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 June 30, 2006
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
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. Yes þ No o
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):
Large accelerated filer o Accelerated filer o Non-accelerated filer 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 registrant had 14,596,146 common units and 7,000,000 subordinated units outstanding as of
August 7, 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.
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. Any decrease in supplies of natural gas could adversely affect our business and
operating results. |
1
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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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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 future financial and operating flexibility may be adversely affected by restrictions
in our indenture and by our leverage. |
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Williams credit agreement 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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Our partnership agreement limits our general partners fiduciary duties to our
unitholders and restricts the remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of fiduciary duty. |
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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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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 Part I of our annual report
on Form 10-K filed March 3, 2006 and Item 1A of Part II of this report. The forward-looking
statements included in this report are only made as of the date of this report and, except as
required by securities laws, 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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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005* |
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2006 |
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2005* |
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Revenues: |
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Storage |
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$ |
5,924 |
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$ |
4,638 |
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$ |
11,029 |
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$ |
9,026 |
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Fractionation |
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2,989 |
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2,307 |
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6,942 |
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4,737 |
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Gathering |
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676 |
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766 |
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1,409 |
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1,646 |
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Product sales: |
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Affiliate |
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2,902 |
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3,679 |
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9,043 |
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6,508 |
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Third-party |
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63 |
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Other |
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901 |
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786 |
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2,032 |
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1,565 |
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Total revenues |
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13,392 |
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12,176 |
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30,455 |
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23,545 |
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Costs and expenses: |
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Operating and maintenance expense (excluding depreciation): |
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Affiliate |
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3,383 |
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2,693 |
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7,383 |
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5,346 |
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Third-party |
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3,660 |
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99 |
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7,351 |
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3,174 |
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Product cost |
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2,919 |
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3,327 |
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8,642 |
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6,062 |
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Depreciation and accretion |
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900 |
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893 |
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1,800 |
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1,798 |
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General and administrative expense: |
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Affiliate |
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1,526 |
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851 |
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2,941 |
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1,538 |
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Third-party |
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595 |
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27 |
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1,128 |
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46 |
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Taxes other than income |
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161 |
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146 |
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368 |
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338 |
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Other expense |
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5 |
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5 |
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Total costs and expenses |
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13,149 |
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8,036 |
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29,618 |
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18,302 |
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Operating income |
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243 |
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4,140 |
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837 |
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5,243 |
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Equity earnings |
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10,264 |
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7,422 |
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22,432 |
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16,133 |
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Interest expense: |
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Affiliate |
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(15 |
) |
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(2,812 |
) |
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(30 |
) |
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(5,617 |
) |
Third-party |
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(633 |
) |
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(170 |
) |
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(854 |
) |
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(369 |
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Interest income |
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110 |
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180 |
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Net income |
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$ |
9,969 |
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$ |
8,580 |
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$ |
22,565 |
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$ |
15,390 |
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Allocation of 2006 net income: |
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Limited partners interest |
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$ |
3,795 |
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$ |
8,693 |
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General partners interest |
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(825 |
) |
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(1,514 |
) |
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Portion applicable to partners interest |
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2,970 |
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7,179 |
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Pre-June 20,
2006 Four Corners equity earnings applicable to general partner
interest |
|
|
6,999 |
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15,386 |
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Net income |
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$ |
9,969 |
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$ |
22,565 |
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Basic and diluted net income per limited partner unit: |
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Common units |
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$ |
0.25 |
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$ |
0.60 |
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|
Subordinated units |
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|
0.25 |
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|
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|
|
|
0.60 |
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Weighted average number of units outstanding: |
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Common units |
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7,923,619 |
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|
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7,467,417 |
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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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Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
3
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, |
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December 31, |
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2006 |
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2005* |
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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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$ |
27,499 |
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$ |
6,839 |
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Accounts receivable: |
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Trade |
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|
1,060 |
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|
1,840 |
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Other |
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|
3,815 |
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|
2,104 |
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Gas purchase contract affiliate |
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5,021 |
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|
5,320 |
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Product imbalance |
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|
1,563 |
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|
760 |
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Prepaid expense |
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|
1,677 |
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|
1,133 |
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Other current assets |
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628 |
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Total current assets |
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41,263 |
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17,996 |
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Investment in Williams Four Corners |
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156,544 |
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|
152,003 |
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Investment in Discovery Producer Services |
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|
148,388 |
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|
150,260 |
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Property, plant and equipment, net |
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68,436 |
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|
67,931 |
|
Gas purchase contract noncurrent affiliate |
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2,377 |
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|
4,754 |
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Other |
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|
2,534 |
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Total assets |
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$ |
419,542 |
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$ |
392,944 |
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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 |
|
$ |
5,477 |
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$ |
3,906 |
|
Affiliate |
|
|
3,197 |
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|
|
4,729 |
|
Deferred revenue |
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|
7,036 |
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|
3,552 |
|
Accrued liabilities |
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|
2,385 |
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|
|
2,373 |
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Total current liabilities |
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|
18,095 |
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|
14,560 |
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Long-term debt |
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|
150,000 |
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|
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Environmental remediation liabilities |
|
|
3,964 |
|
|
|
3,964 |
|
Other noncurrent liabilities |
|
|
766 |
|
|
|
762 |
|
Commitments and contingent liabilities (Note 7) |
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|
|
|
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Partners capital |
|
|
246,717 |
|
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|
373,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities and partners capital |
|
$ |
419,542 |
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|
$ |
392,944 |
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|
|
|
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|
* |
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Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
4
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
|
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|
June 30, |
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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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|
|
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|
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Net income |
|
$ |
22,565 |
|
|
$ |
15,390 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
1,800 |
|
|
|
1,798 |
|
Amortization of gas purchase contract affiliate |
|
|
2,676 |
|
|
|
|
|
Distributions in excess of/(undistributed) equity earnings of: |
|
|
|
|
|
|
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|
Discovery Producer Services |
|
|
1,872 |
|
|
|
(2,903 |
) |
Williams Four Corners |
|
|
(16,304 |
) |
|
|
(13,230 |
) |
Cash provided (used) by changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(930 |
) |
|
|
(265 |
) |
Prepaid expense |
|
|
(544 |
) |
|
|
(422 |
) |
Accounts payable |
|
|
16 |
|
|
|
(1,476 |
) |
Accrued liabilities |
|
|
(6 |
) |
|
|
(492 |
) |
Deferred revenue |
|
|
3,484 |
|
|
|
4,118 |
|
Other, including changes in non-current liabilities |
|
|
(605 |
) |
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,024 |
|
|
|
3,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of equity investment |
|
|
(155,627 |
) |
|
|
|
|
Capital expenditures |
|
|
(2,259 |
) |
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(157,886 |
) |
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of common units |
|
|
227,107 |
|
|
|
|
|
Proceeds from debt issuance |
|
|
150,000 |
|
|
|
|
|
Excess purchase price over contributed basis of equity
investment |
|
|
(204,373 |
) |
|
|
|
|
Distributions paid |
|
|
(10,433 |
) |
|
|
|
|
Payment of debt issuance costs |
|
|
(3,188 |
) |
|
|
|
|
Payment of offering costs |
|
|
(1,863 |
) |
|
|
|
|
General partner contributions |
|
|
4,841 |
|
|
|
|
|
Contributions per omnibus agreement |
|
|
2,431 |
|
|
|
|
|
Changes in advances from affiliates net |
|
|
|
|
|
|
(2,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
164,522 |
|
|
|
(2,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
20,660 |
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
6,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
27,499 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
5
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Limited Partners |
|
|
General |
|
|
Partners |
|
|
|
Common |
|
|
Subordinated |
|
|
Partner |
|
|
Capital |
|
|
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
|
|
Balance January 1, 2006* |
|
$ |
108,526 |
|
|
$ |
108,491 |
|
|
$ |
156,641 |
|
|
$ |
373,658 |
|
Net income |
|
|
4,487 |
|
|
|
4,206 |
|
|
|
13,872 |
|
|
|
22,565 |
|
Cash distributions |
|
|
(5,114 |
) |
|
|
(5,110 |
) |
|
|
(209 |
) |
|
|
(10,433 |
) |
Contributions pursuant to the omnibus agreement |
|
|
|
|
|
|
|
|
|
|
2,431 |
|
|
|
2,431 |
|
Issuance of units to public
(7,590,000 common units) |
|
|
227,107 |
|
|
|
|
|
|
|
|
|
|
|
227,107 |
|
Contributions from general partner |
|
|
|
|
|
|
|
|
|
|
4,841 |
|
|
|
4,841 |
|
Distribution to general partner in exchange for
interest in Williams Four Corners |
|
|
|
|
|
|
|
|
|
|
(360,000 |
) |
|
|
(360,000 |
) |
Adjustment in basis of investment in Williams
Four Corners |
|
|
|
|
|
|
|
|
|
|
(11,763 |
) |
|
|
(11,763 |
) |
Offering costs |
|
|
(1,863 |
) |
|
|
|
|
|
|
|
|
|
|
(1,863 |
) |
Other |
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2006 |
|
$ |
333,317 |
|
|
$ |
107,587 |
|
|
$ |
(194,187 |
) |
|
$ |
246,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Restated as discussed in Note 1 |
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) and Williams Four Corners LLC (Four Corners), in
which we own a 40 percent and 25.1 percent interest, respectively. When we refer to Discovery by
name, we are referring exclusively to its businesses and operations. When we refer to Four Corners
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. Effective with the IPO we owned (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 June 20, 2006, we acquired a 25.1 percent membership interest in Four Corners pursuant to
an agreement with Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field
Services Company, LLC (WFSC), Williams OLLC and our general partner for aggregate consideration
of $360 million (See Note 3-Acquisition of Four Corners). Prior to closing, WFSC contributed to
Four Corners its natural gas gathering, processing and treating assets in the San Juan Basin in New
Mexico and Colorado. Because Four Corners was an affiliate of Williams at the time of the
acquisition, the transaction was between entities under common control, and has been accounted for
at historical cost. Accordingly, our consolidated financial statements and notes have been
restated to reflect the combined historical results of our investment in Four Corners throughout
the periods presented.
We financed this acquisition with a combination of equity and debt. On June 20, 2006, we
issued 6,600,000 common units at a price of $31.25 per unit. Additionally, at the closing, the
underwriters fully exercised their option to purchase 990,000 common units at a price of $31.25 per
unit. This offering yielded net proceeds of $227.1 million after the payment of underwriting
discounts and commissions of $10.1 million, but before the payment of other offering expenses. On
June 20, 2006, we also issued $150 million aggregate principal of unsecured 7.5 percent Senior
Notes due 2011 under a private placement debt agreement (See Note 6-Long-Term Debt). Proceeds from
this issuance totaled $146.8 million (net of $3.2 million of related expenses).
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 and our Prospectus, as filed with the Securities and Exchange
Commission on June 15, 2006 for information regarding our acquisition of Four Corners in June 2006
which is not reflected in the Annual Report on Form 10-K. The accompanying consolidated financial
statements include all normal recurring adjustments that, in the opinion of management, are
necessary to present fairly our financial position at June 30, 2006, and results of operations for
the three months and six months ended June 30, 2006 and 2005 and cash flows for the six months
ended June 30, 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 our Consolidated Financial Statements and accompanying notes. Actual results
could differ from those estimates.
7
Note 2. Recent Accounting Standards
In January 2006, Williams adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment. Accordingly, payroll costs 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. The adoption of this Statement beginning in the
first quarter of 2006 had no material impact on our Consolidated Financial Statements.
Note 3. Acquisition of Four Corners
Because Four Corners was an affiliate of Williams at the time of the acquisition, the
transaction was between entities under common control, and has been accounted for at historical
cost. As a result of recording the Four Corners investment at historical cost while acquiring the
interest in Four Corners at market value, our general partners capital account was decreased by
$204.4 million which represents the difference between the historical cost and market value of Four
Corners. The acquisition had no impact on earnings per unit as pre-acquisition earnings were
allocated to our general partner. The following table summarizes the impact of this acquisition on
our Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Equity earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Four Corners |
|
$ |
2,347 |
|
|
$ |
691 |
|
|
$ |
6,128 |
|
|
$ |
2,903 |
|
Four Corners |
|
|
7,917 |
|
|
|
6,731 |
|
|
|
16,304 |
|
|
|
13,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined equity earnings |
|
$ |
10,264 |
|
|
$ |
7,422 |
|
|
$ |
22,432 |
|
|
$ |
16,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Four Corners |
|
$ |
2,052 |
|
|
$ |
1,849 |
|
|
$ |
6,261 |
|
|
$ |
2,160 |
|
Four Corners |
|
|
7,917 |
|
|
|
6,731 |
|
|
|
16,304 |
|
|
|
13,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined net income |
|
$ |
9,969 |
|
|
$ |
8,580 |
|
|
$ |
22,565 |
|
|
$ |
15,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Note 4. Allocation of Net Income and Distributions
The allocation of net income between our general partner and limited partners for the three
months and six months ended June 30, 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2006 |
|
Allocation to general partner: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,969 |
|
|
$ |
22,565 |
|
Charges direct to general partner: |
|
|
|
|
|
|
|
|
Reimbursable general and administrative costs |
|
|
798 |
|
|
|
1,587 |
|
Core drilling indemnified costs |
|
|
105 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charges direct to general partner |
|
|
903 |
|
|
|
1,692 |
|
|
|
|
|
|
|
|
|
|
Pre-June 20, 2006 Four Corners equity earnings applicable
to general partner interest |
|
|
(6,999 |
) |
|
|
(15,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before direct charges to general partner and
Four Corners equity earnings applicable to general partner interest |
|
|
3,873 |
|
|
|
8,871 |
|
General partners share of net income |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners allocated share of net income before
direct charges and Four Corners equity earnings applicable to general partner interest |
|
|
78 |
|
|
|
178 |
|
Direct charges to general partner |
|
|
(903 |
) |
|
|
(1,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general partners interest |
|
|
(825 |
) |
|
|
(1,514 |
) |
Pre-June 20,
2006 Four Corners equity earnings applicable to general partner
interest |
|
|
6,999 |
|
|
|
15,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to general partner |
|
$ |
6,174 |
|
|
$ |
13,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,969 |
|
|
$ |
22,565 |
|
Net income allocated to general partner |
|
|
6,174 |
|
|
|
13,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to limited partners |
|
$ |
3,795 |
|
|
$ |
8,693 |
|
|
|
|
|
|
|
|
Common and
subordinated unitholders share equally, on a per-unit basis, in the
net income allocated to limited partners for the three and six months
ended June 30, 2006.
