UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                      to                    

WILLIAMS PARTNERS L.P.

(Exact Name of Registrant as Specified in its Charter)

DELAWARE		20-2485124
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA		74172-0172
(Address of principal executive offices)		(Zip Code)

(918) 573-2000
(Registrant’s telephone number, including area code)

NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)

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

     Indicate by check mark whether the registrant 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 þ      Non-accelerated filer o

     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 32,358,798 common units and 7,000,000 subordinated units outstanding as of August 1, 2007.

 

 

WILLIAMS PARTNERS L.P.
INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income — Three and Six Months Ended June 30, 2007 and 2006			3
Consolidated Balance Sheets — June 30, 2007 and December 31, 2006			4
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2007 and 2006			5
Consolidated Statement of Partners’ Capital from January 1, 2007 to June 30, 2007			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 4. Submission of Matters to a Vote of Security Holders			36
Item 6. Exhibits			37
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certifications of CEO and CFO

FORWARD-LOOKING STATEMENTS

     Certain matters contained in this report include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements discuss our expected future results based on current and pending business operations.

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

	•		amounts and nature of future capital expenditures;
	•		expansion and growth of our business and operations;
	•		business strategy;
	•		cash flow from operations;
	•		seasonality of certain business segments; and
	•		natural gas liquids and gas prices and demand.

     Forward-looking statements are based on numerous assumptions, uncertainties and risks that could cause future events or results to be materially different from those stated or implied in this document. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors which could cause actual results to differ from those in the forward-looking statements include:

	•		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.
	•		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 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.
	•		Lower natural gas and oil prices could adversely affect our fractionation and storage businesses.
	•		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.
	•		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.
	•		Our future financial and operating flexibility may be adversely affected by restrictions in our indentures and by our leverage.
	•		The revolving credit facility of The Williams Companies, Inc. (“Williams”) 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.
	•		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.
	•		Even if unitholders are dissatisfied, they currently have little ability to remove our general partner without its consent.
	•		Unitholders may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
	•		Our operations are subject to operational hazards and unforeseen interruptions for which we may or may not be adequately insured.

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

     Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item IA “Risk Factors” in our Form 10-K for the year ended December 31, 2006.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

WILLIAMS PARTNERS L.P.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006*				2007				2006*
Revenues:
Product sales:
Affiliate		$	62,119			$	63,370			$	118,671			$	121,766
Third-party			5,070				7,766				11,383				10,558
Gathering and processing:
Affiliate			8,743				10,756				18,234				20,689
Third-party			51,422				49,405				102,525				100,781
Storage			6,818				5,924				13,228				11,029
Fractionation			2,616				2,989				4,533				6,942
Other			2,481				976				4,510				2,156
Total revenues			139,269				141,186				273,084				273,921
Costs and expenses:
Product cost and shrink replacement:
Affiliate			18,520				18,057				40,245				39,437
Third-party			26,157				26,662				46,627				49,282
Operating and maintenance expense (excluding depreciation):
Affiliate			10,484				13,401				24,812				29,087
Third-party			23,759				28,167				51,944				49,267
Depreciation, amortization and accretion			11,234				10,852				24,412				21,566
General and administrative expense:
Affiliate			9,644				9,227				19,050				16,508
Third-party			1,189				950				1,853				2,255
Taxes other than income			2,626				1,757				4,740				4,040
Other (income) expense			198				328				658				(3,315	)
Total costs and expenses			103,811				109,401				214,341				208,127
Operating income			35,458				31,785				58,743				65,794
Equity earnings-Discovery Producer Services			3,875				3,521				7,806				9,192
Interest expense:
Affiliate			(15	)			(15	)			(30	)			(30	)
Third-party			(14,395	)			(633	)			(28,770	)			(854	)
Interest income			1,261				110				2,244				180
Net income		$	26,184			$	34,768			$	39,993			$	74,282
Allocation of net income:
Net income		$	26,184			$	34,768			$	39,993			$	74,282
Allocation of net income to general partner			3,964				30,973				4,855				65,589
Allocation of net income to limited partners		$	22,220			$	3,795			$	35,138			$	8,693
Basic and diluted net income per limited partner unit:
Common units		$	0.56			$	0.25			$	0.87			$	0.60
Subordinated units			0.56				0.25				0.87				0.60
Weighted average number of units outstanding:
Common units			32,358,798				7,923,619				32,358,798				7,467,417
Subordinated units			7,000,000				7,000,000				7,000,000				7,000,000

