Edgar Filing: Williams Partners L.P.

e10vq

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, 2006


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

For the transition period from to

Commission file number 1-32599

WILLIAMS PARTNERS L.P.

(Exact Name of Registrant as Specified in its Charter)


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 o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 14,598,276 common units and 7,000,000 subordinated units outstanding as of November 1, 2006.

WILLIAMS PARTNERS L.P.
INDEX


	Page
Part I. Financial Information

Item 1. Financial Statements

Consolidated Statements of Income — Three and Nine Months Ended September 30, 2006 and 2005		3

Consolidated Balance Sheets — September 30, 2006 and December 31, 2005		4

Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2006 and 2005		5

Consolidated Statement of Partners’ Capital from January 1, 2006 to September 30, 2006		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		36

Item 4. Controls and Procedures		36

Part II. Other Information

Item 1. Legal Proceedings		37

Item 1A. Risk Factors		37

Item 6. Exhibits		47
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certifications

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 indenture and by our leverage.

	•		Williams’ credit agreement and Williams’ public indentures contain financial and operating restrictions that may limit our access to credit. In addition, our ability to obtain credit in the future will be affected by Williams’ credit ratings.

	•		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.

	•		Our partnership agreement limits our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

	•		Even if unitholders are dissatisfied, they cannot currently remove our general partner without its consent.

	•		You 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 Annual Report on Form 10-K for the year ended December 31, 2005, and Item 1A of Part II, “Risk Factors,” of this report.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

WILLIAMS PARTNERS L.P.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per-unit amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005*			2006			2005*
Revenues:
Storage	$	6,581		$	5,409		$	17,610		$	14,435
Fractionation		2,708			2,386			9,650			7,123
Gathering		632			649			2,041			2,295
Product sales:
Affiliate		2,920			2,726			11,963			9,234
Third-party		—			—			—			63
Other		1,138			1,006			3,170			2,571


Total revenues		13,979			12,176			44,434			35,721

Costs and expenses:
Operating and maintenance expense (excluding depreciation):
Affiliate		3,658			2,592			11,041			7,938
Third-party		3,961			5,680			11,312			8,854
Product cost		2,880			2,258			11,522			8,320
Depreciation and accretion		909			896			2,709			2,694
General and administrative expense:
Affiliate		1,652			1,170			4,593			2,708
Third-party		562			385			1,690			431
Taxes other than income		182			194			550			532
Other expense		—			—			5			—


Total costs and expenses		13,804			13,175			43,422			31,477


Operating income (loss)		175			(999	)		1,012			4,244

Equity earnings-Williams Four Corners		10,538			8,565			26,842			21,795
Equity earnings-Discovery Producer Services		4,055			66			10,183			2,969
Interest expense:
Affiliate		(15	)		(1,822	)		(45	)		(7,439	)
Third-party		(3,256	)		(192	)		(4,110	)		(561	)
Interest income		462			76			642			76


Net income	$	11,959		$	5,694		$	34,524		$	21,084


Allocation of net income:
Net income		11,959			5,694			34,524			21,084
Allocation of net income (loss) to general partner		(622	)		5,950			13,249			21,340

Allocation of net income (loss) to limited partners	$	12,581		$	(256	)	$	21,275		$	(256	)


Basic and diluted net income (loss) per limited partner unit:
Common units	$	0.58		$	(0.02	)	$	1.19		$	(0.02	)
Subordinated units		0.58			(0.02	)		1.19			(0.02	)

Weighted average number of units outstanding:
Common units		14,597,072			7,000,000			9,870,084			7,000,000
Subordinated units		7,000,000			7,000,000			7,000,000			7,000,000


*		Restated as discussed in Note 1.

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2006		2005*
	(Unaudited)
	(Thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	32,150	$	6,839
Accounts receivable:
Trade		2,483		1,840
Other		3,124		2,104
Gas purchase contract – affiliate		4,888		5,320
Product imbalance		428		760
Prepaid expense		2,133		1,133
Other current assets		628		—

Total current assets		45,834		17,996

Investment in Williams Four Corners		157,874		152,003
Investment in Discovery Producer Services		148,443		150,260
Property, plant and equipment, net		69,280		67,931
Gas purchase contract – noncurrent – affiliate		1,188		4,754
Other		2,327		—


Total assets	$	424,946	$	392,944


LIABILITIES AND PARTNERS’ CAPITAL

Current liabilities:
Accounts payable:
Trade	$	4,459	$	3,906
Affiliate		2,167		4,729
Deferred revenue		6,818		3,552
Accrued liabilities		5,507		2,373

Total current liabilities		18,951		14,560

Long-term debt		150,000		—
Environmental remediation liabilities		3,964		3,964
Other noncurrent liabilities		769		762
Commitments and contingent liabilities (Note 7)
Partners’ capital		251,262		373,658


Total liabilities and partners’ capital	$	424,946	$	392,944


*		Restated as discussed in Note 1.

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
	2006			2005*
	(Thousands)
OPERATING ACTIVITIES:
Net income	$	34,524		$	21,084
Adjustments to reconcile to cash provided by operations:
Depreciation and accretion		2,709			2,694
Amortization of gas purchase contract — affiliate		3,998			581
Distributions in excess of/(undistributed) equity earnings of:
Discovery Producer Services		1,817			(2,969	)
Williams Four Corners		(17,132	)		(21,795	)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable		(1,663	)		(2,538	)
Prepaid expense		(1,000	)		(126	)
Accounts payable		(2,135	)		3,685
Accrued liabilities		3,219			45
Deferred revenue		3,266			3,571
Other, including changes in non-current liabilities		706			3,045


Net cash provided by operating activities		28,309			7,277


INVESTING ACTIVITIES:
Purchase of equity investment		(156,129	)		—
Capital expenditures		(4,009	)		(1,860	)
Contribution to Discovery Producer Services LLC		—			(24,400	)


Net cash used by investing activities		(160,138	)		(26,260	)


FINANCING ACTIVITIES:
Proceeds from sale of common units		227,107			100,247
Proceeds from debt issuance		150,000			—
Excess purchase price over contributed basis of equity investment		(203,871	)		—
Distributions to unitholders		(19,875	)		—
Distributions to The Williams Companies, Inc		—			(58,756	)
Payment of debt issuance costs		(3,138	)		—
Payment of offering costs		(2,168	)		(4,291	)
General partner contributions		4,841			—
Contributions per omnibus agreement		4,244			—
Changes in advances from affiliates – net		—			(3,735	)


Net cash provided by financing activities		157,140			33,465


Increase in cash and cash equivalents		25,311			14,482
Cash and cash equivalents at beginning of period		6,839			—


Cash and cash equivalents at end of period	$	32,150		$	14,482


*		Restated as discussed in Note 1.

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(Unaudited)


										Total
	Limited Partners						General			Partners’
	Common			Subordinated			Partner			Capital
	(Thousands)
Balance — January 1, 2006*	$	108,526		$	108,491		$	156,641		$	373,658
Net income		13,410			8,385			12,729			34,524
Cash distributions		(11,318	)		(8,085	)		(472	)		(19,875	)
Contributions pursuant to the omnibus agreement		—			—			4,244			4,244
Issuance of units to public (7,590,000 common units)		227,107			—			—			227,107
Contributions from general partner		—			—			4,841			4,841
Distribution to general partner in exchange for interest in Williams Four Corners		—			—			(360,000	)		(360,000	)
Adjustment in basis of investment in Williams Four Corners		—			—			(11,261	)		(11,261	)
Offering costs		(2,168	)		—			—			(2,168	)
Other		192			—			—			192


Balance — September 30, 2006	$	335,749		$	108,791		$	(193,278	)	$	251,262


*		Restated as discussed in Note 1.

See accompanying notes to consolidated financial statements.

WILLIAMS PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Basis of Presentation

Unless the context clearly indicates otherwise, references in this quarterly report to “we,” “our,” “us” or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context clearly indicates otherwise, references to “we,” “our,” and “us” include the operations of Discovery Producer Services LLC (“Discovery”) and Williams Four Corners LLC (“Four Corners”), in which we own a 40 percent and 25.1 percent interest, respectively. When we refer to Discovery by name, we are referring exclusively to its businesses and operations. When we refer to Four Corners by name, we are referring exclusively to its businesses and operations.

We are a Delaware limited partnership formed by The Williams Companies, Inc. (“Williams”) in February 2005. On August 23, 2005, we completed our initial public offering (“IPO”) of common units. Effective with the IPO, we owned (1) a 40 percent interest in Discovery; (2) the Carbonate Trend gathering pipeline off the coast of Alabama; (3) three integrated natural gas liquids (“NGL”) product storage facilities near Conway, Kansas; and (4) a 50 percent undivided ownership interest in a fractionator near Conway, Kansas.

Williams Partners GP LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Williams, serves as our general partner and owns all of our two percent general partner interest. All of our activities are conducted through Williams Partners Operating LLC (“Williams OLLC”), an operating limited liability company wholly owned by us.

On June 20, 2006, we acquired a 25.1 percent membership interest in Four Corners pursuant to an agreement with Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field Services Company, LLC (“WFSC”), Williams OLLC and our general partner for aggregate consideration of $360.0 million (See Note 3-Acquisition of 25.1 Percent Interest in Four Corners). Prior to closing, WFSC contributed to Four Corners its natural gas gathering, processing and treating assets in the San Juan Basin in New Mexico and Colorado. Because Four Corners was an affiliate of Williams at the time of the acquisition, the transaction was between entities under common control, and has been accounted for at historical cost. Accordingly, our consolidated financial statements and notes have been restated to reflect the combined historical results of our investment in Four Corners throughout the periods presented.

We financed this acquisition with a combination of equity and debt. On June 20, 2006, we issued 6,600,000 common units at a price of $31.25 per unit. Additionally, at the closing, the underwriters fully exercised their option to purchase 990,000 common units at a price of $31.25 per unit. This offering yielded net proceeds of $227.1 million after the payment of underwriting discounts and commissions of $10.1 million, but before the payment of other offering expenses. On June 20, 2006, we also issued $150.0 million aggregate principal of unsecured 7.5 percent Senior Notes due 2011 under a private placement debt agreement (See Note 6-Credit Facilities and Long-Term Debt). Proceeds from this issuance totaled $146.9 million (net of $3.1 million of related expenses).

The accompanying interim consolidated financial statements do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 8-K, filed September 22, 2006, for the year ended December 31, 2005. The accompanying consolidated financial statements include all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position at September 30, 2006, and results of operations for the three months and nine months ended September 30, 2006 and 2005 and cash flows for the nine months ended September 30, 2006 and 2005. All intercompany transactions have been eliminated.

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

Note 2. Recent Accounting Standards

In January 2006, Williams adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.” Accordingly, payroll costs reflect additional compensation costs related to the adoption of this accounting standard. These costs relate to Williams’ common stock equity awards made between Williams and its employees. The adoption of this Statement beginning in the first quarter of 2006 had no material impact on our Consolidated Financial Statements.

Note 3. Acquisition of 25.1 Percent Interest in Four Corners

Because Four Corners was an affiliate of Williams at the time of our 25.1 percent interest acquisition, the transaction was between entities under common control, and has been accounted for at historical cost. As a result of recording the Four Corners investment at historical cost while acquiring the interest in Four Corners at market value, our general partner’s capital account was decreased by $203.9 million which represents the difference between the historical cost and market value of Four Corners. The acquisition had no impact on earnings per unit as pre-acquisition earnings were allocated to our general partner. The following table summarizes the impact of this acquisition on our Consolidated Statements of Income:


	Three months ended					Nine months ended
	September 30,					September 30,
	2006		2005			2006		2005
	(Thousands)
Equity earnings:
Without Four Corners	$	4,055	$	66		$	10,183	$	2,969
Four Corners		10,538		8,565			26,842		21,795


Combined equity earnings	$	14,593	$	8,631		$	37,025	$	24,764


Net income (loss):
Without Four Corners	$	1,421	$	(2,871	)	$	7,682	$	(711	)
Four Corners		10,538		8,565			26,842		21,795


Combined net income	$	11,959	$	5,694		$	34,524	$	21,084

Note 4. 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, 2006 and 2005 is as follows (in thousands):


	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
Allocation to general partner:
Net income	$	11,959		$	5,694		$	34,524		$	21,084
Pre-June 20, 2006 Four Corners equity earnings allocated to general partner interest		—			(8,565	)		(15,386	)		(21,795	)
Pre-partnership net loss applicable to period through August 22, 2005		—			2,192			—			32
Charges direct to general partner:
Reimbursable general and administrative costs		807			417			2,393			417
Core drilling indemnified costs		679			—			784			—


Total charges direct to general partner		1,486			417			3,177			417

Income (loss) subject to 2% allocation of general partner interest		13,445			(262	)		22,315			(262	)
General partner’s share of net income (loss)		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		269			(6	)		446			(6	)
Incentive distributions paid to general partner*		74			—			74			—
Direct charges to general partner		(1,486	)		(417	)		(3,177	)		(417	)

Pre-partnership net loss applicable to period through August 22, 2005		—			(2,192	)		—			(32	)
Pre June 20, 2006 Four Corners equity earnings applicable to general partner interest		—			8,565			15,386			21,795


Net income (loss) allocated to general partner	$	(1,143	)	$	5,950		$	12,729		$	21,340


Net income	$	11,959		$	5,694		$	34,524		$	21,084
Net income (loss) allocated to general partner		(1,143	)		5,950			12,729			21,340


Net income (loss) allocated to limited partners	$	13,102		$	(256	)	$	21,795		$	(256	)


*		Under the “two class” method of computing earnings per share, prescribed by Statement of Financials Accounting Standards No. 128, “Earnings Per Share,” earnings are to be allocated to participating securities as if all of the earnings for the period had been distributed. As a result, the general partner receives an additional allocation of income in quarterly periods where an assumed incentive distribution, calculated as if all earnings for the period had been distributed, exceeds the actual incentive distribution. The assumed incentive distribution for the three months ended September 30, 2006 is $595,000. This results in an allocation of income for the calculation of earnings per limited partner unit as follows:


	Three Months Ended
	September 30,
	2006			2005

Net income (loss) allocated to general partner	$	(622	)	$	5,950
Net income (loss) allocated to limited partners		12,581			(256	)


Net income	$	11,959		$	5,694

Pursuant to the partnership agreement, income allocations are made on a quarterly basis; therefore, earnings per limited partner unit for the nine months ended September 30, 2006 is calculated as the sum of the quarterly earnings per limited partner unit for each of the first three quarters of 2006. Common and subordinated unitholders share equally, on a per-unit basis, in the net income allocated to limited partners for the three and nine months ended September 30, 2006 and 2005.