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 |
|
2/14/2006 |
|
$ |
0.3500 |
|
|
$ |
2,452 |
|
|
$ |
2,450 |
|
|
$ |
100 |
|
|
$ |
5,002 |
|
5/15/2006 |
|
$ |
0.3800 |
|
|
$ |
2,662 |
|
|
$ |
2,660 |
|
|
$ |
109 |
|
|
$ |
5,431 |
|
8/14/2006 (a) |
|
$ |
0.4250 |
|
|
$ |
6,203 |
|
|
$ |
2,975 |
|
|
$ |
263 |
|
|
$ |
9,441 |
|
|
|
|
|
(a) |
|
The board of directors of our general partner declared this cash distribution on July
27, 2006 to be paid on August 14, 2006 to unitholders of record at the close of business on
August 7, 2006. |
9
Note 5. Equity Investments
We use the equity method to account for our 25.1 percent ownership interest in Four Corners
and our 40 percent ownership interest in Discovery. During the period from January 1, 2006 to June
20, 2006, Four Corners made distributions to Williams associated with Four Corners operations
prior to our acquisition of a 25.1 percent ownership interest. These distributions resulted in a
revised basis used for the calculation of the 25.1 percent interest transferred to us; therefore,
the carrying value of our 25.1 percent interest in Four Corners and partners capital decreased
$11.8 million during that period.
Due to the significance of each investments equity earnings to our results of operations, the
summarized financial position and results of operations for 100 percent of Four Corners and 100
percent of Discovery are presented below (in thousands):
Williams Four Corners LLC
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Current assets |
|
$ |
35,757 |
|
|
$ |
18,832 |
|
Non-current assets |
|
|
24,423 |
|
|
|
25,228 |
|
Property, plant and equipment |
|
|
582,613 |
|
|
|
591,034 |
|
Current liabilities |
|
|
(17,992 |
) |
|
|
(27,978 |
) |
Non-current liabilities |
|
|
(1,118 |
) |
|
|
(1,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners equity |
|
$ |
623,683 |
|
|
$ |
605,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Revenues |
|
$ |
127,794 |
|
|
$ |
108,080 |
|
|
$ |
243,466 |
|
|
$ |
215,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
96,252 |
|
|
|
81,265 |
|
|
|
178,509 |
|
|
|
163,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,542 |
|
|
$ |
26,815 |
|
|
$ |
64,957 |
|
|
$ |
52,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discovery Producer Services LLC
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Current assets |
|
$ |
48,974 |
|
|
$ |
70,525 |
|
Non-current restricted cash and cash equivalents |
|
|
32,509 |
|
|
|
44,559 |
|
Property, plant and equipment |
|
|
354,300 |
|
|
|
344,743 |
|
Current liabilities |
|
|
(20,870 |
) |
|
|
(45,070 |
) |
Non-current liabilities |
|
|
(1,172 |
) |
|
|
(1,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members capital |
|
$ |
413,741 |
|
|
$ |
413,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Revenues |
|
$ |
32,916 |
|
|
$ |
23,025 |
|
|
$ |
95,036 |
|
|
$ |
50,314 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
27,649 |
|
|
|
21,687 |
|
|
|
80,943 |
|
|
|
43,729 |
|
Interest income |
|
|
(601 |
) |
|
|
(389 |
) |
|
|
(1,227 |
) |
|
|
(673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,868 |
|
|
$ |
1,727 |
|
|
$ |
15,320 |
|
|
$ |
7,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Note
6. Credit Facilities and Long-Term Debt
We may borrow up to $75 million under Williams $1.5 billion revolving credit facility, which
is available for borrowings and letters of credit. Borrowings under this facility mature on May 1,
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 June 30, 2006, letters of
credit totaling $107 million had been issued on behalf of Williams by the participating
institutions under this facility and no revolving credit loans were outstanding.
We also have a $20 million revolving credit facility with Williams as the lender. The
facility was amended and restated on August 7, 2006. The facility is available exclusively to fund
working capital borrowings. Borrowings under the amended and restated facility will mature on June
29, 2009. 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. As
of August 7, 2006, we have had no borrowings under the working capital credit facility.
On June 20, 2006, we issued $150.0 million aggregate principal of 7.5 percent senior unsecured
notes in a private debt placement. The maturity date of the notes is June 15, 2011. Interest is
payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15,
2006. Debt issuance costs associated with the notes totaled $3.2 million and are being amortized
over the life of the notes.
In connection with the issuance of the $150 million senior unsecured notes, sold in a private
debt placement to qualified institutional buyers, we entered into a registration rights agreement
with the initial purchasers of the senior notes whereby we agreed to conduct a registered exchange
offer of exchange notes in exchange for the senior notes or cause to become effective a shelf
registration statement providing for resale of the senior notes. If we fail to comply with certain
obligations under the registration rights agreement, we will be required to pay liquidated damages
in the form of additional cash interest to the holders of the senior notes. Upon the occurrence of
such a failure to comply, the interest rate on the senior notes shall be increased by 0.25 percent
per annum during the 90-day period immediately following the occurrence of such failure to comply
and shall increase by 0.25 percent per annum 90 days thereafter until all defaults have been cured,
but in no event shall such aggregate additional interest exceed 0.50 percent per annum.
The terms of the senior notes are governed by an indenture that contains affirmative and
negative covenants that, among other things, limit (1) our ability and the ability of our
subsidiaries to incur liens securing indebtedness, (2) mergers, consolidations and transfers of all or substantially all of our properties or
assets, (3) Williams Partners Finances ability to incur additional indebtedness and (4) Williams
Partners Finances ability to engage in any business not related to obtaining money or arranging
financing for us or our other subsidiaries. We use the equity method of accounting for our
investments in Discovery and Four Corners, and neither will be classified as our subsidiary under
the indenture so long as we continue to own a minority interest in such entity. As a result,
neither Discovery nor Four Corners will be subject to the restrictive covenants in the indenture.
The indenture also contains customary events of default, upon which the trustee or the holders of
the senior notes may declare all outstanding senior notes to be due and payable immediately.
Pursuant to the indenture, we may issue additional notes from time to time. The senior notes
and any additional notes subsequently issued under the indenture, together with any exchange notes,
will be treated as a single class for all purposes under the indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase.
The senior notes are our senior unsecured obligations and rank equally in right of payment
with all of our other senior indebtedness and senior to all of our future indebtedness that is
expressly subordinated in right of payment to the senior notes. The senior notes will not
initially be guaranteed by any of our subsidiaries. In the future in certain instances as set
forth in the indenture, one or more of our subsidiaries may be required to guarantee the senior
notes.
We may redeem the senior notes at our option in whole or in part at any time or from time to
time prior to June 15, 2011, at a redemption price per note equal to the sum of (1) the then
outstanding principal amount thereof, plus (2) accrued and unpaid interest, if any, to the
redemption date, plus (3) a specified make-whole premium (as defined in the indenture).
Additionally, upon a change of control (as defined in the indenture), each holder of the senior
notes will have the right to require us to repurchase all or any part of such holders senior notes
at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid
interest. Except upon a change of control as described in the prior sentence, we are not required
to make mandatory redemption or sinking fund payments with respect to the senior notes or to
repurchase the senior notes at the option of the holders.
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, 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 $5.0 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.
At June 30, 2006, 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.
11
Note 8. Segment Disclosures
Our reportable segments are strategic business units that offer different products and
services. The Gathering and Processing segment includes our ownership interest in Four Corners,
our ownership interest in Discovery and the Carbonate Trend gathering pipeline. The NGL Services
segment includes three integrated NGL storage facilities and a 50 percent undivided interest in a
fractionator near Conway, Kansas. 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 June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
676 |
|
|
$ |
12,716 |
|
|
$ |
13,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
231 |
|
|
|
6,812 |
|
|
|
7,043 |
|
Product cost |
|
|
|
|
|
|
2,919 |
|
|
|
2,919 |
|
Depreciation and accretion |
|
|
300 |
|
|
|
600 |
|
|
|
900 |
|
Direct general and administrative expense |
|
|
7 |
|
|
|
235 |
|
|
|
242 |
|
Taxes other than income |
|
|
|
|
|
|
161 |
|
|
|
161 |
|
Other expense |
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
138 |
|
|
|
1,984 |
|
|
|
2,122 |
|
Equity earnings |
|
|
10,264 |
|
|
|
|
|
|
|
10,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
10,402 |
|
|
$ |
1,984 |
|
|
$ |
12,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
2,122 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(1,293 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
765 |
|
|
$ |
11,411 |
|
|
$ |
12,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
269 |
|
|
|
2,523 |
|
|
|
2,792 |
|
Product cost |
|
|
|
|
|
|
3,327 |
|
|
|
3,327 |
|
Depreciation and accretion |
|
|
300 |
|
|
|
593 |
|
|
|
893 |
|
Direct general and administrative expense |
|
|
|
|
|
|
271 |
|
|
|
271 |
|
Taxes other than income |
|
|
|
|
|
|
146 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
196 |
|
|
|
4,551 |
|
|
|
4,747 |
|
Equity earnings |
|
|
7,422 |
|
|
|
|
|
|
|
7,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
7,618 |
|
|
$ |
4,551 |
|
|
$ |
12,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
4,747 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
4,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering & |
|
|
NGL |
|
|
|
|
|
|
Processing |
|
|
Services |
|
|
Total |
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Six Months Ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
1,409 |
|
|
$ |
29,046 |
|
|
$ |
30,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
473 |
|
|
|
14,261 |
|
|
|
14,734 |
|
Product cost |
|
|
|
|
|
|
8,642 |
|
|
|
8,642 |
|
Depreciation and accretion |
|
|
600 |
|
|
|
1,200 |
|
|
|
1,800 |
|
Direct general and administrative expense |
|
|
9 |
|
|
|
536 |
|
|
|
545 |
|
Taxes other than income |
|
|
|
|
|
|
368 |
|
|
|
368 |
|
Other expense |
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
327 |
|
|
|
4,034 |
|
|
|
4,361 |
|
Equity earnings |
|
|
22,432 |
|
|
|
|
|
|
|
22,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
22,759 |
|
|
$ |
4,034 |
|
|
$ |
26,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
4,361 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(2,410 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(1,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
335,632 |
|
|
$ |
67,211 |
|
|
$ |
402,843 |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets and eliminations |
|
|
|
|
|
|
|
|
|
|
16,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
$ |
419,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
1,645 |
|
|
$ |
21,900 |
|
|
$ |
23,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
376 |
|
|
|
8,144 |
|
|
|
8,520 |
|
Product cost |
|
|
|
|
|
|
6,062 |
|
|
|
6,062 |
|
Depreciation and accretion |
|
|
600 |
|
|
|
1,198 |
|
|
|
1,798 |
|
Direct general and administrative expense |
|
|
|
|
|
|
474 |
|
|
|
474 |
|
Taxes other than income |
|
|
|
|
|
|
338 |
|
|
|
338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
669 |
|
|
|
5,684 |
|
|
|
6,353 |
|
Equity earnings |
|
|
16,133 |
|
|
|
|
|
|
|
16,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
16,802 |
|
|
$ |
5,684 |
|
|
$ |
22,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
6,353 |
|
Allocated general and administrative expense |
|
|
|
|
|
|
|
|
|
|
(1,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
5,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
283,190 |
|
|
$ |
52,703 |
|
|
$ |
335,893 |
|
|
|
|
|
|
|
|
|
|
|
13
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 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 25.1
percent ownership interest in Williams Four Corners LLC (Four Corners), (2) our 40
percent ownership interest in Discovery Producer Services, LLC (Discovery) and (3) the
Carbonate Trend gathering pipeline off the coast of Alabama. The Four Corners system
gathers and processes approximately 37 percent of the natural gas produced in the San
Juan Basin and connects with the five pipeline systems that transport natural gas to end
markets from the basin. 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
Issuance of Common Units. On June 20, 2006, we sold 7,590,000 common units (including 990,000
common units pursuant to the underwriters over-allotment option) in a public offering. We
received net proceeds of approximately $227.1 million from the sale of the common units after
deducting underwriting discounts but before estimated offering expenses. The net proceeds were
used to fund our acquisition of a 25.1 percent interest in Four Corners discussed below and for
general partnership purposes.
Issuance of Senior Unsecured Notes. On June 20, 2006, we issued $150 million aggregate
principal amount of 71/2 percent Senior Unsecured Notes due 2011. We received net proceeds of
approximately $146.8 million from the sale of the senior unsecured notes after deducting initial
purchaser discounts and estimated offering expenses. The net proceeds were used to fund our
acquisition of a 25.1 percent interest in Four Corners discussed below.
Acquisition of Interest in Four Corners. On June 20, 2006, we completed our acquisition of a
25.1 percent ownership interest in Four Corners for aggregate consideration of $360 million ($355.8
million net of our general partners capital contribution related to the issuance of common units
discussed above) that was financed by the issuance of common units and senior unsecured notes
discussed above. Four Corners natural gas gathering, processing and treating assets consist of,
among other things, the following:
|
(i) |
|
a 3,500-mile natural gas gathering system in the San Juan
Basin in New Mexico and Colorado with a capacity of two
billion cubic feet per day; |
|
|
(ii) |
|
the Ignacio natural gas processing plant in Colorado and
the Kutz and Lybrook natural gas processing plants in New
Mexico, which have a combined processing capacity of 760
million cubic feet per day (MMcf/d); and |
14
|
(iii) |
|
the Milagro and Esperanza natural gas treating plants in
New Mexico, which have a combined carbon dioxide treating
capacity of 750 MMcf/d. |
We account for the 25.1 percent interest in Four Corners as an equity investment, and
therefore will not consolidate its financial results. Because Four Corners was an affiliate of
Williams at the time of acquisition, the transaction was between entities under common control and
has been accounted for at historical cost and our Consolidated Financial Statements and Notes to
the Consolidated Financial Statements have been restated to reflect the combined historical
results. Accordingly, all prior period information in the following discussion and analysis of
results of operations has been restated to reflect this change. Please read our prospectus, as
filed with the Securities and Exchange Commission on June 15, 2006, for more information related to
this transaction.
