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 September 30, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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 52,777,452 common units outstanding as of November 5, 2008.

 

 

WILLIAMS PARTNERS L.P.

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income — Three and Nine Months Ended September 30, 2008 and 2007			5
Consolidated Balance Sheets — September 30, 2008 and December 31, 2007			6
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2008 and 2007			7
Consolidated Statement of Partners’ Capital from January 1, 2008 to September 30, 2008			8
Notes to Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
Part II. Other Information
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 6. Exhibits			46
EX-10
EX-31.1
EX-31.2
EX-32

FORWARD-LOOKING STATEMENTS

     Certain matters contained in this report include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These 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;
	•		Financial condition and liquidity;
	•		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 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.
	•		Lower natural gas and oil prices could adversely affect our fractionation and storage businesses.
	•		Our processing, fractionation and storage businesses could be affected by any decrease in natural gas liquids (NGL) prices or a change in NGL prices relative to the price of natural gas.
	•		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.
	•		The failure of counterparties to perform their contractual obligations could adversely affect our operating results, financial condition 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 NGLs or to treat natural gas, our revenues and cash available to pay distributions could be adversely affected.
	•		We do not own all of the interests in Wamsutter LLC (Wamsutter), the Conway fractionator or Discovery Producer Services LLC (Discovery), which could adversely affect our ability to operate and control these assets in a manner beneficial to us.
	•		Our results of storage and fractionation operations are dependent upon the demand for propane and other NGLs. A substantial decrease in this demand could adversely affect our business and operation results.

	•		Discovery and Wamsutter may reduce their cash distributions to us in some situations.
	•		Discovery’s interstate tariff rates and terms and conditions are subject to review and possible adjustment by federal regulators, and are subject to changes in policy by federal regulators which could have a material adverse effect on our business and operating results.
	•		Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.
	•		Our partnership agreement limits our general partner’s fiduciary duties to unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
	•		The Williams Companies Inc.’s (Williams) public indentures and our credit facility 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 future financial and operating flexibility may be adversely affected by restrictions in our debt agreements and by our leverage.
	•		We may not be able to grow or effectively manage our growth.
	•		Recent events in the global financial crisis have made equity and debt markets less accessible and created a shortage in the availability of credit, which could disrupt our financing plans and limit our ability to grow.
	•		Common units held by Williams eligible for future sale may have adverse effects on the price of our common units.
	•		Williams controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates have conflicts of interests with us and limited fiduciary duties, and they may 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.
	•		Additional risks described in our filings with the Securities and Exchange Commission.

     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, 2007, and Part II, Item 1A. Risk Factors of this quarterly report on Form 10-Q.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WILLIAMS PARTNERS L.P.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007*				2008				2007*
Revenues:
Product sales:
Affiliate		$	92,421			$	75,519			$	264,677			$	194,190
Third-party			6,430				4,297				20,392				15,680
Gathering and processing:
Affiliate			9,480				9,178				28,117				27,412
Third-party			50,721				51,721				146,479				154,246
Storage			8,264				7,404				22,699				20,632
Fractionation			5,484				2,723				13,580				7,256
Other			2,913				(1,266	)			8,376				3,244
Total revenues			175,713				149,576				504,320				422,660
Costs and expenses:
Product cost and shrink replacement:
Affiliate			22,358				18,806				72,077				59,051
Third-party			35,391				30,043				103,779				76,670
Operating and maintenance expense (excluding depreciation):
Affiliate			21,220				15,275				60,901				40,087
Third-party			29,257				25,259				83,192				77,203
Depreciation, amortization and accretion			11,735				10,345				33,963				34,757
General and administrative expense:
Affiliate			10,620				10,816				32,881				29,866
Third-party			664				925				2,341				2,778
Taxes other than income			2,314				2,474				6,986				7,214
Other (income) expense — net			(5,822	)			134				(8,300	)			792
Total costs and expenses			127,737				114,077				387,820				328,418
Operating income			47,976				35,499				116,500				94,242
Equity earnings-Wamsutter			20,801				18,472				79,475				50,358
Equity earnings-Discovery Producer Services			8,244				7,902				30,435				15,708
Interest expense:
Affiliate			(15	)			(16	)			(55	)			(46	)
Third-party			(16,422	)			(14,268	)			(50,738	)			(43,038	)
Interest income			249				312				667				2,556
Net income		$	60,833			$	47,901			$	176,284			$	119,780
Allocation of net income:
Net income		$	60,833			$	47,901			$	176,284			$	119,780
Allocation of net income to general partner			17,455				23,409				49,374				58,738
Allocation of net income to limited partners		$	43,378			$	24,492			$	126,910			$	61,042
Basic and diluted net income per limited partner common unit		$	0.82			$	0.62			$	2.40			$	1.41
Weighted average number of common units outstanding			52,775,912				39,359,555	(b)			52,775,126	(b)			39,359,053	(a)(b)

