62,120 |
|
|
$ |
27,289 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses, including interest: |
|
|
|
|
|
|
|
|
Product cost and shrink replacement |
|
|
41,550 |
|
|
|
11,124 |
|
Operating and maintenance expense |
|
|
4,822 |
|
|
|
3,993 |
|
General and administrative expense |
|
|
690 |
|
|
|
500 |
|
Depreciation and accretion |
|
|
6,379 |
|
|
|
6,113 |
|
Interest income |
|
|
(626 |
) |
|
|
(284 |
) |
Other (income) expense, net |
|
|
(147 |
) |
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses, including interest |
|
|
52,668 |
|
|
|
21,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,452 |
|
|
$ |
5,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williams Partners 40 percent interest -
Equity earnings per our Consolidated Statements of Income |
|
$ |
3,781 |
|
|
$ |
2,212 |
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 vs. three months ended March 31, 2005
Revenues increased $34.8 million, or 128 percent, due primarily to higher NGL product sales
from marketing of customers NGLs. In addition, the Tennessee Gas Pipeline (TGP) and Texas
Eastern Transmission Company (TETCO) open seasons, which began in the last quarter of 2005,
accounted for $9.9 million in revenues. Throughput volumes from TETCOs open season ended on March
14, 2006, and throughput volumes from TGPs open season have substantially decreased and may cease
soon. The significant components of the revenue increase are addressed more fully below.
|
|
|
Product sales increased $36.8 million for NGL sales related to third-party processing
customers elections to have Discovery market their NGLs for a fee under an option in their
contracts. These sales were offset by higher associated product costs of $36.8 million
discussed below. |
|
|
|
|
Processing and fractionation revenues increased $5.6 million including $6.7 million in
additional fee-based revenues related to the TGP and TETCO open seasons discussed above and
$0.8 million increased volumes from the Front Runner prospect, partially offset by normal
reservoir declines. |
|
|
|
|
Transportation revenue increased $2.1 million including $3.2 million in additional
fee-based revenues related to the TGP and TETCO open seasons discussed above, partially
offset by $1.0 million related to normal reservoir declines. |
15
Partially offsetting these increases were the following:
|
|
|
Product sales decreased approximately $8.5 million as a result of 60 percent lower NGL
sales volumes following Hurricanes Katrina and Rita, partially offset by a $1.8 million
increase associated with 32 percent higher average sales prices. |
|
|
|
|
Product sales also decreased $0.9 million due to the absence of excess fuel and shrink
replacement gas sales in 2006. |
|
|
|
|
Gathering revenues decreased $2.1 million due primarily to a $1.4 million deficiency
payment received in the first quarter of 2005. |
Product cost and shrink replacement increased $30.4 million, from $11.1 million in 2005, due
primarily to $36.8 million of product purchase costs for customers who elected
to have Discovery market their NGLs and $1.4 million from higher average per-unit natural gas
prices, partially offset by $6.3 million lower costs related to reduced processing activity in
2006.
Other operating and maintenance expense increased $0.8 million, or 21 percent, due primarily
to $0.6 million higher processing costs related to increased throughput volumes and $0.2 million
higher property insurance costs in 2006 following the 2005 hurricanes.
General and administrative expense increased $0.2 million, or 38 percent, due primarily to an
increase in the management fee paid to Williams related to Discoverys market expansion project and
additions of other facilities.
Depreciation and accretion expense increased $0.3 million, or 4 percent, due primarily to the
addition of market expansion assets.
Interest income increased $0.3 million due primarily to interest earned on the restricted cash
balance for the Tahiti project.
Other (income) expense,
net improved $0.5 million due primarily to a non-cash foreign
currency transaction gain 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.
Net income increased $3.9 million, or 71 percent, due primarily to the TGP and TETCO open
seasons which contributed approximately $8.2 million. This was largely offset by $1.1 million
lower gross processing margins and $0.7 million lower gathering revenues related to lower volumes
following the hurricanes, the absence of a $1.4 million deficiency payment received in 2005 and
$1.1 million higher operating and maintenance and general and
administrative expenses.