Future Acquisitions. Williams recently announced that it has a goal of completing additional
drop-down transactions involving the transfer of gathering and processing assets to us. However,
Williams has no obligation to sell assets to us, and we have no control as to whether or when
Williams may elect to offer us the opportunity to acquire any such assets. In addition, the
decision by us to acquire any assets from Williams and the terms, including price, of any
significant transaction between Williams and us will be subject to
the approval of the board of directors of our general partner and the conflicts committee of
the board of directors of our general partner.
New Credit Facility with Williams. In May 2006, Williams replaced its $1.275 billion secured
credit facility with a $1.5 billion unsecured credit agreement. The new facility contains
substantially similar terms and covenants as the prior facility. The new credit agreement 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. Please read
Financial Condition and Liquidity Credit Facilities for more information.
15
Results of Operations
Consolidated Overview
The following table and discussion is a summary of our consolidated results of operations for
the three and six months ended June 30, 2006, compared to the three and six months ended June 30,
2005. The results of operations by segment are discussed in further detail following this
consolidated overview discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
% Change |
|
|
Six months ended |
|
|
% Change |
|
|
|
June 30, |
|
|
from |
|
|
June 30, |
|
|
from |
|
|
|
2006 |
|
|
2005 |
|
|
2005(1) |
|
|
2006 |
|
|
2005 |
|
|
2005(1) |
|
|
|
(Thousands) |
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Revenues |
|
$ |
13,392 |
|
|
$ |
12,176 |
|
|
|
+10 |
% |
|
$ |
30,455 |
|
|
$ |
23,545 |
|
|
|
+29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
expense |
|
|
7,043 |
|
|
|
2,792 |
|
|
|
-152 |
% |
|
|
14,734 |
|
|
|
8,520 |
|
|
|
-73 |
% |
Product cost |
|
|
2,919 |
|
|
|
3,327 |
|
|
|
+12 |
% |
|
|
8,642 |
|
|
|
6,062 |
|
|
|
-43 |
% |
Depreciation and accretion |
|
|
900 |
|
|
|
893 |
|
|
|
-1 |
% |
|
|
1,800 |
|
|
|
1,798 |
|
|
|
|
|
General and administrative
expense |
|
|
2,121 |
|
|
|
878 |
|
|
|
-142 |
% |
|
|
4,069 |
|
|
|
1,584 |
|
|
|
-157 |
% |
Taxes other than income |
|
|
161 |
|
|
|
146 |
|
|
|
-10 |
% |
|
|
368 |
|
|
|
338 |
|
|
|
-9 |
% |
Other expense |
|
|
5 |
|
|
|
|
|
|
NM |
|
|
|
5 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
13,149 |
|
|
|
8,036 |
|
|
|
-64 |
% |
|
|
29,618 |
|
|
|
18,302 |
|
|
|
-62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
243 |
|
|
|
4,140 |
|
|
|
-94 |
% |
|
|
837 |
|
|
|
5,243 |
|
|
|
-84 |
% |
Equity earnings Four Corners |
|
|
7,917 |
|
|
|
6,731 |
|
|
|
+18 |
% |
|
|
16,304 |
|
|
|
13,230 |
|
|
|
+23 |
% |
Equity earnings Discovery |
|
|
2,347 |
|
|
|
691 |
|
|
NM |
|
|
|
6,128 |
|
|
|
2,903 |
|
|
|
+111 |
% |
Interest expense |
|
|
(648 |
) |
|
|
(2,982 |
) |
|
|
+78 |
% |
|
|
(884 |
) |
|
|
(5,986 |
) |
|
|
+85 |
% |
Interest income |
|
|
110 |
|
|
|
|
|
|
NM |
|
|
|
180 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,969 |
|
|
$ |
8,580 |
|
|
|
+16 |
% |
|
$ |
22,565 |
|
|
$ |
15,390 |
|
|
|
+47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30, 2006 vs. three months ended June 30, 2005
Revenues increased $1.2 million, or 10 percent, due primarily to higher revenues in our NGL
Services segment reflecting higher fractionation and storage revenues partially offset by decreased
product sales revenues. These increases are discussed in detail in the Results of Operations
NGL Services section.
Operating and maintenance expense increased $4.3 million, or 152 percent, due primarily to our
NGL Services segment where fuel and power costs and cavern workover costs increased and favorable
product imbalance adjustments decreased.
Product cost decreased $0.4 million, or 12 percent, directly related to decreased product
sales discussed above.
General and administrative expense increased $1.2 million, or 142 percent, due primarily to
the increased costs of being a publicly-traded partnership. These costs included $0.5 million for
charges allocated by Williams for accounting, legal, and other support, $0.4 million for audit
fees, tax return preparation, director fees and agency rating fees, and $0.3 million for conflict
committee activity associated with our acquisition of a 25.1 percent interest in Four Corners.
16
Operating income decreased $3.9 million, or 94 percent, due primarily to higher operating and
maintenance expense and higher general and administrative expense, partially offset by higher NGL
Services fractionation and storage revenues.
Equity earnings from Four Corners and Discovery increased $1.2 million and $1.7 million,
respectively. These increases are discussed in detail in the Results of Operations Gathering
and Processing section.
Interest expense decreased $2.3 million, or 78 percent, due to the forgiveness of the advances
from Williams in conjunction with the closing of our 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. In addition, we had 10
days of interest in June 2006 on our $150 million senior unsecured notes issued to finance a
portion of our acquisition of a 25.1 percent interest in Four Corners.
Six months ended June 30, 2006 vs. six months ended June 30, 2005
Revenues increased $6.9 million, or 29 percent, due primarily to higher revenues in our NGL
Services segment reflecting higher fractionation and storage revenues and increased product sales
revenues. These increases are discussed in detail in the Results of Operations NGL Services
section.
Operating and maintenance expense increased $6.2 million, or 73 percent, due primarily to our
NGL Services segment where fuel and power costs and cavern workover costs increased.
Product cost increased $2.6 million, or 43 percent, directly related to increased product
sales discussed above.
General and administrative expense increased $2.5 million, or 157 percent, due primarily to
the increased costs of being a publicly-traded partnership. These costs included $0.8 million for
charges allocated by Williams for accounting, legal, and other support, $0.9 million for audit
fees, tax return preparation, director fees and agency rating fees and $0.5 million for conflict
committee activity associated with our acquisition of a 25.1 percent interest in Four Corners.
Operating income decreased $4.4 million, or 84 percent, due primarily to higher operating and
maintenance expense and general and administrative expense, partially offset by higher NGL
Services fractionation and storage revenues.
Equity earnings from Four Corners and Discovery increased $3.1 million and $3.2 million,
respectively. Both of these increases are discussed in detail in the Results of Operations
Gathering and Processing section.
Interest expense decreased $5.1 million, or 85 percent, due to the forgiveness of the advances
from Williams in conjunction with the closing of our 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. In addition, we had 10
days of interest in June 2006 on our $150 million senior unsecured notes issued to finance a
portion of our acquisition of a 25.1 percent interest in Four Corners.
17
Results of Operations Gathering and Processing
The Gathering and Processing segment includes the Carbonate Trend gathering pipeline, our 25.1
percent ownership interest in Four Corners and our 40 percent ownership interest in Discovery.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Segment revenues |
|
$ |
676 |
|
|
$ |
765 |
|
|
$ |
1,409 |
|
|
$ |
1,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
231 |
|
|
|
269 |
|
|
|
473 |
|
|
|
376 |
|
Depreciation |
|
|
300 |
|
|
|
300 |
|
|
|
600 |
|
|
|
600 |
|
General and administrative expense
direct |
|
|
7 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
538 |
|
|
|
569 |
|
|
|
1,082 |
|
|
|
976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
138 |
|
|
|
196 |
|
|
|
327 |
|
|
|
669 |
|
Equity earnings Four Corners |
|
|
7,917 |
|
|
|
6,731 |
|
|
|
16,304 |
|
|
|
13,230 |
|
Equity earnings Discovery |
|
|
2,347 |
|
|
|
691 |
|
|
|
6,128 |
|
|
|
2,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
10,402 |
|
|
$ |
7,618 |
|
|
$ |
22,759 |
|
|
$ |
16,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbonate Trend
Segment operating income for the three and six months ended June 30, 2006 decreased $0.1
million and $0.3 million, respectively, due to lower gathering revenues caused by declines in
average daily gathered volumes. These volumetric declines are caused by normal reservoir depletion
that was not offset by new sources of throughput.
Four Corners and Discovery are accounted for using the equity method of accounting. As such,
our interest in Four Corners and Discoverys net operating results are reflected as equity earnings
in the Consolidated Statements of Income. Due to the significance of Four Corners and Discoverys
equity earnings to our results of operations, the following discussion addresses in greater detail
the results of operations for 100 percent of both Four Corners and Discovery.
18
Four Corners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Revenues |
|
$ |
127,794 |
|
|
$ |
108,080 |
|
|
$ |
243,466 |
|
|
$ |
215,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses, including interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product cost and shrink replacement |
|
|
41,800 |
|
|
|
36,418 |
|
|
|
80,077 |
|
|
|
72,852 |
|
Operating and maintenance expense |
|
|
34,525 |
|
|
|
26,735 |
|
|
|
63,620 |
|
|
|
52,381 |
|
Depreciation and amortization |
|
|
9,952 |
|
|
|
9,708 |
|
|
|
19,766 |
|
|
|
19,434 |
|
General and administrative expense |
|
|
8,056 |
|
|
|
6,529 |
|
|
|
14,694 |
|
|
|
14,309 |
|
Taxes other than income |
|
|
1,596 |
|
|
|
1,748 |
|
|
|
3,672 |
|
|
|
3,933 |
|
Other (income) expense, net |
|
|
323 |
|
|
|
127 |
|
|
|
(3,320 |
) |
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses, including interest |
|
|
96,252 |
|
|
|
81,265 |
|
|
|
178,509 |
|
|
|
163,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,542 |
|
|
$ |
26,815 |
|
|
$ |
64,957 |
|
|
$ |
52,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williams Partners 25.1 percent interest
Equity earnings per our Consolidated
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,917 |
|
|
$ |
6,731 |
|
|
$ |
16,304 |
|
|
$ |
13,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 vs. three months ended June 30, 2005
Revenues increased $19.7 million, or 18 percent, due to $18.0 million higher product sales and
$1.8 million higher gathering and processing revenue. Product sales revenues increased due
primarily to:
|
|
|
$9.1 million increase related to a 33 percent increase in average NGL sales prices
realized on sales of NGLs that Four Corners received under its processing contracts. This
increase resulted from general increases in market prices for these commodities between the
two periods; |
|
|
|
|
$3.5 million increase related to a 14 percent increase in NGL volumes that Four Corners
received under its processing contracts. This increase was related primarily to the impact
of equipment outages in the second quarter of 2005; |
|
|
|
|
$2.7 million of higher condensate sales primarily resulting from the recognition of two
additional months of condensate revenue in 2006. Prior to 2006, condensate revenue had
been recognized two months in arrears. As a result of more timely
sales information now made available from third parties, we have
recorded these on a current basis and thus have fully recognized this
activity through June 30, 2006. Our management concluded that
the effect of recoding the additional two months was not material to
our results for 2006 or prior periods or our trend of earnings; and |
|
|
|
|
$1.9 million higher sales of NGLs on behalf of third parties. These NGL sales are made
on behalf of producers who have Four Corners market their NGLs for a fee in accordance with
their contracts. This increase was offset by higher associated product costs of $1.9
million discussed below. |
Fee-based gathering and processing revenues increased $1.8 million due primarily to $2.9
million higher revenue from a five percent increase in the average gathering and processing rates,
partially offset by $1.1 million lower revenue from a three percent decrease in gathering and
processing volumes. The average gathering and processing rates increased in 2006 largely as a
result of contractual escalation clauses. Most of Four Corners gathering contracts include
escalation clauses that provide for an annual escalation based on an inflation-sensitive index. One
significant gathering agreement is escalated based on changes in the average price of natural gas.
19
Product cost and shrink replacement increased $5.4 million, or 15 percent, due primarily to:
|
|
|
$3.2 million increase from 28 percent higher volumetric shrink requirements from Four
Corners keep-whole processing contracts; and |
|
|
|
|
$1.9 million increase from third party customers who elected to have Four Corners market
their NGLs. This increase is offset by the corresponding increase in product sales
discussed above. |
Operating and maintenance expense increased $7.8 million, or 29 percent, due primarily to:
|
|
|
$3.0 million increase in non-shrink natural gas purchases due primarily to higher
volumetric gathering fuel requirements; |
|
|
|
|
$3.7 million increase in materials and supplies and outsides services expense related
primarily to increased compression and maintenance costs; and |
|
|
|
|
$1.1 million other operating and maintenance expense increases including $0.8 million
caused by labor and benefits increases associated primarily with the addition of new
personnel. |
General and administrative expense increased $1.5 million, or 23 percent, due primarily to an
increase in allocated general and administrative expense from Williams.
Other expense, net increased $0.2 million due primarily to losses from the sale of surplus
equipment.
Net income increased $4.7 million, or 18 percent, due primarily to $12.6 million from higher
processing margins caused by increased per-unit margins on higher NGL sales volumes and $1.8
million of higher fee-based gathering and processing revenues. These increases were partially
offset by other expense increases including $7.8 million of higher operating and maintenance
expense.