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


	Per Unit		Common		Subordinated		General		Total Cash
Payment Date	Distribution		Units		Units		Partner		Distribution
2/14/2006	$	0.3500	$	2,452	$	2,450	$	100	$	5,002
5/15/2006	$	0.3800	$	2,662	$	2,660	$	109	$	5,431
8/14/2006 (a)	$	0.4250	$	6,204	$	2,975	$	263	$	9,442
11/14/2006 (b)	$	0.4500	$	6,569	$	3,150	$	401	$	10,120


(a)		Includes $74,000 incentive distribution rights payment.

(b)		The board of directors of our general partner declared this cash distribution on October 25, 2006 to be paid on November 14, 2006 to unitholders of record at the close of business on November 6, 2006. Includes $198,000 incentive distribution rights payment.

Note 5. Equity Investments

We use the equity method to account for our 25.1 percent ownership interest in Four Corners and our 40 percent ownership interest in Discovery. During the period from January 1, 2006 to June 20, 2006, Four Corners made distributions to Williams associated with Four Corners’ operations prior to our acquisition of a 25.1 percent ownership interest. These distributions resulted in a revised basis used for the calculation of the 25.1 percent interest transferred to us; therefore, the carrying value of our 25.1 percent interest in Four Corners and partners’ capital decreased $11.3 million during that period.

Due to the significance of each investment’s equity earnings to our results of operations, the summarized financial position and results of operations for 100 percent of Four Corners and 100 percent of Discovery are presented below (in thousands):

Williams Four Corners LLC


	September 30,			December 31,
	2006			2005
	(Unaudited)
Current assets	$	50,948		$	18,832
Non-current assets		24,020			25,228
Property, plant and equipment, net		574,463			591,034
Current liabilities		(19,335	)		(27,978	)
Non-current liabilities		(1,118	)		(1,526	)


Members’ capital	$	628,978		$	605,590


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
			(Unaudited)
Revenues:
Affiliate	$	75,784	$	67,747	$	209,196	$	185,340
Third-party		56,819		52,417		166,873		150,807
Costs and expenses:
Affiliate		32,260		25,975		106,968		77,099
Third-party		58,360		60,066		162,161		172,215


Net income	$	41,983	$	34,123	$	106,940	$	86,833

Discovery Producer Services LLC


	September 30,			December 31,
	2006			2005
	(Unaudited)
Current assets	$	59,769		$	70,525
Non-current restricted cash and cash equivalents		30,781			44,559
Property, plant and equipment, net		349,236			344,743
Current liabilities		(23,103	)		(45,070	)
Non-current liabilities		(1,198	)		(1,121	)


Members’ capital	$	415,485		$	413,636


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
				(Unaudited)
Revenues
Affiliate	$	38,755		$	8,231		$	113,992		$	38,395
Third-party		8,663			10,869			28,462			31,019
Costs and expenses
Affiliate		13,071			3,613			53,822			11,931
Third-party		24,817			15,819			65,009			51,230
Interest income		(608	)		(498	)		(1,835	)		(1,171	)


Net income	$	10,138		$	166		$	25,458		$	7,424

Note 6. Credit Facilities and Long-Term Debt

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. Borrowings under this facility mature on May 1, 2009. 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 September 30, 2006, letters of credit totaling $45.6 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 was amended and restated on August 7, 2006. The facility is available exclusively to fund working capital borrowings. Borrowings under the amended and restated facility will mature on June 29, 2009. We are required to reduce all borrowings under this facility to zero for a period of at least 15 consecutive days once each 12-month period prior to the maturity date of the facility. As of September 30, 2006, we had no outstanding borrowings under the working capital credit facility.

On June 20, 2006, we issued $150.0 million aggregate principal of 7.5 percent senior unsecured notes in a private debt placement. The maturity date of the notes is June 15, 2011. Interest is payable semi-annually in arrears on June 15 and December 15 of each year, with the first payment due on December 15, 2006. Debt issuance costs associated with the notes totaled $3.1 million and are being amortized over the life of the notes.

In connection with the issuance of the $150.0 million senior unsecured notes, sold in a private debt placement to qualified institutional buyers, we entered into a registration rights agreement with the initial purchasers of the senior notes whereby we agreed to conduct a registered exchange offer of exchange notes in exchange for the senior notes or cause to become effective a shelf registration statement providing for resale of the senior notes. The shelf registration became effective October 20, 2006. If we fail to comply with certain obligations under the registration rights agreement, we will be required to pay liquidated damages in the form of additional cash interest to the holders of the senior notes. Upon the occurrence of such a failure to comply, the interest rate on the senior notes shall be increased by 0.25 percent per annum during the 90-day period immediately following the occurrence of such failure to comply and shall increase by 0.25 percent per annum 90 days thereafter until all defaults have been cured, but in no event shall such aggregate additional interest exceed 0.50 percent per annum.

The terms of the senior notes are governed by an indenture that contains affirmative and negative covenants that, among other things, limit (1) our ability and the ability of our subsidiaries to incur liens securing indebtedness, (2) mergers, consolidations and transfers of all or substantially all of our properties or assets, (3) Williams Partners Finance Corporation’s ability to incur additional indebtedness and (4) Williams Partners Finance Corporation’s ability to engage in any business not related to obtaining money or arranging financing for us or our other subsidiaries. Williams Partners Finance Corporation is a Delaware corporation and our wholly owned subsidiary organized for the sole purpose of co-issuing debt securities from time to time with us. We use the equity method of accounting for our investments in Discovery and Four Corners, and neither will be classified as our subsidiary under the indenture so long as we continue to own a minority interest in such entities. As a result, neither Discovery nor Four Corners will be subject to the restrictive covenants in the indenture. The indenture also contains customary events of default, upon which the trustee or the holders of the senior notes may declare all outstanding senior notes to be due and payable immediately.

Pursuant to the indenture, we may issue additional notes from time to time. The senior notes and any additional notes subsequently issued under the indenture, together with any exchange notes, will be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase.

The senior notes are our senior unsecured obligations and rank equally in right of payment with all of our other senior indebtedness and senior to all of our future indebtedness that is expressly subordinated in right of payment to the senior notes. The senior notes will not initially be guaranteed by any of our subsidiaries. In the future in certain instances as set forth in the indenture, one or more of our subsidiaries may be required to guarantee the senior notes.

We may redeem the senior notes at our option in whole or in part at any time or from time to time prior to June 15, 2011, at a redemption price per note equal to the sum of (1) the then outstanding principal amount thereof, plus (2) accrued and unpaid interest, if any, to the redemption date, plus (3) a specified “make-whole” premium (as

defined in the indenture). Additionally, upon a change of control (as defined in the indenture), each holder of the senior notes will have the right to require us to repurchase all or any part of such holder’s senior notes at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid interest. Except upon a change of control as previously described, we are not required to make mandatory redemption or sinking fund payments with respect to the senior notes or to repurchase the senior notes at the option of the holders.

Note 7. Commitments and Contingencies

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

We have an insurance policy that covers up to $5.0 million of remediation costs until an active remediation system is in place or April 30, 2008, whichever is earlier, excluding operation and maintenance costs and ongoing monitoring costs for these projects to the extent such costs exceed a $4.2 million deductible, of which $0.7 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 the IPO, Williams agreed to indemnify us for the remediation expenditures not covered by the insurance policy, excluding costs of project management and soil and groundwater monitoring, and certain other environmental and related obligations arising out of or associated with the operation of the assets prior to the closing of the IPO. There is an aggregate cap of $14.0 million on the total amount of indemnity coverage for environmental and related expenditures under the omnibus agreement, which will be reduced by actual recoveries under the environmental insurance policy. There is also a three-year time limitation from the IPO closing date, August 23, 2005. The benefit of this indemnification will be accounted for as a capital contribution to us by Williams as the costs are reimbursed. We estimate that the approximate cost of this project management and soil and groundwater monitoring associated with the four remediation projects at the Conway storage facilities and for which we will not be indemnified will be approximately $0.2 million to $0.4 million per year following the completion of the remediation work.

At September 30, 2006, we had accrued liabilities totaling $5.5 million for these costs. It is reasonably possible that we will incur losses in excess of our accrual for these matters. However, a reasonable estimate of such amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by KDHE and other governmental authorities and other factors.

Other. The partnership and its subsidiaries are not currently a party to any legal proceedings but are a party to various administrative and regulatory proceedings that have arisen in the ordinary course of our business. Management, including internal counsel, currently believes that the ultimate resolution of the foregoing matters, taken as a whole, and after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a material adverse effect upon our future financial position.

Note 8. Segment Disclosures

Our reportable segments are strategic business units that offer different products and services. The Gathering and Processing segment includes our ownership interest in Four Corners, our ownership interest in Discovery and the Carbonate Trend gathering pipeline. The NGL Services segment includes three integrated NGL storage facilities and a 50 percent undivided interest in a fractionator near Conway, Kansas. The segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies.


	Gathering &			NGL
	Processing			Services			Total
	(Thousands)
Three Months Ended September 30, 2006:

Segment revenues	$	632		$	13,347		$	13,979

Operating and maintenance expense		399			7,220			7,619
Product cost		—			2,880			2,880
Depreciation and accretion		300			609			909
Direct general and administrative expense		—			279			279
Taxes other than income		—			182			182


Segment operating income (loss)		(67	)		2,177			2,110
Equity earnings-Williams Four Corners		10,538			—			10,538
Equity earnings-Discovery Producer Services		4,055			—			4,055


Segment profit	$	14,526		$	2,177		$	16,703


Reconciliation to the Consolidated Statements of Income:
Segment operating income							$	2,110
General and administrative expenses:
Allocated-affiliate								(1,375	)
Third party-direct								(560	)


Combined operating income							$	175


Three Months Ended September 30, 2005:

Segment revenues	$	650		$	11,526		$	12,176

Operating and maintenance expense		101			8,171			8,272
Product cost		—			2,258			2,258
Depreciation and accretion		300			596			896
Direct general and administrative expense		—			308			308
Taxes other than income		—			194			194


Segment operating income (loss)		249			(1	)		248
Equity earnings-Williams Four Corners		8,565			—			8,565
Equity earnings-Discovery Producer Services		66			—			66


Segment profit (loss)	$	8,880		$	(1	)	$	8,879


Reconciliation to the Consolidated Statements of Income:
Segment operating income							$	248
General and administrative expenses:
Allocated-affiliate								(895	)
Third party-direct								(352	)

Combined operating loss							$	(999	)


	Gathering &		NGL
	Processing		Services		Total
	(Thousands)
Nine Months Ended September 30, 2006:

Segment revenues	$	2,041	$	42,393	$	44,434

Operating and maintenance expense		872		21,481		22,353
Product cost		—		11,522		11,522
Depreciation and accretion		900		1,809		2,709
Direct general and administrative expense		9		815		824
Taxes other than income		—		550		550
Other expense		—		5		5


Segment operating income		260		6,211		6,471
Equity earnings-Williams Four Corners		26,842		—		26,842
Equity earnings-Discovery Producer Services		10,183		—		10,183


Segment profit	$	37,285	$	6,211	$	43,496


Reconciliation to the Consolidated Statements of Income:
Segment operating income					$	6,471
General and administrative expenses:
Allocated-affiliate						(3,785	)
Third party-direct						(1,674	)


Combined operating income					$	1,012


Nine Months Ended September 30, 2005:

Segment revenues	$	2,295	$	33,426	$	35,721

Operating and maintenance expense		477		16,315		16,792
Product cost		—		8,320		8,320
Depreciation and accretion		900		1,794		2,694
Direct general and administrative expense		—		782		782
Taxes other than income		—		532		532


Segment operating income		918		5,683		6,601
Equity earnings-Williams Four Corners		21,795		—		21,795
Equity earnings-Discovery Producer Services		2,969		—		2,969


Segment profit	$	25,682	$	5,683	$	31,365


Reconciliation to the Consolidated Statements of Income:
Segment operating income					$	6,601
General and administrative expenses:
Allocated-affiliate						(2,005	)
Third party-direct						(352	)

Combined operating income					$	4,244

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 a Delaware limited partnership formed in February 2005. On August 23, 2005, we completed our initial public offering (“IPO”) of common units. We are principally engaged in the business of gathering, transporting, processing and treating natural gas and fractionating and storing natural gas liquids (“NGLs”). We manage our business and analyze our results of operations on a segment basis. Our operations are divided into two business segments:

	•		Gathering and Processing. Our Gathering and Processing segment includes (1) our 25.1 percent ownership interest in Williams Four Corners LLC (“Four Corners”), (2) our 40 percent ownership interest in Discovery Producer Services LLC (“Discovery”) and (3) the Carbonate Trend gathering pipeline off the coast of Alabama. The Four Corners system gathers and processes or treats approximately 37 percent of the natural gas produced in the San Juan Basin and connects with the five pipeline systems that transport natural gas to end markets from the basin. Discovery owns an integrated natural gas gathering and transportation pipeline system extending from offshore in the Gulf of Mexico to a natural gas processing facility and an NGL fractionator in Louisiana. These assets generate revenues by providing natural gas gathering, transporting and processing services and integrated NGL fractionating services to customers under a range of contractual arrangements. Although Discovery includes fractionation operations, which would normally fall within the NGL Services segment, it is primarily engaged in gathering and processing and is managed as such.