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

		September 30,				December 31,
		2008				2007
		(Unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	81,846			$	36,197
Accounts receivable:
Trade			20,166				12,860
Affiliate			32,794				20,402
Other			3,233				2,543
Product imbalance			15,492				20,660
Prepaid expense			5,135				4,056
Derivative assets — affiliate			3,724				231
Reimbursable projects			954				8,989
Other current assets			3,665				3,574
Total current assets			167,009				109,512
Investment in Wamsutter			287,889				284,650
Investment in Discovery Producer Services			199,797				214,526
Gross property, plant and equipment			1,269,720				1,239,792
Less accumulated depreciation			(619,536	)			(597,503	)
Property, plant and equipment, net			650,184				642,289
Other noncurrent assets			28,838				32,500
Total assets		$	1,333,717			$	1,283,477
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade		$	31,161			$	35,947
Affiliate			10,011				17,676
Product imbalance			15,132				21,473
Deferred revenue			10,320				4,569
Derivative liabilities — affiliate			86				2,718
Accrued interest			10,963				19,500
Other accrued liabilities			7,715				8,243
Total current liabilities			85,388				110,126
Long-term debt			1,000,000				1,000,000
Other noncurrent liabilities			15,246				11,864
Commitments and contingent liabilities (Note 9)
Partners’ capital			233,083				161,487
Total liabilities and partners’ capital		$	1,333,717			$	1,283,477

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

		Nine Months Ended
		September 30,
		2008				2007*
		(In thousands)
OPERATING ACTIVITIES:
Net income		$	176,284			$	119,780
Adjustments to reconcile to cash provided by operations:
Depreciation, amortization and accretion			33,963				34,757
Amortization of gas purchase contract — affiliate			—				3,566
Gain on involuntary conversion			(9,276	)			—
Equity earnings of Wamsutter			(79,475	)			(50,358	)
Equity earnings of Discovery Producer Services			(30,435	)			(15,708	)
Distributions related to equity earnings of Wamsutter			78,296				—
Distributions related to equity earnings of Discovery Producer Services			30,435				13,106
Cash provided (used) by changes in assets and liabilities:
Accounts receivable			(24,871	)			(4,056	)
Prepaid expense			(1,079	)			(1,500	)
Other current assets			9,504				35
Accounts payable			(12,451	)			7,675
Product imbalance			(1,173	)			2,840
Deferred revenue			5,544				4,347
Accrued liabilities			(8,544	)			10,257
Derivative assets and liabilities			14				—
Other, including changes in noncurrent assets and liabilities			2,525				4,324
Net cash provided by operating activities			169,261				129,065
INVESTING ACTIVITIES:
Purchase of equity investment			—				(69,061	)
Capital expenditures			(36,996	)			(33,029	)
Cumulative distributions in excess of equity earnings of Discovery Producer Services			15,165				4,964
Receipt of insurance proceeds			7,718				—
Insurance proceeds related to affiliate accounts receivable			4,483				—
Change in accrued liabilities-capital expenditures			(125	)			(4,779	)
Contributions to Wamsutter			(2,059	)			—
Contributions to Discovery Producer Services			(437	)			—
Other			—				536
Net cash used by investing activities			(12,251	)			(101,369	)
FINANCING ACTIVITIES:
Distributions to unitholders			(113,765	)			(62,935	)
Proceeds from sale of common units			28,992				—
Redemption of common units from general partner			(28,992	)			—
Excess purchase price over contributed basis of equity investment			—				(8,939	)
Contributions per omnibus agreement			2,328				2,726
Other			76				—
Net cash used by financing activities			(111,361	)			(69,148	)
Increase (decrease) in cash and cash equivalents			45,649				(41,452	)
Cash and cash equivalents at beginning of period			36,197				57,541
Cash and cash equivalents at end of period		$	81,846			$	16,089