Six months ended June 30, 2006 vs. six months ended June 30, 2005
Revenues increased $27.5 million, or 13 percent, due to $21.1 million higher product sales and
$6.5 million higher gathering and processing revenues. Product sales revenues increased due
primarily to:
|
|
|
$12.2 million increase related to a 21 percent increase in average NGL sales prices
realized on sales of NGLs which Four Corners received under its processing contracts. This
increase resulted from general increases in market prices for these commodities between the
two periods; |
|
|
|
|
$2.8 million increase related to a five percent increase in NGL volumes which Four
Corners received under its processing contracts. This increase was related primarily to
equipment outages in the second quarter of 2005; |
|
|
|
|
$3.6 million of higher condensate sales, which includes $1.9 million resulting from the
recognition of two additional months of condensate revenue in 2006. Prior to 2006,
condensate revenue had been recognized two months in arrears. As a result of more timely
sales information now made available from third parties, we have
recorded these on a current basis and thus have fully recognized this
activity through June 30, 2006. Our management concluded that
the effect of recoding the additional two months was not material to
our results for 2006 or prior periods or our trend of earnings; and |
|
|
|
|
$2.3 million of higher LNG sales related primarily to an increase in volumes sold. |
Fee-based gathering and processing revenues increased $6.5 million due primarily to $7.3
million higher revenue from a six percent increase in the average gathering and processing rates,
partially offset by $0.9 million lower revenue from a one percent decrease in gathering and
processing volumes. The average gathering and processing rates increased in 2006 largely as a
result of contractual escalation clauses. Most of Four Corners gathering contracts include
escalation clauses that provide for an annual escalation based on an inflation-sensitive index. One
significant gathering agreement is escalated based on changes in the average price of natural gas.
20
Product cost and shrink replacement increased $7.2 million, or 10 percent, due primarily to:
|
|
|
$3.5 million increase from 12 percent higher average natural gas prices; |
|
|
|
|
$1.6 million increase from six percent higher volumetric shrink requirements from Four
Corners keep-whole processing contracts; and |
|
|
|
|
$1.8 million increase related to increased condensate and LNG sales. |
Operating and maintenance expense increased $11.2 million, or 21 percent, due primarily to:
|
|
|
$5.2 million increase in non-shrink natural gas purchases due primarily to higher
volumetric gathering fuel requirements and higher system losses; |
|
|
|
|
$4.2 million increase in materials and supplies and outsides services expense related
primarily to increased compression and maintenance costs; and |
|
|
|
|
$1.8 million other operating and maintenance expense increases including $1.2 million
caused by labor and benefits increases associated primarily with the addition of new
personnel. |
Other (income) expense, net improved $3.7 million due primarily to a $3.3 million gain
recognized on the sale of the LaMaquina treating facility in the first quarter of 2006. The
LaMaquina treating facility was shut down in 2002, and impairments were recorded in 2003 and 2004.
This gain was partially offset by losses from the sale of surplus equipment in the second quarter
of 2006.
Net income increased $12.2 million, or 23 percent, due primarily to $13.8 million from higher
processing margins resulting from increased per-unit margins on higher NGL sales volumes, $6.5
million of higher fee-based gathering and processing revenues and the $3.7 million improvement in
other (income) expense, net. These increases were partially offset by $11.2 million higher
operating and maintenance expense.
21
Discovery Producer Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Revenues |
|
$ |
32,916 |
|
|
$ |
23,025 |
|
|
$ |
95,036 |
|
|
$ |
50,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses, including interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product cost and shrink replacement |
|
|
15,898 |
|
|
|
9,711 |
|
|
|
57,448 |
|
|
|
20,835 |
|
Operating and maintenance expense |
|
|
5,232 |
|
|
|
5,118 |
|
|
|
10,054 |
|
|
|
9,111 |
|
Depreciation and accretion |
|
|
6,374 |
|
|
|
6,126 |
|
|
|
12,753 |
|
|
|
12,239 |
|
General and administrative expense |
|
|
544 |
|
|
|
518 |
|
|
|
1,234 |
|
|
|
1,018 |
|
Interest income |
|
|
(601 |
) |
|
|
(389 |
) |
|
|
(1,227 |
) |
|
|
(673 |
) |
Other (income) expense, net |
|
|
(399 |
) |
|
|
214 |
|
|
|
(546 |
) |
|
|
526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses, including interest |
|
|
27,048 |
|
|
|
21,298 |
|
|
|
79,716 |
|
|
|
43,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,868 |
|
|
$ |
1,727 |
|
|
$ |
15,320 |
|
|
$ |
7,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williams Partners 40 percent interest
Equity earnings per our Consolidated
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,347 |
|
|
$ |
691 |
|
|
$ |
6,128 |
|
|
$ |
2,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 vs. three months ended June 30, 2005
Revenues increased $9.9 million, or 43 percent, due primarily to higher NGL product sales from
the marketing of customers NGLs. In addition, the Tennessee Gas Pipeline (TGP) and Texas
Eastern Transmission Company (TETCO) open season agreements, which began in the last quarter of
2005, contributed $0.8 million in revenues for the second quarter of 2006. The TGP and TETCO open
seasons provided outlets for natural gas that was stranded following damage to third-party
facilities during hurricanes Katrina and Rita. Throughput volumes under these open season
agreements continued at reduced rates during the second quarter of 2006 and may completely cease in
the third quarter. The significant components of the revenue increase are addressed more fully
below.
|
|
|
Product sales increased $8.7 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 $8.7 million
discussed below. |
|
|
|
|
Product sales also increased approximately $1.0 million as a result of an 11 percent
higher average sales prices. |
|
|
|
|
Transportation revenue increased $0.9 million, including $0.4 million due to additional
fee-based revenues related to the TGP and TETCO open season agreements discussed above. |
|
|
|
|
Processing and fractionation revenue increased $0.4 million in additional fee-based
revenues related to the TGP and TETCO open season agreements. |
Partially offsetting these increases was a $0.7 million decrease in gathering revenues due to
declines in both gathered volumes and rates.
Product cost and shrink replacement increased $6.2 million, or 64 percent, due primarily to
$8.7 million of product purchase costs for the processing customers who elected to have Discovery
market their NGLs.
22
Depreciation and accretion expense increased $0.2 million, or four percent, due primarily to
the market expansion project placed in service in June 2005.
Interest income increased $0.2 million due primarily to interest earned on funds restricted
for use in the construction of the Tahiti pipeline lateral expansion project.
Other (income) expense, net improved $0.6 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 $4.1 million, due primarily to $3.4 million higher gross processing
margins caused by very favorable processing margins as compared to the prior year, revenues from
the TGP and TETCO open seasons which contributed approximately $0.8 million and other income of
$0.6 million, partially offset by $0.7 million lower gathering revenues.
Six months ended June 30, 2006 vs. six months ended June 30, 2005
Revenues increased $44.7 million, or 89 percent, due primarily to higher NGL product sales
from the marketing of customers NGLs. In addition, TGP and TETCO open seasons, which began in the
last quarter of 2005, accounted for $10.7 million in revenues. The significant components of the
revenue increase are addressed more fully below.
|
|
|
Product sales increased $45.5 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 $45.5 million
discussed below. |
|
|
|
|
Processing and fractionation revenues increased $5.7 million, including $7.0 million in
additional fee-based revenues related to the TGP and TETCO open seasons discussed above and
$0.9 million from increased volumes from the Front Runner prospect that came on-line in the
first quarter of 2005, partially offset by a $2.2 million decrease in by-pass revenues and
other throughput declines. |
|
|
|
|
Transportation revenues increased $3.0 million, including $3.7 million in additional
fee-based revenues related to the TGP and TETCO open seasons discussed above and $0.9
million in rate increases, partially offset by $1.6 million related to other throughput
declines. |
Partially offsetting these increases were the following:
|
|
|
Product sales decreased approximately $8.9 million as a result of 37 percent lower NGL
sales volumes following Hurricanes Katrina and Rita, partially offset by a $3.2 million
increase associated with 21 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 $2.8 million due primarily to a $1.4 million deficiency
payment received in the first quarter of 2005 and a $1.4 million decrease related to a
decline in both gathered volumes and rates. |
Product cost and shrink replacement increased $36.6 million, or 176 percent, due primarily to
$45.5 million higher product purchase costs for the processing customers who elected to have
Discovery market their NGLs and $1.1 million from higher average per-unit natural gas prices,
partially offset by $8.0 million lower costs related to reduced processing volumes in 2006.
Operating and maintenance expense increased $0.9 million, or 10 percent, due primarily to
higher fuel costs related to increased processing throughput volumes primarily for open season
processing in the first quarter of 2006.
23
Depreciation and accretion expense increased $0.5 million, or four percent, due primarily to
the market expansion project placed in service in June 2005.
General and administrative expense increased $0.2 million, or 21 percent, due primarily to an
increase in the management fee paid to Williams related to Discoverys market expansion project and
additions of other facilities.
Interest income increased $0.6 million due primarily to interest earned on funds restricted
for use in the construction of the Tahiti pipeline lateral expansion project.
Other (income) expense, net improved $1.1 million due primarily to a $1.4 million 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 $8.1 million, or 111 percent, due primarily to the TGP and TETCO open
seasons which contributed approximately $10.7 million, $2.3 million higher gross processing
margins, and $1.1 million other income, partially offset by $2.8 million lower gathering revenues
and $1.1 million higher operating and maintenance and general and administrative expense.
Outlook
Carbonate Trend
During the remainder of 2006, recompletions and workovers may not offset production declines
from the wells currently connected to the Carbonate Trend pipeline.
Four Corners
Throughput volumes on Four Corners gathering, processing and treating system are an important
component of maximizing its profitability. Throughput volumes from existing wells connected to its
pipelines will naturally decline over time. Accordingly, to maintain or increase throughput levels
Four Corners must continually obtain new supplies of natural gas.
|
|
|
We anticipate that sustained drilling activity, expansion opportunities and production
enhancement activities by producers should be sufficient to substantially offset the
historical decline or possibly increase gathered and processed volumes. |
|
|
|
|
Four Corners has realized above average margins at its gas processing plants in recent
years because of volatile natural gas and crude oil markets. We expect per-unit margins in
2006 will remain strong in relation to historical averages. Additionally, we anticipate
that Four Corners contract mix and commodity management activities will continue to allow
it to realize greater margins relative to industry averages. |
|
|
|
|
We anticipate that operating costs, excluding compression, will increase in 2006.
Compression cost increases are dependent upon the extent and amount of additional
compression needed to meet the needs of Four Corners customers and the cost at which
compression can be purchased, leased and operated. Additionally, we have made unbudgeted
expenditures in 2006 that are expected to have a positive long-term economic impact. |
|
|
|
|
We anticipate that the natural gas fuel cost associated with the operation of the
Milagro treating plant will increase due to the expiration, in October 2006, of a natural
gas purchase contract with Williams that contained pricing that has recently been below
market. |
24
Discovery
Throughput volumes on Discoverys pipeline system are an important component of maximizing its
profitability. Pipeline throughput volumes from existing wells connected to its 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, Discovery
must continually obtain new supplies of natural gas.
|
|
|
The Tahiti pipeline lateral expansion project is currently on schedule. We anticipate
the pipe will be installed by May 2007 and initial throughput will begin in April 2008. |
|
|
|
|
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 ATP Oil & Gas Corporations Gomez
prospect, currently the rate is approximately 30,000 MMBtu/d. ATP has announced that it
expects the rate to increase from this level. |
|
|
|
|
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. |
|
|
|
|
During the second quarter of 2006, Discovery began receiving additional production at
South Timbalier 41, and is currently flowing approximately 100,000 MMBtu/d. |
25
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 |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Segment revenues |
|
$ |
12,716 |
|
|
$ |
11,411 |
|
|
$ |
29,046 |
|
|
$ |
21,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
6,812 |
|
|
|
2,523 |
|
|
|
14,261 |
|
|
|
8,144 |
|
Product cost |
|
|
2,919 |
|
|
|
3,327 |
|
|
|
8,642 |
|
|
|
6,062 |
|
Depreciation and accretion |
|
|
600 |
|
|
|
593 |
|
|
|
1,200 |
|
|
|
1,198 |
|
General and administrative expense direct |
|
|
235 |
|
|
|
271 |
|
|
|
536 |
|
|
|
474 |
|
Taxes other than income |
|
|
161 |
|
|
|
146 |
|
|
|
368 |
|
|
|
338 |
|
Other expense |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
10,732 |
|
|
|
6,860 |
|
|
|
25,012 |
|
|
|
16,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
1,984 |
|
|
$ |
4,551 |
|
|
$ |
4,034 |
|
|
$ |
5,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 vs. three months ended June 30, 2005
Segment revenues increased $1.3 million, or 11 percent, due primarily to higher storage and
fractionation revenues offset by a decrease in product sales. The significant components of the
revenue fluctuations are addressed more fully below.
|
|
|
Storage revenues increased $1.3 million due primarily to higher average storage
volumes from additional short-term storage leases caused by the reduced demand for
propane due to the warm 2006 winter. |
|
|
|
|
Fractionation revenues increased $0.7 million due primarily to a 15 percent increase
in the average fractionation rate related to the pass through to customers of increased
fuel and power costs, and 21 percent higher fractionation volumes. |
|
|
|
|
Product sales were $0.8 million lower due primarily to lower sales volumes. This
decrease was offset by a related decrease in product cost discussed below. |
Operating and maintenance expense increased $4.3 million, or 170 percent, due primarily to:
|
|
|
$1.8 million increase in outside services costs caused primarily by increased
storage cavern workovers related to our ongoing efforts to comply with KDHE regulatory
requirements and fractionator maintenance; |
|
|
|
|
The impact of a $1.5 million gain recognized in 2005 during the routine emptying of
caverns; and |
|
|
|
|
$0.8 million increase in fuel and power costs necessary to operate the fractionator
due to higher volumes and rates. |
Product cost decreased $0.4 million, or 12 percent, directly related to decreased product
sales volumes discussed above.