	•		NGL Services. Our NGL Services segment includes three integrated NGL storage facilities and a 50 percent undivided interest in a fractionator near Conway, Kansas. These assets generate revenues by providing stand-alone NGL fractionation and storage services using various fee-based contractual arrangements where we receive a fee or fees based on actual or contracted volumetric measures.

Recent Events

Issuance of Common Units. On June 20, 2006, we sold 7,590,000 common units (including 990,000 common units pursuant to the underwriters’ over-allotment option) in a public offering. We received net proceeds of approximately $227.1 million from the sale of the common units after deducting underwriting discounts but before estimated offering expenses. The net proceeds were used primarily to fund our acquisition of a 25.1 percent interest in Four Corners discussed below and for general partnership purposes.

Issuance of Senior Unsecured Notes. On June 20, 2006, we issued $150.0 million aggregate principal amount of 7.5 percent Senior Unsecured Notes due 2011. We received net proceeds of approximately $146.9 million from the sale of the senior unsecured notes after deducting initial purchaser discounts and estimated offering expenses. The net proceeds were used to fund our acquisition of a 25.1 percent interest in Four Corners discussed below.

Acquisition of Interest in Four Corners. On June 20, 2006, we completed our acquisition of a 25.1 percent ownership interest in Four Corners for aggregate consideration of $360.0 million ($355.8 million net of our general partner’s capital contribution related to the issuance of common units discussed above) that was financed by the issuance of common units and senior unsecured notes discussed above. Four Corners’ natural gas gathering, processing and treating assets consist of, among other things, the following:

	(i)		a 3,500-mile natural gas gathering system in the San Juan Basin in New Mexico and Colorado with a capacity of two billion cubic feet per day;

	(ii)		the Ignacio natural gas processing plant in Colorado and the Kutz and Lybrook natural gas processing plants in New Mexico, which have a combined processing capacity of 760 million cubic feet per day (“MMcf/d”); and

(iii)

the Milagro and Esperanza natural gas treating plants in New Mexico, which have a combined carbon dioxide treating capacity of 750 MMcf/d.

We account for the 25.1 percent interest in Four Corners as an equity investment, and therefore will not consolidate its financial results. Because Four Corners was an affiliate of Williams at the time of acquisition, the transaction was between entities under common control and has been accounted for at historical cost and our Consolidated Financial Statements and Notes to the Consolidated Financial Statements were restated to reflect the combined historical results. Accordingly, all prior period information in the following discussion and analysis of results of operations has been restated to reflect this change. Please read our prospectus, as filed with the Securities and Exchange Commission on June 15, 2006, for more information related to this transaction.

Future Acquisitions. Williams has announced that it has a goal of completing additional transactions of approximately $1.0 billion to $1.5 billion involving gathering and processing assets between us and Williams within the next three months. However, Williams has no obligation to sell assets to us, and we have no control as to whether or when Williams may elect to offer us the opportunity to acquire any such assets. In addition, the decision by us to acquire any assets from Williams and the terms, including price, of any significant transaction between Williams and us will be subject to the approval of the board of directors of our general partner and the terms of such transactions may also be subject to the approval of the conflicts committee of the board of directors of our general partner.

New Credit Facility with Williams. In May 2006, Williams replaced its $1.275 billion secured credit facility with a $1.5 billion unsecured credit agreement. The new facility contains similar terms and covenants as the prior facility. The new credit agreement is available for borrowings and letters of credit and will continue to allow us to borrow up to $75.0 million for general partnership purposes, including acquisitions, but only to the extent that sufficient amounts remain unborrowed by Williams and its other subsidiaries. Please read “— Financial Condition and Liquidity — Credit Facilities” for more information.

Results of Operations

Consolidated Overview

The following table and discussion is a summary of our consolidated results of operations for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005. 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 25.1 percent interest acquisition in Four Corners.


	Three months ended						% Change			Nine months ended						% Change
	September 30,						from			September 30,						from
	2006			2005			2005⁽¹⁾			2006			2005			2005⁽¹⁾
	(Thousands)									(Thousands)
Revenues	$	13,979		$	12,176			+15	%	$	44,434		$	35,721			+24	%

Costs and expenses:
Operating and maintenance expense		7,619			8,272			+8	%		22,353			16,792			-33	%
Product cost		2,880			2,258			-28	%		11,522			8,320			-38	%
Depreciation and accretion		909			896			-1	%		2,709			2,694			-1	%
General and administrative expense		2,214			1,555			-42	%		6,283			3,139			-100	%
Taxes other than income		182			194			+6	%		550			532			-3	%
Other expense		—			—		NM				5			—		NM


Total costs and expenses		13,804			13,175			-5	%		43,422			31,477			-38	%


Operating income (loss)		175			(999	)	NM				1,012			4,244			-76	%
Equity earnings – Four Corners		10,538			8,565			+23	%		26,842			21,795			+23	%
Equity earnings – Discovery		4,055			66		NM				10,183			2,969		NM
Interest expense		(3,271	)		(2,014	)		-62	%		(4,155	)		(8,000	)		+48	%
Interest income		462			76		NM				642			76		NM


Net income	$	11,959		$	5,694			+110	%	$	34,524		$	21,084			+64	%


(1)		+ = Favorable Change; — = Unfavorable Change; NM = A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200.

Three months ended September 30, 2006 vs. three months ended September 30, 2005

Revenues increased $1.8 million, or 15 percent, due primarily to higher revenues in our NGL Services segment reflecting higher storage and fractionation revenues. These increases are discussed in detail in the “– Results of Operations – NGL Services” section.

Operating and maintenance expense decreased $0.7 million, or eight percent, due primarily to our NGL Services segment where a favorable change in product imbalance adjustments was partially offset by increased fuel, power and cavern workover costs.

Product cost increased $0.6 million, or 28 percent, due to higher sales volumes in our NGL Services segment. These increases are discussed in detail in the “– Results of Operations – NGL Services” section.

General and administrative expense increased $0.7 million, or 42 percent, due primarily to the increased costs of being a publicly traded partnership. These costs included $0.4 million for charges allocated by Williams for accounting, legal and other support and $0.2 million for tax return preparation.

Operating income (loss) improved $1.2 million, from a loss of $1.0 million to income of $0.2 million, due primarily to higher NGL Services’ storage and fractionation revenues and lower operating and maintenance expense, partially offset by higher general and administrative expense.

Equity earnings from Four Corners and Discovery increased $2.0 million and $4.0 million, respectively. These increases are discussed in detail in the “– Results of Operations – Gathering and Processing” section.

Interest expense increased $1.3 million, or 62 percent, due to interest on our $150 million senior unsecured notes issued in June 2006 to finance a portion of our acquisition of a 25.1 percent interest in Four Corners and a full quarter of commitment fees on our credit facilities. This increase was partially offset by the impact on interest expense of the forgiveness of the advances from Williams in conjunction with the closing of our IPO on August 23, 2005.

Nine months ended September 30, 2006 vs. nine months ended September 30, 2005

Revenues increased $8.7 million, or 24 percent, due primarily to higher revenues in our NGL Services segment reflecting higher storage and fractionation revenues and increased product sales revenues. These increases are discussed in detail in the “– Results of Operations – NGL Services” section.

Operating and maintenance expense increased $5.6 million, or 33 percent, due primarily to our NGL Services segment where fuel and power costs and cavern workover costs increased.

Product cost increased $3.2 million, or 38 percent, directly related to increased product sales discussed above.

General and administrative expense increased $3.1 million, or 100 percent, due primarily to the increased costs of being a publicly traded partnership. These costs included $1.4 million for charges allocated by Williams for accounting, legal and other support, $1.1 million for audit fees, tax return preparation, director fees and agency rating fees and $0.5 million for activities of the conflicts committee of the board of directors of our general partner associated with our acquisition of a 25.1 percent interest in Four Corners.

Operating income decreased $3.2 million, or 76 percent, due primarily to higher operating and maintenance expense and general and administrative expense, partially offset by higher NGL Services’ storage and fractionation revenues.

Equity earnings from Four Corners and Discovery increased $5.0 million and $7.2 million, respectively. Both of these increases are discussed in detail in the “– Results of Operations – Gathering and Processing” section.

Interest expense decreased $3.8 million, or 48 percent, due to $7.4 million lower interest following the forgiveness of the advances from Williams in conjunction with the closing of our IPO on August 23, 2005. This decrease was partially offset by $3.1 million of interest on our $150.0 million senior unsecured notes issued in June 2006 to finance a portion of our acquisition of a 25.1 percent interest in Four Corners.

Results of Operations – Gathering and Processing

The Gathering and Processing segment includes the Carbonate Trend gathering pipeline, our 25.1 percent ownership interest in Four Corners and our 40 percent ownership interest in Discovery. Four Corners and Discovery are accounted for using the equity method of accounting. As such, our interest in Four Corners and Discovery’s net operating results are reflected as equity earnings in the Consolidated Statements of Income. Due to the significance of Four Corners’ and Discovery’s equity earnings to our results of operations, the discussion below addresses in greater detail the results of operations for 100 percent of both Four Corners and Discovery.


	Three months ended					Nine months ended
	September 30,					September 30,
	2006			2005		2006		2005
	(Thousands)
Segment revenues	$	632		$	650	$	2,041	$	2,295

Costs and expenses:
Operating and maintenance expense		399			101		872		477
Depreciation		300			300		900		900
General and administrative expense — direct		—			—		9		—


Total costs and expenses		699			401		1,781		1,377


Segment operating income (loss)		(67	)		249		260		918
Equity earnings — Four Corners		10,538			8,565		26,842		21,795
Equity earnings — Discovery		4,055			66		10,183		2,969


Segment profit	$	14,526		$	8,880	$	37,285	$	25,682

Carbonate Trend

Segment operating income (loss) for the three and nine months ended September 30, 2006 decreased $0.3 million and $0.7 million, respectively, due to higher insurance premiums related to the increased hurricane activity in the Gulf Coast region in 2005. In addition, gathering revenues decreased during the first nine months of 2006 due to declines in average daily gathered volumes. These volumetric declines are caused by normal reservoir depletion that was not offset by new sources of throughput.

Four Corners


	Three months ended				Nine months ended
	September 30,				September 30,
	2006		2005		2006			2005
	(Thousands)
Revenues	$	132,603	$	120,164	$	376,069		$	336,147

Costs and expenses, including interest:
Product cost and shrink replacement		41,821		42,235		121,898			115,087
Operating and maintenance expense		29,950		24,429		93,570			76,810
Depreciation and amortization		10,035		9,673		29,801			29,107
General and administrative expense		6,554		6,783		21,248			21,092
Taxes other than income		2,170		1,976		5,842			5,909
Other (income) expense, net		90		945		(3,230	)		1,309


Total costs and expenses, including interest		90,620		86,041		269,129			249,314


Net income	$	41,983	$	34,123	$	106,940		$	86,833


Williams Partners’ 25.1 percent interest — Equity earnings per our Consolidated Statements of Income
	$	10,538	$	8,565	$	26,842		$	21,795

Three months ended September 30, 2006 vs. three months ended September 30, 2005

Revenues increased $12.4 million, or ten percent, due to $9.2 million higher product sales and $3.2 million higher gathering and processing revenue.

Product sales revenues increased due primarily to:

	•		$6.3 million related to a 17 percent increase in average NGL sales prices realized on sales of NGLs that Four Corners received under certain processing contracts. This increase resulted from general increases in market prices for these commodities between the two periods;

	•		$3.8 million related to an 11 percent increase in NGL volumes that Four Corners received under certain processing contracts. This increase was related primarily to equipment outages in the third quarter of 2005; and

	•		$0.7 million of higher liquefied natural gas (“LNG”) sales related primarily to an increase in volumes sold.

	•		These product sales increases were partially offset by $1.6 million lower sales of NGLs on behalf of third party producers who have Four Corners market their NGLs for a fee in accordance with their contracts. Under these arrangements, Four Corners purchases the NGLs from the third party producers and sells them to an affiliate. This decrease is offset by lower associated product costs of $1.6 million discussed below.

The $3.2 million increase in fee-based gathering and processing revenues is due primarily to $3.9 million higher revenue from a seven percent increase in the average gathering and processing rates, partially offset by $0.7 million lower revenue from a one percent decrease in gathering and processing volumes. The average gathering and processing rates increased in 2006 largely as a result of contractual escalation clauses. Most of Four Corners’ gathering contracts include escalation clauses that provide for an annual escalation based on an inflation-sensitive index. One significant gathering agreement is escalated based on changes in the average price of natural gas.