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

		June 30,				December 31,
		2007				2006*
		(Thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	20,844			$	57,541
Accounts receivable:
Trade			19,655				18,320
Affiliate			9,241				12,420
Other			3,220				3,991
Gas purchase contract – affiliate			2,377				4,754
Product imbalance			4,762				—
Prepaid expense			3,711				3,765
Other current assets			2,596				2,534
Total current assets			66,406				103,325
Investment in Discovery Producer Services			207,290				221,187
Property, plant and equipment, net			649,803				647,578
Other assets			32,014				34,752
Total assets		$	955,513			$	1,006,842
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable — trade		$	23,066			$	19,827
Product imbalance			—				651
Deferred revenue			10,152				3,382
Accrued interest			24,546				2,796
Other accrued liabilities			12,408				13,377
Total current liabilities			70,172				40,033
Long-term debt			750,000				750,000
Environmental remediation liabilities			3,964				3,964
Other noncurrent liabilities			6,466				3,749
Commitments and contingent liabilities (Note 8).
Partners’ capital			124,911				209,096
Total liabilities and partners’ capital		$	955,513			$	1,006,842

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

		Six Months Ended
		June 30,
		2007				2006*
		(Thousands)
OPERATING ACTIVITIES:
Net income		$	39,993			$	74,282
Adjustments to reconcile to cash provided by operations:
Depreciation, amortization and accretion			24,412				21,566
Amortization of gas purchase contract — affiliate			2,377				2,676
Gain on sale of property, plant and equipment			—				(2,779	)
Equity earnings of Discovery Producer Services			(7,806	)			(9,192	)
Distributions related to equity earnings of Discovery Producer Services			7,806				8,000
Cash provided (used) by changes in assets and liabilities:
Accounts receivable			2,615				(13,814	)
Prepaid expense			(24	)			(544	)
Other current assets			19				—
Accounts payable			3,239				(6,009	)
Product imbalance			(5,414	)			(2,612	)
Deferred revenue			6,770				3,484
Accrued liabilities			23,437				(1,355	)
Other, including changes in non-current liabilities			619				(207	)
Net cash provided by operating activities			98,043				73,496
INVESTING ACTIVITIES:
Purchase of equity investment			(69,061	)			(155,627	)
Distributions in excess of equity earnings of Discovery Producer Services			6,663				—
Property, plant and equipment:
Capital expenditures			(21,703	)			(18,257	)
Change in accrued liabilities-capital expenditures			(2,810	)			—
Proceeds from sales of property, plant and equipment			—				7,430
Net cash used by investing activities			(86,911	)			(166,454	)
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			(8,939	)			(204,373	)
Payment of debt issuance costs			—				(3,188	)
Payment of offering costs			—				(1,863	)
Distributions to unitholders			(40,557	)			(10,433	)
Distributions to The Williams Companies, Inc.			—				(46,863	)
General partner contributions			—				4,841
Contributions per omnibus agreement			1,667				2,431
Net cash provided (used) by financing activities			(47,829	)			117,659
Increase (decrease) in cash and cash equivalents			(36,697	)			24,701
Cash and cash equivalents at beginning of period			57,541				6,839
Cash and cash equivalents at end of period		$	20,844			$	31,540

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

																		Accumulated
																		Other				Total
						Limited Partners								General				Comprehensive				Partners’
		Common				Class B				Subordinated				Partner				Loss				Capital
		(Thousands)
Balance — January 1, 2007*		$	733,878			$	241,923			$	108,862			$	(875,567	)			—			$	209,096
Comprehensive income:
Net income			23,530				6,266				6,446				3,751				—				39,993
Other comprehensive loss:
Net unrealized losses			—				—				—				—				(73	)			(73	)
Total other comprehensive loss																							(73	)
Total comprehensive income																							39,920
Cash distributions			(24,787	)			(6,601	)			(6,790	)			(2,379	)							(40,557	)
Contributions pursuant to the omnibus agreement			—				—				—				1,667				—				1,667
Conversion of B units to Common (6,805,492 units)			241,588				(241,588	)			—				—				—				—
Distribution to general partner in exchange for additional investment in Discovery			—				—				—				(78,000	)			—				(78,000	)
Discovery distributions to The Williams Companies, Inc., not attributable to the Partnership			—								—				(7,235	)							(7,235	)
Other			20				—				—				—				—				20
Balance – June 30, 2007		$	974,229			$	—			$	108,518			$	(957,763	)		$	(73	)		$	124,911

