| | | | | | | | | | | | | | | | | | | | |
| | 2007 | | | 2008-2009 | | | 2010-2011 | | | 2012+ | | | Total | |
|
Long-term debt: | | | | | | | | | | | | | | | | | | | | |
Principal | | $ | — | | | $ | — | | | $ | 150,000 | | | $ | 600,000 | | | $ | 750,000 | |
Interest | | | 36,625 | | | | 109,500 | | | | 109,500 | | | | 239,250 | | | | 494,875 | |
Capital leases | | | — | | | | — | | | | — | | | | — | | | | — | |
Operating leases | | | 2,426 | | | | 4,025 | | | | 2,440 | | | | 1,000 | | | | 9,891 | |
Purchase obligations | | | 20,212 | (a) | | | 240 | | | | 240 | | | | 120 | (b) | | | 20,812 | |
Other long term liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 59,263 | | | $ | 113,765 | | | $ | 262,180 | | | $ | 840,370 | | | $ | 1,275,578 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | Includes the open purchase orders as of12/31/06 to be paid in 2007. |
|
(b) | | Year 20112012 represents one year of payments associated with an operating agreement whose term is tied to the life of the underlying gas reserves. |
Our equity investee, Discovery, also has contractual obligations for which we are not contractually liable. These contractual obligations, however, will impact Discovery’s ability to make cash distributions to us. A summary of Discovery’s total contractual obligations as of December 31, 2005,2006, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2007-2008 | | | 2009-2010 | | | 2011+ | | | Total | |
| | | | | | | | | | | | | | | |
Notes payable/long-term debt | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Capital leases | | | — | | | | — | | | | — | | | | — | | | | — | |
Operating leases | | | 854 | | | | 1,712 | | | | 1,716 | | | | 4,109 | | | | 8,391 | |
Purchase obligations(a) | | | 30,807 | | | | 23,488 | | | | — | | | | — | | | | 54,295 | |
Other long-term liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| Total | | $ | 31,661 | | | $ | 25,200 | | | $ | 1,716 | | | $ | 4,109 | | | $ | 62,686 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | 2007 | | | 2008-2009 | | | 2010-2011 | | | 2012+ | | | Total | |
|
Notes payable/long-term debt | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Capital leases | | | — | | | | — | | | | — | | | | — | | | | — | |
Operating leases | | | 855 | | | | 1,715 | | | | 1,715 | | | | 3,252 | | | | 7,537 | |
Purchase obligations(a) | | | 33,279 | | | | — | | | | — | | | | — | | | | 33,279 | |
Other long-term liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 34,134 | | | $ | 1,715 | | | $ | 1,715 | | | $ | 3,252 | | | $ | 40,816 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | WithA majority of the exception of $3.4 million of 2006 outstanding purchase orders, all other amounts are Tahiti-related expenditures that will be funded from the amounts that were escrowed for this project in September 2005 and capital contributions from members including us. Please read “Financial Condition and Liquidity — Outlook for 2006”Liquidity”. |
Effects of Inflation
Inflation in the United States has been relatively low
We have experienced increased costs in recent years due to the effects of growth in the oil and didgas industry, which has increased competition for resources. Approximately 50% of Four Corners’ gathering and processing revenues are from contracts that include escalation clauses that provide for an annual escalation based on an inflation-sensitive index. These escalations, combined with increased fees where competition permits for new and amended contracts, help to offset these inflationary pressures; however, they may not have a material impactalways approximate the actual inflation rate we experience due to geographicand/or industry-specific inflationary pressures on our resultscosts and expenses. We have significant annual capital expenditures related to well connections and gathering system expansions necessary to connect new sources of operations for the three-year period ended December 31, 2005. It may in the future, however, increase the cost to acquire or replace property, plant and equipment and may increase the costs of labor and supplies. Our operating revenues and costs are influenced to a greater extent by specific price changes in natural gas and NGLs. To the extent permitted by competition, regulation and our existing agreements, we have and will continue to pass along increased costs to our customers in the form of higher fees.
Regulatory Matters
As of December 31, 2005, Discovery had deferred amounts of $6 million relating to retained system gas gains and the over-recovery of lost and unaccounted-for gas on the Discovery system. Please read Note 7 — Rate and Regulatory Matters and Contingent Liabilities — Rate and Regulatory Mattersthroughput to the Discovery Producer Services LLC Consolidated Financial Statements included herein. Certain shippers challenged Discovery’s right to retain these gains. FERC requested and receivedFour Corners’ system as throughput volumes from Discovery additional information regarding both lost and unaccounted-for-volumes and gas gains. Discovery responded to the informationexisting wells will naturally decline over time.
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63
request and on October 31, 2005, the FERC accepted the filing and no requests for rehearing were filed. As a result, we recognized the portion of this reserve for the period 2002 through 2004 of $10.7 million in 2005.Regulatory Matters
Discovery’s natural gas pipeline transportation is subject to rate regulation by the FERC under the Natural Gas Act. For more information on federal and state regulations affecting our business, please read “Risk Factors” and “FERC Regulation” elsewhere in this report.
Environmental
We are a participant in certain hydrocarbon removal and groundwater monitoring activities associated with certain well sites in New Mexico. Of nine remaining active sites, product removal is ongoing at seven and groundwater monitoring is ongoing at each site. As groundwater concentrations reach and sustain closure criteria levels and state regulator approval is received, the sites will be properly abandoned. We expect the remaining sites will be closed within four to eight years. As of December 31, 2006, we had accrued liabilities totaling $0.7 million for these environmental activities. Actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by governmental authorities and other factors. During 2006, we paid approximately $0.2 million in construction with these environmental activities.
Our Conway storage facilities are subject to strict environmental regulation by the Underground Storage Unit within the Geology Section of the Bureau of Water of the KDHE under the Underground Hydrocarbon and Natural Gas Storage Program, which became effective on April 1, 2003.
We are in the process of modifying our Conway storage facilities, including the caverns and brine ponds, and we expect our storage operations will be in compliance with the Underground Hydrocarbon and Natural Gas Storage Program regulations by the applicable required compliance dates. In 2003, we began to complete workovers on approximately 30 to 35 salt caverns per year and install, on average, a double liner on one brine pond perevery other year. The incremental costscost of these activities is approximately $5.5 million per year to complete the workovers and approximately $900,000$1.2 million per year to install a double liner on a brine bond. In response to these increased costs, we raised our storage rates in 2004 by an amount sufficient to preserve our margins in this business. Accordingly, we do not believe that these increased costs have had a material effect on our business or results of operations. We expect on average to complete workovers on each of our caverns every five to ten years and install double liners on each of our brine ponds every 18 years. The KDHE has also advised us that a regulation relating to the metering of NGL volumes that are injected and withdrawn from our caverns may be interpreted and enforced to require the installation of meters at each of our well bores. We have informed the KDHE that we disagree with this interpretation, and the KDHE has asked us to provide it with additional information. We estimate that the cost of installing a meter at each of our well bores at Conway West and Mitchell would be approximately $3.9 million over three years.
As of December 31, 2005, we had accrued environmental liabilities of $5.4 million related to four remediation projects at the Conway storage facilities. In 2004, we purchased an insurance policy that covers up to $5.0 million of remediation costs until an active remediation system is in place or April 30, 2008, whichever is earlier, excluding operation and maintenance costs and ongoing monitoring costs, for these four projects to the extent such costs exceed a $4.2 million deductible. The policy also covers costs incurred as a result of third party claims associated with then existing but unknown contamination related to the storage facilities. The aggregate limit under the policy for all claims is $25 million. In the omnibus agreement, Williams agreed to indemnify us for these remediation expenditures to the extent not recovered under 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 before the closing date of our IPO. There is an aggregate cap of $14.0 million on the total amount of indemnity coverage under the omnibus agreement, which will be reduced by actual recoveries under the environmental insurance policy. There is also a three-year time limitation from the IPO closing date, August 23, 2005. We estimate that the approximate cost of the project management and soil and groundwater monitoring associated with the four remediation projects at the Conway storage facilities and for which we will not be indemnified will be approximately $200,000 to $400,000 per year following the completion of remediation work. The benefit of the indemnification will be accounted for as a capital contribution to us by Williams as the costs are incurred. Please read “Certain Relationships and Related Transactions — Omnibus Agreement.”