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

														Accumulated Other				Total
		Limited Partners								General				Comprehensive				Partners’
		Common				Subordinated				Partner				Income (Loss)				Capital
										(In thousands)
Balance — January 1, 2008		$	1,473,814			$	109,542			$	(1,419,382	)		$	(2,487	)		$	161,487
Net income			155,991				1,556				18,737				—				176,284
Other comprehensive income (loss):
Net unrealized losses on cash flow hedges			—				—				—				(358	)			(358	)
Reclassification into earnings of derivative instrument losses			—				—				—				6,497				6,497
Total other comprehensive income																			6,139
Total comprehensive income																			182,423
Cash distributions			(90,970	)			(4,025	)			(18,770	)			—				(113,765	)
Conversion of subordinated units into common			107,073				(107,073	)			—				—				—
Contributions pursuant to the omnibus agreement			—				—				2,328				—				2,328
Issuance of units to public			28,992				—				—				—				28,992
Repurchase of units from Williams			(28,992	)			—				—				—				(28,992	)
Other			(405	)			—				1,015				—				610
Balance — September 30, 2008		$	1,645,503			$	—			$	(1,416,072	)		$	3,652			$	233,083

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

Note 1. Organization and Basis of Presentation

     Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context clearly indicates otherwise, references to “we,” “our,” and “us” include the operations of Wamsutter LLC (Wamsutter) and Discovery Producer Services LLC (Discovery) in which we own interests accounted for as equity investments that are not consolidated in our financial statements. When we refer to Wamsutter or Discovery by name, we are referring exclusively to their businesses and operations.

     We are principally engaged in the business of gathering, transporting, processing and treating natural gas and fractionating and storing natural gas liquids (NGL). Operations of our businesses are located in the United States and are organized into three reporting segments: (1) Gathering and Processing — West, (2) Gathering and Processing — Gulf and (3) NGL Services. Our Gathering and Processing — West segment includes the Four Corners gathering and processing operations and our equity investment in Wamsutter. Our Gathering and Processing — Gulf segment includes the Carbonate Trend gathering pipeline and our equity investment in Discovery. Our NGL Services segment includes the Conway fractionation and storage operations.

     On June 28, 2007 we closed on the acquisition of an additional 20% interest in Discovery from Williams Energy, L.L.C. and Williams Energy Services, LLC, bringing our total ownership of Discovery to 60%. This transaction was effective July 1, 2007. Because this additional 20% interest in Discovery was purchased from an affiliate of The Williams Companies, Inc. (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 retrospectively adjusted to reflect the historical results of our total investment in Discovery throughout the periods presented. The effect of retroactively adjusting our financial statements to account for this common control exchange increased net income $2.6 million through September 30, 2007. This acquisition had no impact on earnings per unit because we allocated pre-acquisition earnings to our general partner.

     On December 11, 2007, we acquired certain ownership interests in Wamsutter, consisting of 100% of the Class A limited liability company interests and 20 Class C units representing 50% of the initial Class C ownership interests (collectively the Wamsutter Ownership Interests). Because the Wamsutter Ownership Interests were 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 retrospectively adjusted to reflect the historical results of our investment in Wamsutter throughout the periods presented. The effect of retrospectively adjusting our financial statements to account for this common control exchange increased net income $50.4 million through September 30, 2007. This acquisition does not impact earnings per unit because we allocated pre-acquisition earnings to our 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 26, 2008, for the year ended December 31, 2007. The accompanying consolidated financial statements include all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position at September 30, 2008, results of operations for the three and nine months ended September 30, 2008 and 2007 and cash flows for the nine months ended September 30, 2008 and 2007. We eliminated all intercompany transactions and reclassified certain amounts to conform to the current classifications.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2. Recent Accounting Standards

     In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” with enhanced quantitative, qualitative and credit risk disclosures. The Statement requires quantitative disclosure in a tabular format about the fair values of derivative instruments in the balance sheet, gains and losses on derivative instruments in the statement of income and information about where these items are reported in the financial statements. The Statement also requires a separation of hedging and non-hedging activities in tabular presentation. Qualitative disclosures include outlining objectives and strategies for using derivative instruments in terms of underlying risk exposures, use of derivatives for risk management and other purposes and accounting designation, and an understanding of the volume and purpose of derivative activity. Credit risk disclosures provide information about credit risk related contingent features included in derivative agreements. SFAS No. 161 also amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to clarify that disclosures about concentrations of credit risk should include derivative instruments. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We plan to apply this Statement beginning in 2009. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Application of this Statement will increase the disclosures in our consolidated financial statements.