Outlook
At March 31, 2006, Williams had an insurance receivable of $965,000 for costs incurred to
assess property damage caused by Hurricane Ivan in 2004 to the Carbonate Trend pipeline. Although
Williams believes these costs to be recoverable under its property damage insurance, it has not
received approval from its insurer and it is reasonably possible that the insurer will deny some or
all of this claim. If Williams is unable to recover these costs from insurance we will recognize
a loss for these costs as they relate to the Carbonate Trend pipeline. This loss will be fully
allocated to our general partner.
Additionally, we currently estimate that we will incur $3.4 million to $4.6 million of
maintenance expenditures for Carbonate Trend during 2006 and 2007 for restoration activities
related to the partial erosion of the pipeline overburden caused by Hurricane Ivan in September
2004. Under an omnibus agreement, 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.
16
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.
|
|
|
In 2006, recompletions and workovers may not offset production declines from the wells
currently connected to the Carbonate Trend pipeline. |
|
|
|
|
Throughput volumes for Discovery resulting from the TETCO open season ended on March 14,
2006. Currently Discovery continues to receive reduced throughput volumes from TGP.
Discovery is negotiating for the retention of some of this gas on a long-term basis and
will compete with several other plants in the area for this business. |
|
|
|
|
We anticipate lower gathered volumes from Discoverys pre-hurricane sources throughout
2006. The 2005 hurricanes caused a significant disruption in the normal operations of our
customers including critical recompletion and drilling activity necessary to sustain and
improve their production levels. |
|
|
|
|
With the current oil and natural 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 the ability of producers 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. |
|
|
|
|
On March 31, 2006, Discovery connected a new well in ATPs Gomez prospect, with initial
volume of approximately 13,000 million British Thermal Units per day (MMBtu/d) and may
increase to approximately 50,000 MMBtu/d by Fall 2006. |
|
|
|
|
We anticipate a significant increase in Discoverys property damage insurance premiums,
which are due in October 2006. The expected increase is related to an overall increase in
premiums for property located in the Gulf Coast area following the 2005 hurricanes. |
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 |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Segment revenues |
|
$ |
16,330 |
|
|
$ |
10,489 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
7,449 |
|
|
|
5,621 |
|
Product cost |
|
|
5,723 |
|
|
|
2,735 |
|
Depreciation and accretion |
|
|
600 |
|
|
|
605 |
|
General and administrative expense direct |
|
|
301 |
|
|
|
203 |
|
Taxes other than income |
|
|
207 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
14,280 |
|
|
|
9,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
2,050 |
|
|
$ |
1,133 |
|
|
|
|
|
|
|
|
17
Three months ended March 31, 2006 vs. three months ended March 31, 2005
Segment revenues increased $5.8 million, or 56 percent, due primarily to higher product sales,
fractionation and storage revenues. The significant components of the revenue increase are
addressed more fully below:
|
|
|
Product sales were $3.2 million higher due primarily to the sale of normal butane
and propylene. The $2.0 million increase in normal butane resulted from the sale of
product that was previously purchased for operating supply at our storage facilities.