In connection with our operations at the Conway facilities, we are required by the KDHE regulations to provide assurance of our financial capability to plug and abandon the wells and abandon the brine facilities we operate at Conway. Williams has posted two letters of credit on our behalf in an aggregate amount of $17.5 million to guarantee our plugging and abandonment responsibilities for these facilities. We anticipate providing assurance in the form of letters of credit in future periods until such time as we obtain an investment-grade credit rating.
64
In connection with the construction of Discovery’s pipeline, approximately 73 acres of marshland was traversed. Discovery is required to restore marshland in other areas to offset the damage caused during the initial construction. In Phase I of this project, Discovery created new marshlands to replace about half of the traversed acreage. Phase II, which will complete the project, began during 2005 and will cost approximately $2.0 million.
| |
Item 7A. | 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. We were also exposed to the risk of interest rate fluctuations on our intercompany balances with Williams prior to the forgiveness of these balances by Williams in conjunction with our IPO.
Commodity Price Risk
Certain of 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 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. We and Discovery do not currently use financial derivatives to manage the risks associated with these price fluctuations.
Interest Rate Risk
Historically, our interest rate exposure was related to our advances from Williams. The table below provides information as of December 31, 2004 about our interest rate risk. We have no interest rate risk as of December 31, 2005.
| | | | | | | | |
| | December 31, 2004 | |
| | | |
| | Carrying | | | Fair | |
| | Value | | | Value | |
| | | | | | |
| | ($ in thousands) | |
Advances from Williams | | $ | 186,024 | | | $ | 186,024 | |
These advances are due on demand. Prior to the closing of our IPO, Williams forgave these advances. The variable interest rate was 7.4% at December 31, 2004.
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| |
Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Williams Partners GP LLC
General Partner of Williams Partners L.P.
We have audited the accompanying consolidated balance sheets of Williams Partners L.P. as of December 31, 2005 and 2004, and the related consolidated statements of operations, partners’ capital, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Williams Partners L.P. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
As described in Note 7, effective January 1, 2003, Williams Partners L.P. adopted Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement Obligations, and effective December 31, 2005, adopted Financial Accounting Standards Board Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations.
Tulsa, Oklahoma
February 27, 2005
66
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
ASSETS |
Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 6,839 | | | $ | — | |
| Accounts receivable: | | | | | | | | |
| | Trade | | | 1,840 | | | | 2,150 | |
| | Other | | | 2,104 | | | | 1,388 | |
| Product imbalance | | | 760 | | | | — | |
| Gas purchase contract — affiliate | | | 5,320 | | | | — | |
| Prepaid expenses | | | 1,133 | | | | 749 | |
| | | | | | |
| Total current assets | | | 17,996 | | | | 4,287 | |
Investment in Discovery Producer Services | | | 150,260 | | | | 147,281 | |
Property, plant and equipment, net | | | 67,931 | | | | 67,793 | |
Gas purchase contract — noncurrent — affiliate | | | 4,754 | | | | — | |
| | | | | | |
Total assets | | $ | 240,941 | | | $ | 219,361 | |
| | | | | | |
|
LIABILITIES AND PARTNERS’ CAPITAL |
Current liabilities: | | | | | | | | |
| Accounts payable: | | | | | | | | |
| | Trade | | $ | 3,906 | | | $ | 2,480 | |
| | Affiliate | | | 4,729 | | | | 1,980 | |
| Product imbalance | | | — | | | | 1,071 | |
| Deferred revenue | | | 3,552 | | | | 3,305 | |
| Accrued liabilities | | | 2,373 | | | | 3,924 | |
| | | | | | |
| Total current liabilities | | | 14,560 | | | | 12,760 | |
Advances from affiliate | | | — | | | | 186,024 | |
Environmental remediation liabilities | | | 3,964 | | | | 3,909 | |
Other noncurrent liabilities | | | 762 | | | | — | |
Commitments and contingent liabilities (Note 13) | | | | | | | | |
Partners’ capital: | | | | | | | | |
| Predecessor partners’ equity | | | — | | | | 16,668 | |
| Common unitholders (7,006,146 outstanding at December 31, 2005) | | | 108,526 | | | | — | |
| Subordinated unitholders (7,000,000 outstanding at December 31, 2005) | | | 108,491 | | | | — | |
| General partner | | | 4,638 | | | | — | |
| | | | | | |
| | Total partners’ capital | | | 221,655 | | | | 16,668 | |
| | | | | | |
Total liabilities and partners’ capital | | $ | 240,941 | | | $ | 219,361 | |
| | | | | | |
See accompanying notes to consolidated financial statements.
67
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | (In thousands) | |
Revenues: | | | | | | | | | | | | |
| Storage: | | | | | | | | | | | | |
| | Affiliate | | $ | — | | | $ | — | | | $ | 2,426 | |
| | Third-party | | | 20,290 | | | | 15,318 | | | | 9,223 | |
| Fractionation | | | 10,770 | | | | 9,070 | | | | 8,221 | |
| Gathering | | | 3,063 | | | | 3,883 | | | | 5,513 | |
| Product sales: | | | | | | | | | | | | |
| | Affiliate | | | 13,400 | | | | 506 | | | | — | |
| | Third-party | | | 63 | | | | 7,947 | | | | 1,263 | |
| Other | | | 4,183 | | | | 4,252 | | | | 1,648 | |
| | | | | | | | | |
Total revenues | | | 51,769 | | | | 40,976 | | | | 28,294 | |
Costs and expenses: | | | | | | | | | | | | |
| Operating and maintenance expense: | | | | | | | | | | | | |
| | Affiliate | | | 13,378 | | | | 9,986 | | | | 8,789 | |
| | Third-party | | | 11,733 | | | | 9,390 | | | | 5,171 | |
| Product cost | | | 11,821 | | | | 6,635 | | | | 1,263 | |
| Depreciation and accretion | | | 3,619 | | | | 3,686 | | | | 3,707 | |
| General and administrative expense: | | | | | | | | | | | | |
| | Affiliate | | | 4,186 | | | | 2,534 | | | | 1,738 | |
| | Third-party | | | 1,137 | | | | 79 | | | | 75 | |
| Taxes other than income | | | 700 | | | | 716 | | | | 640 | |
| Other — net | | | (6 | ) | | | (91 | ) | | | (133 | ) |
| | | | | | | | | |
Total costs and expenses | | | 46,568 | | | | 32,935 | | | | 21,250 | |
| | | | | | | | | |
| Operating income | | | 5,201 | | | | 8,041 | | | | 7,044 | |
Equity earnings — Discovery Producer Services | | | 8,331 | | | | 4,495 | | | | 3,447 | |
Impairment of investment in Discovery Producer Services | | | — | | | | (13,484 | ) | | | — | |
Interest expense: | | | | | | | | | | | | |
| Affiliate | | | (7,461 | ) | | | (11,980 | ) | | | (4,176 | ) |
| Third-party | �� | | (777 | ) | | | (496 | ) | | | — | |
Interest income | | | 165 | | | | — | | | | — | |
| | | | | | | | | |
Income (loss) before cumulative effect of change in accounting principle | | | 5,459 | | | | (13,424 | ) | | | 6,315 | |
Cumulative effect of change in accounting principle | | | (628 | ) | | | — | | | | (1,099 | ) |
| | | | | | | | | |
Net income (loss) | | $ | 4,831 | | | $ | (13,424 | ) | | $ | 5,216 | |
| | | | | | | | | |
Allocation of net income: | | | | | | | | | | | | |
| Net income | | $ | 4,831 | | | | | | | | | |
| Net loss applicable to the period through August 22, 2005 | | | (103 | ) | | | | | | | | |
| | | | | | | | | |
| Net income applicable to the period August 23 through December 31, 2005 | | | 4,934 | | | | | | | | | |
| Allocation of net loss to general partner | | | (1,273 | ) | | | | | | | | |
| | | | | | | | | |
| Allocation of net income to limited partners | | $ | 6,207 | | | | | | | | | |
| | | | | | | | | |
Basic and diluted net income per limited partner unit: | | | | | | | | | | | | |
| Income before cumulative effect of change in accounting principle: | | | | | | | | | | | | |
| | Common units | | $ | 0.49 | | | | | | | | | |
| | Subordinated units | | $ | 0.49 | | | | | | | | | |
| Cumulative effect of change in accounting principle: | | | | | | | | | | | | |
| | Common units | | $ | (0.05 | ) | | | | | | | | |
| | Subordinated units | | $ | (0.05 | ) | | | | | | | | |
| Net income: | | | | | | | | | | | | |
| | Common units | | $ | 0.44 | | | | | | | | | |
| | Subordinated units | | $ | 0.44 | | | | | | | | | |
Weighted average number of units outstanding: | | | | | | | | | | | | |
| Common units | | | 7,001,366 | | | | | | | | | |
| Subordinated units | | | 7,000,000 | | | | | | | | | |
See accompanying notes to consolidated financial statements.