     In March 2008, the FASB ratified the decisions reached by the Emerging Issues Task Force (EITF) with respect to EITF Issue No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships.” EITF Issue No. 07-4 states, among other things, that the calculation of earnings per unit should not reflect an allocation of undistributed earnings to the incentive distribution right (IDR) holders beyond amounts distributable to IDR holders under the terms of the partnership agreement. As described in Note 3, under current generally accepted accounting principles, we calculate earnings per unit as if all the earnings for the period had been distributed. This results in an additional allocation of income to the general partner (the IDR holder) in quarterly periods where an assumed incentive distribution, calculated as if all earnings for the period had been distributed, exceeds the actual incentive distribution. Following the adoption of the guidance in EITF Issue No. 07-4, we will no longer calculate assumed incentive distributions. The final consensus is effective beginning with the first interim period of the fiscal year beginning after December 15, 2008, and must be retrospectively applied to all periods presented. Early application is prohibited. Retrospective application of this guidance will result in a decrease in the income allocated to the general partner and an increase in the income allocated to limited partners for the amount that any assumed incentive distribution exceeded the actual incentive distribution paid during that period. Application of this Statement is not expected to have a material 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 nine months ended September 30, 2008 and 2007 is as follows (in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007*				2008				2007*
Allocation to general partner:
Net income		$	60,833			$	47,901			$	176,284			$	119,780
Net income applicable to pre-partnership operations allocated to general partner			—				(18,472	)			—				(52,960	)
Beneficial conversion of Class B units(a)			—				—				—				(5,308	)
Charges direct to general partner:
Reimbursable general and administrative costs			402				605				1,198				1,795
Carbonate Trend overburden indemnified costs			112				—				112				—
Total charges direct to general partner			514				605				1,310				1,795
Income subject to 2% allocation of general partner interest			61,347				30,034				177,594				63,307
General partner’s share of net income			2.0	%			2.0	%			2.0	%			2.0	%
General partner’s allocated share of net income before items directly allocable to general partner interest			1,227				600				3,552				1,265
Incentive distributions paid to general partner(b)			6,765				1,267				16,495				2,835
Direct charges to general partner			(514	)			(605	)			(1,310	)			(1,795	)
Pre-partnership net income allocated to general partner			—				18,472				—				52,960
Net income allocated to general partner		$	7,478			$	19,734			$	18,737			$	55,265
Net income		$	60,833			$	47,901			$	176,284			$	119,780
Net income allocated to general partner			7,478				19,734				18,737				55,265
Net income allocated to limited partners		$	53,355			$	28,167			$	157,547			$	64,515

     Common and subordinated unitholders have always shared equally, on a per-unit basis, in the net income allocated to limited partners.

     We paid or have authorized payment of the following cash distributions during 2007 and 2008 (in thousands, except for per unit amounts):

																		General Partner
																						Incentive
		Per Unit				Common				Subordinated				Class B								Distribution				Total Cash
Payment Date		Distribution				Units				Units				Units				2%				Rights				Distribution
2/14/2007		$	0.4700			$	12,010			$	3,290			$	3,198			$	390			$	603			$	19,491
5/15/2007		$	0.5000			$	12,777			$	3,500			$	3,403			$	421			$	965			$	21,066
8/14/2007		$	0.5250			$	16,989			$	3,675				—			$	447			$	1,267			$	22,378
11/14/2007		$	0.5500			$	17,799			$	3,850				—			$	487			$	2,211			$	24,347
2/14/2008		$	0.5750			$	26,321			$	4,025				—			$	706			$	4,231			$	35,283
5/15/2008		$	0.6000			$	31,665				—				—			$	758			$	5,499			$	37,922
8/14/2008		$	0.6250			$	32,984				—				—			$	811			$	6,765			$	40,560
11/14/2008 (a)		$	0.6350			$	33,514				—				—			$	832			$	7,272			$	41,618

Note 4. Reclassification of Assets Previously Held for Sale

     Effective April 1, 2008, we classified our gathering system assets located in Rio Arriba County of northern New Mexico on land owned by the Jicarilla Apache Nation (JAN) as held for sale. This classification resulted from active negotiations to sell these assets to the JAN following the expiration of our right-of-way agreement with them on December 31, 2006. During the third quarter of 2008, negotiations with the JAN changed focus from an asset sale to other alternative arrangements; therefore, we determined that it was no longer appropriate to classify these assets as held for sale, and the net book value of these assets of $11.3 million at September 30, 2008 is now presented within Property, plant and equipment, net. Concurrently, during the third quarter we recognized depreciation expense of $0.5 million on these assets, including $0.2 million pertaining to the second quarter of 2008. We currently operate these gathering assets pursuant to a special business license granted by the JAN which expires February 28, 2009. These gathering system assets are part of the Gathering and Processing — West segment.