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

Note 1. Organization and Basis of Presentation

     Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context clearly indicates otherwise, references to “we,” “our,” and “us” include the operations of Discovery Producer Services LLC (“Discovery”) in which we own a 60% interest. When we refer to Discovery by name, we are referring exclusively to its businesses and operations.

     We are a Delaware limited partnership that was formed in February 2005, to acquire and own (1) a 40% 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% undivided ownership interest in a fractionator near Conway, Kansas. Our initial public offering (the “IPO”) closed in August 2005. Williams Partners GP LLC, a Delaware limited liability company, was also formed in February 2005 to serve as our general partner. In addition, we formed Williams Partners Operating LLC (“OLLC”), an operating limited liability company (wholly owned by us), through which all our activities are conducted.

     During 2006, we acquired Williams Four Corners LLC (“Four Corners”) pursuant to two agreements with Williams Energy Services, LLC (“WES”), Williams Field Services Group LLC (“WFSG”), Williams Field Services Company, LLC (“WFSC”) and OLLC. Because Four Corners was an affiliate of Williams at the time of the acquisition, the transactions were accounted for as a combination of entities under common control, similar to a pooling of interests, whereby the assets and liabilities of Four Corners were combined with Williams Partners L.P. at their historical amounts. Accordingly, the comparative June 30, 2006 financial statements and notes have been restated to reflect the combined results, increasing net income by $64.0 million. The restatement does not impact historical earnings per unit as pre-acquisition earnings were allocated to our general partner.

     On June 28, 2007 we closed on the acquisition of an additional 20% interest in Discovery from Williams Energy, L.L.C. and WES for aggregate consideration of $78.0 million. This transaction was effective July 1, 2007. Because this additional 20% interest in Discovery was purchased from an affiliate of Williams, 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 Discovery throughout the periods presented. We now own 60% of Discovery. We continue to account for this investment under the equity method due to the voting provisions of Discovery’s limited liability company agreement which provide the other member of Discovery significant participatory rights such that we do not control the investment. The acquisition increased net income for the six months ended June 30, 2007 and June 30, 2006 by $2.6 million and $3.1 million, respectively. The acquisition had no impact on earnings per unit as pre-acquisition earnings were allocated to the general partner.

     The accompanying interim consolidated financial statements do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K, filed February 28, 2007, for the year ended December 31, 2006. 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, 2007, results of operations for the three and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006. 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.

Note 2. Recent Accounting Standards

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS No. 159 establishes a fair value option permitting entities to elect the option to measure eligible financial instruments and certain other items at fair value on specified election dates. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The fair value option may be applied on an instrument-by-instrument basis with a few exceptions, is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007 and should not be applied retrospectively to fiscal years beginning prior to the effective date, except as permitted for early adoption. We will adopt SFAS No. 159 on January 1, 2008. On the adoption date, an entity may elect the fair value option for eligible items existing at that date and the adjustment for the initial remeasurement of those items to fair value should be reported as a cumulative effect adjustment to the opening balance of retained earnings. We continue to assess whether to apply the provisions of SFAS No. 159 to eligible financial instruments in place on the adoption date and the related impact on our Consolidated Financial Statements.