68
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | |
| | | | | | | | Other | | | |
| | Pre-IPO | | | Limited Partners | | | | | Comprehensive | | | Total | |
| | Owner’s | | | | | | General | | | Income | | | Partners’ | |
| | Equity | | | Common | | | Subordinated | | | Partner | | | (Loss) | | | Capital | |
| | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | |
Balance — January 1, 2003 | | $ | 24,876 | | | $ | — | | | $ | — | | | $ | — | | | $ | (1,962 | ) | | $ | 22,914 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income — 2003 | | | 5,216 | | | | — | | | | — | | | | — | | | | — | | | | 5,216 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net unrealized losses | | | — | | | | — | | | | — | | | | — | | | | (116 | ) | | | (116 | ) |
| | Net reclassification into earnings of derivative instrument losses | | | — | | | | — | | | | — | | | | — | | | | 2,078 | | | | 2,078 | |
| | | | | | | | | | | | | | | | | | |
| Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 1,962 | |
| | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 7,178 | |
| | | | | | | | | | | | | | | | | | |
Balance — December 31, 2003 | | | 30,092 | | | | — | | | | — | | | | — | | | | — | | | | 30,092 | |
| Net loss — 2004 | | | (13,424 | ) | | | — | | | | — | | | | — | | | | — | | | | (13,424 | ) |
| | | | | | | | | | | | | | | | | | |
Balance — December 31, 2004 | | | 16,668 | | | | — | | | | — | | | | — | | | | — | | | | 16,668 | |
Accounts receivable not contributed | | | (2,640 | ) | | | — | | | | — | | | | — | | | | | | | | (2,640 | ) |
Net loss attributable to the period through August 22, 2005 | | | (103 | ) | | | — | | | | — | | | | — | | | | — | | | | (103 | ) |
| | | | | | | | | | | | | | | | | | |
| | | 13,925 | | | | — | | | | — | | | | — | | | | — | | | | 13,925 | |
Contribution of net assets of predecessor companies (2,000,000 common units; 7,000,000 subordinated units) | | | (13,925 | ) | | | 10,471 | | | | 106,427 | | | | 4,343 | | | | — | | | | 107,316 | |
Issuance of units to public (5,000,000 common units) | | | — | | | | 100,247 | | | | — | | | | — | | | | — | | | | 100,247 | |
Offering costs | | | — | | | | (4,291 | ) | | | — | | | | — | | | | — | | | | (4,291 | ) |
Net income (loss) attributable to the period August 23, 2005 through December 31, 2005 | | | — | | | | 3,104 | | | | 3,103 | | | | (1,273 | ) | | | — | | | | 4,934 | |
Cash distributions ($.1484 per unit) | | | | | | | (1,039 | ) | | | (1,039 | ) | | | (42 | ) | | | — | | | | (2,120 | ) |
Issuance of common units (6,146 common units) | | | — | | | | 34 | | | | — | | | | — | | | | — | | | | 34 | |
Contributions pursuant to the Omnibus Agreement | | | — | | | | — | | | | — | | | | 1,610 | | | | — | | | | 1,610 | |
| | | | | | | | | | | | | | | | | | |
Balance — December 31, 2005 | | $ | — | | | $ | 108,526 | | | $ | 108,491 | | | $ | 4,638 | | | $ | — | | | $ | 221,655 | |
| | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
69
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | (In thousands) | |
OPERATING ACTIVITIES: | | | | | | | | | | | | |
| Net income (loss) before cumulative effect of change in accounting principle | | $ | 5,459 | | | $ | (13,424 | ) | | $ | 6,315 | |
| Adjustments to reconcile to cash provided by operations: | | | | | | | | | | | | |
| | Depreciation and accretion | | | 3,619 | | | | 3,686 | | | | 3,707 | |
| | Impairment of investment in Discovery Producer Services | | | — | | | | 13,484 | | | | — | |
| | Amortization of gas purchase contract — affiliate | | | 2,033 | | | | — | | | | — | |
| | Undistributed earnings of Discovery Producer Services | | | (7,051 | ) | | | (4,495 | ) | | | (3,447 | ) |
| | Cash provided (used) by changes in assets and liabilities: | | | | | | | | | | | | |
| | | Accounts receivable | | | (3,045 | ) | | | 261 | | | | (850 | ) |
| | | Other current assets | | | (384 | ) | | | (362 | ) | | | (187 | ) |
| | | Accounts payable | | | 4,215 | | | | 2,711 | | | | (274 | ) |
| | | Accrued liabilities | | | (737 | ) | | | (417 | ) | | | (320 | ) |
| | | Deferred revenue | | | 247 | | | | 775 | | | | 1,108 | |
| | Other, including changes in noncurrent assets and liabilities | | | (2,463 | ) | | | 484 | | | | 592 | |
| | | | | | | | | |
| | | Net cash provided by operating activities | | | 1,893 | | | | 2,703 | | | | 6,644 | |
| | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
| | Capital expenditures | | | (3,688 | ) | | | (1,534 | ) | | | (1,167 | ) |
| | Contribution to Discovery Producer Services | | | (24,400 | ) | | | — | | | | (101,643 | ) |
| | | | | | | | | |
| | | Net cash used by investing activities | | | (28,088 | ) | | | (1,534 | ) | | | (102,810 | ) |
| | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
| | Proceeds from sale of common units | | | 100,247 | | | | — | | | | — | |
| | Payment of offering costs | | | (4,291 | ) | | | — | | | | — | |
| | Distribution to The Williams Companies, Inc. | | | (58,756 | ) | | | — | | | | — | |
| | Changes in advances from affiliates — net | | | (3,656 | ) | | | (1,169 | ) | | | 96,166 | |
| | Distributions to unitholders | | | (2,120 | ) | | | — | | | | — | |
| | Contributions per omnibus agreement | | | 1,610 | | | | — | | | | — | |
| | | | | | | | | |
| | | | Net cash provided (used) by financing activities | | | 33,034 | | | | (1,169 | ) | | | 96,166 | |
| | | | | | | | | |
Increase in cash and cash equivalents | | | 6,839 | | | | — | | | | — | |
Cash and cash equivalents at beginning of year | | | — | | | | — | | | | — | |
| | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 6,839 | | | $ | — | | | $ | — | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
70
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context clearly indicates otherwise, references to “we,” “our,” and “us” include the operations of Discovery Producer Services LLC (“Discovery”), in which we own a 40 percent interest. When we refer to Discovery by name, we are referring exclusively to its businesses and operations.