Product cost and shrink replacement decreased $0.4 million, or one percent, due primarily to:

	•		$1.2 million net increase from a $3.6 million increase caused by 23 percent higher volumetric shrink requirements under Four Corners’ keep-whole processing contracts, partially offset by a $2.4 million decrease from 13 percent lower average natural gas prices; and

	•		$1.6 million decrease from third party producers who elected to have Four Corners market their NGLs. This increase is offset by the corresponding increase in product sales discussed above.

Operating and maintenance expense increased $5.5 million, or 23 percent, due primarily to:

	•		$4.2 million increase in materials and supplies and outside services expense related primarily to increased compression, environmental and maintenance costs;

	•		$2.3 million in other increases including a $2.0 million correction of understated leased compression expense in the second quarter of 2006. Our management concluded that the effect of this correction was not material to our consolidated results for the third quarter of 2006, or the prior period or to our trend in earnings; and

	•		$1.6 million increase in labor and benefits increases primarily caused by adjustments to Williams annual incentive program.

	•		These increases were partially offset by a $2.6 million decrease in non-shrink natural gas purchases due primarily to lower system losses.

Other expense, net decreased $0.9 million due primarily to the absence of a loss contingency recorded in the third quarter of 2005.

Net income increased $7.9 million, or 23 percent, due primarily to $8.9 million from higher processing margins caused by increased per-unit margins on higher NGL sales volumes and $3.2 million of higher fee-based gathering and processing revenues, partially offset by $5.5 million of higher operating and maintenance expense.

Nine months ended September 30, 2006 vs. nine months ended September 30, 2005

Revenues increased $39.9 million, or 12 percent, due to $30.2 million higher product sales and $9.6 million higher gathering and processing revenues. Product sales revenues increased due primarily to:

	•		$21.0 million related to a 23 percent increase in average NGL sales prices realized on sales of NGLs which Four Corners received under certain processing contracts. This increase resulted from general increases in market prices for these commodities between the two periods;

	•		$4.1 million related to a five percent increase in NGL volumes that Four Corners received under certain processing contracts. This increase was related primarily to reduced equipment outages in 2005;

	•		$3.5 million of higher condensate sales, which includes $1.9 million resulting from the recognition of two additional months of condensate revenue in 2006. Prior to 2006, condensate revenue had been recognized two months in arrears. As a result of more timely sales information now made available from third parties, we have recorded these on a current basis and thus have fully recognized this activity through September 30, 2006. Our management concluded that the effect of recording the additional two months was not material to our results for 2006, prior periods or our trend of earnings; and

	•		$3.1 million of higher LNG sales related primarily to an increase in volumes sold.

	•		These product sales increases were partially offset by $1.4 million lower sales of NGLs on behalf of third party producers who have Four Corners market their NGLs for a fee in accordance with their contracts.

Under these arrangements, Four Corners purchases the NGLs from the third party producers and sells them to an affiliate. This decrease is offset by lower associated product costs of $1.4 million discussed below.

The $9.6 million increase in fee-based gathering and processing revenues is due primarily to $11.2 million higher revenue from a seven percent increase in the average gathering and processing rates, partially offset by $1.6 million lower revenue from a one percent decrease in gathering and processing volumes. The average gathering and processing rates increased in 2006 largely as a result of contractual escalation clauses. One significant gathering agreement is escalated based on changes in the average price of natural gas.

Product cost and shrink replacement increased $6.8 million, or six percent, due primarily to:

	•		$4.9 million increase from 12 percent higher volumetric shrink requirements under Four Corners’ keep-whole processing contracts;

	•		$1.3 million increase from three percent higher average natural gas prices;

	•		$2.0 million increase related to increased condensate and LNG sales; and

	•		$1.4 million decrease from third party producers who elected to have Four Corners market their NGLs. This increase is offset by the corresponding increase in product sales discussed above.

Operating and maintenance expense increased $16.8 million, or 22 percent, due primarily to:

	•		$11.3 million increase in materials and supplies, outside services and other operating expenses related primarily to increased compression and maintenance costs;

	•		$2.8 million increase in labor and benefits caused by adjustments to Williams annual incentive program and the addition of new personnel; and

	•		$2.7 million increase in non-shrink natural gas purchases due primarily to higher volumetric gathering fuel requirements and higher system losses.

Other (income) expense, net improved $4.5 million due primarily to a $3.3 million gain recognized on the sale of the LaMaquina treating facility in the first quarter of 2006. The LaMaquina treating facility was shut down in 2002, and impairments were recorded in 2003 and 2004. Additionally, a $0.9 million loss contingency was recorded in the third quarter of 2005.

Net income increased $20.1 million, or 23 percent, due primarily to $23.4 million from higher net liquids margins resulting primarily from increased per-unit margins on higher NGL sales volumes, $9.6 million of higher fee-based gathering and processing revenues and the $4.5 million improvement in other (income) expense, net. These increases were partially offset by $16.8 million higher operating and maintenance expense.

Discovery Producer Services


	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
	(Thousands)
Revenues	$	47,418		$	19,100		$	142,454		$	69,414

Costs and expenses, including interest:
Product cost and shrink replacement		25,631			7,763			83,079			28,598
Operating and maintenance expense		5,095			4,063			15,149			13,174
Depreciation and accretion		6,380			6,127			19,133			18,366
General and administrative expense		372			517			1,606			1,535
Interest income		(608	)		(498	)		(1,835	)		(1,171	)
Other (income) expense, net		410			962			(136	)		1,488


Total costs and expenses, including interest		37,280			18,934			116,996			61,990


Net income	$	10,138		$	166		$	25,458		$	7,424


Williams Partners’ 40 percent interest – Equity earnings per our Consolidated Statements of Income
	$	4,055		$	66		$	10,183		$	2,969

Three months ended September 30, 2006 vs. three months ended September 30, 2005

Revenues increased $28.3 million, or 148 percent, due primarily to higher NGL product sales from the marketing of customers’ NGLs. In addition, the Texas Eastern Transmission Company (“TETCO”) open season agreement, which began in the last quarter of 2005, contributed $2.4 million in revenues for the third quarter of 2006. The Tennessee Gas Pipeline (“TGP”) and TETCO open seasons provided outlets for natural gas that was stranded following damage to third-party facilities during hurricanes Katrina and Rita. In October 2006, we signed a one-year contract with TETCO which is discussed further in the Outlook section. The significant components of the revenue increase are addressed more fully below.

	•		Product sales increased $18.2 million for NGL sales related to third-party processing customers’ elections to have Discovery market their NGLs for a fee under an option in their contracts. Under these arrangements, Discovery purchases the NGLs from the third-party processing customers and sells them to an affiliate. These sales were offset by higher associated product costs of $18.2 million discussed below.

	•		Product sales also increased approximately $9.7 million due to NGL sales that Discovery received under certain processing contracts of approximately 14.0 million gallons in 2006 compared to 4.4 million gallons in 2005. NGL sales volumes in 2005 were lower due primarily to the temporary shutdown of the Discovery assets for hurricanes.

	•		Transportation revenue increased $1.6 million, including $0.8 million due to additional fee-based revenues related to the TETCO open season agreement discussed above.

	•		Processing and fractionation revenue increased $1.6 million in additional fee-based revenues related to the TETCO open season agreement.

Partially offsetting these increases were the following:

•

Product sales decreased $2.3 million due to the absence of excess fuel and shrink replacement gas sales in 2006.

•

Gathering revenues decreased $0.4 million due to a rate decrease partially offset by increased gathered volumes.

Product cost and shrink replacement increased $17.9 million due primarily to $18.2 million of product purchase costs for the processing customers who elected to have Discovery market their NGLs.

Operating and maintenance expense increased $1.0 million, or 25 percent, primarily due to hurricane-related survey costs and increased property insurance premiums.

Depreciation and accretion expense increased $0.3 million, or four percent, due primarily to the market expansion project placed in service in September 2005.

Other expense decreased $0.6 million, or 57 percent, due primarily to a non-cash foreign currency transaction loss from the revaluation of restricted cash accounts denominated in Euros. These restricted cash accounts were established from contributions made by Discovery’s members, including us, for the construction of the Tahiti pipeline lateral expansion project.

Net income increased $10.0 million, due primarily to $7.7 million higher gross processing margins resulting from higher NGL sales volumes as compared to the prior year and $2.4 million higher revenues from the TETCO open season agreement.

Nine months ended September 30, 2006 vs. Nine months ended September 30, 2005

Revenues increased $73.0 million, or 105 percent, due primarily to higher NGL product sales from the marketing of customers’ NGLs. In addition, TGP and TETCO open seasons, which began in the last quarter of 2005, accounted for $13.0 million in revenues. The significant components of the revenue increase are addressed more fully below.

	•		Product sales increased $63.7 million for NGL sales related to third-party processing customers’ elections to have Discovery market their NGLs for a fee under an option in their contracts. These sales were offset by higher associated product costs of $63.7 million discussed below.

	•		Fee-based processing and fractionation revenues increased $7.3 million, including $8.3 million in additional fee-based revenues related to the TGP and TETCO open seasons discussed above, $1.7 million from increased volumes and fees from the wells that came on-line in 2006 and $0.6 million from increased volumes from existing wells, partially offset by a $3.3 million decrease in by-pass revenues and other throughput declines.

	•		Transportation revenues increased $4.6 million, including $4.7 million in additional fee-based revenues related to the TGP and TETCO open seasons discussed above, $1.8 million in revenues from wells that came on-line in 2006 and $1.0 million in other tariff rate changes, partially offset by $2.8 million related to other throughput declines.

	•		Product sales also increased approximately $4.0 million as a result of $5.3 million from 19 percent higher average NGL sales prices, partially offset by $1.3 million from a four percent decrease in sales volumes.

Partially offsetting these increases were the following:

	•		Product sales decreased $3.2 million due to the absence of excess fuel and shrink replacement gas sales in 2006.

	•		Gathering revenues decreased $3.2 million due primarily to a $1.8 million decrease related to a decline in both gathered volumes and rates and a $1.4 million deficiency payment received in the first quarter of 2005.

Product cost and shrink replacement increased $54.5 million, or 191 percent, due primarily to $63.7 million higher product purchase costs for the processing customers who elected to have Discovery market their NGLs, partially offset by $5.0 million lower costs related to reduced processing volumes in 2006, $3.2 million decrease due to the absence of excess fuel and shrink replacement gas sales in 2006, and $1.2 million for net system gains from 2005.

Operating and maintenance expense increased $2.0 million, or 15 percent, due primarily to higher fuel costs related to increased processing throughput volumes primarily for open season processing in 2006 and higher property insurance premiums related to the increased hurricane activity in the Gulf Coast region in prior years.

Depreciation and accretion expense increased $0.8 million, or four percent, due primarily to the market expansion project placed in service in September 2005.

Interest income increased $0.7 million due primarily to interest earned on funds restricted for use in the construction of the Tahiti pipeline lateral expansion project.

Other (income) expense, net improved $1.6 million due primarily to a $1.9 million non-cash foreign currency transaction gain from the revaluation of restricted cash accounts denominated in Euros. These restricted cash accounts were established from contributions made by Discovery’s members, including us, for the construction of the Tahiti pipeline lateral expansion project.

Net income increased $18.0 million, from $7.4 million, due primarily to the $13.0 million higher revenues from TGP and TETCO open seasons and $10.0 million higher gross processing margins, partially offset by $3.2 million lower gathering revenues and $2.0 million higher operating and maintenance.

Outlook

Carbonate Trend

During the remainder of 2006, recompletions and workovers may not offset production declines from the wells currently connected to the Carbonate Trend pipeline.

In connection with our restoration activities for the partial erosion of the pipeline overburden caused by Hurricane Ivan in September 2004, the Carbonate Trend pipeline may experience a temporary shut down. We estimate that this shut down could reduce our cash flows from operations, excluding the maintenance expenditures, by approximately $0.2 million to $0.3 million.

Four Corners

Throughput volumes on Four Corners’ gathering, processing and treating system are an important component of maximizing its profitability. Throughput volumes from existing wells connected to its pipelines will naturally decline over time. Accordingly, to maintain or increase throughput levels Four Corners must continually obtain new supplies of natural gas.

	•		In 2007, we anticipate that sustained drilling activity, expansion opportunities and production enhancement activities by existing customers should be sufficient to more than offset the historical decline and increase gathered and processed volumes.

	•		Four Corners has realized above average margins at its gas processing plants in recent years because of volatile natural gas and crude oil markets. We expect per-unit margins in 2006 will remain strong in relation to historical averages. Additionally, we anticipate that Four Corners’ contract mix and commodity management activities will continue to allow it to realize greater margins relative to industry averages.

	•		We anticipate that operating costs, excluding compression, will increase in 2006. Compression cost increases are dependent upon the extent and amount of additional compression needed to meet the needs of Four Corners’ customers and the cost at which compression can be purchased, leased and operated.

			Additionally, Four Corners has made unbudgeted expenditures in 2006 that are expected to have a positive long-term economic impact.

	•		We anticipate that the natural gas fuel cost associated with the operation of the Milagro treating plant will increase due to the expiration, in October 2006, of a natural gas purchase contract with Williams that contained pricing that has recently been below market.

	•		We are conducting negotiations with the Jicarilla Apache Nation (“JAN”) in Northern New Mexico for the renewal of certain rights of way on reservation lands. The current right of way agreement, which covers certain gathering system assets in Rio Arriba County, NM, expires on December 31, 2006. JAN has recently advised us that they do not intend to extend the existing right of way agreement and asked that we enter into negotiations for the sale of those gathering system assets to JAN. We anticipate further discussions that could include renewal, sale or other options that might be in the mutual interest of both parties.