Note 3. Allocation of Net Income and Distributions

     The allocation of net income between our general partner and limited partners, as reflected in the Consolidated Statement of Partners’ Capital, for the three months and six months ended June 30, 2007 and 2006 is as follows (in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006*				2007				2006*
Allocation to general partner:
Net income		$	26,184			$	34,768			$	39,993			$	74,282
Net income applicable to pre-partnership operations allocated to general partner			(1,291	)			(31,798	)			(2,602	)			(67,103	)
Charges direct to general partner:
Reimbursable general and administrative costs			598				798				1,190				1,587
Core drilling indemnified costs			—				105				—				105
Total charges direct to general partner			598				903				1,190				1,692
Income subject to 2% allocation of general partner interest			25,491				3,873				38,581				8,871
General partner’s share of net income			2.0	%			2.0	%			2.0	%			2.0	%
General partner’s allocated share of net income (loss) before items directly allocable to general partner interest			509				78				771				178
Incentive distributions paid to general partner**			965				—				1,568				—
Direct charges to general partner			(598	)			(903	)			(1,190	)			(1,692	)
Pre-partnership net income allocated to general partner			1,291				31,798				2,602				67,103
Net income allocated to general partner		$	2,167			$	30,973			$	3,751			$	65,589
Net income		$	26,184			$	34,768			$	39,993			$	74,282
Net income allocated to general partner			2,167				30,973				3,751				65,589
Net income allocated to limited partners		$	24,017			$	3,795			$	36,242			$	8,693

Pursuant to the partnership agreement, income allocations are made on a quarterly basis; therefore, earnings per limited partner unit for the six months ended June 30, 2007 and 2006 is calculated as the sum of the quarterly earnings per limited partner unit for each of the first two quarters of 2007 and 2006. 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, 2007 and 2006.

     We paid or have authorized payment of the following cash distributions during 2006 and 2007 (in thousands, except for per unit amounts):

		Per Unit				Common				Subordinated				Class B				General				Total Cash
Payment Date		Distribution				Units				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			$	6,204			$	2,975			$	—			$	263			$	9,442
11/14/2006 (b)		$	0.4500			$	6,569			$	3,150			$	—			$	401			$	10,120
2/14/2007 (c)		$	0.4700			$	12,010			$	3,290			$	3,198			$	993			$	19,491
5/15/2007 (d)		$	0.5000			$	12,777			$	3,500			$	3,403			$	1,386			$	21,066
8/14/2007 (e)		$	0.5250			$	16,989			$	3,675			$	—			$	1,714			$	22,378

Note 4. Out of Period Adjustments

     Out of period adjustments to correct the carrying value of our assets and liabilities reflected in Revenues or Costs and expenses in our Consolidated Statements of Income are summarized in the following table (in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
		Increase (decrease) in income/expense
Gathering and Processing –West
Adjustment to correct carrying value of prepaid right-of-way asset recorded from 2001 through 2006		$	—			$	—			$	1,243			$	—
Adjustment to correct the 2006 incentive compensation accrual			—				—				(899	)			—
Adjustment to correct the asset retirement obligation originally recorded in 2005			—				—				785				—
Adjustment to correct the accounts payable balance recorded in 2005			—				—				—				(2,000	)
Misstated accounts payable balance at March 31, 2006 corrected in the second quarter of 2006			—				1,300				—				—
Misstated accounts payable balance at June 30, 2006 corrected in the third quarter of 2006			—				(2,000	)			—				(2,000	)
Adjustment to record condensate revenue on a current basis			—				1,900				—				1,900

Note 5. Equity Investments

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

Discovery Producer Services LLC

		June 30,				December 31,
		2007				2006
		(Unaudited)
Current assets		$	52,978			$	73,841
Non-current restricted cash and cash equivalents			5,955				28,773
Property, plant and equipment, net			372,770				355,304
Current liabilities			(33,420	)			(40,559	)
Non-current liabilities			(3,894	)			(3,728	)
Members’ capital		$	394,389			$	413,631

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
						(Unaudited)
Revenues:
Affiliate		$	48,635			$	22,451			$	93,168			$	75,237
Third-party			14,869				10,465				22,817				19,799
Costs and expenses:
Affiliate			24,017				7,464				47,172				41,135
Third-party			32,414				21,152				56,534				41,202
Interest income			(422	)			(601	)			(1,083	)			(1,227	)
Loss on sale of operating assets			1,071				—				603				—
Foreign exchange gain			(36	)			(967	)			(252	)			(1,394	)
Net income		$	6,460			$	5,868			$	13,011			$	15,320

Note 6. Credit Facilities and Long-Term Debt

  Credit Facilities

     We may borrow up to $75.0 million under Williams’ $1.5 billion revolving credit facility, which is available for borrowings and letters of credit. Pursuant to an amendment dated May 9, 2007, borrowings under the Williams facility mature in May 2012. Our $75.0 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, 2007, letters of credit totaling $28.0 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 $20.0 million revolving credit facility with Williams as the lender. The facility is available exclusively to fund working capital borrowings. Borrowings under the credit 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 June 30, 2007, we have no outstanding borrowings under the working capital credit facility.