We are a Delaware limited partnership that was formed in February 2005, to acquire and own (1) a 40 percent interest in Discovery; (2) the Carbonate Trend gathering pipeline off the coast of Alabama; (3) three integrated natural gas liquids (“NGL”) product storage facilities near Conway, Kansas; and (4) a 50 percent undivided ownership interest in a fractionator near Conway, Kansas. Prior to the closing of our initial public offering (the “IPO”) in August 2005, the 40 percent interest in Discovery was held by Williams Energy, L.L.C. (“Energy”) and Williams Discovery Pipeline LLC; the Carbonate Trend gathering pipeline was held in Carbonate Trend Pipeline LLC (“CTP”), which was owned by Williams Mobile Bay Producers Services, L.L.C.; and the NGL product storage facilities and the interest in the fractionator were owned by Mid-Continent Fractionation and Storage, LLC (“MCFS”). All of these are wholly owned indirect subsidiaries of The Williams Companies, Inc. (collectively “Williams”). Williams Partners GP LLC, a Delaware limited liability company, was also formed in February 2005, to serve as our general partner. We also formed Williams Partners Operating LLC, an operating limited liability company (wholly owned by us) through which all our activities are conducted,.
| |
| Initial Public Offering and Related Transactions |
On August 23, 2005, we completed our IPO of 5,000,000 common units representing limited partner interests in us at a price of $21.50 per unit. The proceeds of $100.2 million, net of the underwriters’ discount and a structuring fee totaling $7.3 million, were used to:
| | |
| • | distribute $58.8 million to Williams, in part to reimburse Williams for capital expenditures relating to the assets contributed to us and for a gas purchase contract contributed to us; |
|
| • | provide $24.4 million to make a capital contribution to Discovery to fund an escrow account required in connection with the Tahiti pipeline lateral expansion project; |
|
| • | provide $12.7 million of additional working capital; and |
|
| • | pay $4.3 million of expenses associated with the IPO and related formation transactions. |
Concurrent with the closing of the IPO, the 40 percent interest in Discovery and all of the interests in CTP and MCFS were contributed to us by Williams’ subsidiaries in exchange for an aggregate of 2,000,000 common units and 7,000,000 subordinated units. The public, through the underwriters of the offering, contributed $107.5 million ($100.2 million net of the underwriters’ discount and a structuring fee) to us in exchange for 5,000,000 common units, representing a 35 percent limited partner interest in us. Additionally, at the closing of the IPO, the underwriters fully exercised their option to purchase 750,000 common units from Williams’ subsidiaries at the IPO price of $21.50 per unit, less the underwriters’ discount and a structuring fee.
| |
Note 2. | Description of Business |
We are principally engaged in the business of gathering, transporting and processing natural gas and fractionating and storing NGLs. Operations of our businesses are located in the United States and are organized into two reporting segments: (1) Gathering and Processing and (2) NGL Services. Our Gathering and Processing segment includes our equity investment in Discovery and the Carbonate Trend gathering pipeline. Our NGL Services segment includes the Conway fractionation and storage operations.
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Gathering and Processing. We own a 40 percent interest in Discovery, which includes a wholly owned subsidiary, Discovery Gas Transmission LLC. Discovery owns (1) a273-mile natural gas gathering and transportation pipeline system, located primarily off the coast of Louisiana in the Gulf of Mexico, (2) a 600 million cubic feet per day cryogenic natural gas processing plant in Larose, Louisiana, (3) a 32,000 barrels per day (“bpd”) natural gas liquids fractionator in Paradis, Louisiana and (4) two onshore liquids pipelines, including a22-mile mixed NGL pipeline connecting the gas processing plant to the fractionator and a10-mile condensate pipeline connecting the gas processing plant to a third party oil gathering facility. 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. Hence, this equity investment is considered part of the Gathering and Processing segment.
Our Carbonate Trend gathering pipeline is an unregulated sour gas gathering pipeline consisting of approximately 34 miles of pipeline off the coast of Alabama.
NGL Services. Our Conway storage facilities include three underground NGL storage facilities in the Conway, Kansas, area with a storage capacity of approximately 20 million barrels. The facilities are connected via a series of pipelines. The storage facilities receive daily shipments of a variety of products, including mixed NGLs and fractionated products. In addition to pipeline connections, one facility offers truck and rail service.
Our Conway fractionation facility is located near McPherson, Kansas, and has a capacity of approximately 107,000 bpd. We own a 50 percent undivided interest in these facilities representing capacity of approximately 53,500 bpd. ConocoPhillips and ONEOK, Inc. are the other owners. Williams operates the facility pursuant to an operating agreement that extends until May 2011. The fractionator separates mixed NGLs into five products: ethane, propane, normal butane, isobutane and natural gasoline. Portions of these products are then transported and stored at our Conway storage facilities.
| |
Note 3. | Summary of Significant Accounting Policies |
Basis of Presentation. The consolidated financial statements have been prepared based upon accounting principles generally accepted in the United States and include the accounts of the parent and our wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include:
| | |
| • | impairment assessments of investments and long-lived assets; |
|
| • | loss contingencies; |
|
| • | environmental remediation obligations; and |
|
| • | asset retirement obligations. |
These estimates are discussed further throughout the accompanying notes.
Proportional Accounting for the Conway Fractionator. No separate legal entity exists for the fractionator. We hold a 50 percent undivided interest in the fractionator property, plant and equipment, and we are responsible for our proportional share of the costs and expenses of the fractionator. As operator of the facility, we incur the liabilities of the fractionator (except for certain fuel costs purchased directly by one of the co-
72
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
owners) and are reimbursed by the co-owners for their proportional share of the total costs and expenses. Each co-owner is responsible for the marketing of their proportional share of the fractionator’s capacity. Accordingly, we reflect our proportionate share of the revenues and costs and expenses of the fractionator in the Consolidated Statements of Operations; and we reflect our proportionate share of the fractionator property, plant and equipment in the Consolidated Balance Sheets. Liabilities in the Consolidated Balance Sheets include those incurred on behalf of the co-owners with corresponding receivables from the co-owners. Accounts receivable also includes receivables from our customers for fractionation services.
Cash and Cash Equivalents. Cash and cash equivalents include demand and time deposits, certificates of deposit and other marketable securities with maturities of three months or less when acquired.
Accounts Receivable. Accounts receivable are carried on a gross basis, with no discounting, less an allowance for doubtful accounts. No allowance for doubtful accounts is recognized at the time the revenue which generates the accounts receivable is recognized. We estimate the allowance for doubtful accounts based on existing economic conditions, the financial condition of our customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been unsuccessful.
Investments. The voting rights under Discovery’s limited liability company agreement are such that our 40 percent interest combined with the additional interest held by Williams do not control Discovery. Hence, we account for our investment in Discovery under the equity method. Prior to 2004, the excess of the carrying value of our investment over the amount of underlying equity in net assets of Discovery represented interest capitalized during construction on the funds advanced to Discovery for construction prior to Discovery’s receipt of external financing. This excess was being amortized on a straight-line basis over the life of the related assets. In 2004, we recognized an other-than-temporary impairment of our investment. As a result, Discovery’s underlying equity exceeds the carrying value of our investment at December 31, 2005.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost. We base the carrying value of these assets on capitalized costs, useful lives and salvage values. Depreciation of property, plant and equipment is provided on the straight-line basis over estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred. Expenditures that enhance the functionality or extend the useful lives of the assets are capitalized. The cost of property, plant and equipment sold or retired and the related accumulated depreciation is removed from the accounts in the period of sale or disposition. Gains and losses on the disposal of property, plant and equipment are recorded in the Consolidated Statements of Operations.