The $1.1 million increase in propylene sales resulted from a loss allowance retained
from the unloading of railcars. This volume accumulated in 2004 and 2005. This
increase was largely offset by the related increase in Product cost. |
|
|
|
|
Fractionation revenues increased $1.5 million due primarily to a 35 percent increase
in the average fractionation rate related to the pass through to customers of increased
fuel and power costs and 21 percent higher volumes in the first three months of 2006
compared to the first three months of 2005. The increased fractionation volumes are a
result of increased customer throughput in anticipation of a scheduled turnaround in
April 2006 and the elimination of Conways backlogged product at the storage facility. |
|
|
|
|
Storage revenues increased $0.7 million due primarily to higher average per-unit
storage rates for the 2005-2006 term and higher storage volumes from additional
short-term storage leases caused by the reduced demand for propane due to the unusually
warm temperatures in the early winter months of 2006. |
|
|
|
|
Other revenues increased $0.4 million due to increased butane conversion revenue and
increased terminaling revenue. |
The following table summarizes the major components of operating and maintenance expense which
are discussed in detail below.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Operating and maintenance expense: |
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
701 |
|
|
$ |
661 |
|
Outside services and other |
|
|
3,492 |
|
|
|
1,555 |
|
Fuel and power |
|
|
3,658 |
|
|
|
2,268 |
|
Product imbalance expense (income) |
|
|
(402 |
) |
|
|
1,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating and maintenance expense |
|
$ |
7,449 |
|
|
$ |
5,621 |
|
|
|
|
|
|
|
|
|
|
|
Outside services and other increased $1.9 million due primarily to increased storage
cavern workovers to meet KDHE requirements. |
|
|
|
|
Fuel and power costs increased $1.4 million due primarily to: |
|
|
|
$0.5 million higher average cost due to a 23 percent increase in the price of natural gas; |
|
|
|
|
$0.4 million higher average cost associated with a long-term physical natural gas contract; and |
|
|
|
|
$0.4 million increase due to a 19 percent increase in the consumption of natural gas
associated with higher fractionated volumes. |
18
|
|
|
Product imbalance expense (income) had a favorable change of $1.5 million due primarily
to: |
|
|
|
$1.2 million of gains recognized from the management of the fractionation process to
optimize the resulting mix of products which typically results in surplus propane
volumes and deficit ethane volumes; and |
|
|
|
|
$0.8 million lower product imbalance valuation adjustments. |
Partially offsetting these increases are $0.6 million of losses from cavern empties.
Product cost increased $3.0 million, or 109 percent, directly related to increased sales of
surplus propylene and normal butane volumes discussed above.
Segment profit increased $0.9 million, or 81 percent, due primarily to the $2.2 million higher
storage and fractionation revenues, $0.4 million higher other revenues and $0.3 million higher
product sales margins, largely offset by $1.9 million higher operating and maintenance expense.
Outlook
For the second quarter of 2006, fractionation volumes will decrease due to scheduled
maintenance activities to ensure mechanical integrity. After this maintenance is completed we
expect to average throughput of 42,000 barrels per day. We also expect to continue to produce
income from the blending and segregation of various products.
The early results of the 2006 storage season are positive. During the first quarter of 2006,
we received storage volume nominations for the storage year beginning April 1, 2006 that would
generate revenues equal to last years record levels. There is still potential for additional
short term storage leases later in 2006.
We continue to have a high level of storage cavern workovers and wellhead modifications to
comply with KDHE regulatory requirements. We expect outside service
costs to continue at high levels throughout 2006 and 2007 to ensure that we meet the regulatory compliance
requirement to complete cavern workovers before the end of 2008.
Financial Condition and Liquidity
Outlook for 2006
We believe we have, or have access to, the financial resources and liquidity necessary to meet
future requirements for working capital, capital and investment expenditures, and quarterly cash
distributions. We anticipate our 2006 sources of liquidity will include:
|
|
|
The issuance of common units contemplated in our Form S-1 filed on April 7, 2006; |
|
|
|
|
The issuance of senior notes in a private placement concurrent with the common unit offering; |
|
|
|
|
Cash and cash equivalents; |
|
|
|
|
Cash generated from operations; |
|
|
|
|
Cash distributions from Discovery and Four Corners; |
|
|
|
|
Capital contributions from Williams pursuant to an omnibus agreement; and |
|
|
|
|
Credit facilities, as needed. |
We anticipate our more significant 2006 capital requirements to be:
|
|
|
Acquisition of a 25.1 percent interest in Four Corners; |
|
|
|
|
Maintenance capital expenditures for our Conway assets; |
|
|
|
|
Capital contributions to Discovery for its capital expenditure program; and |
|
|
|
|
Minimum quarterly distributions to our unitholders. |
19
Discovery
Discovery expects to make quarterly distributions of available cash to its members.