   Long-Term Debt

     In connection with the issuances of our $600.0 million of 7.25% senior unsecured notes on December 13, 2006 and $150.0 million of 7.5% senior unsecured notes on June 20, 2006, sold in private debt placements to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States in accordance with Regulations under the Securities Act, we entered into registration rights agreements with the initial purchasers of the senior unsecured notes. Under these agreements, we agreed to conduct a registered exchange offer of exchange notes in exchange for the senior unsecured notes or cause to become effective a shelf registration statement providing for resale of the senior unsecured notes. We launched exchange offers for both series on April 10, 2007 and they were successfully closed on May 11, 2007.

Note 7. Derivative Instruments and Hedging Activities

  Accounting policy

     We utilize derivatives to manage a portion of our commodity price risk. These instruments consist primarily of swap agreements. We execute these transactions in over-the-counter markets in which quoted prices exist for active periods. We report the fair value of derivatives, except for those for which the normal purchases and normal sales exception has been elected, on the Consolidated Balance Sheet in other current assets, other accrued liabilities, other assets or other noncurrent liabilities. We determine the current and noncurrent classification based on the timing of expected future cash flows of individual contracts.

     The accounting for changes in the fair value of a commodity derivative is governed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and depends on whether the derivative has been designated in a hedging relationship and what type of hedging relationship it is. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and we must maintain appropriate documentation. We establish hedging relationships pursuant to our risk management policies. We evaluate the hedging relationships at the inception of the hedge and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. We also regularly assess whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if we believe the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative are recognized currently in other revenues.

     For commodity derivatives designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is reported in other comprehensive loss and reclassified into earnings in the period in which the hedged item affects earnings. Any ineffective portion of the derivative’s change in fair value is recognized currently in other revenues. Gains or losses deferred in accumulated other comprehensive loss associated with terminated derivatives, derivatives that cease to be highly effective hedges, derivatives for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in accumulated other comprehensive loss until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in accumulated other comprehensive loss is recognized in other revenues at that time. The change in likelihood is a judgmental decision that includes qualitative assessments made by management.

  Energy commodity cash flow hedges

     We are exposed to market risk from changes in energy commodity prices within our operations. Our Four Corners operation receives NGL volumes as compensation for certain processing services. To reduce our exposure to a decrease in revenues from the sale of these NGL volumes from fluctuations in NGL market prices, we entered into financials swap contracts for 8.8 million gallons of May through December 2007 forecasted NGL sales. These derivatives were designated in cash flow hedge relationships and are expected to be highly effective in offsetting cash flows attributable to the hedged risk during the term of the hedge. However, ineffectiveness may be recognized primarily as a result of locational differences between the hedging derivative and the hedged item. The ineffectiveness measured during the second quarter of 2007 was insignificant. There were no derivative gains or losses excluded from the assessment of hedge effectiveness in the second quarter of 2007. Based on recorded values at June 30, 2007, approximately $0.1 million of net losses will be reclassified into earnings within the next year. These recorded values are based on market prices of the commodities as of June 30, 2007. Due to the volatile nature of commodity prices and changes in the creditworthiness of counterparties, actual gains or losses realized in 2007 will likely differ from these values. These gains or losses will offset net losses or gains that will be realized in earnings from previous unfavorable or favorable market movements associated with underlying hedged transactions.

Note 8. Commitments and Contingencies

     Environmental Matters-Four Corners. Current federal regulations require that certain unlined liquid containment pits located near named rivers and catchment areas be taken out of use, and current state regulations required all unlined, earthen pits to be either permitted or closed by December 31, 2005. Operating under a New Mexico Oil Conservation Division-approved work plan, we have physically closed all of our pits that were slated for closure under those regulations. We are presently awaiting agency approval of the closures for 40 to 50 of those pits.

     We are also a participant in certain hydrocarbon removal and groundwater monitoring activities associated with certain well sites in New Mexico. Of nine remaining active sites, product removal is ongoing at seven and groundwater monitoring is ongoing at each site. As groundwater concentrations reach and sustain closure criteria levels and state regulator approval is received, the sites will be properly abandoned. We expect the remaining sites will be closed within four to eight years.