We record an asset and a liability equal to the present value of each expected future asset retirement obligation (“ARO”). The ARO asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. We measure changes in the liability due to passage of time by applying an interest method of allocation. This amount is recognized as an increase in the carrying amount of the liability and as a corresponding accretion expense included in operating income.
Revenue Recognition. The nature of our businesses result in various forms of revenue recognition. Our Gathering and Processing segment recognizes revenue from gathering services when the services have been performed. Our NGL Services segment recognizes (1) fractionation revenues when services have been performed and product has been delivered, (2) storage revenues under prepaid contracted storage capacity evenly over the life of the contract as services are provided and (3) product sales revenue when the product has been delivered.
Gas purchase contract. 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. The gas purchase contract is for the purchase of 80,000 MMBtu per month and
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
terminates on December 31, 2007. The initial value of this contract is being amortized to expense over the contract life.
Product Imbalances. In the course of providing fractionation and storage services to our customers, we realize product gains and losses that are reflected as product imbalance receivables or payables on the Consolidated Balance Sheets. These imbalances are valued based on the market price of the products when the imbalance is identified and are evaluated for the impact of a change in market prices at the balance sheet date. Certain of these product gains and losses arise due to the product blending process at the fractionator. Others are realized when storage caverns are emptied. Storage caverns are emptied periodically to determine whether any product gains or losses have occurred, and as these caverns are emptied, it is possible that the resulting product gains or losses could have a material impact to the results of operations for the period during which the cavern drain is performed.
Impairment of Long-Lived Assets and Investments. We evaluate our long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. The impairment evaluation of tangible long-lived assets is measured pursuant to the guidelines of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” When an indicator of impairment has occurred, we compare our management’s estimate of undiscounted future cash flows attributable to the assets to the carrying value of the assets to determine whether the carrying value of the assets is recoverable. We apply a probability weighted approach to consider the likelihood of different cash flow assumptions and possible outcomes. If the carrying value is not recoverable, we determine the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.
We evaluate our investments for impairment when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and we consider the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment.
Judgments and assumptions are inherent in our management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.
Income Taxes. We are not a taxable entity for federal and state income tax purposes. The tax on our net income is borne by the individual partners through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income of unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes in us is not available to us.
Environmental. Environmental expenditures that relate to current or future revenues are expensed or capitalized based upon the nature of the expenditures. Expenditures that relate to an existing contamination caused by past operations that do not contribute to current or future revenue generation are expensed. Accruals related to environmental matters are generally determined based on site-specific plans for remediation, taking into account our prior remediation experience. Environmental contingencies are recorded independently of any potential claim for recovery.
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capitalized Interest. We capitalize interest on major projects during construction to the extent we incur interest expense. Historically, Williams provided the financing for capital expenditures; hence, the rates used to calculate the interest were based on Williams’ average interest rate on debt during the applicable period in time.
Earnings Per Unit. In accordance with the Emerging Issues Task Force (“EITF”) Issue 03-6, we use the two-class method to calculate basic and diluted earnings per unit whereby net income, adjusted for items specifically allocated to our general partner, is allocated on a pro-rata basis between unitholders and our general partner. Basic and diluted earnings per unit are based on the average number of common and subordinated units outstanding. Basic and diluted earnings per unit are equivalent as there are no dilutive securities outstanding.
Recent Accounting Standards. In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised SFAS No. 123, “Share-Based Payment.” The Statement requires that compensation costs for all share-based awards to employees be recognized in the financial statements at fair value. The Statement, as issued by the FASB, was to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that delayed the effective date for revised SFAS No. 123 to the beginning of the next fiscal year that begins after June 15, 2005. We intend to adopt the revised Statement as of January 1, 2006. Payroll costs directly charged to us by Williams and general and administrative costs allocated to us by Williams (see Note 5) will include such compensation costs beginning January 1, 2006. Our and Williams’ adoption of this Statement will not have a material impact on our Consolidated Financial Statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will be applied prospectively for inventory costs incurred in fiscal years beginning after June 15, 2005. The Statement amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify that abnormal amounts of certain costs should be recognized as current period charges and that the allocation of overhead costs should be based on the normal capacity of the production facility. The impact of this Statement on our Consolidated Financial Statements will not be material.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and will be applied prospectively. The Statement amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged but includes certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which is effective prospectively for reporting a change in accounting principle for fiscal years beginning after December 15, 2005. The Statement changes the reporting of a change in accounting principle to require retrospective application to prior periods’ financial statements, except for explicit transition provisions provided for in any existing accounting pronouncements, including those in the transition phase when SFAS No. 154 becomes effective.
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 4. | Allocation of Net Income and Distributions |
The allocation of net income between our general partner and limited partners for the period August 23, 2005 through December 31, 2005 is as follows (in thousands):
| | | | | | |
Allocation of net income to general partner: | | | | |
| Net income for the period August 23, 2005 through December 31, 2005 | | $ | 4,934 | |
| Direct charges to general partner: | | | | |
| | Reimbursable general and administrative costs | | | 1,400 | |
| | | |
| Income before direct charges to general partner | | | 6,334 | |
| General partner’s share of net income | | | 2.0 | % |
| | | |
| General partner’s allocated share of net income before direct charges | | | 127 | |
| Direct charges to general partner | | | (1,400 | ) |
| | | |
Net loss allocated to general partner | | $ | (1,273 | ) |
| | | |
Net income for the period August 23, 2005 through December 31, 2005 | | $ | 4,934 | |
Net loss allocated to general partner | | | (1,273 | ) |
| | | |
Net income allocated to limited partners | | $ | 6,207 | |
| | | |
The reimbursable general and administrative costs represent the general and administrative costs charged against our income that are required to be reimbursed to us by our general partner under the terms of the Omnibus Agreement.
On November 14, 2005, we paid a cash distribution of $0.1484 per unit on our outstanding common and subordinated units to unitholders of record at the close of business on November 7, 2005. The distribution represents the $0.35 per unit minimum quarterly distribution pro-rated for the39-day period following the IPO closing date (August 23, 2005 through September 30, 2005). The total distribution, including distributions paid to our general partner on its equivalent units, was $2.1 million.
On February 14, 2006, we paid a cash distribution of $0.35 per unit on our outstanding common and subordinated units to unitholders of record on February 7, 2006. The total distribution, including distributions paid to our general partner on its equivalent units, was $5.0 million.
| |
Note 5. | Related Party Transactions |
The employees of our operated assets and all of our general and administrative employees are employees of Williams. Williams directly charges us for the payroll costs associated with the operations employees and certain general and administrative employees. Williams carries the obligations for most employee-related benefits in its financial statements, including the liabilities related to the employee retirement and medical plans and paid time off. Certain of these costs are charged back to the other Conway fractionator co-owners. Our share of those costs are charged to us through affiliate billings and reflected in Operating and maintenance expense — Affiliate in the accompanying Consolidated Statements of Operations.
Williams charges its affiliates, including us and its Midstream segment, of which we are a part, for certain corporate administrative expenses that are directly identifiable or allocable to the affiliates. Direct costs charged from Williams represent the direct costs of services provided by Williams on our behalf. Prior to the IPO, a portion of the charges allocated to the Midstream segment were then reallocated to us. These allocated corporate administrative expenses are based on a three-factor formula, which considered revenues; property, plant and equipment; and payroll. Certain of these costs are charged back to the other Conway fractionator co-owners. Our share of these costs is reflected in General and administrative expense — Affiliate in the
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accompanying Consolidated Statements of Operations. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing business incurred by Williams. Under the Omnibus Agreement, Williams gives us a quarterly credit for general and administrative expenses. These amounts are reflected as a capital contribution from our general partner. The annual amounts of the credits are as follows: $3.9 million in 2005 ($1.4 million pro-rated for the portion of the year from August 23 to December 31), $3.2 million in 2006, $2.4 million in 2007, $1.6 million in 2008 and $0.8 million in 2009.