26
Segment profit decreased $2.6 million, or 56 percent, due primarily to $4.3 million higher
operating and maintenance expense, partially offset by the $2.0 million higher storage and
fractionation revenues.
Six months ended June 30, 2006 vs. six months ended June 30, 2005
Segment revenues increased $7.1 million, or 33 percent, due primarily to higher product sales
and fractionation and storage revenues. The significant components of the revenue increase are
addressed more fully below.
|
|
|
Product sales were $2.5 million higher due primarily to higher NGL sales prices.
These product sales revenues were largely offset by the related increase in product
cost. |
|
|
|
|
Fractionation revenues increased $2.2 million due primarily to a 24 percent increase
in the average fractionation rate related to the pass through to customers of increased
fuel and power costs and 19 percent higher volumes. |
|
|
|
|
Storage revenues increased $2.0 million due primarily to higher average storage
volumes from additional short-term storage leases caused by the reduced demand for
propane due to the warm 2006 winter. |
|
|
|
|
Other revenues increased $0.4 million due to increased butane conversion revenue and
increased terminalling revenue. |
Operating and maintenance expense increased $6.1 million, or 75 percent, due primarily to:
|
|
|
$3.2 million increase in outside services costs caused primarily by increased
storage cavern workovers and fractionator maintenance; and |
|
|
|
|
$2.2 million higher fuel and power costs necessary to operate the fractionator due
to higher volumes and rates. |
Product cost increased $2.6 million, or 43 percent, directly related to increased product
sales volumes discussed above.
Segment profit decreased $1.7 million, or 29 percent, due primarily to $6.1 million higher
operating and maintenance expense, partially offset by the $4.2 million higher storage and
fractionation revenues.
Outlook
|
|
|
For the third quarter of 2006, we anticipate that fractionation volumes will average
approximately 40,000 barrels per day, which is in-line with average fractionation volumes
for the second quarter of 2006. We expect to experience a slight decrease in throughput
due to high temperatures that negatively impact the plant capacity. 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 will generate revenues equal to last years record levels. There is still potential
for additional short-term storage leases in the fourth quarter of 2006. |
|
|
|
|
We continue to execute a large number of storage cavern workovers and wellhead
modifications to comply with KDHE regulatory requirements. We expect outside service costs
to continue at current levels throughout 2006 and 2007 to ensure that we meet the
regulatory compliance requirement to complete cavern workovers before the end of 2008. For
the third quarter of 2006, we anticipate having two cavern workover rigs in operation and
are making good progress on cavern workovers. |
27
Financial Condition and Liquidity
Outlook for 2006
We believe we have 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 for the remainder of 2006 will include:
|
|
|
Cash and cash equivalents; |
|
|
|
|
Cash generated from operations; |
|
|
|
|
Cash distributions from Four Corners and Discovery; |
|
|
|
|
Capital contributions from Williams pursuant to an omnibus agreement; and |
|
|
|
|
Credit facilities, as needed. |
Our cash and cash equivalents increased $16.5 million on June 20, 2006 upon the completion of
our acquisition of a 25.1 percent ownership interest in Four Corners. This amount represents the
net proceeds above the purchase price generated by our offering of common units and the issuance
of senior unsecured notes in a private debt placement. We have retained this cash to be used for
general partnership purposes.
We anticipate our more significant capital requirements for the remainder of 2006 to be:
|
|
|
Maintenance capital expenditures for our Conway assets; |
|
|
|
|
Capital contributions to Discovery for its capital expenditure program; |
|
|
|
|
Quarterly distributions to our unitholders; and |
|
|
|
|
Carbonate Trend overburden restoration. |
Four Corners
Historically, Four Corners sources of liquidity included cash generated from operations and
advances from Williams. Four Corners limited liability company agreement, as amended effective
June 20, 2006, provides for the distribution of available cash on at least a quarterly basis. We
expect future cash requirements for Four Corners relating to working capital, maintenance capital
expenditures and quarterly cash distributions to its members to be funded from cash flows
internally generated from its operations. Growth or expansion capital expenditures for Four Corners
will be funded either by cash calls to its members, which require unanimous consent of the members
except in limited circumstances, or from internally generated funds.
Discovery
Discovery expects to make quarterly distributions of available cash to its members. On July
31, 2006, pursuant to the terms of its limited liability company agreement, Discovery made an $10.0
million distribution of available cash to its members. Our 40 percent share of this distribution
was $4.0 million.
In 2005, Discovery sustained damages from Hurricane Katrina. The estimated total cost for
hurricane-related repairs is approximately $6.9 million, including $5.5 million in reimbursable
expense 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
June 30, 2006 was $5.5 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.
28
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 $1.0 million for our 40 percent share of Discoverys costs for marshland
restoration and repair or replacement of Paradis emission-control flare. As of June 30,
2006 we have received $0.4 million from Williams for these items. |
|
|
|
|
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. For the six months ended
June 30, 2006 we have received $1.6 million in credits. |
|
|
|
|
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. |
|
|
|
|
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 $1.5 billion revolving credit facility, which
is available for borrowings and letters of credit. Borrowings under this facility mature on May 1,
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 June 30, 2006, letters of
credit totaling $107 million had been issued on behalf of Williams by the participating
institutions under this facility and no revolving credit loans were outstanding.
We also have a $20 million revolving credit facility with Williams as the lender. The
facility was amended and restated on August 7, 2006. The facility is available exclusively to fund
working capital borrowings. Borrowings under the amended and restated facility will mature on June
29, 2009. 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. As
of August 7, 2006, we have had no borrowings under the working capital credit facility.
On June 20, 2006 Four Corners entered into a $20 million loan agreement with Williams as the
lender. The loan agreement is revolving in nature and is available to fund working capital
borrowings and for other purposes. Borrowings under the loan agreement will mature on June 20,
2009.
Senior Unsecured Notes
In connection with the issuance of the $150 million senior unsecured notes, sold in a private
debt placement to qualified institutional buyers, we entered into a registration rights agreement
with the initial purchasers of the senior notes whereby we agreed to conduct a registered exchange
offer of exchange notes in exchange for the senior notes or cause to become effective a shelf
registration statement providing for resale of the senior notes. If we fail to comply with certain
obligations under the registration rights agreement, we will be required to pay liquidated damages
in the form of additional cash interest to the holders of the senior notes. Upon the occurrence of
such a failure to comply, the interest rate on the senior notes shall be increased by 0.25 percent
per annum during the 90-day period immediately following the occurrence of such failure to comply
and shall increase by 0.25 percent per annum 90 days thereafter until all defaults have been cured,
but in no event shall such aggregate additional interest exceed 0.50 percent per annum.
The terms of the senior notes are governed by an indenture that contains affirmative and
negative covenants that, among other things, limit (1) our ability and the ability of our
subsidiaries to incur liens securing indebtedness,
29
(2) mergers, consolidations and transfers of all or substantially all of our properties or
assets, (3) Williams Partners Finances ability to incur additional indebtedness and (4) Williams
Partners Finances ability to engage in any business not related to obtaining money or arranging
financing for us or our other subsidiaries. We use the equity method of accounting for our
investments in Discovery and Four Corners, and neither will be classified as our subsidiary under
the indenture so long as we continue to own a minority interest in such entity. As a result,
neither Discovery nor Four Corners will be subject to the restrictive covenants in the indenture.
The indenture also contains customary events of default, upon which the trustee or the holders of
the senior notes may declare all outstanding senior notes to be due and payable immediately.
Pursuant to the indenture, we may issue additional notes from time to time. The senior notes
and any additional notes subsequently issued under the indenture, together with any exchange notes,
will be treated as a single class for all purposes under the indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase.
The senior notes are our senior unsecured obligations and rank equally in right of payment
with all of our other senior indebtedness and senior to all of our future indebtedness that is
expressly subordinated in right of payment to the senior notes. The senior notes will not
initially be guaranteed by any of our subsidiaries. In the future in certain instances as set
forth in the indenture, one or more of our subsidiaries may be required to guarantee the senior
notes.
The senior notes bear interest at 71/2 percent per annum payable semi-annually in arrears on
June 15 and December 15 of each year, starting on December 15, 2006. We will make each interest
payment to the holders of record on the immediately preceding June 1 and December 1. The senior
notes mature on June 15, 2011.
We may redeem the senior notes at our option in whole or in part at any time or from time to
time prior to June 15, 2011, at a redemption price per note equal to the sum of (1) the then
outstanding principal amount thereof, plus (2) accrued and unpaid interest, if any, to the
redemption date, plus (3) a specified make-whole premium (as defined in the indenture).
Additionally, upon a change of control (as defined in the indenture), each holder of the senior
notes will have the right to require us to repurchase all or any part of such holders senior notes
at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid
interest. Except upon a change of control as described in the prior sentence, we are not required
to make mandatory redemption or sinking fund payments with respect to the senior notes or to
repurchase the senior notes at the option of the holders.
Capital Requirements
The natural gas gathering, treating, 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
$6.8 million for 2006. Of this amount, approximately $1.2 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 a limitation of $14.0 million on environmental and related
indemnities. We expect to fund the remainder of these expenditures through cash flows from
operations. These expenditures relate primarily to cavern workovers and wellhead modifications
necessary to comply with KDHE regulations.
We estimate that maintenance capital expenditures for 100 percent of Four Corners will be
approximately $18.7 million for 2006. We expect Four Corners will fund its maintenance capital
expenditures through its cash flows from operations. These expenditures relate primarily to well
connections necessary to connect new sources of
30
throughput for the Four Corners system. We expect these new sources of throughput will
substantially offset the natural decline of existing sources.
We estimate that expansion capital expenditures for 100 percent of Four Corners will be
approximately $7.2 million for 2006. We expect Four Corners will fund its expansion capital
expenditures through its cash flows from operations.
We estimate that maintenance capital expenditures for 100 percent of Discovery will be
approximately $4.3 million for 2006. We expect Discovery will fund its maintenance capital
expenditures through its cash flows from operations. These maintenance capital expenditures relate
to numerous smaller projects.
We estimate that expansion capital expenditures for 100 percent of Discovery will be
approximately $42.7 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 June 30, 2006, our deferred storage revenue is $7.0 million.
Cash Distributions to Unitholders
We paid a quarterly distribution of $5.0 million ($0.35 per unit) to common and subordinated
unitholders and the general partner interest on February 14, 2006. We paid a quarterly
distribution of $5.4 million ($0.38 per unit) to common and subordinated unitholders and the
general partner interest on May 15, 2006. We intend to make a quarterly distribution each quarter
during 2006, including $9.4 million ($0.425 per unit) on August 14, 2006 to the general partner
interest and common and subordinated unitholders of record at the close of business on August 7,
2006. This distribution will include an additional payment to the general partner of approximately
$74,316 of incentive distributions.
Carbonate Trend Overburden Restoration
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. We will
fund these repairs with cash flows from operations and then seek reimbursement from insurance. 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.
31
Results of Operations Cash Flows
Williams Partners L.P.
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
|
|
(Thousands) |
Net cash provided by operating activities |
|
$ |
14,024 |
|
|
$ |
3,677 |
|
Net cash used by investing activities |
|
$ |
(157,886 |
) |
|
$ |
(679 |
) |
Net cash provided (used) by financing activities |
|
$ |
164,522 |
|
|
$ |
(2,998 |
) |
The $10.3 million increase in net cash provided by operating activities for the first six
months of 2006 as compared to the first six months of 2005 is due primarily to:
|
|
|
$8.0 million increase in distributed earnings from Discovery; and |
|
|
|
|
$5.3 million in lower interest expense due primarily to the forgiveness by Williams of
advances to us at the closing of our IPO. |
These increases in net cash provided by operating activities were partially offset by a $3.0
million decrease in operating income, adjusted for non-cash expenses.
Net cash used by investing activities includes the purchase of our 25.1 percent interest in
Four Corners on June 20, 2006. Because Four Corners was an affiliate of Williams at the time of
the acquisition, the transaction was between entities under common control, and has been accounted
for at historical cost. Therefore the amount reflected as cash used by investing activities for
this purchase represents the historical cost of the investment to Williams. Additionally, 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 provided by financing activities in 2006 includes:
|
|
|
$225.2 million in proceeds from the sale of 7,590,000 common units, net of related
offering costs, and |
|
|
|
|
$146.8 million in proceeds from the issuance of debt, net of related issuance costs, to
finance our purchase of a 25.1 percent interest in Four Corners; |
|
|
|
|
$204.4 million excess purchase price over contributed basis of equity investment
distributed to Williams; |
|
|
|
|
$10.4 million of distributions paid to unitholders; |
|
|
|
|
$4.8 million of contributions from our general partner to maintain its ownership
interest following the issuance of the additional common units discussed above; and |
|
|
|
|
$2.4 million in indemnifications and reimbursements received from Williams pursuant to
the omnibus agreement. |
Net cash used by financing activities in the first six months of 2005 represent net cash flows
passed through to Williams, prior to the IPO on August 23, 2005, under its cash management program.
Four Corners and Discovery
As previously disclosed, cash distributions from Four Corners and Discovery will be a
significant source of our liquidity. Due to the significance of Four Corners and 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 Four Corners and Discovery for the six months
ended June 30, 2006 and 2005.
32
Four Corners 100 percent
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
64,957 |
|
|
$ |
52,710 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
19,766 |
|
|
|
19,434 |
|
(Gain)/loss on sale of equipment |
|
|
(2,779 |
) |
|
|
|
|
Cash used by changes in assets and liabilities |
|
|
(22,472 |
) |
|
|
(9,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
59,472 |
|
|
|
62,674 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(15,998 |
) |
|
|
(7,501 |
) |
Proceeds from sales of equipment |
|
|
7,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(8,568 |
) |
|
|
(7,501 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Distributions to Williams |
|
|
(46,863 |
) |
|
|
(55,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(46,863 |
) |
|
|
(55,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
4,041 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities decreased $3.2 million in 2006 as compared to 2005
due to a $9.8 million increase in operating income, adjusted for non-cash items, offset by a $13.0
million increase in cash used for working capital. The increase in cash used for working capital
was caused by an increase in affiliate receivables in the second quarter of 2006 as a result of our
transition from Williams cash management program to a stand-alone cash management program.