Accordingly, on April 28, 2006, pursuant to the terms of its limited liability company agreement,
Discovery made a $9.0 million distribution of available cash to its members. Our 40 percent share
of this distribution was $3.6 million.
In 2005, Discovery sustained damages from Hurricane Katrina that exceeded its $1.0 million
insurance deductible. Discovery estimates the total cost for hurricane-related repairs will be
approximately $5.8 million, $4.8 million in excess of its deductible. Discovery will fund these
repairs with cash flows from operations and then seek reimbursement from its insurance carrier.
The insurance receivable at March 31, 2006 was $3.9 million.
We expect future cash requirements for Discovery relating to working capital and maintenance
capital expenditures to be funded from its own internally generated cash flows from operations.
Growth or expansion capital expenditures for Discovery will be funded either by cash calls to its
members, which requires unanimous consent of the members except in limited circumstances, or from
internally generated funds.
Capital Contributions from Williams
Capital
contributions from Williams including amounts 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 $1.0 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 $3.2 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. |
|
|
|
|
Capital contributions from Williams of approximately $1.0 million for expensed
KDHE-related compliance work at our Conway storage facilities. |
Credit Facilities
We may borrow up to
$75 million under Williams $1.275 billion revolving credit facility,
which is available for borrowings and letters of credit. Borrowings under this facility mature on
May 3, 2007. Our $75 million borrowing limit under Williams revolving credit 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 March 31, 2006,
letters of credit totaling $102 million had been issued on behalf of Williams by the participating
institutions under this facility and no revolving credit loans were outstanding. This facility was
replaced in May 2006 with a similar facility of $1.5 billion that matures in May 2009, under which we are allowed
to borrow up to $75 million.
We also have a $20 million revolving credit facility with Williams as the lender. The
facility is available exclusively to fund working capital borrowings. Borrowings under the
facility will mature on May 3, 2007. We are required to reduce all borrowings under this facility
to zero for a period of at least 15 consecutive days once each 12-month period prior to the
maturity date of the facility. For the three months ended March 31, 2006 we had no borrowings
under the working capital credit facility.
20
Capital Requirements
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, which are capital expenditures made 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. |
We estimate that maintenance capital expenditures for the Conway assets will be approximately
$8.3 million for 2006. Of this amount, approximately $2.3 million will be reimbursed by Williams
subject to an omnibus agreement. This omnibus agreement includes a three-year limitation from the
IPO closing date, August 23, 2005, and an overall omnibus agreement limitation of $14.0 million.
We estimate that maintenance capital expenditures for 100 percent of Discovery will be
approximately $2.3 million for 2006. We expect Discovery will fund its maintenance capital
expenditures through its cash flows from operations.
We estimate that expansion capital expenditures for 100 percent of Discovery will be
approximately $30.8 million for 2006. These expenditures are primarily for the ongoing
construction of the Tahiti pipeline lateral expansion project. Discovery will fund these
expenditures with amounts previously escrowed for this project.
Working Capital Attributable to Deferred Revenues
We require cash in order to continue providing services to our storage customers who prepay
their annual storage contracts in April of each year. The storage year for a majority of customer
contracts at our Conway storage facility runs from April 1 of a year to March 31 of the following
year. For most of these agreements we receive payment for these one-year contracts in advance in
April after the beginning of the storage year and recognize the associated revenue over the course
of the storage year. As of March 31, 2006, our deferred storage revenue is $0.2 million.
Cash Distributions to Unitholders
We paid a quarterly distribution of $5.0 million ($.35 per unit) to common and subordinated
unitholders and the general partner interest on February 14, 2006. We intend to make a quarterly
distribution each quarter during 2006, including $5.4 million ($0.38 per unit) on May 15, 2006 to
the general partner interest and common and subordinated unitholders of record at the close of
business on May 8, 2006.