At December 31, 2005, we have a contribution receivable from our general partner of $.3 million, which is netted against Partners’ capital on the Consolidated Balance Sheets, for amounts reimbursable to us under the Omnibus Agreement.
We purchase fuel for the Conway fractionator, including fuel on behalf of the co-owners, from Williams Power Company (“Power”), a wholly owned subsidiary of Williams. These purchases are made at market rates at the time of purchase. 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. The amortization of this contract is reflected in Operating and maintenance expense — Affiliate in the accompanying Consolidated Statements of Operations. The carrying value of this contract is reflected as Gas purchase contract — affiliate and Gas purchase contract — noncurrent — affiliate on the Consolidated Balance Sheets.
During a portion of 2003, we provided propane storage, fractionation, transportation and terminalling services to subsidiaries of Williams that have subsequently been sold. In December 2004, we began selling surplus propane and other NGLs to Power, which takes title to the product and resells it, for its own account, to end users. Revenues associated with these activities are reflected as Affiliate revenues on the Consolidated Statements of Operations. Correspondingly, we purchase ethane and other NGLs from Power to replenish deficit product positions. The transactions conducted between us and Power are transacted at current market prices for the products.
A summary of the general and administrative expenses directly charged and allocated to us, fuel purchases from Power and NGL purchases from Power for the periods stated is as follows:
| | | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | (In thousands) | |
General and administrative expenses, including amounts subsequently charged to co-owners: | | | | | | | | | | | | |
| Allocated | | $ | 3,494 | | | $ | 2,078 | | | $ | 1,392 | |
| Directly charged | | | 992 | | | | 456 | | | | 346 | |
Operating and maintenance expenses, including amounts subsequently charged to co-owners: | | | | | | | | | | | | |
| Fuel purchases, including amortization of gas contract | | | 24,478 | | | | 17,053 | | | | 12,843 | |
| Salaries and benefits | | | 3,514 | | | | 3,473 | | | | 2,105 | |
NGL purchases | | | 15,657 | | | | 1,271 | | | | — | |
The per-unit gathering fee associated with two of our Carbonate Trend gathering contracts was negotiated on a bundled basis that includes transportation along a segment of a pipeline system owned by Transcontinental Gas Pipe Line Company (“Transco”), a wholly owned subsidiary of Williams. The fees we realize are dependent upon whether our customer elects to utilize this Transco capacity. When they make this election, our gathering fee is determined by subtracting the Transco tariff from the total negotiated fee. The rate associated with the capacity agreement is based on a Federal Energy Regulatory Commission tariff that is subject to change. Accordingly, if the Transco rate increases, our net gathering fees for these two contracts
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
may be reduced. The customers with these bundled contracts must make an annual election to receive this capacity. For 2005 and 2006, only one of our customers has elected to utilize this capacity.
We historically participated in Williams’ cash management program; thus, we carried no cash balance on our Consolidated Balance Sheet at December 31, 2004. Effective with the IPO, we began maintaining our own bank accounts but continue to utilize Williams’ personnel to manage our cash and investments. As of December 31, 2004, our net Advances from affiliate consisted of an unsecured promissory note agreement with Williams for both advances to and from Williams. The advances were due on demand; however, Williams did not historically require repayment. Therefore, Advances from affiliate at December 31, 2004 were classified as noncurrent. Prior to the closing of the IPO, Williams forgave the advances due to them at the date the net assets were transferred to us. Accordingly, the advances balance was transferred to Partners’ capital at that date.
Affiliate interest expense includes interest on the advances with Williams calculated using Williams’ weighted average cost of debt applied to the outstanding balance of the advances with Williams and commitment fees on the working capital credit facility (see Note 11). The interest rate on the advances with Williams was 7.373 percent at December 31, 2004.
| |
Note 6. | Investment in Discovery Producer Services |
Our 40 percent investment in Discovery is accounted for using the equity method of accounting. At December 31, 2005, Williams owned an additional 20 percent ownership interest in Discovery through Energy. Although we and Williams hold a 60 percent interest in Discovery on a combined basis, the voting provisions of Discovery’s limited liability company agreement give the other member of Discovery significant participatory rights such that we and Williams do not control Discovery.
Of the total ownership interest owned by Williams prior to the transfer of 40 percent to us, a portion was acquired by Williams in April 2005 resulting in a revised basis used for the calculation of the 40 percent interest transferred to us in connection with the IPO. As a result, the carrying value of our 40 percent interest in Discovery and Partners’ capital decreased $11.0 million during the second quarter of 2005.
On August 22, 2005, Discovery made a distribution of approximately $43.8 million to Williams and the other member of Discovery at that date. This distribution was associated with Discovery’s operations prior to the IPO; hence, we did not receive any portion of this distribution. The distribution resulted in a revised basis used for the calculation of the 40 percent interest transferred to us in connection with the IPO. As a result, the carrying value of our 40 percent interest in Discovery and Partners’ capital decreased $17.5 million during the third quarter of 2005.
In September 2005, we made a $24.4 million capital contribution to Discovery for a substantial portion of our share of the estimated future capital expenditures for the Tahiti pipeline lateral expansion project.
Williams is the operator of Discovery. Discovery reimburses Williams for actual payroll and employee benefit costs incurred on its behalf. In addition, Discovery pays Williams a monthly operations and management fee to cover the cost of accounting services, computer systems and management services provided to it. Discovery also has an agreement with Williams pursuant to which Williams markets the NGLs and excess natural gas to which Discovery takes title.
During 2004, we performed an impairment review of this investment because of Williams’ planned purchase of an additional interest in Discovery at an amount below its carrying value. As a result, we recorded a $13.5 million impairment of our investment in Discovery based on a probability-weighted estimation of fair value of our investment. In December 2003, each of the owners made an additional investment in Discovery, which was subsequently used by Discovery to repay maturing debt. Our proportionate share of this additional investment was approximately $101.6 million.
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WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to the significance of Discovery’s equity earnings to our results of operations, the summarized financial position and results of operations for 100 percent of Discovery are presented below (in thousands).
| | | | | | | | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
| | | | | | |
Current assets | | $ | 70,525 | | | $ | 67,534 | |
Non-current restricted cash | | | 44,559 | | | | — | |
Property, plant and equipment | | | 344,743 | | | | 356,385 | |
Current liabilities | | | (45,070 | ) | | | (31,572 | ) |
Non-current liabilities | | | (1,121 | ) | | | (702 | ) |
| | | | | | |
Members’ capital | | $ | 413,636 | | | $ | 391,645 | |
| | | | | | |
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
Revenues | | $ | 122,745 | | | $ | 99,876 | | | $ | 103,178 | |
Costs and expenses | | | 102,597 | | | | 88,756 | | | | 84,519 | |
Interest expense | | | — | | | | — | | | | 9,611 | |
Interest income | | | (1,685 | ) | | | (550 | ) | | | — | |
Foreign exchange loss | | | 1,005 | | | | — | | | | — | |
| | | | | | | | | |
Income before cumulative effect of change in accounting principle | | $ | 20,828 | | | $ | 11,670 | | | $ | 9,048 | |
| | | | | | | | | |
Net income | | $ | 20,652 | | | $ | 11,670 | | | $ | 8,781 | |
| | | | | | | | | |
| |
Note 7. | Property, Plant and Equipment |
Property, plant and equipment, at cost, is as follows:
| | | | | | | | | | | |
| | December 31, | | | Estimated |
| | | | | Depreciable |
| | 2005 | | | 2004 | | | Lives |
| | | | | | | | |
| | (In thousands) | | | |
Land and right of way | | $ | 2,373 | | | $ | 2,373 | | | |
Fractionation plant and equipment | | | 16,646 | | | | 16,555 | | | 30 years |
Storage plant and equipment | | | 65,892 | | | | 63,632 | | | 30 years |
Pipeline plant and equipment | | | 23,684 | | | | 23,684 | | | 20-30 years |
Construction work in progress | | | 1,886 | | | | 566 | | | |
Other | | | 1,492 | | | | 1,490 | | | 5-45 years |
| | | | | | | | |
| Total property, plant and equipment | | | 111,973 | | | | 108,300 | | | |
Accumulated depreciation | | | 44,042 | | | | 40,507 | | | |
| | | | | | | | |
| Net property, plant and equipment | | $ | 67,931 | | | $ | 67,793 | | | |
| | | | | | | | |
We adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” on January 1, 2003. As a result, we recorded a liability of $993,000 representing the present value of expected future asset retirement obligations at January 1, 2003, and a decrease to earnings of $992,000 reflected as a cumulative effect of a change in accounting principle. An additional $107,000 reduction of earnings is reflected as a cumulative
79
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
effect of a change in accounting principle for our 40 percent interest in Discovery’s cumulative effect of a change in accounting principle related to the adoption of SFAS No. 143.