Net cash used by investing activities increased $1.1 million in 2006 as compared to 2005 due
to $8.5 million higher capital expenditures in 2006 related primarily to capital expenditures for
well connections, partially offset by $7.4 million of proceeds received from the sale of the
LaMaquina treating facility in the first quarter of 2006.
Net cash used by financing activities in the first six months of 2006 and 2005 represents net
cash flows passed through to Williams under its cash management program.
33
Discovery 100 percent
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,320 |
|
|
$ |
7,258 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
12,753 |
|
|
|
12,239 |
|
Cash provided (used) by changes in assets and liabilities |
|
|
3,200 |
|
|
|
(2,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
31,273 |
|
|
|
17,217 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(22,260 |
) |
|
|
(7,434 |
) |
Change in accounts payable capital expenditures |
|
|
1,163 |
|
|
|
(9,874 |
) |
Decrease in restricted cash |
|
|
12,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(9,047 |
) |
|
|
(17,308 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Contributions from members |
|
|
7,383 |
|
|
|
|
|
Distributions to members |
|
|
(22,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(15,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
7,011 |
|
|
$ |
(91 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities increased $14.1 million in 2006 as compared to 2005
due primarily to an $8.6 million increase in operating income, adjusted for non-cash expenses, and
a $5.5 million increase in cash from changes in working capital. The $5.5 million increase in cash
from changes in working capital resulted primarily from the payment, in the first quarter of 2005,
of an extra month of liquid sales invoices outstanding at the end of 2004.
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. The $12.1 million decrease in restricted cash is the amount used for this project
from the funds previously escrowed. Capital expenditures in 2005 related primarily to Discoverys
market expansion project for the purchase of leased compressors at the Larose processing plant.
Net cash used by financing activities in 2006 includes:
|
|
|
$22.6 million of distributions paid to members, including two quarterly distributions
totaling $20.0 million; and |
|
|
|
|
$7.4 million of capital contributions from members other than us for the construction of
the Tahiti pipeline lateral expansion. |
Contractual Obligations
On June 20, 2006, we issued $150.0 million aggregate principal of 7.5 percent senior unsecured
notes in a private debt placement. The maturity date of the notes is June 15, 2011. Interest is
payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15,
2006.
34
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.
Interest Rate Risk
Our long-term senior unsecured notes have a fixed 7.5 percent interest rate. Any borrowings
under our credit agreements would be at a variable interest rate and would expose us to the risk of
increasing interest rates. During May 2006, we entered into two forward-starting interest rate
swap agreements to protect against changes in the interest rates between the time of the execution
of the interest rate swap agreements and the pricing of our senior unsecured notes offering. We
terminated these swap agreements in June 2006.
Commodity Price Risk
Certain of Four Corners and 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 Four
Corners and 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, Four Corners, 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 15d-15(e) of the Securities Exchange Act of 1934)
(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 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.
35
There were no changes in our Internal Controls over financial reporting that occurred during
the fiscal quarter ended June 30, 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 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 1A. Risk Factors
Limited partner interests are inherently different from the capital stock of a corporation,
although many of the business risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. The following new or modified risk factors,
most of which relate to our recent acquisition of a 25.1 percent interest in Williams Four Corners
LLC and our recent issuance of $150 million aggregate principal amount of senior unsecured notes,
should be read in conjunction with the risk factors disclosed in Part I, Item 1A, Risk Factors,
in our annual report on Form 10-K for the year ended December 31, 2005. In addition to the
information contained elsewhere in this quarterly report, the following risk factors, along with
the risk factors contained in our annual report on Form 10-K for the year ended December 31, 2005,
should be carefully considered by each unitholder in evaluating an investment in us. If any of the
following risks or those risks included in our Form 10-K were actually to occur, our business,
results of operations and financial condition could be materially adversely affected. In that
case, we might not be able to pay distributions on our common units and the trading price of our
common units could decline and unitholders could lose all or part of their investment.
Risks Inherent in Our Business
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.
We may not have sufficient available cash each quarter to pay the minimum quarterly
distribution. The amount of cash we can distribute on our common units principally depends upon
the amount of cash we generate from our operations, which will fluctuate from quarter to quarter
based on, among other things:
|
|
|
the prices we obtain for our services; |
|
|
|
|
the prices of, level of production of, and demand for, natural gas and NGLs; |
|
|
|
|
the volumes of natural gas we gather, transport and process and the volumes of NGLs we
fractionate and store; |
|
|
|
|
the level of our operating costs, including payments to our general partner; and |
|
|
|
|
prevailing economic conditions. |
In addition, the actual amount of cash we will have available for distribution will depend on
other factors such as:
|
|
|
the level of capital expenditures we make; |
|
|
|
|
the restrictions contained in our and Williams debt agreements and our debt service requirements; |
36
|
|
|
the cost of acquisitions, if any; |
|
|
|
|
fluctuations in our working capital needs; |
|
|
|
|
our ability to borrow for working capital or other purposes; |
|
|
|
|
the amount, if any, of cash reserves established by our general partner; |
|
|
|
|
the amount of cash that each of Discovery and Four Corners distributes to us; and |
|
|
|
|
reimbursement payments to us by, and credits from, Williams under the omnibus agreement. |
Our unitholders should be aware that the amount of cash we have available for distribution
depends primarily on our cash flow, including cash reserves and working capital or other
borrowings, and not solely on profitability, which will be affected by non-cash items. As a
result, we may make cash distributions during periods when we record losses, and we may not make
cash distributions during periods when we record net income.
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. Any decrease in
supplies of natural gas could adversely affect our business and operating results.
Our and Discoverys pipelines receive natural gas directly from offshore producers. The Four
Corners gathering system receives natural gas directly from producers in the San Juan Basin. The
production from existing wells connected to these pipelines and the Four Corners gathering system
will naturally decline over time, which means that our cash flows associated with these wells will
also decline over time. We do not produce an aggregate reserve report on a regular basis or
regularly obtain or update independent reserve evaluations. The amount of natural gas reserves
underlying these wells may be less than we anticipate, and the rate at which production will
decline from these reserves may be greater than we anticipate. Accordingly, to maintain or
increase throughput levels on these pipelines and the utilization rate of Discoverys natural gas
processing plant and fractionator and Four Corners processing plants and treating plants, we,
Discovery and Four Corners must continually connect new supplies of natural gas. The primary
factors affecting our ability to connect new supplies of natural gas and attract new customers to
our pipelines include: (1) the level of successful drilling activity near these pipelines; (2) our
ability to compete for volumes from successful new wells and existing wells connected to third
parties; and (3) our, Discoverys and Four Corners ability to successfully complete lateral
expansion projects to connect to new wells.
Neither we nor Four Corners has any current significant lateral expansion projects planned and
Discovery has only one currently planned significant lateral expansion project. Discovery signed
definitive agreements with Chevron, Shell and Statoil to construct an approximate 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. Initial
production is expected in April 2008.
The level of drilling activity in the fields served by our and Discoverys pipelines and Four
Corners gathering system is dependent on economic and business factors beyond our control. The
primary factors that impact drilling decisions are oil and natural gas prices. A sustained decline
in oil and natural gas prices could result in a decrease in exploration and development activities
in these fields, which would lead to reduced throughput levels on our pipelines and gathering
system. Other factors that impact production decisions include producers capital budget
limitations, the ability of producers to obtain necessary drilling and other governmental permits,
the availability of qualified personnel and equipment, the quality of drilling prospects in the
area and regulatory changes. Because of these factors, even if new oil or natural gas reserves are
discovered in areas served by our pipelines and gathering system, producers may choose not to
develop those reserves. If we were not able to connect new supplies of natural gas to replace the
natural decline in volumes from existing wells, due to reductions in drilling activity,
competition, or difficulties in completing lateral expansion projects to connect to new supplies of
natural gas, throughput on our pipelines and gathering system and the utilization rates of
Discoverys natural gas processing plant and fractionator
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and Four Corners processing plants and treating plants would decline, which could have a
material adverse effect on our business, results of operations, financial condition and ability to
make cash distributions to our unitholders.
Lower natural gas and oil prices could adversely affect our fractionation and storage businesses.
Lower natural gas and oil prices could result in a decline in the production of natural gas
and NGLs resulting in reduced throughput on our pipelines and Four Corners gathering system. Any
such decline would reduce the amount of NGLs we fractionate and store, which could have a material
adverse effect on our business, results of operations, financial condition and our ability to make
cash distributions to our unitholders.
In general terms, the prices of natural gas, NGLs and other hydrocarbon products fluctuate in
response to changes in supply, changes in demand, market uncertainty and a variety of additional
factors that are impossible to control. These factors include:
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worldwide economic conditions; |
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weather conditions and seasonal trends; |
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the levels of domestic production and consumer demand; |
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the availability of imported natural gas and NGLs; |
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the availability of transportation systems with adequate capacity; |
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the price and availability of alternative fuels; |
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the effect of energy conservation measures; |
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the nature and extent of governmental regulation and taxation; and |
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the anticipated future prices of natural gas, NGLs and other commodities. |
Our processing, fractionation and storage businesses could be affected by any decrease in NGL
prices or a change in NGL prices relative to the price of natural gas.
Lower NGL prices would reduce the revenues we generate from the sale of NGLs for our own
account. Under certain gas processing contracts, referred to as percent-of-liquids and keep
whole contracts, Discovery and Four Corners both receive NGLs removed from the natural gas stream
during processing. Discovery and Four Corners can then choose to either fractionate and sell the
NGLs or to sell the NGLs directly. In addition, product optimization at our Conway fractionator
generally leaves us with excess propane, an NGL, which we sell. We also sell excess storage
volumes resulting from measurement variances at our Conway storage facilities.
The relationship between natural gas prices and NGL prices may also affect our profitability.
When natural gas prices are low relative to NGL prices, it is more profitable for Discovery, Four
Corners and their customers to process natural gas. When natural gas prices are high relative to
NGL prices, it is less profitable to process natural gas both because of the higher value of
natural gas and of the increased cost (principally that of natural gas as a feedstock and a fuel)
of separating the mixed NGLs from the natural gas. As a result, Discovery and Four Corners may
experience periods in which higher natural gas prices reduce the volumes of NGLs removed at their
processing plants, which would reduce their margins. Finally, higher natural gas prices relative
to NGL prices could also reduce volumes of gas processed generally, reducing the volumes of mixed
NGLs available for fractionation.
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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 NGLs. The loss of any of these key customers or producers could result
in a decline in our revenues and cash available to pay distributions.
We rely on a limited number of customers for a significant portion of our revenues. Our three
largest customers for the year ended December 31, 2005, other than a subsidiary of Williams that
markets NGLs for Conway, were BP Products North America, Inc., SemStream, L.P. and Enterprise
Products Partners, all customers of our Conway facilities. These customers accounted for
approximately 45 percent of our revenues for the year ended December 31, 2005. Four Corners three
largest customers for the year ended December 31, 2005, other than a subsidiary of Williams that
markets NGLs for Four Corners and Williams Production Company, LLC, were ConocoPhillips, Burlington
Resources and BP America Production Company, which accounted for approximately 30 percent of Four
Corners revenues for the year ended December 31, 2005. On March 31, 2006, ConocoPhillips acquired
Burlington Resources.
In addition, although some of these customers are subject to long-term contracts, we may be
unable to negotiate extensions or replacements of these contracts, on favorable terms, if at all.
For example, Four Corners is in active negotiations with several customers to renew gathering,
processing and treating contracts that are in evergreen status and that represent approximately 14
percent of Four Corners revenues for the year ended December 31, 2005. The negotiations may not
result in any extended commitments from these customers. The loss of all or even a portion of the
volumes of natural gas or NGLs, as applicable, supplied by these customers, as a result of
competition or otherwise, could have a material adverse effect on our business, results of
operations, financial condition and our ability to make cash distributions to our unitholders,
unless we are able to acquire comparable volumes from other sources.
If third-party pipelines and other facilities interconnected to our pipelines and facilities become
unavailable to transport natural gas and NGLs or to treat natural gas, our revenues and cash
available to pay distributions could be adversely affected.
We depend upon third party pipelines and other facilities that provide delivery options to and
from our pipelines and facilities for the benefit of our customers. For example, MAPL delivers its
customers mixed NGLs to our Conway fractionator and provides access to multiple end markets for
NGL products of our storage customers. If MAPL were to become temporarily or permanently
unavailable for any reason, or if throughput were reduced because of testing, line repair, damage
to pipelines, reduced operating pressures, lack of capacity or other causes, our customers would be
unable to store or deliver NGL products and we would be unable to receive deliveries of mixed NGLs
at our Conway fractionator. This would have an immediate adverse impact on our ability to enter
into short-term storage contracts and our ability to fractionate sufficient volumes of mixed NGLs
at Conway.
MAPL also provides the only liquids pipeline access to multiple end markets for NGL products
that are recovered from Four Corners processing plants. If MAPL were to become temporarily or
permanently unavailable for any reason, or if throughput were reduced because of testing, line
repair, damage to pipelines, reduced operating pressures, lack of capacity or other causes, Four
Corners would be unable to deliver a substantial portion of the NGLs recovered at its processing
plants. This would have an immediate impact on Four Corners ability to sell or deliver NGL
products recovered at its processing plants. In addition, the five pipeline systems that move
natural gas to end markets from the San Juan Basin connect to Four Corners treating and processing
facilities, including the El Paso Natural Gas, Transwestern, Williams Northwest Pipeline, PNM and
Southern Trails systems. Some of these natural gas pipeline systems have minimal excess capacity.
If any of these pipeline systems were to become temporarily or permanently unavailable for any
reason, or if throughput were reduced because of testing, line repair, damage to pipelines, reduced
operating pressures, lack of capacity or other causes, Four Corners customers would be unable to
deliver natural gas to end markets. This would reduce the volumes of natural gas processed or
treated at Four Corners treating and processing facilities. Either of such events could
materially and adversely affect our business results of operations, financial condition and ability
to make distributions to our unitholders.