Discovery

Throughput volumes on Discovery’s pipeline system are an important component of maximizing its profitability. Pipeline throughput volumes from existing wells connected to its pipelines will naturally decline over time. Accordingly, to maintain or increase throughput levels on these pipelines and the utilization rate of Discovery’s natural gas plant and fractionator, Discovery must continually obtain new supplies of natural gas.

	•		The Tahiti pipeline lateral expansion project is currently on schedule. We anticipate initial throughput will begin in April 2008. We expect this agreement will have a significant favorable impact on Discovery’s revenues.

	•		Discovery signed a one-year processing contract with TETCO effective October 2006 for a minimum volume of 100 billion British Thermal Units a day (“BBtu/d”) and a maximum of 300 BBtu/d.

	•		With the current oil and natural gas price environment, drilling activity across the shelf and the deepwater of the Gulf of Mexico has been robust. However, the availability of specialized rigs necessary to drill in the deepwater areas, such as those in and around Discovery’s gathering areas, limits the ability of producers to bring identified reserves to market quickly. This will prolong the timeframe over which these reserves will be developed. We expect Discovery to be successful in competing for a portion of these new volumes.

	•		On March 31, 2006, Discovery connected a new well in ATP Oil & Gas Corporation’s Gomez prospect; currently the rate is approximately 40 BBtu/d. We expect the rate to increase from this level in the first quarter of 2007.

	•		Insurance premiums have increased dramatically from approximately $2.3 million in 2005 to the current level of $4.9 million in 2006 on an annual basis. We have no reason to expect premiums to materially change from this amount in the near term.

	•		During the second quarter of 2006, Discovery began receiving additional production at South Timbalier 41, and is currently flowing approximately 100 BBtu/d.

	•		In September 2006, Discovery began receiving additional production at South Timbalier 219/220, and is currently flowing approximately 25 BBtu/d.

Results of Operations – NGL Services

The NGL Services segment includes our three NGL storage facilities near Conway, Kansas and our undivided 50 percent interest in the Conway fractionator.


	Three months ended					Nine months ended
	September 30,					September 30,
	2006		2005			2006		2005
	(Thousands)
Segment revenues	$	13,347	$	11,526		$	42,393	$	33,426

Costs and expenses:
Operating and maintenance expense		7,220		8,171			21,481		16,315
Product cost		2,880		2,258			11,522		8,320
Depreciation and accretion		609		596			1,809		1,794
General and administrative expense — direct		279		308			815		782
Taxes other than income		182		194			550		532
Other expense		—		—			5		—


Total costs and expenses		11,170		11,527			36,182		27,743


Segment profit (loss)	$	2,177	$	(1	)	$	6,211	$	5,683

Three months ended September 30, 2006 vs. three months ended September 30, 2005

Segment revenues increased $1.8 million, or 16 percent, due primarily to higher storage and fractionation revenues. The significant components of the revenue fluctuations are addressed more fully below.

	•		Storage revenues increased $1.2 million due primarily to higher average storage volumes from additional short-term storage leases caused by the reduced demand for propane during the mild 2006 winter.

	•		Fractionation revenues increased $0.3 million due primarily to 16 percent higher fractionation volumes.

	•		Product sales were $0.2 million higher due to higher sales volumes.

Operating and maintenance expense decreased $1.0 million, or 12 percent, due primarily to a $1.6 million favorable change in product imbalance adjustments. This decrease was partially offset by a $0.6 million increase in operating and maintenance expense caused by increased storage cavern workovers and fuel and power costs.

Product cost increased $0.6 million, or 28 percent, due to the higher product sales volumes discussed above.

Segment profit (loss) improved $2.2 million due primarily to $1.5 million higher storage and fractionation revenues and $1.0 million lower operating and maintenance expense, partially offset by the decrease in product sales margin of $0.4 million.

Nine months ended September 30, 2006 vs. nine months ended September 30, 2005

Segment revenues increased $9.0 million, or 27 percent, due primarily to higher storage and fractionation revenues and higher product sales. The significant components of the revenue increase are addressed more fully below.

•

Storage revenues increased $3.2 million due primarily to higher average storage volumes from additional short-term storage leases caused by the reduced demand for propane during the mild 2006 winter.

	•		Product sales were $2.7 million higher due to higher sales volumes.

	•		Fractionation revenues increased $2.5 million due primarily to 26 percent higher volumes and a seven percent increase in the average fractionation rate related to the pass through to customers of increased fuel and power costs.

Operating and maintenance expense increased $5.2 million, or 32 percent, due primarily to a $6.9 million increase in operating and maintenance expense caused by increased storage cavern workovers and fuel and power costs. This increase was partially offset by a $2.0 million favorable change in product imbalance adjustments.

Product cost increased $3.2 million, or 38 percent, due to the higher product sales volumes discussed above.

Segment profit increased $0.5 million, or nine percent, due primarily to $5.7 million higher storage and fractionation revenues, substantially offset by $5.2 million higher operating and maintenance expense.

Outlook

	•		For the fourth quarter of 2006, we anticipate that fractionation volumes will average approximately 34,000 barrels per day, which is a decrease from the third quarter’s average of 38,500 barrels per day. The commodity differential between Conway and Mont Belvieu currently favors fractionation at Mont Belvieu. One of our customers is forecasting sending certain volumes south to Mont Belvieu in accordance with their contract option. We expect continued income from the blending and segregation of various products.

	•		During the first quarter of 2006, we received storage volume nominations for the storage year beginning April 1, 2006 that will generate revenues equal to last year’s record levels. We have experienced record physical storage volumes and generated 1.7 million barrels of short-term storage leases during the third quarter of 2006. We expect minimal additional short-term leases during the remainder of 2006 as storage volumes are near capacity for a number of products.

	•		We continue to execute a large number of storage cavern workovers and wellhead modifications to comply with KDHE regulatory requirements. We expect outside service costs to continue at current levels throughout 2006 and 2007 to ensure that we meet the regulatory compliance requirement to complete cavern wellhead modifications before the end of 2008. Our forecast for the end of 2006 is to complete approximately 38 cavern workovers compared to 30 in 2005.

Financial Condition and Liquidity

Outlook for 2006

We believe we have the financial resources and liquidity necessary to meet future requirements for working capital, capital and investment expenditures, and quarterly cash distributions. We anticipate our sources of liquidity for the remainder of 2006 will include:

	•		Cash and cash equivalents;

	•		Cash generated from operations;

	•		Cash distributions from Four Corners and Discovery;

	•		Capital contributions from Williams pursuant to an omnibus agreement; and

	•		Credit facilities, as needed.

Our cash and cash equivalents increased $16.5 million on June 20, 2006 upon the completion of our acquisition of a 25.1 percent ownership interest in Four Corners. This amount represents the excess of net proceeds generated by our offering of common units and issuance of senior unsecured notes above the purchase price for the Four Corners interest. We have retained this cash to be used for general partnership purposes.

We anticipate our more significant capital requirements for the remainder of 2006 to be:

	•		Maintenance capital expenditures for our Conway assets;

	•		Quarterly distributions to our unitholders; and

	•		Carbonate Trend overburden restoration.

Four Corners

Historically, Four Corners’ sources of liquidity included cash generated from operations and advances from Williams. Four Corners’ limited liability company agreement, as amended effective June 20, 2006, provides for the distribution of available cash on at least a quarterly basis. We expect future cash requirements for Four Corners relating to working capital, maintenance capital expenditures and quarterly cash distributions to its members to be funded from cash flows internally generated from its operations. Growth or expansion capital expenditures for Four Corners will be funded either by cash calls to its members, which require unanimous consent of the members except in limited circumstances, or from internally generated funds. Four Corners made the following distributions to its members during the third quarter of 2006 (all amounts in thousands):


Date of Distribution	Total Distribution to Members		Our 25.1% Share
8/31/06	$	17,164	$	4,308
9/30/06	$	21,522	$	5,402

Discovery

Discovery expects to make quarterly distributions of available cash to its members pursuant to the terms of its limited liability company agreement. Discovery made the following distributions to its members in 2006 (all amounts in thousands):


Date of Distribution	Total Distribution to Members		Our 40% Share
1/31/06	$	11,000	$	4,400
4/28/06	$	9,000	$	3,600
7/31/06	$	10,000	$	4,000
10/30/06	$	11,000	$	4,400

In 2005, Discovery sustained damages from Hurricane Katrina. The estimated total cost for hurricane-related repairs is approximately $8.3 million, including $7.0 million in potentially reimbursable expenditures in excess of its deductible. Discovery funded these repairs with cash flows from operations and is seeking reimbursement from its insurance carrier. The insurance receivable at September 30, 2006 was $7.0 million.

We expect future cash requirements for Discovery relating to working capital and maintenance capital expenditures to be funded from its own internally generated cash flows from operations. Growth or expansion capital expenditures for Discovery will be funded either by cash calls to its members, which requires unanimous consent of the members except in limited circumstances, or from internally generated funds.

Capital Contributions from Williams

Capital contributions from Williams required under the omnibus agreement consist of the following:

•

Indemnification of environmental and related expenditures for a period of three years (for certain of those expenditures) up to $14 million, which includes between $3.4 million and $4.6 million for the restoration activities due to the partial erosion of the Carbonate Trend pipeline overburden by Hurricane Ivan, approximately $3.1 million for capital expenditures related to KDHE-related cavern compliance at our Conway storage facilities, and approximately $1.0 million for our 40 percent share of Discovery’s costs for

marshland restoration and repair or replacement of Paradis’ emission-control flare. As of September 30, 2006 we have received $2.4 million from Williams for these items.

	•		An annual credit for general and administrative expenses of $3.2 million in 2006, $2.4 million in 2007, $1.6 million in 2008 and $0.8 million in 2009. For the nine months ended September 30, 2006 we have received $2.4 million in credits.

	•		Up to $3.4 million to fund our 40 percent share of the expected total cost of Discovery’s Tahiti pipeline lateral expansion project in excess of the $24.4 million we contributed during September 2005.

Credit Facilities

We also have a $20.0 million revolving credit facility with Williams as the lender. The facility was amended and restated on August 7, 2006. The facility is available exclusively to fund working capital borrowings. Borrowings under the amended and restated facility will mature on June 29, 2009. We are required to reduce all borrowings under this facility to zero for a period of at least 15 consecutive days once each 12-month period prior to the maturity date of the facility. As of September 30, 2006 we had no outstanding borrowings under the working capital credit facility.

Four Corners has a $20.0 million loan agreement with Williams as the lender. The loan agreement is revolving in nature and is available to fund working capital borrowings and for other purposes. Borrowings under the loan agreement will mature on June 20, 2009.

Senior Unsecured Notes

In June 2006, we issued $150.0 million aggregate principal amount of senior notes. The senior notes bear interest at 7.5 percent per annum payable semi-annually in arrears on June 15 and December 15 of each year, with the first payment due on December 15, 2006. We will make each interest payment to the holders of record on the immediately preceding June 1 and December 1. The senior notes mature on June 15, 2011. The senior notes are our senior unsecured obligations and rank equally in right of payment with all of our other senior indebtedness and senior to all of our future indebtedness that is expressly subordinated in right of payment to the senior notes. The senior notes will not initially be guaranteed by any of our subsidiaries. In the future in certain instances as set forth in the indenture, one or more of our subsidiaries may be required to guarantee the senior notes.

The terms of the senior notes are governed by an indenture that contains affirmative and negative covenants that, among other things, limit (1) our ability and the ability of our subsidiaries to incur liens securing indebtedness, (2) mergers, consolidations and transfers of all or substantially all of our properties or assets, (3) Williams Partners Finance’s ability to incur additional indebtedness and (4) Williams Partners Finance’s ability to engage in any business not related to obtaining money or arranging financing for us or our other subsidiaries. We use the equity method of accounting for our investments in Discovery and Four Corners, and neither will be classified as our subsidiary under the indenture so long as we continue to own a minority interest in such entity. As a result, neither Discovery nor Four Corners will be subject to the restrictive covenants in the indenture. The indenture also contains customary events of default, upon which the trustee or the holders of the senior notes may declare all outstanding senior notes to be due and payable immediately. Pursuant to the indenture, we may issue additional notes from time to time.

(2) accrued and unpaid interest, if any, to the redemption date, plus (3) a specified “make-whole” premium (as defined in the indenture). Additionally, upon a change of control (as defined in the indenture), each holder of the senior notes will have the right to require us to repurchase all or any part of such holder’s senior notes at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid interest.

In connection with the issuance of the senior notes, we entered into a registration rights agreement with the initial purchasers of the senior notes whereby we agreed to conduct a registered exchange offer of exchange notes in exchange for the senior notes or cause to become effective a shelf registration statement providing for resale of the senior notes. If we fail to comply with certain obligations under the registration rights agreement, we will be required to pay liquidated damages in the form of additional cash interest to the holders of the senior notes.

Capital Requirements

The natural gas gathering, treating, processing and transportation, and NGL fractionation and storage businesses are capital-intensive, requiring investment to upgrade or enhance existing operations and comply with safety and environmental regulations. The capital requirements of these businesses consist primarily of:

	•		Maintenance capital expenditures, which are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives; and

	•		Expansion capital expenditures such as those to acquire additional assets to grow our business, to expand and upgrade plant or pipeline capacity and to construct new plants, pipelines and storage facilities.