Effective December 31, 2005, we adopted FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the liability’s fair value can be reasonably estimated. The Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. As required by the new standard, we reassessed the estimated remaining life of all our assets with a conditional ARO. We recorded additional liabilities totaling $573,000 equal to the present value of expected future asset retirement obligations at December 31, 2005. The liabilities are slightly offset by a $16,000 increase in property, plant and equipment, net of accumulated depreciation, recorded as if the provisions of the Interpretation had been in effect at the date the obligation was incurred. The net $557,000 reduction to earnings is reflected as a cumulative effect of a change in accounting principle for the year ended 2005. An additional $70,000 reduction of earnings is reflected as a cumulative effect of a change in accounting principle for our 40 percent interest in Discovery’s cumulative effect of a change in accounting principle related to the adoption of FIN No. 47. If the Interpretation had been in effect at the beginning of 2003, the impact to our income from continuing operations and net income would have been immaterial.
The obligations relate to underground storage caverns and the associated brine ponds. At the end of the useful life of each respective asset, we are legally obligated to properly abandon the storage caverns, empty the brine ponds and restore the surface, and remove any related surface equipment.
A rollforward of our asset retirement obligation for 2005 and 2004 is presented below.
| | | | | | | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
Balance, January 1 | | $ | 760 | | | $ | 801 | |
Liabilities incurred during the period | | | 91 | | | | 79 | |
Liabilities settled during the period | | | (204 | ) | | | (166 | ) |
Accretion expense | | | 1 | | | | 83 | |
Estimate revisions | | | (460 | ) | | | — | |
FIN No. 47 revisions | | | 574 | | | | — | |
Gain on settlements | | | — | | | | (37 | ) |
| | | | | | |
Balance, December 31 | | $ | 762 | | | $ | 760 | |
| | | | | | |
| |
Note 8. | Accrued Liabilities |
Accrued liabilities are as follows:
| | | | | | | | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
Environmental remediation — current portion | | $ | 1,424 | | | $ | 1,633 | |
Customer volume deficiency payment | | | — | | | | 749 | |
Asset retirement obligation — current portion | | | — | | | | 760 | |
Employee costs — affiliate | | | 387 | | | | 317 | |
Taxes other than income | | | 375 | | | | 359 | |
Other | | | 187 | | | | 106 | |
| | | | | | |
| | $ | 2,373 | | | $ | 3,924 | |
| | | | | | |
80
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 9. | Long-Term Incentive Plan |
In November 2005, our general partner adopted the Williams Partners GP LLC Long-Term Incentive Plan (the “Plan”) for employees, consultants and directors of our general partner and its affiliates who perform services for us. The Plan permits the grant of awards covering an aggregate of 700,000 common units. These awards may be in the form of options, restricted units, phantom units or unit appreciation rights. The compensation committee of our general partner’s board of directors administers the Plan.
During November and December 2005, our general partner granted 6,146 restricted units pursuant to the Plan to members of our general partner’s board of directors who are not officers or employees of our general partner or its affiliates. These restricted units vest six months from grant date. We recognized compensation expense of $34 thousand associated with these awards in 2005.
| |
Note 10. | Major Customers, Concentrations of Credit Risk and Financial Instruments |
In 2005, four customers, Williams Power Company (an affiliate company), SemStream, L.P., Enterprise and BP Products North America, Inc. (BP) accounted for approximately 25.9 percent, 17.1 percent, 14.1 percent and 13.5 percent, respectively, of our total revenues. In 2004, three customers, SemStream, L.P., BP and Enterprise accounted for approximately 20.6 percent, 16.1 percent and 16.0 percent, respectively, of our total revenues. In 2003, four customers, BP, Enterprise, Chevron and Williams Power Company, accounted for approximately 24.6 percent, 15.9 percent, 14.7 percent and 11.6 percent, respectively, of our total revenues. SemStream, L.P., BP, Enterprise and Williams Power Company are customers of the NGL Services segment. Chevron is a customer of the Gathering and Processing segment.
Our Carbonate Trend gathering pipeline has only two customers. The loss of either of these customers, unless replaced, would have a significant impact on the Gathering and Processing segment.
| |
| Concentrations of credit risk |
Our cash equivalents consist of high-quality securities placed with various major financial institutions with credit ratings at or above AA by Standard & Poor’s or Aa by Moody’s Investor’s Service.
The following table summarizes the concentration of accounts receivable by service and segment.
| | | | | | | | | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
Gathering and Processing: | | | | | | | | |
| Natural gas gathering | | $ | 525 | | | $ | 441 | |
NGL Services: | | | | | | | | |
| Fractionation services | | | 532 | | | | 468 | |
| Amounts due from fractionator partners | | | 1,834 | | | | 1,381 | |
| Storage | | | 793 | | | | 1,241 | |
| Other | | | 260 | | | | 7 | |
| | | | | | |
| | $ | 3,944 | | | $ | 3,538 | |
| | | | | | |
Our fractionation and storage customers include crude refiners; propane wholesalers and retailers; gas producers; natural gas plant, fractionator and storage operators; and NGL traders and pipeline operators. Our two Carbonate Trend natural gas gathering customers are oil and gas producers. While sales to our customers are unsecured, we routinely evaluate their financial condition and creditworthiness.
81
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We used the following methods and assumptions to estimate the fair value of financial instruments.
Cash and cash equivalents. The carrying amounts reported in the balance sheets approximate fair value due to the short-term maturity of these instruments.
Advances from affiliates. At December 31, 2004, our net Advances from affiliate consisted of an unsecured promissory note agreement with Williams for both advances to and from Williams. The carrying amounts reported in the Consolidated Balance Sheet approximate fair value as this instrument had an interest rate approximating market.
| | | | | | | | | | | | | | | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | Carrying | | | Fair | | | Carrying | | | Fair | |
| | Amount | | | Value | | | Amount | | | Value | |
| | | | | | | | | | | | |
| | (In thousands) | |
Cash and cash equivalents | | $ | 6,839 | | | $ | 6,839 | | | | — | | | | — | |
Advances from affiliates | | | — | | | | — | | | $ | 186,024 | | | $ | 186,024 | |
| |
Note 11. | Credit Facilities and Leasing Activities |
On May 20, 2005, Williams amended its $1.275 billion revolving credit facility (“Williams facility”), which is available for borrowings and letters of credit, to allow us to borrow up to $75 million under the Williams facility. Borrowings under the Williams facility mature on May 3, 2007. Our $75 million borrowing limit under the Williams 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 December 31, 2005, letters of credit totaling $378 million had been issued on behalf of Williams by the participating institutions under the Williams facility and no revolving credit loans were outstanding.