     We have accrued liabilities totaling $0.7 million at June 30, 2007 for these environmental activities. It is reasonably possible that we will incur losses in excess of our accrual for these matters. However, a reasonable estimate of such amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by governmental authorities and other factors.

     We are subject to extensive federal, state and local environmental laws and regulations which affect our operations related to the construction and operation of our facilities. Appropriate governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements and injunctions as to future compliance.

     On April 11, 2007, the New Mexico Environment Department’s Air Quality Bureau (“NMED”) issued a Notice of Violation to Four Corners that alleges various emission and reporting violations in connection with our Lybrook gas processing plant’s flare and leak detection and repair program. We are investigating the matter and will respond to the NMED.

     Environmental Matters-Conway. We are a participant in certain environmental remediation activities associated with soil and groundwater contamination at our Conway storage facilities. These activities relate to four projects that are in various remediation stages including assessment studies, cleanups and/or remedial operations and monitoring. We continue to coordinate with the Kansas Department of Health and Environment (“KDHE”) to develop screening, sampling, cleanup and monitoring programs. The costs of such activities will depend upon the program scope ultimately agreed to by the KDHE and are expected to be paid over the next two to nine years.

     In 2004, we purchased 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, of which $0.9 million has been incurred to date from the onset of the policy. 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 $25.0 million. In addition, under an omnibus agreement with Williams entered into at the closing of our IPO, Williams agreed to indemnify us for the $4.2 million deductible not covered by the insurance policy, excluding costs of project management and soil and groundwater monitoring. There is a $14.0 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 August 23, 2005 IPO closing date. 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 $0.2 million to $0.4 million per year following the completion of the remediation work. At June 30, 2007, we had accrued liabilities totaling $6.1 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.

     Will Price. In 2001, we were named, along with other subsidiaries of Williams, as defendants in a nationwide class action lawsuit in Kansas state court that had been pending against other defendants, generally pipeline and gathering companies, since 2000. The plaintiffs alleged that the defendants have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs and sought an unspecified amount of damages. The defendants have opposed class certification and a hearing on the plaintiffs’ second motion to certify the class was held on April 1, 2005. We are awaiting a decision from the court.

     Grynberg. In 1998, the Department of Justice informed Williams that Jack Grynberg, an individual, had filed claims on behalf of himself and the federal government, in the United States District Court for the District of Colorado under the False Claims Act against Williams and certain of its wholly owned subsidiaries, and us. The claims sought an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys’ fees, and costs. Grynberg has also filed claims against approximately 300 other energy companies alleging that the defendants violated the False Claims Act in connection with the measurement, royalty valuation and purchase of hydrocarbons. In 1999, the Department of Justice announced that it was declining to intervene in any of the Grynberg cases, including the action filed in federal court in Colorado against us. Also in 1999, the Panel on Multi-District Litigation transferred all of these cases, including those filed against us, to the federal court in Wyoming for pre-trial purposes. Grynberg’s measurement claims remain pending against us and the other defendants; the court previously dismissed Grynberg’s royalty valuation claims. In May 2005, the court-appointed special master entered a report which recommended that the claims against certain Williams’ subsidiaries, including us, be dismissed. On October 20, 2006, the court dismissed all claims against us. In November 2006, Grynberg filed his notice of appeals with the Tenth Circuit Court of Appeals.

     Vendor Dispute. We are parties to an agreement with a service provider for work on turbines at our Ignacio, New Mexico plant. A dispute has arisen between us as to the quality of the service provider’s work and the appropriate compensation. The service provider claims it is entitled to additional extra work charges under the agreement, which we deny are due.