As another example, Shells Yellowhammer sour gas treating facility in Coden, Alabama is the
only sour gas treating facility currently connected to our Carbonate Trend pipeline. Natural gas
produced from the Carbonate Trend area must pass through a Shell-owned pipeline and Shells
Yellowhammer sour gas treating facility before delivery to end markets. If the Shell-owned
pipeline or the Yellowhammer facility were to become unavailable for
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current or future volumes of natural gas delivered to it through the Carbonate Trend pipeline
due to repairs, damages to the facility, lack of capacity or any other reason, our Carbonate Trend
customers would be unable to continue shipping natural gas to end markets until either repairs are
made to Yellowhammer or a new interconnection is made with another treating facility. Since we
generally receive revenues for volumes shipped on the Carbonate Trend pipeline, this would reduce
our revenues.
Any temporary or permanent interruption in operations at MAPL, Yellowhammer or any other third
party pipelines or facilities that would cause a material reduction in volumes transported on our
pipelines or our gathering systems or processed, fractionated, treated or stored at our facilities
could have a material adverse effect on our business, results of operations, financial condition
and our ability to make cash distributions to our unitholders.
Our future financial and operating flexibility may be adversely affected by restrictions in our
indenture and by our leverage.
In June 2006, we issued $150 million of senior unsecured notes in a private placement, which
caused our leverage to increase. Our total outstanding debt was $150 million as of June 30, 2006,
representing approximately 38 percent of our total book capitalization. Immediately prior to the
private debt placement of our senior unsecured notes, we had no outstanding debt.
Our debt service obligations and restrictive covenants in the indenture governing our
outstanding notes could have important consequences. For example, they could:
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make it more difficult for us to satisfy our obligations with respect to our outstanding
notes and our other indebtedness, which could in turn result in an event of default on such
other indebtedness or our outstanding notes; |
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impair our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes; |
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adversely affect our ability to pay cash distributions to our unitholders; |
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diminish our ability to withstand a downturn in our business or the economy generally; |
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require us to dedicate a substantial portion of our cash flow from operations to debt
service payments, thereby reducing the availability of cash for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes; |
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limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate; and |
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place us at a competitive disadvantage compared to our competitors that have
proportionately less debt. |
Our ability to repay, extend or refinance our existing debt obligations and to obtain future
credit will depend primarily on our operating performance, which will be affected by general
economic, financial, competitive, legislative, regulatory, business and other factors, many of
which are beyond our control. If we are unable to meet our debt service obligations, we could be
forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets.
We may be unable to obtain financing or sell assets on satisfactory terms, or at all.
We are not prohibited under the indenture from incurring additional indebtedness. Our
incurrence of significant additional indebtedness would exacerbate the negative consequences
mentioned above, and could adversely affect our ability to repay our outstanding notes.
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Neither Four Corners nor Discovery is prohibited from incurring indebtedness, which may affect our
ability to make distributions to our unitholders.
Neither Four Corners nor Discovery is prohibited by the terms of their respective limited
liability company agreements from incurring indebtedness. In June 2006, Four Corners entered into
a $20 million revolving credit facility with Williams as the lender. As of June 30, 2006, there
were no outstanding borrowings under the Four Corners revolving credit facility. If either Four
Corners or Discovery were to incur significant amounts of indebtedness, it may inhibit their
ability to make distributions to us. An inability by either Four Corners or Discovery to make
distributions to us would materially and adversely affect our ability to make distributions to our
unitholders because we expect distributions we receive from Discovery and Four Corners to represent
a significant portion of the cash we distribute to our unitholders.
We do not own all of the interests in the Conway fractionator, in Discovery or in Four Corners,
which could adversely affect our ability to operate and control these assets in a manner beneficial
to us.
Because we do not wholly own the Conway fractionator, Discovery or Four Corners, we may have
limited flexibility to control the operation of, dispose of, encumber or receive cash from these
assets. Any future disagreements with the other co-owners of these assets could adversely affect
our ability to respond to changing economic or industry conditions, which could have a material
adverse effect on our business, results of operations, financial condition and ability to make cash
distributions to our unitholders.
Discovery and Four Corners may reduce their cash distributions to us in some situations.
Discoverys limited liability company agreement provides that Discovery will distribute its
available cash to its members on a quarterly basis. Four Corners limited liability company
agreement provides that Four Corners will distribute its available cash to its members at least
quarterly. Both Discoverys and Four Corners available cash includes cash on hand less any
reserves that may be appropriate for operating its business. As a result, reserves established by
Discovery and Four Corners, including those for working capital, will reduce the amount of
available cash. The amount of Discoverys and Four Corners quarterly distributions, including the
amount of cash reserves not distributed, are to be determined by the members of their respective
management committees representing a majority-in-interest in such entity.
We own a 40 percent interest in Discovery and an affiliate of Williams owns a 20 percent
interest in Discovery. In addition, to the extent Discovery requires working capital in excess of
applicable reserves, the Williams member must make working capital advances to Discovery of up to
the amount of Discoverys two most recent prior quarterly distributions of available cash, but
Discovery must repay any such advances before it can make future distributions to its members. As
a result, the repayment of advances could reduce the amount of cash distributions we would
otherwise receive from Discovery. In addition, if the Williams member cannot advance working
capital to Discovery as described above, Discoverys business and financial condition may be
adversely affected.
We do not operate all of our assets. This reliance on others to operate our assets and to provide
other services could adversely affect our business and operating results.
Williams operates all of our assets, other than the Carbonate Trend pipeline, which is
operated by Chevron, and our Conway fractionator and storage facilities, which we operate.
Williams also operates the major plants and all of the plant compression for Four Corners, while
Hanover operates approximately 85 percent of Four Corners field compression. We have a limited
ability to control our operations or the associated costs of these operations. The success of
these operations is therefore dependent upon a number of factors that are outside our control,
including the competence and financial resources of the operators.
We also rely on Williams for services necessary for us to be able to conduct our business.
Williams may outsource some or all of these services to third parties, and a failure of all or part
of Williams relationships with its outsourcing providers could lead to delays in or interruptions
of these services. Our reliance on Williams as an operator and on Williams outsourcing
relationships, our reliance on Chevron, Four Corners reliance on Hanover
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and Williams and our limited ability to control certain costs could have a material adverse
effect on our business, results of operations, financial condition and ability to make cash
distributions to our unitholders.
Our industry is highly competitive, and increased competitive pressure could adversely affect our
business and operating results.
We compete with similar enterprises in our respective areas of operation. Some of our
competitors are large oil, natural gas and petrochemical companies that have greater financial
resources and access to supplies of natural gas and NGLs than we do.
Discovery competes with other natural gas gathering and transportation and processing
facilities and other NGL fractionation facilities located in south Louisiana, offshore in the Gulf
of Mexico and along the Gulf Coast, including the Manta Ray/Nautilus systems, the Trunkline
pipeline and the Venice Gathering System and the processing and fractionation facilities that are
connected to these pipelines.
Our Conway fractionation facility competes for volumes of mixed NGLs with fractionators
located in each of Hutchinson, Kansas, Medford, Oklahoma, and Bushton, Kansas owned by ONEOK
Partners, L.P., the other joint owners of the Conway fractionation facility and, to a lesser
extent, with fractionation facilities on the Gulf Coast. In April 2006, ONEOK, Inc. transferred
its entire gathering and processing, natural gas liquids, and pipelines and storage segments to
ONEOK Partners, L.P. (formerly known as Northern Border Partners, L.P.), or ONEOK. Our Conway
storage facilities compete with ONEOK-owned storage facilities in Bushton, Kansas and in Conway,
Kansas, an NCRA-owned facility in Conway, Kansas, a ONEOK-owned facility in Hutchinson, Kansas and
an Enterprise Products Partners-owned facility in Hutchinson, Kansas and, to a lesser extent, with
storage facilities on the Gulf Coast and in Canada.
Four Corners competes with other natural gas gathering, processing and treating facilities in
the San Juan Basin, including Enterprise, Red Cedar and TEPPCO. In addition, our customers who are
significant producers of gas or consumers of NGLs may develop their own gathering, processing,
fractionation and storage facilities in lieu of using ours.
Also, competitors may establish new connections with pipeline systems that would create
additional competition for services we provide to our customers. For example, other than the
producer gathering lines that connect to the Carbonate Trend pipeline, there are no other sour gas
pipelines near our Carbonate Trend pipeline, but the producers that are currently our customers
could construct or commission such pipelines in the future.
Our ability to renew or replace existing contracts with our customers at rates sufficient to
maintain current revenues and cash flows could be adversely affected by the activities of our
competitors. All of these competitive pressures could have a material adverse effect on our
business, results of operations, financial condition and ability to make cash distributions to our
unitholders.
The only pipeline that provides NGL transportation capacity in the San Juan Basin has filed at FERC
to increase certain of its tariff rates. If the requested increase is granted, Four Corners
operating costs would increase, which could have an adverse effect on our business and operating
results.
MAPL, the only pipeline in the San Juan Basin that provides NGL transportation capacity, has
filed at FERC to increase certain of its tariff rates. If FERC grants this request to increase
those tariff rates, we estimate that Four Corners cost of transporting NGLs to certain markets
would increase by approximately $1.5 million per year, which could have an adverse effect on our
business, results of operations, financial condition and ability to make cash distributions to us.
Pipeline integrity programs and repairs may impose significant costs and liabilities on us.
In December 2003, the U.S. Department of Transportation issued a final rule requiring pipeline
operators to develop integrity management programs for gas transportation pipelines located where a
leak or rupture could do the most harm in high consequence areas. The final rule requires
operators to:
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perform ongoing assessments of pipeline integrity; |
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identify and characterize applicable threats to pipeline segments that could impact a
high consequence area; |
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improve data collection, integration and analysis; |
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repair and remediate the pipeline as necessary; and |
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implement preventive and mitigating actions. |
The final rule incorporates the requirements of the Pipeline Safety Improvement Act of 2002. The
final rule became effective on January 14, 2004. In response to this new Department of
Transportation rule, we have initiated pipeline integrity testing programs that are intended to
assess pipeline integrity. In addition, we have voluntarily initiated a testing program to assess
the integrity of the brine pipelines of our Conway storage facilities. In 2005, Conway replaced
two sections of brine systems at a cost of $0.2 million. This work is in anticipation of integrity
testing scheduled to begin in the third quarter of 2006. The results of these testing programs
could cause us to incur significant capital and operating expenditures in response to any repair,
remediation, preventative or mitigating actions that are determined to be necessary.
Additionally, the transportation of sour gas in our Carbonate Trend pipeline necessitates a
corrosion control program in order to protect the integrity of the pipeline and prolong its life.
Our corrosion control program may not be successful and the sour gas could compromise pipeline
integrity. Our inability to reduce corrosion on our Carbonate Trend pipeline to acceptable levels
could significantly reduce the service life of the pipeline and could have a material adverse
effect on our business, results of operations, financial condition and ability to make cash
distributions to our unitholders.
The State of New Mexico recently enacted rule changes that permit the pressure in gathering
pipelines to be reduced below atmospheric levels. In response to these rule changes, Four Corners
may reduce the pressures in its gathering lines below atmospheric levels. With Four Corners
concurrence, producers may also reduce pressures below atmospheric levels prior to delivery to Four
Corners. All of the gathering lines owned by Four Corners in the San Juan Basin are made of steel.
Reduced pressures below atmospheric levels may introduce increasing amounts of oxygen into those
pipelines, which could cause an acceleration of the corrosion.
We do not own all of the land on which our pipelines and facilities are located, which could
disrupt our operations.
We do not own all of the land on which our pipelines and facilities have been constructed, and
we are therefore subject to the possibility of increased costs to retain necessary land use. We
obtain the rights to construct and operate our pipelines and gathering systems on land owned by
third parties and governmental agencies for a specific period of time. For example, portions of
the Four Corners gathering system are located on Native American right-of-ways. Four Corners is
currently in discussions with the Jicarilla Apache Nation regarding rights-of-way that expire at
the end of 2006 for a small segment of the gathering system. Our loss of these rights, through our
inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our
business, results of operations and financial condition and our ability to make cash distributions
to our unitholders.
Our operations are subject to governmental laws and regulations relating to the protection of the
environment, which may expose us to significant costs and liabilities.
The risk of substantial environmental costs and liabilities is inherent in natural gas
gathering, transportation and processing, and in the fractionation and storage of NGLs, and we may
incur substantial environmental costs and liabilities in the performance of these types of
operations. Our operations are subject to stringent federal, state and local laws and regulations
relating to protection of the public and the environment. These laws include, for example:
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the Federal Clean Air Act and analogous state laws, which impose obligations related to
air emissions; |
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the Federal Water Pollution Control Act of 1972, as renamed and amended as the Clean
Water Act, or CWA, and analogous state laws, which regulate discharge of wastewaters from
our facilities to state and federal waters; |
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the federal Comprehensive Environmental Response, Compensation, and Liability Act, also
known as CERCLA or the Superfund law, and analogous state laws that regulate the cleanup of
hazardous substances that may have been released at properties currently or previously
owned or operated by us or locations to which we have sent wastes for disposal; and |
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the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous
state laws that impose requirements for the handling and discharge of solid and hazardous
waste from our facilities. |
Various governmental authorities, including the U.S. Environmental Protection Agency, or EPA,
have the power to enforce compliance with these laws and regulations and the permits issued under
them, and violators are subject to administrative, civil and criminal penalties, including civil
fines, injunctions or both. Joint and several, strict liability may be incurred without regard to
fault under CERCLA, RCRA and analogous state laws for the remediation of contaminated areas.
There is inherent risk of the incurrence of environmental costs and liabilities in our
business due to our handling of the products we gather, transport, process, fractionate and store,
air emissions related to our operations, historical industry operations, waste disposal practices,
and the prior use of flow meters containing mercury, some of which may be material. Private
parties, including the owners of properties through which our pipeline and gathering systems pass,
may have the right to pursue legal actions to enforce compliance as well as to seek damages for
non-compliance with environmental laws and regulations or for personal injury or property damage
arising from our operations. Some sites we operate are located near current or former third party
hydrocarbon storage and processing operations and there is a risk that contamination has migrated
from those sites to ours. In addition, increasingly strict laws, regulations and enforcement
policies could significantly increase our compliance costs and the cost of any remediation that may
become necessary, some of which may be material.