We estimate that maintenance capital expenditures for the Conway assets will be approximately $6.8 million for 2006. Of this amount, $4.0 million has been spent through September 30, 2006, of which approximately $0.8 million has been reimbursed by Williams subject to an omnibus agreement. We expect to fund the remainder of these expenditures through cash flows from operations. These expenditures relate primarily to cavern workovers and wellhead modifications necessary to comply with KDHE regulations.

We currently estimate that we will incur $3.4 million to $4.6 million of maintenance expenditures for Carbonate Trend during 2006 and 2007 for restoration activities related to the partial erosion of the pipeline overburden caused by Hurricane Ivan in September 2004. We will fund these repairs with cash flows from operations and then seek reimbursement from insurance.

We estimate that maintenance capital expenditures for 100 percent of Four Corners will be approximately $19.6 million for 2006. Of this amount, $16.4 million has been spent through September 30, 2006. We expect Four Corners will fund its maintenance capital expenditures through its cash flows from operations. These expenditures relate primarily to well connections necessary to connect new sources of throughput for the Four Corners’ system.

We estimate that expansion capital expenditures for 100 percent of Four Corners will be approximately $8.1 million for 2006. Of this amount $0.6 million has been spent through September 30, 2006. We expect Four Corners will fund its expansion capital expenditures through its cash flows from operations. These expenditures include $3.0 million for certain well connections that will likely produce an overall increase in throughput volumes in 2007.

We estimate that maintenance capital expenditures for 100 percent of Discovery will be approximately $4.3 million for 2006. Of this amount $1.3 million has been spent through September 30, 2006. We expect Discovery will fund its maintenance capital expenditures through its cash flows from operations. These maintenance capital expenditures relate to numerous smaller projects.

We estimate that expansion capital expenditures for 100 percent of Discovery will be approximately $42.7 million for 2006. Of this amount $22.3 million has been spent through September 30, 2006. These expenditures are primarily for the ongoing construction of the Tahiti pipeline lateral expansion project. Discovery will fund these expenditures with amounts previously escrowed for this project.

Working Capital Attributable to Deferred Revenues

We require cash in order to continue providing services to our storage customers who prepay their annual storage contracts in April of each year. The storage year for a majority of customer contracts at our Conway storage facility runs from April 1 of a year to March 31 of the following year. For most of these agreements, we receive payment for these one-year contracts in advance in April after the beginning of the storage year and recognize the associated revenue over the course of the storage year. As of September 30, 2006, our deferred storage revenue is $6.8 million.

Cash Distributions to Unitholders

We paid quarterly distributions to common and subordinated unitholders and the general partner interest after every quarter since our IPO on August 23, 2005. We intend to make a quarterly distribution of $10.1 million on November 14, 2006 to the general partner interest and common and subordinated unitholders of record at the close of business on November 6, 2006. This distribution will include an additional payment to the general partner of approximately $198,406 of incentive distributions.

Results of Operations — Cash Flows

Williams Partners L.P.


	Nine months ended
	September 30,
	2006			2005
	(Thousands)
Net cash provided by operating activities	$	28,309		$	7,277

Net cash used by investing activities	$	(160,138	)	$	(26,260	)

Net cash provided by financing activities	$	157,140		$	33,465

The $21.0 million increase in net cash provided by operating activities for the first nine months of 2006 as compared to the first nine months of 2005 is due primarily to:

	•		$12.0 million increase in distributed earnings from Discovery;

	•		$9.7 million increase in distributed earnings from Four Corners; and

	•		$3.9 million net lower interest from the forgiveness of the advances from Williams in conjunction with the closing of our IPO on August 23, 2005 offset by interest on our $150 million senior unsecured notes issued to finance a portion of our acquisition of a 25.1 percent interest in Four Corners.

These increases in net cash provided by operating activities were partially offset by a $5.3 million increase in cash used for working capital.

Net cash used by investing activities includes the purchase of our 25.1 percent interest in Four Corners on June 20, 2006. Because Four Corners was an affiliate of Williams at the time of the acquisition, the transaction was between entities under common control, and has been accounted for at historical cost. Therefore the amount reflected as cash used by investing activities for this purchase represents the historical cost of the investment to Williams. Investing activities in 2005 includes our $24.4 million capital contribution to Discovery for the construction of the Tahiti pipeline lateral expansion project. Additionally, net cash used by investing activities includes maintenance capital expenditures in our NGL Services segment primarily for the installation of cavern liners and KDHE-related cavern compliance with the installation of wellhead control equipment and well meters.

Net cash provided by financing activities in 2006 includes:

	•		$172.7 million in net cash flows from transactions related to our acquisition of a 25.1 percent interest in Four Corners;

	•		$19.9 million of distributions paid to unitholders; and

	•		$4.2 million in indemnifications and reimbursements received from Williams pursuant to the omnibus agreement.

Net cash provided by financing activities in the first nine months of 2005 represent net cash flows related to our IPO on August 23, 2005. These consisted of $100.2 million in net proceeds from the sale of units, a $58.8 million distribution to Williams and the payment of $4.3 million in expenses associated with our IPO. In addition, 2005 includes $3.7 million passed through to Williams, prior to the IPO on August 23, 2005, under its cash management program.

Four Corners and Discovery

As previously disclosed, cash distributions from Four Corners and Discovery will be a significant source of our liquidity. Due to the significance of Four Corners’ and Discovery’s cash flows to our ability to make cash distributions, the following discussion addresses in greater detail the cash flow activities for 100 percent of Four Corners and Discovery for the nine months ended September 30, 2006 and 2005.

Four Corners – 100 percent


	Nine months ended
	September 30,
	2006			2005
	(Thousands)
Operating Activities:
Net income	$	106,940		$	86,833
Adjustments to reconcile to cash provided by operations:
Depreciation and accretion		29,801			29,107
Gain on sale of equipment		(2,622	)		—
Cash used by changes in assets and liabilities		(34,380	)		(9,393	)


Net cash provided by operating activities		99,739			106,547

Investing Activities:
Property, plant and equipment:
Capital expenditures		(17,506	)		(13,301	)
Proceeds from sales of equipment		7,299			—


Net cash used by investing activities		(10,207	)		(13,301	)

Financing Activities:
Distributions to Williams under cash management program		(44,865	)		(93,246	)
Distributions to members		(38,686	)		—


Net cash used by financing activities		(83,551	)		(93,246	)


Net increase in cash and cash equivalents	$	5,981		$	—

Net cash provided by operating activities decreased $6.8 million in 2006 as compared to 2005 due to a $25.0 million increase in cash used for working capital, partially offset by an $18.2 million increase in operating income, adjusted for non-cash items. The increase in cash used for working capital was caused primarily by a $16.1 million

increase in affiliate receivables as a result of our transition from Williams’ cash management program to a stand-alone cash management program and an increase of $6.8 million for accounts receivable due from affiliate for reimbursable compression projects.

Net cash used by investing activities decreased $3.1 million in 2006 as compared to 2005 due to $7.3 million of proceeds received from the sale of the LaMaquina treating facility in the first quarter of 2006, partially offset by $4.2 million higher capital expenditures in 2006 related primarily to capital expenditures for well connections.

Net cash used by financing activities decreased by $9.7 million in 2006 as compared to 2005 due to $48.4 million lower net cash flows passed through to Williams under its cash management program, largely offset by $38.7 million in cash distributions to members. Four Corners participation in Williams’ cash management program ceased, effective June 20, 2006, when we acquired our 25.1 percent membership interest. Beginning in the third quarter of 2006, in accordance with its amended limited liability company agreement, Four Corners began regular distributions of its available cash.

Discovery — 100 percent


	Nine months ended
	September 30,
	2006			2005
	(Thousands)
Operating Activities:
Net income	$	25,458		$	7,424
Adjustments to reconcile to cash provided by operations:
Depreciation and accretion		19,133			18,366
Cash provided (used) by changes in assets and liabilities		(5,657	)		3,094


Net cash provided by operating activities		38,934			28,884

Investing Activities:
Property, plant and equipment:
Capital expenditures		(23,549	)		(9,327	)
Change in accounts payable — capital expenditures		285			(10,224	)
(Increase) decrease in restricted cash		13,778			(45,501	)


Net cash used by investing activities		(9,486	)		(65,052	)

Financing Activities:
Contributions from members		8,989			48,303
Distributions to members		(32,598	)		(43,764	)


Net cash provided (used) by financing activities		(23,609	)		4,539


Net increase (decrease) in cash and cash equivalents	$	5,839		$	(31,629	)

Net cash provided by operating activities increased $10.1 million in 2006 as compared to 2005 due primarily to an $18.8 million increase in operating income, adjusted for non-cash expenses, partially offset by an $8.7 million decrease in cash from changes in working capital due primarily to a $7.0 million hurricane-related insurance receivable at September 30, 2006.

Capital expenditures in 2006 related primarily to the Tahiti pipeline lateral expansion project, which were funded from amounts previously escrowed in 2005 and included on the balance sheet as restricted cash. The $13.8 million decrease in 2006 restricted cash is the amount used for this project from the funds previously escrowed. Capital expenditures in 2005 related primarily to the completion of the Front Runner and market expansion projects as well as the purchase of leased compressors at the Larose processing plant.

Net cash used by financing activities in 2006 includes:

	•		$32.6 million of distributions paid to members, including three quarterly distributions totaling $30.0 million; and

	•		$9.0 million of capital contributions from members other than us for the construction of the Tahiti pipeline lateral expansion.

Net cash provided by financing activities in 2005 includes capital contributions from Discovery’s members for the construction of the Tahiti pipeline lateral expansion and the distribution of cash retained from Discovery’s operations prior to our IPO.

Contractual Obligations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risk to which we are exposed is commodity price risk for natural gas and NGLs.

Interest Rate Risk

Our long-term senior unsecured notes have a fixed 7.5 percent interest rate. Any borrowings under our credit agreements would be at a variable interest rate and would expose us to the risk of increasing interest rates. As of September 30, 2006 we did not have borrowings outstanding under our credit agreements.

Commodity Price Risk

Certain of Four Corners’ and Discovery’s processing contracts are exposed to the impact of price fluctuations in the commodity markets, including the correlation between natural gas and NGL prices. In addition, price fluctuations in commodity markets could impact the demand for Four Corners’ and Discovery’s services in the future. Carbonate Trend and our fractionation and storage operations are not directly affected by changing commodity prices except for product imbalances, which are exposed to the impact of price fluctuation in NGL markets. Price fluctuations in commodity markets could also impact the demand for storage and fractionation services in the future. In connection with the IPO, Williams transferred to us a gas purchase contract for the purchase of a portion of our fuel requirements at the Conway fractionator at a market price not to exceed a specified level. This physical contract is intended to mitigate the fuel price risk under one of our fractionation contracts which contains a cap on the per-unit fee that we can charge, at times limiting our ability to pass through the full amount of increases in variable expenses to that customer. This physical contract is a derivative. However, we elected to account for this contract under the normal purchases exemption to the fair value accounting that would otherwise apply. We, Four Corners, and Discovery do not currently use any other derivatives to manage the risks associated with these price fluctuations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) (“Disclosure Controls”) was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our general partner’s management, including our general partner’s chief executive officer and chief financial officer. Based upon that evaluation, our general partner’s chief executive officer and chief financial officer concluded that these Disclosure Controls are effective at a reasonable assurance level.

Our management, including our general partner’s chief executive officer and chief financial officer, does not expect that our Disclosure Controls or our internal controls over financial reporting (“Internal Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be modified as systems change and conditions warrant.

Third-Quarter 2006 Changes in Internal Control Over Financial Reporting

There have been no changes during the third-quarter 2006 that have materially affected, or are reasonably likely to materially affect, our Internal Controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information required for this item is provided in Note 7, Commitments and Contingencies, included in the Notes to Consolidated Financial Statements included under Part I, Item 1, which information is incorporated by reference into this item.

Item 1A. Risk Factors

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. The following new or modified risk factors, most of which relate to our recent acquisition of a 25.1 percent interest in Williams Four Corners LLC and our recent issuance of $150.0 million aggregate principal amount of senior unsecured notes, should be read in conjunction with the risk factors disclosed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, 2005. In addition to the information contained elsewhere in this quarterly report, the following risk factors, along with the risk factors contained in our annual report on Form 10-K for the year ended December 31, 2005, should be carefully considered by each unitholder in evaluating an investment in us. If any of the following risks or those risks included in our Form 10-K were actually to occur, our business, results of operations and financial condition could be materially adversely affected. In that case, we might not be able to pay distributions on our common units and the trading price of our common units could decline and unitholders could lose all or part of their investment.

Risks Inherent in Our Business

We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

We may not have sufficient available cash each quarter to pay the minimum quarterly distribution. The amount of cash we can distribute on our common units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

	•		the prices we obtain for our services;

	•		the prices of, level of production of, and demand for, natural gas and NGLs;

	•		the volumes of natural gas we gather, transport and process and the volumes of NGLs we fractionate and store;

	•		the level of our operating costs, including payments to our general partner; and

	•		prevailing economic conditions.

In addition, the actual amount of cash we will have available for distribution will depend on other factors such as:

	•		the level of capital expenditures we make;

	•		the restrictions contained in our and Williams’ debt agreements and our debt service requirements;

	•		the cost of acquisitions, if any;

	•		fluctuations in our working capital needs;

	•		our ability to borrow for working capital or other purposes;

	•		the amount, if any, of cash reserves established by our general partner;

	•		the amount of cash that each of Discovery and Four Corners distributes to us; and

	•		reimbursement payments to us by, and credits from, Williams under the omnibus agreement.