Note 5. Equity Investments

Wamsutter

     Wamsutter allocates net income (equity earnings) to us based upon the allocation, distribution, and liquidation provisions of its limited liability company agreement applied as though liquidation occurs at book value. In general, the agreement allocates income in a manner that will maintain capital account balances reflective of the amounts each ownership interest would receive if Wamsutter were dissolved and liquidated at carrying value. The income allocation for the quarterly periods during a year reflects the preferential rights of the Class A interest to any distributions made to the Class C interest until the Class A interest has received $70.0 million in distributions for the year. The Class B interest receives no income or loss allocation. As the owner of 100% of the Class A ownership interest, we will receive 100% of Wamsutter’s net income up to $70.0 million. Income in excess of $70.0 million will be shared between the Class A interest and Class C interest, of which we currently own 50%. For annual periods in which Wamsutter’s net income exceeds $70.0 million, this will result in a higher allocation of equity earnings to us early in the year and a lower allocation of equity earnings to us later in the year. As such, our share of Wamsutter’s net income will vary by quarter and will be higher in quarters prior to reaching the $70.0 million net income threshold. Beginning in the third quarter of 2008, having exceeded $70.0 million in net income for the 12-month distribution period which began December 1, 2007, Wamsutter’s net income is shared between the Class A interest and Class C interest. Accordingly, the Class A and Class C interests were allocated net income of $9.6 million and $22.4 million, respectively, for the third quarter of 2008 and our total equity earnings from Wamsutter was $20.8 million. Wamsutter’s net income allocation does not affect the amount of available cash it distributes for any quarter.

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

		September 30,				December 31,
		2008				2007
		(Unaudited)
Current assets		$	23,656			$	27,114
Property, plant and equipment, net			293,287				275,163
Other non-current assets			4				191
Current liabilities			(10,039	)			(13,016	)
Non-current liabilities			(4,003	)			(2,740	)
Members’ capital		$	302,905			$	286,712

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Unaudited)
Revenues:
Affiliate		$	38,764			$	20,076			$	138,568			$	63,765
Third-party			19,056				18,075				57,099				55,093
Costs and expenses:
Affiliate			11,031				7,440				61,510				31,198
Third-party			14,782				12,239				43,476				37,302
Net income		$	32,007			$	18,472			$	90,681			$	50,358
Williams Partners’ interest — equity earnings		$	20,801			$	18,472			$	79,475			$	50,358

Discovery Producer Services LLC

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

		September 30,				December 31,
		2008				2007
		(Unaudited)
Current assets		$	60,204			$	78,035
Non-current restricted cash and cash equivalents			3,471				6,222
Property, plant and equipment, net			359,719				368,228
Current liabilities			(23,605	)			(33,820	)
Non-current liabilities			(16,287	)			(12,216	)
Members’ capital		$	383,502			$	406,449

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Unaudited)
Revenues:
Affiliate		$	53,037			$	51,829			$	202,954			$	144,997
Third-party			8,243				8,281				28,365				31,098
Costs and expenses:
Affiliate			17,249				24,973				87,717				72,145
Third-party			30,224				22,452				93,403				78,986
Interest income			(143	)			(389	)			(593	)			(1,472	)
Loss on sale of operating assets			—				—				2				603
Foreign exchange loss (gain)			208				(94	)			65				(346	)
Net income		$	13,742			$	13,168			$	50,725			$	26,179
Williams Partners’ interest — equity earnings		$	8,244			$	7,902			$	30,435			$	15,708

Note 6. Long-Term Debt and Credit Facilities

     Long-Term Debt

     Long-term debt at September 30, 2008 and December 31, 2007 is as follows:

		Interest				September 30,				December 31,
		Rate				2008				2007
		(In millions)
Credit agreement term loan, adjustable rate, due 2012			(a	)		$	250			$	250
Senior unsecured notes, fixed rate, due 2017			7.25	%			600				600
Senior unsecured notes, fixed rate, due 2011			7.50	%			150				150
Total Long-term debt						$	1,000			$	1,000

     Credit Facilities

     We have a $450.0 million senior unsecured credit agreement with Citibank, N.A. as administrative agent, comprised initially of a $200.0 million revolving credit facility available for borrowings and letters of credit and a $250.0 million term loan. The parent company and certain affiliates of Lehman Brothers Commercial Bank, who is committed to fund up to $12.0 million of this credit facility, have filed for bankruptcy. We expect that our ability to borrow under this facility is reduced by this committed amount. The committed amounts of the other participating banks under this agreement remain in effect and are not impacted by this reduction. We must repay

borrowings under this agreement by December 11, 2012. At September 30, 2008, we had a $250.0 million term loan outstanding under the term loan provisions and no amounts outstanding under the revolving credit facility.