     Outstanding Registration Rights Agreement. On December 13, 2006, we issued approximately $350.0 million of common and Class B units in a private equity offering. In connection with these issuances, we entered into a registration rights agreement with the initial purchasers whereby we agreed to file a shelf registration statement providing for the resale of the common units purchased and the common units issued on conversion of the Class B units. We filed the shelf registration statement on January 12, 2007 and it became effective on March 13, 2007. On May 21, 2007, our outstanding Class B units were converted into common units on a one-for-one basis. If the shelf is unavailable for a period that exceeds an aggregate of 30 days in any 90-day period or 105 days in any 365 day period, the purchasers are entitled to receive liquidated damages. Liquidated damages with respect to each purchaser are calculated as 0.25% of the Liquidated Damages Multiplier per 30-day period for the first 60 days following the 90th day, increasing by an additional 0.25% of the Liquidated Damages Multiplier per 30-day period for each subsequent 60 days, up to a maximum of 1.00% of the Liquidated Damages Multiplier per 30-day period; provided, the aggregate amount of liquidated damages payable to any purchaser is capped at 10.0% of the Liquidated Damages Multiplier. The Liquidated Damages Multiplier, with respect to each purchaser, is (i) the product of $36.59 times the number of common units purchased plus (ii) the product of $35.81 times the number of Class B units purchased. We do not expect to pay any liquidated damages related to this agreement.

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

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

Note 9. Segment Disclosures

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

		Gathering &				Gathering &
		Processing -				Processing -				NGL
		West				Gulf				Services				Total
						(In thousands)
Three Months Ended June 30, 2007:
Segment revenues		$	125,047			$	459			$	13,763			$	139,269
Operating and maintenance expense			29,487				361				4,395				34,243
Product cost and shrink replacement			42,313				—				2,364				44,677
Depreciation, amortization and accretion			10,203				303				728				11,234
Direct general and administrative expense			1,797				—				470				2,267
Other, net			2,624				—				200				2,824
Segment operating income (loss)			38,623				(205	)			5,606				44,024
Equity earnings — Discovery Producer Services			—				3,875				—				3,875
Segment profit		$	38,623			$	3,670			$	5,606			$	47,899
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	44,024
General and administrative expenses:
Allocated — affiliate															(7,430	)
Third party — direct															(1,136	)
Combined operating income														$	35,458
Three Months Ended June 30, 2006*:
Segment revenues		$	127,794			$	676			$	12,716			$	141,186
Operating and maintenance expense			34,525				231				6,812				41,568
Product cost and shrink replacement			41,800				—				2,919				44,719
Depreciation, amortization and accretion			9,952				300				600				10,852
Direct general and administrative expense			2,361				7				235				2,603
Other, net			1,919				—				166				2,085
Segment operating income			37,237				138				1,984				39,359
Equity earnings — Discovery Producer Services			—				3,521				—				3,521
Segment profit		$	37,237			$	3,659			$	1,984			$	42,880
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	39,359
General and administrative expenses:
Allocated — affiliate															(6,988	)
Third party — direct															(586	)
Combined operating income														$	31,785

		Gathering &				Gathering &
		Processing -				Processing -				NGL
		West				Gulf				Services				Total
						(In thousands)
Six Months Ended June 30, 2007:
Segment revenues		$	245,475			$	1,020			$	26,589			$	273,084
Operating and maintenance expense			62,584				911				13,261				76,756
Product cost and shrink replacement			81,988				—				4,884				86,872
Depreciation, amortization and accretion			22,378				607				1,427				24,412
Direct general and administrative expense			3,618				—				968				4,586
Other, net			5,008				—				390				5,398
Segment operating income (loss)			69,899				(498	)			5,659				75,060
Equity earnings — Discovery Producer Services			—				7,806				—				7,806
Segment profit		$	69,899			$	7,308			$	5,659			$	82,866
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	75,060
General and administrative expenses:
Allocated — affiliate															(14,654	)
Third party — direct															(1,663	)
Combined operating income														$	58,743
Six Months Ended June 30, 2006*:
Segment revenues		$	243,466			$	1,409			$	29,046			$	273,921
Operating and maintenance expense			63,620				473				14,261				78,354
Product cost and shrink replacement			80,077				—				8,642				88,719
Depreciation, amortization and accretion			19,766				600				1,200				21,566
Direct general and administrative expense			5,761				9				536				6,306
Other, net			352				—				373				725
Segment operating income			73,890				327				4,034				78,251
Equity earnings — Discovery Producer Services			—				9,192				—				9,192
Segment profit		$	73,890			$	9,519			$	4,034			$	87,443
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	78,251
General and administrative expenses:
Allocated — affiliate															(11,343	)
Third party — direct															(1,114	)
Combined operating income														$	65,794