Our unitholders should be aware that the amount of cash we have available for distribution depends primarily on our cash flow, including cash reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses, and we may not make cash distributions during periods when we record net income.

Because of the natural decline in production from existing wells and competitive factors, the success of our gathering and transportation businesses depends on our ability to connect new sources of natural gas supply, which is dependent on factors beyond our control. Any decrease in supplies of natural gas could adversely affect our business and operating results.

Our and Discovery’s pipelines receive natural gas directly from offshore producers. The Four Corners gathering system receives natural gas directly from producers in the San Juan Basin. The production from existing wells connected to these pipelines and the Four Corners’ gathering system will naturally decline over time, which means that our cash flows associated with these wells will also decline over time. We do not produce an aggregate reserve report on a regular basis or regularly obtain or update independent reserve evaluations. The amount of natural gas reserves underlying these wells may be less than we anticipate, and the rate at which production will decline from these reserves may be greater than we anticipate. Accordingly, to maintain or increase throughput levels on these pipelines and the utilization rate of Discovery’s natural gas processing plant and fractionator and Four Corners’ processing plants and treating plants, we, Discovery and Four Corners must continually connect new supplies of natural gas. The primary factors affecting our ability to connect new supplies of natural gas and attract new customers to our pipelines include: (1) the level of successful drilling activity near these pipelines; (2) our ability to compete for volumes from successful new wells and existing wells connected to third parties; and (3) our, Discovery’s and Four Corners’ ability to successfully complete lateral expansion projects to connect to new wells.

Neither we nor Four Corners has any current significant lateral expansion projects planned and Discovery has only one currently planned significant lateral expansion project. Discovery signed definitive agreements with Chevron, Shell and Statoil to construct an approximate 35-mile gathering pipeline lateral to connect Discovery’s

existing pipeline system to these producers’ production facilities for the Tahiti prospect in the deepwater region of the Gulf of Mexico. Initial production is expected in April 2008.

The level of drilling activity in the fields served by our and Discovery’s pipelines and Four Corners’ gathering system is dependent on economic and business factors beyond our control. The primary factors that impact drilling decisions are oil and natural gas prices. A sustained decline in oil and natural gas prices could result in a decrease in exploration and development activities in these fields, which would lead to reduced throughput levels on our pipelines and gathering system. Other factors that impact production decisions include producers’ capital budget limitations, the ability of producers to obtain necessary drilling and other governmental permits, the availability of qualified personnel and equipment, the quality of drilling prospects in the area and regulatory changes. Because of these factors, even if new oil or natural gas reserves are discovered in areas served by our pipelines and gathering system, producers may choose not to develop those reserves. If we were not able to connect new supplies of natural gas to replace the natural decline in volumes from existing wells, due to reductions in drilling activity, competition, or difficulties in completing lateral expansion projects to connect to new supplies of natural gas, throughput on our pipelines and gathering system and the utilization rates of Discovery’s natural gas processing plant and fractionator and Four Corners’ processing plants and treating plants would decline, which could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

Lower natural gas and oil prices could adversely affect our fractionation and storage businesses.

Lower natural gas and oil prices could result in a decline in the production of natural gas and NGLs resulting in reduced throughput on our pipelines and Four Corners’ gathering system. Any such decline would reduce the amount of NGLs we fractionate and store, which could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

In general terms, the prices of natural gas, NGLs and other hydrocarbon products fluctuate in response to changes in supply, changes in demand, market uncertainty and a variety of additional factors that are impossible to control. These factors include:

	•		worldwide economic conditions;

	•		weather conditions and seasonal trends;

	•		the levels of domestic production and consumer demand;

	•		the availability of imported natural gas and NGLs;

	•		the availability of transportation systems with adequate capacity;

	•		the price and availability of alternative fuels;

	•		the effect of energy conservation measures;

	•		the nature and extent of governmental regulation and taxation; and

	•		the anticipated future prices of natural gas, NGLs and other commodities.

Our processing, fractionation and storage businesses could be affected by any decrease in NGL prices or a change in NGL prices relative to the price of natural gas.

Lower NGL prices would reduce the revenues we generate from the sale of NGLs for our own account. Under certain gas processing contracts, referred to as ‘‘percent-of-liquids’’ and ‘‘keep whole’’ contracts, Discovery and Four Corners both receive NGLs removed from the natural gas stream during processing. Discovery and Four Corners can then choose to either fractionate and sell the NGLs or to sell the NGLs directly. In addition, product optimization at our Conway fractionator generally leaves us with excess propane, an NGL, which we sell. We also sell excess storage volumes resulting from measurement variances at our Conway storage facilities.

The relationship between natural gas prices and NGL prices may also affect our profitability. When natural gas prices are low relative to NGL prices, it is more profitable for Discovery, Four Corners and their customers to process natural gas. When natural gas prices are high relative to NGL prices, it is less profitable to process natural gas both because of the higher value of natural gas and of the increased cost (principally that of natural gas as a feedstock and a fuel) of separating the mixed NGLs from the natural gas. As a result, Discovery and Four Corners may experience periods in which higher natural gas prices reduce the volumes of NGLs removed at their processing plants, which would reduce their margins. Finally, higher natural gas prices relative to NGL prices could also reduce volumes of gas processed generally, reducing the volumes of mixed NGLs available for fractionation.

We depend on certain key customers and producers for a significant portion of our revenues and supply of natural gas and NGLs. The loss of any of these key customers or producers could result in a decline in our revenues and cash available to pay distributions.

We rely on a limited number of customers for a significant portion of our revenues. Our three largest customers for the year ended December 31, 2005, other than a subsidiary of Williams that markets NGLs for Conway, were BP Products North America, Inc., SemStream, L.P. and Enterprise Products Partners, all customers of our Conway facilities. These customers accounted for approximately 45 percent of our revenues for the year ended December 31, 2005. Four Corner’s three largest customers for the year ended December 31, 2005, other than a subsidiary of Williams that markets NGLs for Four Corners and Williams Production Company, LLC, were ConocoPhillips, Burlington Resources and BP America Production Company, which accounted for approximately 30 percent of Four Corners’ revenues for the year ended December 31, 2005. On March 31, 2006, ConocoPhillips acquired Burlington Resources.

In addition, although some of these customers are subject to long-term contracts, we may be unable to negotiate extensions or replacements of these contracts, on favorable terms, if at all. For example, Four Corners is in active negotiations with several customers to renew gathering, processing and treating contracts that are in evergreen status and that represent approximately 14 percent of Four Corners’ revenues for the year ended December 31, 2005. The negotiations may not result in any extended commitments from these customers. The loss of all or even a portion of the volumes of natural gas or NGLs, as applicable, supplied by these customers, as a result of competition or otherwise, could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders, unless we are able to acquire comparable volumes from other sources.

If third-party pipelines and other facilities interconnected to our pipelines and facilities become unavailable to transport natural gas and NGLs or to treat natural gas, our revenues and cash available to pay distributions could be adversely affected.

We depend upon third party pipelines and other facilities that provide delivery options to and from our pipelines and facilities for the benefit of our customers. For example, MAPL delivers its customers’ mixed NGLs to our Conway fractionator and provides access to multiple end markets for NGL products of our storage customers. If MAPL were to become temporarily or permanently unavailable for any reason, or if throughput were reduced because of testing, line repair, damage to pipelines, reduced operating pressures, lack of capacity or other causes, our customers would be unable to store or deliver NGL products and we would be unable to receive deliveries of mixed NGLs at our Conway fractionator. This would have an immediate adverse impact on our ability to enter into short-term storage contracts and our ability to fractionate sufficient volumes of mixed NGLs at Conway.

MAPL also provides the only liquids pipeline access to multiple end markets for NGL products that are recovered from Four Corners’ processing plants. If MAPL were to become temporarily or permanently unavailable for any reason, or if throughput were reduced because of testing, line repair, damage to pipelines, reduced operating pressures, lack of capacity or other causes, Four Corners would be unable to deliver a substantial portion of the NGLs recovered at its processing plants. This would have an immediate impact on Four Corners’ ability to sell or deliver NGL products recovered at its processing plants. In addition, the five pipeline systems that move natural gas to end markets from the San Juan Basin connect to Four Corners’ treating and processing facilities, including the El Paso Natural Gas, Transwestern, Williams’ Northwest Pipeline, PNM and Southern Trails systems. Some of these natural gas pipeline systems have minimal excess capacity. If any of these pipeline systems were to become

temporarily or permanently unavailable for any reason, or if throughput were reduced because of testing, line repair, damage to pipelines, reduced operating pressures, lack of capacity or other causes, Four Corners’ customers would be unable to deliver natural gas to end markets. This would reduce the volumes of natural gas processed or treated at Four Corners’ treating and processing facilities. Either of such events could materially and adversely affect our business results of operations, financial condition and ability to make distributions to our unitholders.

As another example, Shell’s Yellowhammer sour gas treating facility in Coden, Alabama is the only sour gas treating facility currently connected to our Carbonate Trend pipeline. Natural gas produced from the Carbonate Trend area must pass through a Shell-owned pipeline and Shell’s Yellowhammer sour gas treating facility before delivery to end markets. If the Shell-owned pipeline or the Yellowhammer facility were to become unavailable for current or future volumes of natural gas delivered to it through the Carbonate Trend pipeline due to repairs, damages to the facility, lack of capacity or any other reason, our Carbonate Trend customers would be unable to continue shipping natural gas to end markets until either repairs are made to Yellowhammer or a new interconnection is made with another treating facility. Since we generally receive revenues for volumes shipped on the Carbonate Trend pipeline, this would reduce our revenues.

Any temporary or permanent interruption in operations at MAPL, Yellowhammer or any other third party pipelines or facilities that would cause a material reduction in volumes transported on our pipelines or our gathering systems or processed, fractionated, treated or stored at our facilities could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

Our future financial and operating flexibility may be adversely affected by restrictions in our indenture and by our leverage.

In June 2006, we issued $150.0 million of senior unsecured notes in a private placement, which caused our leverage to increase. Our total outstanding debt was $150.0 million as of September 30, 2006, representing approximately 37 percent of our total book capitalization. Immediately prior to the private debt placement of our senior unsecured notes, we had no outstanding debt.

Our debt service obligations and restrictive covenants in the indenture governing our outstanding notes could have important consequences. For example, they could:

	•		make it more difficult for us to satisfy our obligations with respect to our outstanding notes and our other indebtedness, which could in turn result in an event of default on such other indebtedness or our outstanding notes;

	•		impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;

	•		adversely affect our ability to pay cash distributions to our unitholders;

	•		diminish our ability to withstand a downturn in our business or the economy generally;

	•		require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

	•		place us at a competitive disadvantage compared to our competitors that have proportionately less debt.

Our ability to repay, extend or refinance our existing debt obligations and to obtain future credit will depend primarily on our operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all.

We are not prohibited under the indenture from incurring additional indebtedness. Our incurrence of significant additional indebtedness would exacerbate the negative consequences mentioned above, and could adversely affect our ability to repay our outstanding notes.

Neither Four Corners nor Discovery is prohibited from incurring indebtedness, which may affect our ability to make distributions to our unitholders.

Neither Four Corners nor Discovery is prohibited by the terms of their respective limited liability company agreements from incurring indebtedness. In June 2006, Four Corners entered into a $20.0 million revolving credit facility with Williams as the lender. As of September 30, 2006, there were no outstanding borrowings under the Four Corners revolving credit facility. If either Four Corners or Discovery were to incur significant amounts of indebtedness, it may inhibit their ability to make distributions to us. An inability by either Four Corners or Discovery to make distributions to us would materially and adversely affect our ability to make distributions to our unitholders because we expect distributions we receive from Discovery and Four Corners to represent a significant portion of the cash we distribute to our unitholders.

We do not own all of the interests in the Conway fractionator, in Discovery or in Four Corners, which could adversely affect our ability to operate and control these assets in a manner beneficial to us.

Because we do not wholly own the Conway fractionator, Discovery or Four Corners, we may have limited flexibility to control the operation of, dispose of, encumber or receive cash from these assets. Any future disagreements with the other co-owners of these assets could adversely affect our ability to respond to changing economic or industry conditions, which could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

Discovery and Four Corners may reduce their cash distributions to us in some situations.

Discovery’s limited liability company agreement provides that Discovery will distribute its available cash to its members on a quarterly basis. Four Corners’ limited liability company agreement provides that Four Corners will distribute its available cash to its members at least quarterly. Both Discovery’s and Four Corners’ available cash includes cash on hand less any reserves that may be appropriate for operating its business. As a result, reserves established by Discovery and Four Corners, including those for working capital, will reduce the amount of available cash. The amount of Discovery’s and Four Corners’ quarterly distributions, including the amount of cash reserves not distributed, are to be determined by the members of their respective management committees representing a majority-in-interest in such entity.

We own a 40 percent interest in Discovery and an affiliate of Williams owns a 20 percent interest in Discovery. In addition, to the extent Discovery requires working capital in excess of applicable reserves, the Williams member must make working capital advances to Discovery of up to the amount of Discovery’s two most recent prior quarterly distributions of available cash, but Discovery must repay any such advances before it can make future distributions to its members. As a result, the repayment of advances could reduce the amount of cash distributions we would otherwise receive from Discovery. In addition, if the Williams member cannot advance working capital to Discovery as described above, Discovery’s business and financial condition may be adversely affected.