     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 20, 2009. We are required to and have reduced all borrowings under this facility to zero for a period of at least 15 consecutive days once each 12-month period prior to the maturity date of the facility. As of September 30, 2008, we had no outstanding borrowings under the working capital credit facility.

Note 7. Partners’ Capital

     On January 9, 2008, we sold an additional 800,000 common units to the underwriters upon the underwriters’ partial exercise of their option to purchase additional common units pursuant to our common unit offering in December 2007. We used the net proceeds from the partial exercise of the underwriters’ option to redeem 800,000 common units from an affiliate of Williams at a price per common unit of $36.24 ($37.75, net of underwriter discount).

     On January 28, 2008, our general partner’s board of directors confirmed that we had satisfied the financial test contained in our partnership agreement required for conversion of all of our outstanding subordinated units into common units. Accordingly, our 7,000,000 subordinated units held by four subsidiaries of Williams converted into common units on a one-for-one basis on February 19, 2008.

     Pursuant to Williams Partners GP LLC Long-Term Incentive Plan, on August 22, 2008, our general partner granted 2,724 restricted units to members of our general partner’s board of directors who are not officers or employees of our general partner or its affiliates.

Note 8. Fair Value Measurements

Adoption of SFAS No. 157

     SFAS No. 157, “Fair Value Measurements” (1) establishes a framework for fair value measurements in the financial statements by providing a definition of fair value, (2) provides guidance on the methods used to estimate fair value and (3) expands disclosures about fair value measurements. On January 1, 2008, we adopted SFAS No. 157 for our assets and liabilities which are measured at fair value on a recurring basis, our commodity derivatives. Upon applying SFAS No. 157, we changed our valuation methodology to consider our nonperformance risk in estimating the fair value of our liabilities. Applying SFAS No. 157 did not materially impact our consolidated financial statements. In February 2008, the FASB issued Financial Staff Position (FSP) FAS 157-2 permitting entities to delay application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Beginning January 1, 2009, we will apply SFAS No. 157 fair value requirements to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis. We are evaluating the impact of this application on our consolidated financial statements. SFAS No. 157 requires two distinct transition approaches: (i) cumulative-effect adjustment to beginning retained earnings for certain financial instrument transactions and (ii) prospectively as of the date of adoption through earnings or other comprehensive income, as applicable. Upon adopting SFAS No. 157, we applied a prospective transition as we did not have financial instrument transactions that required a cumulative-effect adjustment to beginning retained earnings.

     Fair value is the price that would be received in the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement from the perspective of a market participant. We use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily observable, market corroborated, or unobservable. We primarily apply a market approach for recurring fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

     SFAS No. 157 establishes a fair-value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to

unobservable inputs (Level 3 measurement). We classify fair-value balances based on the observability of those inputs. The three levels of the fair-value hierarchy are as follows:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
	•		Level 2 — Inputs are other than quoted prices in active markets included in Level 1, that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
	•		Level 3 — Includes inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value. Our Level 3 consists of instruments valued with valuation methods that utilize unobservable pricing inputs that are significant to the overall fair value.

     In valuing certain contracts, the inputs used to measure fair value may fall into different levels of the fair-value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair-value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. Our assessment of the significance of a particular input to the fair-value measurement requires judgment and may affect the placement within the fair-value hierarchy levels.

     At September 30, 2008 all of our derivative assets and liabilities which are valued at fair value are included in Level 3 and include $3.7 million of energy commodity derivative assets and $0.1 million of energy commodity derivative liabilities. These derivatives are contracted entirely with Williams, and include commodity based financial swap contracts.

     The following table sets forth a reconciliation of changes in the fair value of net derivatives classified as Level 3 in the fair-value hierarchy for the three and nine months ended September 30, 2008.