For example, the Kansas Department of Health and Environment, or the KDHE, regulates the
storage of NGLs and natural gas in the state of Kansas. This agency also regulates the
construction, operation and closure of brine ponds associated with such storage facilities. In
response to a significant incident at a third party facility, the KDHE recently promulgated more
stringent regulations regarding safety and integrity of brine ponds and storage caverns. These
regulations are subject to interpretation and the costs associated with compliance with these
regulations could vary significantly depending upon the interpretation of these regulations.
Additionally, incidents similar to the incident at a third party facility that prompted the recent
KDHE regulations could prompt the issuance of even stricter regulations.
There is increasing pressure in New Mexico from environmental groups and area residents to
reduce the noise from midstream operations through regulatory means. If these groups are
successful, Four Corners may have to make capital expenditures to muffle noise from its facilities
or to ensure adequate barriers or distance to mitigate noise concerns.
Our insurance may not cover all environmental risks and costs or may not provide sufficient
coverage in the event an environmental claim is made against us. Our business may be adversely
affected by increased costs due to stricter pollution control requirements or liabilities resulting
from non-compliance with required operating or other regulatory permits. Also, new environmental
regulations might adversely affect our products and activities, including processing,
fractionation, storage and transportation, as well as waste management and air emissions. Federal
and state agencies also could impose additional safety requirements, any of which could affect our
profitability.
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The natural gas gathering operations in the San Juan Basin may be subjected to regulation by the
state of New Mexico, which could negatively affect Four Corners.
The New Mexico state legislature has called for hearings to take place to examine the
regulation of natural gas gathering systems in the state. It is unclear when these hearings will
occur or if these hearings will occur at all, but they could result in gathering regulation that
would affect the fees that Four Corners could collect for gathering services. This type of
regulation could adversely impact Four Corners revenues and cash flow.
Risks Inherent in an Investment in Us
We have a holding company structure in which our subsidiaries conduct our operations and own our
operating assets, which may affect our ability to make payments on our outstanding notes and
distributions on our common units.
We have a holding company structure, and our subsidiaries conduct all of our operations and
own all of our operating assets. Williams Partners L.P. has no significant assets other than the
ownership interests in its subsidiaries. As a result, our ability to make required payments on our
outstanding notes and distributions on our common units depends on the performance of our
subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to make
distributions to us may be restricted by, among other things, applicable state partnership and
limited liability company laws and other laws and regulations. If we are unable to obtain the
funds necessary to pay the principal amount at maturity of our outstanding notes, or to repurchase
our outstanding notes upon the occurrence of a change of control, or make distributions on our
common units we may be required to adopt one or more alternatives, such as a refinancing of our
outstanding notes or borrowing funds to make distributions on our common units. We cannot assure
our notes holders that we would be able to refinance our outstanding notes or that we will be able
to borrow funds to make distributions on our common units.
Our common units have a limited trading history and a limited trading volume compared to other
units representing limited partner interests.
Our common units are traded publicly on the New York Stock Exchange under the symbol WPZ.
However, our common units have a limited trading history and daily trading volumes for our common
units are, and may continue to be, relatively small compared to many other units representing
limited partner interests quoted on the New York Stock Exchange.
The market price of our common units may also be influenced by many factors, some of which are
beyond our control, including:
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our quarterly distributions; |
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our quarterly or annual earnings or those of other companies in our industry; |
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loss of a large customer; |
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announcements by us or our competitors of significant contracts or acquisitions; |
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changes in accounting standards, policies, guidance, interpretations or principles; |
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general economic conditions; |
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the failure of securities analysts to cover our common units or changes in financial
estimates by analysts; |
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future sales of our common units; and |
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the other factors described in the Risk Factors set forth in our annual report on
Form 10-K for the year ended December 31, 2005 and our quarterly reports on Form 10-Q. |
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Item 5. Other Information
On August 7, 2006, our general partner amended our Amended and Restated Agreement of Limited
Partnership (the Partnership Agreement). The description of our Partnership Agreement in our
Registration Statement on Form S-1 (File No. 333-124517) (the Registration Statement) and the
form of the agreement attached as Appendix A to the Registration Statement in connection with our
IPO contemplated that during the subordination period holders of common and subordinated units
would receive distributions on a pro rata basis with respect to distributions of the excess of the
First Target Distribution over the Minimum Quarterly Distribution for a Quarter. However, as a
result of scriveners error, words were included in the version of the Partnership Agreement filed
after the initial public offering that created an ambiguity as to whether or not subordinated
unitholders share the excess pro rata with common unitholders. The amendment to the Partnership
Agreement (the Amendment) corrects the scriveners error to effect the intent expressed in the
Registration Statement and is retroactive to the date of the adoption of the Partnership Agreement
on August 23, 2005. The description of the Amendment in this paragraph is qualified in its
entirety by reference to the complete terms of the Amendment, which is filed as Exhibit 3.2 to this
quarterly report on
Form 10-Q. Capitalized terms used in this paragraph without definition are
used as defined in the Partnership Agreement, as amended.
On August 7, 2006, we amended and restated the Working Capital Loan Agreement, dated August
23, 2005, under which Williams is the lender and we are the borrower (the Working Capital Loan
Agreement), so that it is substantially identical to the Loan Agreement, dated June 20, 2006,
between Williams, as lender, and Williams Four Corners LLC, as borrower, the terms and provisions
of which were approved by the conflicts committee of the board of directors of our general partner.
The amendment shortens the borrowing notice period from three days to same day, and extends the
maturity date from May 3, 2007 to June 20, 2009. Please read Managements Discussion and Analysis
of Financial Condition and Results of OperationsFinancial Condition and LiquidityCredit
Facilities for information on other terms of the Working Capital Loan Agreement. The description
of the amendment in this paragraph is qualified in its entirety by reference to the complete terms
of the Amended and Restated Working Capital Loan Agreement, which is filed as Exhibit 10.7 to this
quarterly report on Form 10-Q.
Relationships
Williams indirectly owns 100 percent of our general partner, which allows it to control us.
Williams also directly or indirectly owns an approximate 37.4 percent limited partner interest in
us. Further, certain officers and directors of our general partner serve as officers and/or
directors of Williams. We are a party to an Omnibus Agreement with Williams and its affiliates
that governs our relationship with them regarding the following matters: (i) reimbursement of
certain general and administrative expenses; (ii) indemnification for certain environmental
liabilities, tax liabilities and right-of-way defects; (iii) reimbursement for certain
expenditures; and (iv) a license for the use of certain software and intellectual property.
Further, we and Williams are both party to a $1.5 billion credit agreement with certain lenders
whereby we are permitted to borrow up to $75 million for general partnership purposes, including
acquisitions.
46
Item 6. Exhibits
The exhibits listed below are filed or furnished as part of this report:
|
|
|
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 3.1
|
|
Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit
3.1 to Williams Partners L.P.s registration statement on Form S-1 (File No.
333-124517) filed with the SEC on May 2, 2005). |
|
|
|
+Exhibit 3.2
|
|
Amended and Restated Agreement of Limited Partnership of Williams Partners L.P.,
as amended. |
|
|
|
*Exhibit 4.1
|
|
Indenture, dated June 20, 2006, by and among Williams Partners L.P., Williams
Partners Finance Corporation and JPMorgan Chase Bank, N.A. (attached as Exhibit
4.1 to Williams Partners L.P.s current report on Form 8-K (File No. 001-32599)
filed with the SEC on June 20, 2006). |
|
|
|
*Exhibit 4.2
|
|
Form of 71 / 2 % Senior Note due 2011 (included as Exhibit 1 to
Rule144A/Regulation S Appendix of Exhibit 4.1 attached to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on June 20,
2006). |
|
|
|
*Exhibit 4.3
|
|
Registration Rights Agreement, dated June 20, 2006, by and between Williams
Partners L.P., Williams Partners Finance Corporation, Citigroup Global Markets
Inc. and Lehman Brothers Inc. (attached as Exhibit 4.3 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on June 20,
2006). |
|
|
|
*Exhibit 10.1
|
|
Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and
among Williams Energy Services, LLC, Williams Field Services Company, LLC,
Williams Field Services Group, LLC, Williams Partners GP LLC, Williams Partners
L.P. and Williams Partners Operating LLC (attached as Exhibit 10.1 to Williams
Partners L.P.s current report on Form 8-K (File No. 001-32599) filed with the SEC
on June 20, 2006). |
|
|
|
*Exhibit 10.2
|
|
Credit Agreement dated as of May 1, 2006 among The Williams Companies, Inc.,
Williams Partners L.P., Northwest Pipeline Corporation, Transcontinental Gas Pipe
Line Corporation, and the Banks named therein, Citibank, N.A., as administrative
agent, and the other parties thereto (attached as Exhibit 10.1 to The Williams
Companies, Inc.s current report on Form 8-K (File No. 001-04174) filed with the
SEC on May 1, 2006). |
|
|
|
*Exhibit 10.3
|
|
Amended and Restated Limited Liability Company Agreement of Williams Four Corners
LLC dated June 20, 2006 (attached as Exhibit 10.2 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on June 20,
2006). |
|
|
|
*Exhibit 10.4
|
|
Loan Agreement, dated June 20, 2006, between The Williams Companies, Inc. and
Williams Four Corners LLC (attached as Exhibit 10.3 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on June 20,
2006). |
|
|
|
*Exhibit 10.5
|
|
Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and
among Williams Field Services Company, LLC and Williams Four Corners LLC (attached
as Exhibit 10.4 to Williams Partners L.P.s current report on Form 8-K (File No.
001-32599) filed with the SEC on June 20, 2006). |
|
|
|
+Exhibit 10.6
|
|
Amendment No. 1 to Third Amended and Restated Limited Liability Company Agreement
for Discovery Producer Services LLC. |
|
|
|
+Exhibit 10.7
|
|
Amended and Restated Working Capital Loan Agreement, dated August 7, 2006,
between The Williams Companies, Inc. and Williams Partners L.P. |
|
|
|
+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. |
47
|
|
|
+ |
|
Filed herewith |
|
* |
|
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 |
48
SIGNATURES
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 Principal Accounting Officer) |
|
|
|
|
|
August 8, 2006 |
|
|
|
|
49
EXHIBIT INDEX
|
|
|
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 3.1
|
|
Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit 3.1 to
Williams Partners L.P.s registration statement on Form S-1 (File No. 333-124517) filed
with the SEC on May 2, 2005). |
|
|
|
+Exhibit 3.2
|
|
Amended and Restated Agreement of Limited Partnership of Williams Partners L.P., as amended. |
|
|
|
*Exhibit 4.1
|
|
Indenture, dated June 20, 2006, by and among Williams Partners L.P., Williams Partners
Finance Corporation and JPMorgan Chase Bank, N.A. (attached as Exhibit 4.1 to Williams
Partners L.P.s current report on Form 8-K (File No. 001-32599) filed with the SEC on June
20, 2006). |
|
|
|
*Exhibit 4.2
|
|
Form of 71 / 2 % Senior Note due 2011 (included as Exhibit 1 to
Rule144A/Regulation S Appendix of Exhibit 4.1 attached to Williams Partners L.P.s current
report on Form 8-K (File No. 001-32599) filed with the SEC on June 20, 2006). |
|
|
|
*Exhibit 4.3
|
|
Registration Rights Agreement, dated June 20, 2006, by and between Williams Partners L.P.,
Williams Partners Finance Corporation, Citigroup Global Markets Inc. and Lehman Brothers
Inc. (attached as Exhibit 4.3 to Williams Partners L.P.s current report on Form 8-K (File
No. 001-32599) filed with the SEC on June 20, 2006). |
|
|
|
*Exhibit 10.1
|
|
Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and among
Williams Energy Services, LLC, Williams Field Services Company, LLC, Williams Field
Services Group, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners
Operating LLC (attached as Exhibit 10.1 to Williams Partners L.P.s current report on Form
8-K (File No. 001-32599) filed with the SEC on June 20, 2006). |
|
|
|
*Exhibit 10.2
|
|
Credit Agreement dated as of May 1, 2006 among The Williams Companies, Inc., Williams
Partners L.P., Northwest Pipeline Corporation, Transcontinental Gas Pipe Line Corporation,
and the Banks named therein, Citibank, N.A., as administrative agent, and the other parties
thereto (attached as Exhibit 10.1 to The Williams Companies, Inc.s current report on Form
8-K (File No. 001-04174) filed with the SEC on May 1, 2006). |
|
|
|
*Exhibit 10.3
|
|
Amended and Restated Limited Liability Company Agreement of Williams Four Corners LLC dated
June 20, 2006 (attached as Exhibit 10.2 to Williams Partners L.P.s current report on Form
8-K (File No. 001-32599) filed with the SEC on June 20, 2006). |
|
|
|
*Exhibit 10.4
|
|
Loan Agreement, dated June 20, 2006, between The Williams Companies, Inc. and Williams Four
Corners LLC (attached as Exhibit 10.3 to Williams Partners L.P.s current report on Form
8-K (File No. 001-32599) filed with the SEC on June 20, 2006). |
|
|
|
*Exhibit 10.5
|
|
Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and among
Williams Field Services Company, LLC and Williams Four Corners LLC (attached as Exhibit
10.4 to Williams Partners L.P.s current report on Form 8-K (File No. 001-32599) filed with
the SEC on June 20, 2006). |
|
|
|
+Exhibit 10.6
|
|
Amendment No. 1 to Third Amended and Restated Limited Liability Company Agreement for
Discovery Producer Services LLC. |
|
|
|
+Exhibit 10.7
|
|
Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between The
Williams Companies, Inc. and Williams Partners L.P. |
|
|
|
+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. |
|
|
|
+ |
|
Filed herewith |
|
* |
|
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 |
50