We do not operate all of our assets. This reliance on others to operate our assets and to provide other services could adversely affect our business and operating results.

Williams operates all of our assets, other than the Carbonate Trend pipeline, which is operated by Chevron, and our Conway fractionator and storage facilities, which we operate. Williams also operates the major plants and all of the plant compression for Four Corners, while Hanover operates approximately 85 percent of Four Corners’ field compression. We have a limited ability to control our operations or the associated costs of these operations. The success of these operations is therefore dependent upon a number of factors that are outside our control, including the competence and financial resources of the operators.

We also rely on Williams for services necessary for us to be able to conduct our business. Williams may outsource some or all of these services to third parties, and a failure of all or part of Williams’ relationships with its outsourcing providers could lead to delays in or interruptions of these services. Our reliance on Williams as an operator and on Williams’ outsourcing relationships, our reliance on Chevron, Four Corners’ reliance on Hanover and Williams and our limited ability to control certain costs could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

Our industry is highly competitive, and increased competitive pressure could adversely affect our business and operating results.

We compete with similar enterprises in our respective areas of operation. Some of our competitors are large oil, natural gas and petrochemical companies that have greater financial resources and access to supplies of natural gas and NGLs than we do.

Discovery competes with other natural gas gathering and transportation and processing facilities and other NGL fractionation facilities located in south Louisiana, offshore in the Gulf of Mexico and along the Gulf Coast, including the Manta Ray/Nautilus systems, the Trunkline pipeline and the Venice Gathering System and the processing and fractionation facilities that are connected to these pipelines.

Our Conway fractionation facility competes for volumes of mixed NGLs with fractionators located in each of Hutchinson, Kansas, Medford, Oklahoma, and Bushton, Kansas owned by ONEOK Partners, L.P., the other joint owners of the Conway fractionation facility and, to a lesser extent, with fractionation facilities on the Gulf Coast. In April 2006, ONEOK, Inc. transferred its entire gathering and processing, natural gas liquids, and pipelines and storage segments to ONEOK Partners, L.P. (formerly known as Northern Border Partners, L.P.), or ONEOK. Our Conway storage facilities compete with ONEOK-owned storage facilities in Bushton, Kansas and in Conway, Kansas, an NCRA-owned facility in Conway, Kansas, a ONEOK-owned facility in Hutchinson, Kansas and an Enterprise Products Partners-owned facility in Hutchinson, Kansas and, to a lesser extent, with storage facilities on the Gulf Coast and in Canada.

Four Corners competes with other natural gas gathering, processing and treating facilities in the San Juan Basin, including Enterprise, Red Cedar and TEPPCO. In addition, our customers who are significant producers of gas or consumers of NGLs may develop their own gathering, processing, fractionation and storage facilities in lieu of using ours.

Also, competitors may establish new connections with pipeline systems that would create additional competition for services we provide to our customers. For example, other than the producer gathering lines that connect to the Carbonate Trend pipeline, there are no other sour gas pipelines near our Carbonate Trend pipeline, but the producers that are currently our customers could construct or commission such pipelines in the future.

Our ability to renew or replace existing contracts with our customers at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of our competitors. All of these competitive pressures could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

The only pipeline that provides NGL transportation capacity in the San Juan Basin has filed at FERC to increase certain of its tariff rates. If the requested increase is granted, Four Corners’ operating costs would increase, which could have an adverse effect on our business and operating results.

MAPL, the only pipeline in the San Juan Basin that provides NGL transportation capacity, has filed at FERC to increase certain of its tariff rates. If FERC grants this request to increase those tariff rates, we estimate that Four Corners’ cost of transporting NGLs to certain markets would increase by approximately $1.5 million per year, which could have an adverse effect on our business, results of operations, financial condition and ability to make cash distributions to us.

Pipeline integrity programs and repairs may impose significant costs and liabilities on us.

In December 2003, the U.S. Department of Transportation issued a final rule requiring pipeline operators to develop integrity management programs for gas transportation pipelines located where a leak or rupture could do the most harm in ‘‘high consequence areas.’’ The final rule requires operators to:

	•		perform ongoing assessments of pipeline integrity;

	•		identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

	•		improve data collection, integration and analysis;

	•		repair and remediate the pipeline as necessary; and

	•		implement preventive and mitigating actions.

The final rule incorporates the requirements of the Pipeline Safety Improvement Act of 2002. The final rule became effective on January 14, 2004. In response to this new Department of Transportation rule, we have initiated pipeline integrity testing programs that are intended to assess pipeline integrity. In addition, we have voluntarily initiated a testing program to assess the integrity of the brine pipelines of our Conway storage facilities. In 2005, Conway replaced two sections of brine systems at a cost of $0.2 million. This work is in anticipation of integrity testing scheduled to begin in the third quarter of 2006. The results of these testing programs could cause us to incur significant capital and operating expenditures in response to any repair, remediation, preventative or mitigating actions that are determined to be necessary.

Additionally, the transportation of sour gas in our Carbonate Trend pipeline necessitates a corrosion control program in order to protect the integrity of the pipeline and prolong its life. Our corrosion control program may not be successful and the sour gas could compromise pipeline integrity. Our inability to reduce corrosion on our Carbonate Trend pipeline to acceptable levels could significantly reduce the service life of the pipeline and could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

The State of New Mexico recently enacted rule changes that permit the pressure in gathering pipelines to be reduced below atmospheric levels. In response to these rule changes, Four Corners may reduce the pressures in its gathering lines below atmospheric levels. With Four Corners’ concurrence, producers may also reduce pressures below atmospheric levels prior to delivery to Four Corners. All of the gathering lines owned by Four Corners in the San Juan Basin are made of steel. Reduced pressures below atmospheric levels may introduce increasing amounts of oxygen into those pipelines, which could cause an acceleration of the corrosion.

We do not own all of the land on which our pipelines and facilities are located, which could disrupt our operations.

We do not own all of the land on which our pipelines and facilities have been constructed, and we are therefore subject to the possibility of increased costs to retain necessary land use. We obtain the rights to construct and operate our pipelines and gathering systems on land owned by third parties and governmental agencies for a specific period of time. For example, portions of the Four Corners gathering system are located on Native American right-of-ways. Four Corners is currently in discussions with the Jicarilla Apache Nation regarding rights-of-way that expire at the end of 2006 for a small segment of the gathering system. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions to our unitholders.

Our operations are subject to governmental laws and regulations relating to the protection of the environment, which may expose us to significant costs and liabilities.

The risk of substantial environmental costs and liabilities is inherent in natural gas gathering, transportation and processing, and in the fractionation and storage of NGLs, and we may incur substantial environmental costs and liabilities in the performance of these types of operations. Our operations are subject to stringent federal, state and local laws and regulations relating to protection of the public and the environment. These laws include, for example:

	•		the Federal Clean Air Act and analogous state laws, which impose obligations related to air emissions;

	•		the Federal Water Pollution Control Act of 1972, as renamed and amended as the Clean Water Act, or CWA, and analogous state laws, which regulate discharge of wastewaters from our facilities to state and federal waters;

	•		the federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or the Superfund law, and analogous state laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which we have sent wastes for disposal; and

	•		the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous state laws that impose requirements for the handling and discharge of solid and hazardous waste from our facilities.

Various governmental authorities, including the U.S. Environmental Protection Agency, or EPA, have the power to enforce compliance with these laws and regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Joint and several, strict liability may be incurred without regard to fault under CERCLA, RCRA and analogous state laws for the remediation of contaminated areas.

There is inherent risk of the incurrence of environmental costs and liabilities in our business due to our handling of the products we gather, transport, process, fractionate and store, air emissions related to our operations, historical industry operations, waste disposal practices, and the prior use of flow meters containing mercury, some of which may be material. Private parties, including the owners of properties through which our pipeline and gathering systems pass, may have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage arising from our operations. Some sites we operate are located near current or former third party hydrocarbon storage and processing operations and there is a risk that contamination has migrated from those sites to ours. In addition, increasingly strict laws, regulations and enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary, some of which may be material.

For example, the Kansas Department of Health and Environment, or the KDHE, regulates the storage of NGLs and natural gas in the state of Kansas. This agency also regulates the construction, operation and closure of brine ponds associated with such storage facilities. In response to a significant incident at a third party facility, the KDHE recently promulgated more stringent regulations regarding safety and integrity of brine ponds and storage caverns. These regulations are subject to interpretation and the costs associated with compliance with these regulations could vary significantly depending upon the interpretation of these regulations. Additionally, incidents similar to the incident at a third party facility that prompted the recent KDHE regulations could prompt the issuance of even stricter regulations.

There is increasing pressure in New Mexico from environmental groups and area residents to reduce the noise from midstream operations through regulatory means. If these groups are successful, Four Corners may have to make capital expenditures to muffle noise from its facilities or to ensure adequate barriers or distance to mitigate noise concerns.

Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage in the event an environmental claim is made against us. Our business may be adversely affected by increased costs due to stricter pollution control requirements or liabilities resulting from non-compliance with required operating or other

regulatory permits. Also, new environmental regulations might adversely affect our products and activities, including processing, fractionation, storage and transportation, as well as waste management and air emissions. Federal and state agencies also could impose additional safety requirements, any of which could affect our profitability.

The natural gas gathering operations in the San Juan Basin may be subjected to regulation by the state of New Mexico, which could negatively affect Four Corners.

The New Mexico state legislature has called for hearings to take place to examine the regulation of natural gas gathering systems in the state. It is unclear when these hearings will occur or if these hearings will occur at all, but they could result in gathering regulation that would affect the fees that Four Corners could collect for gathering services. This type of regulation could adversely impact Four Corners’ revenues and cash flow.

Risks Inherent in an Investment in Us

We have a holding company structure in which our subsidiaries conduct our operations and own our operating assets, which may affect our ability to make payments on our outstanding notes and distributions on our common units.

We have a holding company structure, and our subsidiaries conduct all of our operations and own all of our operating assets. Williams Partners L.P. has no significant assets other than the ownership interests in its subsidiaries. As a result, our ability to make required payments on our outstanding notes and distributions on our common units depends on the performance of our subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, applicable state partnership and limited liability company laws and other laws and regulations. If we are unable to obtain the funds necessary to pay the principal amount at maturity of our outstanding notes, or to repurchase our outstanding notes upon the occurrence of a change of control, or make distributions on our common units we may be required to adopt one or more alternatives, such as a refinancing of our outstanding notes or borrowing funds to make distributions on our common units. We cannot assure our notes holders that we would be able to refinance our outstanding notes or that we will be able to borrow funds to make distributions on our common units.

Our common units have a limited trading history and a limited trading volume compared to other units representing limited partner interests.

Our common units are traded publicly on the New York Stock Exchange under the symbol “WPZ.” However, our common units have a limited trading history and daily trading volumes for our common units are, and may continue to be, relatively small compared to many other units representing limited partner interests quoted on the New York Stock Exchange.

The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

	•		our quarterly distributions;

	•		our quarterly or annual earnings or those of other companies in our industry;

	•		loss of a large customer;

	•		announcements by us or our competitors of significant contracts or acquisitions;

	•		changes in accounting standards, policies, guidance, interpretations or principles;

	•		general economic conditions;

	•		the failure of securities analysts to cover our common units or changes in financial estimates by analysts;

	•		future sales of our common units; and

	•		the other factors described in the ‘‘Risk Factors’’ set forth in our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly reports on Form 10-Q.

Item 6. Exhibits

The exhibits listed below are filed or furnished as part of this report:


Exhibit
Number		Description

*#Exhibit 2.1		Purchase and Sale Agreement, dated April 6, 2006, by and among Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field Services Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7, 2006).

*Exhibit 3.1		Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit 3.1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on May 2, 2005).

*Exhibit 3.2		Amended and Restated Agreement of Limited Partnership of Williams Partners L.P. (including form of common unit certificate), as amended by Amendments Nos. 1 and 2 (attached as Exhibit 4.2 to Williams Partners L.P.’s registration statement on Form S-3 (File No. 333-137562) filed with the SEC on September 22, 2006).

*Exhibit 10.1		Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.7 to Williams Partners L.P.’s quarterly report on Form 10-Q (File No. 001-32599) filed with the SEC on August 8, 2006).

+Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

+Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

+Exhibit 32		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.


+		Filed herewith.

*		Such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference.

#		Pursuant to item 601(b) (2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		WILLIAMS PARTNERS L.P.
		(Registrant)
		By: Williams Partners GP LLC, its general partner

		/s/ Ted T. Timmermans

		Ted. T. Timmermans
		Controller (Duly Authorized Officer and Principal Accounting Officer)
November 2, 2006

EXHIBIT INDEX


Exhibit
Number		Description
*#Exhibit 2.1		Purchase and Sale Agreement, dated April 6, 2006, by and among Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field Services Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7, 2006).

*Exhibit 3.1		Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit 3.1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on May 2, 2005).

*Exhibit 3.2		Amended and Restated Agreement of Limited Partnership of Williams Partners L.P. (including form of common unit certificate), as amended by Amendments Nos. 1 and 2 (attached as Exhibit 4.2 to Williams Partners L.P.’s registration statement on Form S-3 (File No. 333-137562) filed with the SEC on September 22, 2006).

*Exhibit 10.1		Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.7 to Williams Partners L.P.’s quarterly report on Form 10-Q (File No. 001-32599) filed with the SEC on August 8, 2006).

+Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

+Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

+Exhibit 32		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.


+		Filed herewith.

*		Such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference.

#		Pursuant to item 601(b) (2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.