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

		Net Derivative
		Asset (Liability)
Balance as of July 1, 2008		$	(11,978	)
Realized and unrealized gains:
Included in net income			143
Included in other comprehensive income			10,015
Purchases, issuances, and settlements			5,458
Transfers in/(out) of Level 3			—
Balance as of September 30, 2008		$	3,638
Unrealized gains included in net income relating to instruments still held at September 30, 2008		$	4,962

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

		Net Derivative
		Asset (Liability)
Balance as of January 1, 2008		$	(2,487	)
Realized and unrealized losses:
Included in net income			(214	)
Included in other comprehensive income			(358	)
Purchases, issuances, and settlements			6,697
Transfers in/(out) of Level 3			—
Balance as of September 30, 2008		$	3,638
Unrealized gains included in net income relating to instruments still held at September 30, 2008		$	4,585

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

Note 9. Commitments and Contingencies

     Environmental Matters-Four Corners. Current federal regulations require that certain unlined liquid containment pits located near named rivers and catchment areas be taken out of use, and current state regulations required all unlined, earthen pits to be either permitted or closed by December 31, 2005. Operating under a New Mexico Oil Conservation Division-approved work plan, we have physically closed all of our pits that were slated for closure under those regulations. We are presently awaiting agency approval of the closures for 40 to 50 of those pits. We are also a participant in certain hydrocarbon removal and groundwater monitoring activities associated with certain well sites in New Mexico. Of nine remaining active sites, product removal is ongoing at four and groundwater monitoring is ongoing at each site. As groundwater concentrations reach and sustain closure criteria levels and state regulator approval is received, the sites will be properly abandoned. We expect the remaining sites will be closed within four to seven years.

     In April 2007, the New Mexico Environment Department’s Air Quality Bureau (NMED) issued a Notice of Violation (NOV) that alleges various emission and reporting violations in connection with our Lybrook gas processing plant’s flare and leak detection and repair program. The NMED proposed a penalty of approximately $3 million. In July 2008, the NMED issued an NOV that alleged air emissions permit exceedances for three glycol dehydrators at our Pump Mesa central delivery point compressor facility and proposed a penalty of approximately $103,000. We are discussing the basis for and scope of the calculation of the proposed penalties with the NMED.

     In March 2008, the Environmental Protection Agency (EPA) proposed a penalty of $370,000 for alleged violations relating to leak detection and repair program delays at our Ignacio gas plant in Colorado and for alleged permit violations at our Ute “E” compressor station. We met with the EPA and are exchanging information in order to resolve the issues.

     We have accrued liabilities totaling $1.5 million at September 30, 2008 for these environmental activities. It is reasonably possible that we will incur losses in excess of our accrual for these matters. However, a reasonable estimate of such amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by governmental authorities, negotiations with the applicable agencies, and other factors.

     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. We have not been notified and are not currently aware of any material noncompliance under the various applicable environmental laws and regulations.

     Environmental Matters-Conway. We are a participant in certain environmental remediation activities associated with soil and groundwater contamination at our Conway storage facilities. These activities relate to four projects that are in various remediation stages including assessment studies, cleanups and/or remedial operations and monitoring. We continue to coordinate with the Kansas

Department of Health and Environment (KDHE) to develop screening, sampling, cleanup and monitoring programs. The costs of such activities will depend upon the program scope ultimately agreed to by the KDHE and are expected to be paid over the next two to six years. At September 30, 2008, we had accrued liabilities totaling $3.2 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.

     In 2004, we purchased an insurance policy that covered up to $5.0 million of remediation costs until an active remediation system was in place or April 30, 2008, whichever was earlier, excluding operation and maintenance costs and ongoing monitoring costs for these projects to the extent such costs exceeded a $4.2 million deductible. We incurred $3.1 million in costs from the onset of the policy through its termination; hence, we did not submit any claims under this insurance policy prior to its expiration. In addition, under an omnibus agreement with Williams entered into at the closing of our initial public offering, Williams agreed to indemnify us for the Conway environmental remediation costs, excluding costs of project management and soil and groundwater monitoring, to the extent they were not reimbursed under the insurance policy. There is a $14.0 million cap on the total amount of indemnity coverage for environmental and other items under the omnibus agreement. Of this, $7.5 million remains available for future indemnification. Payments received under this indemnification are accounted for as a capital contribution to us by Williams as the costs are reimbursed.

     Will Price. In 2001, we were named, along with other subsidiaries of Williams, as defendants in a nationwide class action lawsuit in Kansas state court that had been pending against other defendants, generally pipeline and gathering companies, since 2000. The plaintiffs alleged that the defendants have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs and sought an unspecified amount of damages. The defendants have opposed class certification and 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. The amount of any possible liability cannot be reasonably estimated at this time.