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

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

Overview

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

	•		Gathering and Processing — West. Our West segment includes Four Corners. The Four Corners system gathers and processes or treats approximately 37% 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.
	•		Gathering and Processing — Gulf. Our Gulf segment includes (1) our 60% ownership interest in Discovery and (2) the Carbonate Trend gathering pipeline off the coast of Alabama. Discovery owns an integrated natural gas gathering and transportation pipeline system extending from offshore in the Gulf of Mexico to a natural gas processing facility and an NGL fractionator in Louisiana. These assets generate revenues by providing natural gas gathering, transporting and processing services and integrated NGL fractionating services to customers under a range of contractual arrangements. Although Discovery includes fractionation operations, which would normally fall within the NGL Services segment, it is primarily engaged in gathering and processing and is managed as such.
	•		NGL Services. Our NGL Services segment includes three integrated NGL storage facilities and a 50% 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.

Executive Summary

     Through the second quarter of 2007 we continued to realize strong NGL margins at Four Corners. Gathering and processing revenues for Four Corners are nearly equal between years and we expect our full-year gathering volumes will remain consistent with 2006 levels. In late June 2007 we closed on the purchase of an additional 20% ownership interest in Discovery using available cash. We expect this acquisition will be immediately accretive to unitholders’ distributions. Through June 2007, Discovery saw a relatively small decrease in its income from the prior year considering the exceptional first half of 2006 when it was processing volumes from damaged third-party facilities after Hurricanes Katrina and Rita. At Conway we continue to see strong demand for leased storage and new product upgrade services. Year-over-year net income comparisons are significantly impacted by the interest on our $750.0 million in long-term debt issued in June and December 2006 to finance a portion of our acquisition of Four Corners. Additionally, our results reflect the impact of adjustments in our operating costs and expenses, which are itemized in Note 4 of the Notes to our Consolidated Financial Statements.

Recent Events

     Conversion of Class B Units. On May 21, 2007, our outstanding Class B units were converted into common units on a one-for-one basis by a majority vote of common units eligible to vote.

     Additional Investment in Discovery. On June 28, 2007, we closed on the acquisition of an additional 20% limited liability company interest in Discovery for aggregate consideration of $78.0 million pursuant to an agreement with Williams Energy, L.L.C., Williams Energy Services, LLC, and Williams Partners Operating LLC. This transaction was effective July 1, 2007. Because this additional 20% interest in Discovery was purchased from an affiliate of Williams, the transaction was between entities under common control, and has been accounted for at historical cost. Accordingly, our consolidated financial statements and notes and this discussion of results of operations have been restated to reflect the combined historical results of our investment in Discovery throughout

the periods presented. We continue to account for this investment under the equity method due to the voting provisions of Discovery’s limited liability company agreement which provide the other member of Discovery significant participatory rights such that we do not control the investment.

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, 2007, compared to the three and six months ended June 30, 2006. The results of operations by segment are discussed in further detail following this consolidated overview discussion. All prior period information in the following discussion and analysis of results of operations has been restated to reflect our 100% interest acquisition in Four Corners in 2006 and our 60% equity interest in Discovery.

		Three months ended								% Change				Six months ended								% Change
		June 30,								from				June 30,								from
		2007				2006				2006(1)				2007				2006				2006(1)
		(Thousands)												(Thousands)
Revenues		$	139,269			$	141,186				-1	%		$	273,084			$	273,921				—
Costs and expenses:
Product cost and shrink replacement			44,677				44,719				—				86,872				88,719				+2	%
Operating and maintenance expense			34,243				41,568				+18	%			76,756				78,354				+2	%
Depreciation, amortization and accretion			11,234				10,852				-4	%			24,412				21,566				-13	%
General and administrative expense			10,833				10,177				-6	%			20,903				18,763				-11	%
Taxes other than income			2,626				1,757				-49	%			4,740				4,040				-17	%
Other (income) expense			198				328				+40	%			658				(3,315	)		NM
Total costs and expenses			103,811				109,401				+5	%			214,341				208,127				-3	%
Operating income			35,458				31,785				+12	%			58,743				65,794				-11	%
Equity earnings – Discovery			3,875				3,521				+10	%			7,806				9,192				-15	%
Interest expense			(14,410	)			(648	)		NM					(28,800	)			(884	)		NM
Interest income			1,261				110			NM					2,244				180			NM
Net income		$	26,184			$	34,768				-25	%		$	39,993			$	74,282				-46	%