Results of Operations Cash Flows
Williams Partners L.P.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Net cash provided (used) by operating activities |
|
$ |
2,395 |
|
|
$ |
(4,055 |
) |
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
$ |
(1,165 |
) |
|
$ |
(212 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
$ |
(3,754 |
) |
|
$ |
4,267 |
|
21
The $6.5 million increase in net cash provided by operating activities for the first three
months of 2006 as compared to the first three months of 2005 is due primarily to:
|
|
|
$4.4 million increase in distributed earnings from Discovery; and |
|
|
|
|
$2.8 million in lower interest expense due to the forgiveness by Williams of advances to
us at the closing of our IPO. |
Net cash used by investing activities includes maintenance capital expenditures in our NGL
Services segment primarily for the installation of cavern liners and KDHE-related cavern compliance
with the installation of wellhead control equipment and well meters.
Net cash used by financing activities in 2006 includes $5.0 million of distributions paid to
unitholders partially offset by $1.2 million in indemnifications and reimbursements received from
Williams pursuant to the omnibus agreement. Net cash provided by financing activities in the first
three months of 2005 represent net cash flows passed through to Williams, prior to the IPO on
August 23, 2005, under its cash management program.
Discovery 100 percent
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 three months ended March 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,452 |
|
|
$ |
5,531 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
6,379 |
|
|
|
6,113 |
|
Cash provided (used) by changes in assets and liabilities |
|
|
2,684 |
|
|
|
(3,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,515 |
|
|
|
7,981 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,546 |
) |
|
|
(3,638 |
) |
Change in accounts payable capital expenditures |
|
|
454 |
|
|
|
(3,459 |
) |
Decrease in restricted cash |
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
608 |
|
|
|
(7,097 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Contributions from members |
|
|
7,383 |
|
|
|
|
|
Distributions to members |
|
|
(13,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(6,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
12,908 |
|
|
$ |
884 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities increased $10.5 million in 2006 as compared to 2005
due primarily to a $4.2 million increase in operating income, adjusted for non-cash expenses, and a
$6.3 million increase in cash from changes in working capital. The $6.3 million increase in cash
from changes in working capital resulted
22
primarily from the payment, in the first quarter of 2005, of an extra month of liquid sales
invoices outstanding at the end of 2004.
Net cash provided by investing activities increased $7.7 million in 2006 as compared to 2005
due to higher capital expenditures in 2005 related primarily to capital expenditures for
Discoverys market expansion project and for the purchase of leased compressors at the Larose
processing plant. Capital expenditures in 2006 related primarily to the Tahiti pipeline lateral
expansion project, which were funded from amounts previously escrowed and included on the balance
sheet as restricted cash.
Net cash used by financing activities in 2006 includes:
|
|
|
$13.6 million of distributions paid to members, including a regular quarterly
distribution of $11.0 million; partially offset by |
|
|
|
|
$7.4 million of capital contributions from members for the construction of the
Tahiti pipeline lateral expansion. |
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.
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. This physical contract is a
derivative. However, we elected to account for this contract under the normal purchases exemption
to the fair value accounting that would otherwise apply. We and Discovery do not currently use any
other derivatives to manage the risks associated with these price fluctuations.
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) 15(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 company 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
23
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.
There were no changes in our internal controls over financial reporting that occurred during
the fiscal quarter ended March 31, 2006 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 5, 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 5. Other Information
On May 1, 2006 we entered into a three year credit agreement among The Williams Companies,
Inc. (Williams), Northwest Pipeline Corporation,
Transcontinental Gas Pipe Line Corporation, the several lenders from
time to time parties thereto, and
Citibank, N.A., as administrative agent (the Credit
Agreement). This $1.5
billion revolving credit facility is available for borrowings and letters of credit and allows us
to borrow up to $75 million for general partnership purposes, including acquisitions, but only to
the extent that sufficient amounts remain unborrowed by Williams and its other subsidiaries.
Our borrowings under the Credit Agreement would bear interest at a variable interest rate based on
either LIBOR or a base rate, in either case plus an applicable margin that varies depending upon
the rating of Williams senior unsecured long-term debt.