     Grynberg. In 1998, the U. S. 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 had 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 would not intervene in any of the Grynberg cases. Also in 1999, the Panel on Multi-District Litigation transferred all of these cases, including those filed against us, to the federal court in Wyoming for pre-trial purposes. Grynberg’s measurement claims remained pending against us and the other defendants; the court previously dismissed Grynberg’s royalty valuation claims. In 2005, the court-appointed special master entered a report which recommended that the claims against certain Williams’ subsidiaries, including us, be dismissed. In October 2006, the District Court dismissed all claims against us, and in November 2006, Grynberg filed his notice of appeals with the Tenth Circuit Court of Appeals. The Court held oral argument on September 25, 2008.

     GEII Litigation. General Electric International, Inc. (GEII) worked on turbines at our Ignacio, New Mexico plant. We disagree with GEII on the quality of GEII’s work and the appropriate compensation. GEII asserts that it is entitled to additional extra work charges under the agreement, which we deny are due. In 2006 we filed suit in federal court in Tulsa, Oklahoma against GEII, GE Energy Services, Inc., and Qualified Contractors, Inc. We alleged, among other claims, breach of contract, breach of the duty of good faith and fair dealing, and negligent misrepresentation and sought unspecified damages. In 2007, the defendants and GEII filed counterclaims in the amount of $1.9 million against us that alleged breach of contract and breach of the duty of good faith and fair dealing. Trial has been set for April 20, 2009.

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

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

Note 10. 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 -				NGL
		Processing - West				Gulf				Services				Total
		(In thousands)
Three Months Ended September 30, 2008:
Segment revenues		$	155,217			$	537			$	19,959			$	175,713
Product cost and shrink replacement			53,902				—				3,847				57,749
Operating and maintenance expense			42,129				148				8,200				50,477
Depreciation, amortization and accretion			10,811				153				771				11,735
Direct general and administrative expense			2,188				—				631				2,819
Other, net			(3,703	)			—				195				(3,508	)
Segment operating income			49,890				236				6,315				56,441
Equity earnings			20,801				8,244				—				29,045
Segment profit		$	70,691			$	8,480			$	6,315			$	85,486
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	56,441
General and administrative expenses:
Allocated-affiliate															(7,908	)
Third party-direct															(557	)
Combined operating income														$	47,976
Three Months Ended September 30, 2007*:
Segment revenues		$	134,035			$	521			$	15,020			$	149,576
Product cost and shrink replacement			45,791				—				3,058				48,849
Operating and maintenance expense			34,267				443				5,824				40,534
Depreciation, amortization and accretion			8,564				304				1,477				10,345
Direct general and administrative expense			1,839				—				510				2,349
Other, net			2,414				—				194				2,608
Segment operating income (loss)			41,160				(226	)			3,957				44,891
Equity earnings			18,472				7,902				—				26,374
Segment profit		$	59,632			$	7,676			$	3,957			$	71,265
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	44,891
General and administrative expenses:
Allocated-affiliate															(8,670	)
Third party-direct															(722	)
Combined operating income														$	35,499

						Gathering &
		Gathering &				Processing -				NGL
		Processing - West				Gulf				Services				Total
		(In thousands)
Nine Months Ended September 30, 2008:
Segment revenues		$	446,113			$	1,650			$	56,557			$	504,320
Product cost and shrink replacement			162,492				—				13,364				175,856
Operating and maintenance expense			119,699				1,191				23,203				144,093
Depreciation, amortization and accretion			31,246				457				2,260				33,963
Direct general and administrative expense			6,176				—				1,875				8,051
Other, net			(1,899	)			—				585				(1,314	)
Segment operating income			128,399				2				15,270				143,671
Equity earnings			79,475				30,435				—				109,910
Segment profit		$	207,874			$	30,437			$	15,270			$	253,581
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	143,671
General and administrative expenses:
Allocated-affiliate															(25,416	)
Third party-direct															(1,755	)
Combined operating income														$	116,500
Nine Months Ended September 30, 2007*:
Segment revenues		$	379,510			$	1,541			$	41,609			$	422,660
Product cost and shrink replacement			127,779				—				7,942				135,721
Operating and maintenance expense			96,851				1,354				19,085				117,290
Depreciation, amortization and accretion			30,942				911				2,904				34,757
Direct general and administrative expense			5,457				—				1,478				6,935
Other, net			7,422				—				584				8,006
Segment operating income (loss)			111,059				(724	)			9,616				119,951
Equity earnings			50,358				15,708				—				66,066
Segment profit		$	161,417			$	14,984			$	9,616			$	186,017
Reconciliation to the Consolidated Statements of Income:
Segment operating income														$	119,951
General and administrative expenses:
Allocated-affiliate															(23,324	)
Third party-direct															(2,385	)
Combined operating income														$	94,242