The Credit Agreement contains a number of restrictions on the borrowers business, including, but
not limited to, restrictions on certain of the borrowers and certain of the borrowers other
subsidiaries ability, but not our ability, to grant liens on assets, merge, consolidate, or sell
assets; incur indebtedness; engage in transactions with related parties; and make distributions on
equity interests. In addition, Williams is at certain times subject to a minimum ratio of
consolidated EBITDA to interest expense financial maintenance covenant. The Credit Agreement also
contains affirmative covenants and events of default. Failure to comply with these covenants, or
the occurrence of an event of default, could result in acceleration of the borrowers debt and
other financial obligations under the Credit Agreement.
Also on May 1, 2006, the previous credit agreement dated as of May 20, 2005 among us,
Williams, Northwest Pipeline Corporation, Transcontinental Gas Pipe Line Corporation, Citibank,
N.A., Bank of America, N.A., and Citicorp USA, INC. as administrative agent was terminated. This
previous agreement contained similar terms with respect to us as the new Credit Agreement
referenced above. At closing, letters of credit totaling $235 million that had been issued on
behalf of Williams by the participating institutions under the predecessor facility were reissued
under the new facility described above, and no revolving credit loans were outstanding.
Relationships
We are an indirect subsidiary of Williams. As a result, certain individuals, including,
officers and directors of our general partner, serve as officers and/or directors of more than one
of such entities.
24
Item 6. Exhibits
The exhibits listed below are filed or furnished as part of this report:
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Exhibit |
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Number |
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Description |
*# Exhibit 2
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Purchase and Sale agreement, dated April 6, 2006, by and among Williams Energy
Services, LLC, Williams Field Services Group, LLC, Williams Field Services
Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams
Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7,
2006. |
*Exhibit 10
|
|
|
|
Credit agreement dated as of
May 1, 2006 among Williams Partners L.P., The Williams
Companies, Inc., Northwest Pipeline
Corporation, Transcontinental Gas Pipeline Corporation, and Citibank,
N.A., as administrative agent
(attached as Exhibit 10.1 to The Williams Companies, Incs current report on Form 8-K (File No.
001-04174) filed with the SEC on May 1, 2006). |
+Exhibit 31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
+Exhibit 31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
+Exhibit 32
|
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Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. |
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* |
|
Such exhibit has heretofore been filed with the SEC as part of the filing indicated and is
incorporated herein by reference. |
|
# |
|
Pursuant to Item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a
copy of any omitted exhibit or schedule to the SEC upon request. |
|
+ |
|
Filed herewith |
25
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.
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WILLIAMS PARTNERS L.P. |
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By: Williams Partners GP LLC, its general partner |
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/s/ Ted T. Timmermans |
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Ted. T. Timmermans |
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Controller (Duly Authorized Officer and Chief Accounting Officer)
|
|
|
May 2, 2006
26
EXHIBIT INDEX
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|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description |
*# Exhibit 2
|
|
|
|
Purchase and Sale agreement, dated April 6, 2006, by and among Williams Energy
Services, LLC, Williams Field Services Group, LLC, Williams Field Services
Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams
Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7,
2006. |
*Exhibit 10
|
|
|
|
Credit agreement dated as of
May 1, 2006 among Williams Partners L.P., The Williams
Companies, Inc., Northwest Pipeline
Corporation, Transcontinental Gas Pipeline Corporation, and Citibank, N.A., as administrative agent
(attached as Exhibit 10.1 to The Williams Companies, Incs current report on Form 8-K (File No.
001-04174) filed with the SEC on May 1, 2006). |
+Exhibit 31.1
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
+Exhibit 31.2
|
|
|
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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. |
|
|
|
* |
|
Such exhibit has heretofore been filed with the SEC as part of the filing indicated and is
incorporated herein by reference. |
|
# |
|
Pursuant to Item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a
copy of any omitted exhibit or schedule to the SEC upon request. |
|
+ |
|
Filed herewith |
27