Interest on any borrowings under the Williams facility is calculated based on our choice of two methods: (i) a fluctuating rate equal to the facilitating bank’s base rate plus an applicable margin or (ii) a periodic fixed rate equal to LIBOR plus an applicable margin. We are also required to pay or reimburse Williams for a commitment fee based on the unused portion of its $75 million borrowing limit under the Williams facility, currently 0.325 percent annually. The applicable margin, currently 1.75 percent, and the commitment fee are based on Williams’ senior unsecured long-term debt rating. Under the Williams facility, Williams and certain of its subsidiaries, other than us, are required to comply with certain financial and other covenants. Significant financial covenants under the Williams facility to which Williams is subject include the following:
| | |
| • | ratio of debt to net worth no greater than (i) 70 percent through December 31, 2005, and (ii) 65 percent for the remaining term of the agreement; |
|
| • | ratio of debt to net worth no greater than 55 percent for Northwest Pipeline Corporation, a wholly-owned subsidiary of Williams, and Transco; and |
|
| • | ratio of EBITDA to interest, on a rolling four quarter basis, no less than (i) 2.0 for any period after March 31, 2005 through December 31, 2005, and (ii) 2.5 for the remaining term of the agreement. |
In August 2005, we entered into a $20 million revolving credit facility (the “credit facility”) with Williams as the lender. The credit facility is available exclusively to fund working capital requirements. Borrowings under the credit facility mature on May 3, 2007 and bear interest at the same rate as for borrowings under the Williams facility described above. We pay a commitment fee to Williams on the unused portion of the credit facility of 0.30 percent annually. We are required to reduce all borrowings under the
82
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
credit facility to zero for a period of at least 15 consecutive days once each12-month period prior to the maturity date of the credit facility. No amounts have been drawn on this facility.
We lease automobiles for use in our NGL Services segment. We account for these leases as operating leases. Future minimum annual rentals under non-cancelable operating leases as of December 31, 2005 are as follows (in thousands):
| | | | |
2006 | | $ | 30 | |
2007 | | | 29 | |
2008 | | | 27 | |
2009 | | | 10 | |
2010 | | | — | |
| | | |
| | $ | 96 | |
| | | |
Total rent expense was $119,000, $110,000 and $116,000 for 2005, 2004 and 2003, respectively.
| |
Note 12. | Partners’ Capital |
Of the 7,006,146 common units outstanding at December 31, 2005, 5,756,146 are held by the public, with the remaining 1,250,000 held by our affiliates. All of the 7,000,000 subordinated units are held by our affiliates.
Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. The subordination period will end on the first day of any quarter beginning after June 30, 2008 or when we meet certain financial tests provided for in our partnership agreement.
Significant information regarding rights of the limited partners include the following:
| | |
| • | Right to receive distributions of available cash within 45 days after the end of each quarter. |
|
| • | No limited partner shall have any management power over our business and affairs; the general partner shall conduct, direct and manage our activities. |
|
| • | The general partner may be removed if such removal is approved by the unitholders holding at least 662/3 percent of the outstanding units voting as a single class, including units held by our general partner and its affiliates. |
|
| • | Right to receive information reasonably required for tax reporting purposes within 90 days after the close of the calendar year. |
Our general partner is entitled to incentive distributions if the amount we distribute to unitholders with respect to any quarter exceeds specified target levels shown below:
| | | | | | | | |
| | | | General | |
Quarterly Distribution Target Amount (per unit) | | Unitholders | | | Partner | |
| | | | | | |
Minimum quarterly distribution of $0.35 | | | 98 | % | | | 2 | % |
Up to $0.4025 | | | 98 | | | | 2 | |
Above $0.4025 up to $0.4375 | | | 85 | | | | 15 | |
Above $0.4375 up to $0.5250 | | | 75 | | | | 25 | |
Above $0.5250 | | | 50 | | | | 50 | |
83
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the event of a liquidation, all property and cash in excess of that required to discharge all liabilities will be distributed to the unitholders and our general partner, in proportion to their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
| |
| Other Comprehensive Income |
The main component of our accumulated other comprehensive loss is our share of Discovery’s accumulated other comprehensive loss which is related to a cash flow hedge of interest rate risk held by Discovery in 2003.
| |
Note 13. | 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.
In 2004, we purchased an insurance policy that covers up to $5 million of remediation costs until an active remediation system is in place or April 30, 2008, whichever is earlier, excluding operation and maintenance costs and ongoing monitoring costs, for these projects to the extent such costs exceed a $4.2 million deductible.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 million. In addition, under an omnibus agreement with Williams entered into at the closing of the IPO, Williams has agreed to indemnify us for the $4.2 million deductible (less amounts expended prior to the closing of the IPO) of remediation expenditures not covered by the insurance policy, excluding costs of project management and soil and groundwater monitoring. There is a $14 million cap on the total amount of indemnity coverage under the omnibus agreement, which will be reduced by actual recoveries under the environmental insurance policy. There is also a three-year time limitation from the IPO closing date of August 23, 2005. 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 December 31, 2006 and 2005, we had accrued liabilities totaling $5.9 million and $5.4 million, respectively, for these costs. Actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by KDHE and other governmental authorities and other factors.
In connection with our operations at the Conway facilities, we are required by the KDHE regulations to provide assurance of our financial capability to plug and abandon the wells and abandon the brine facilities we operate at Conway. Williams has posted two letters of credit on our behalf in an aggregate amount of
70
$18.0 million to guarantee our plugging and abandonment responsibilities for these facilities. We anticipate providing assurance in the form of letters of credit in future periods until such time as we obtain an investment-grade credit rating or are capable of meeting KDHE financial strength tests. After our filing of thisForm 10-K, we will request the state to accept a financial test in lieu of the letters of credit.
In connection with the construction of Discovery’s pipeline, approximately 73 acres of marshland was traversed. Discovery is required to restore marshland in other areas to offset the damage caused during the initial construction. In Phase I of this project, Discovery created new marshlands to replace about half of the traversed acreage. Phase II, which will complete the project, began during 2005 and will cost approximately $2.9 million.
| |
Item 7A. | Qualitative and Quantitative Disclosures About Market Risk |
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risks to which we are exposed are commodity price risk and interest rate risk.
Commodity Price Risk
Certain of our 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 our and Discovery’s services in the future. Our Carbonate Trend pipeline 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 theper-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 also have physical contracts for the purchase of ethane and the sale of propane related to our operating supply management activities at Conway. These physical contracts are derivatives. However, we elected to account for these contracts under the normal purchases exemption to the fair value accounting that would otherwise apply. We and Discovery do not currently use any other derivatives to manage the risks associated with these price fluctuations.
Interest Rate Risk
Our long-term senior unsecured notes have fixed interest rates. 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 December 31, 2006 we did not have borrowings under our credit agreements.
The table below provides information about our interest rate-sensitive instruments as of December 31, 2006. Long-term debt in the table represents principal cash flows by expected maturity date. The fair value of our private debt is valued based on the prices of similar securities with similar terms and credit ratings.
| | | | | | | | |
| | | | | Fair Value
| |
| | | | | December 31,
| |
| | 2011 | | | 2006 | |
|
Long-term debt: | | | | | | | | |
Fixed rate | | $ | 150 | | | $ | 156 | |
Interest rate | | | 7.5 | % | | | | |
Fixed rate | | $ | 600 | | | $ | 612 | |
Interest rate | | | 7.25 | % | | | | |
71
| |
Item 8. | Financial Statements and Supplementary Data |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Our general partner is responsible for establishing and maintaining adequate internal control over financial reporting (as defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) and for the assessment of the effectiveness of internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of Williams Partners L.P.’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on our assessment we believe that, as of December 31, 2006, Williams Partners L.P.’s internal control over financial reporting is effective based on those criteria.
Ernst & Young, LLP, our independent registered public accounting firm, has issued an audit report on our assessment of the company’s internal control over financial reporting. A copy of this report is included in this Annual Report onForm 10-K.
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors of Williams Partners GP LLC
General Partner of Williams Partners L.P.
and the Limited Partners of Williams Partners L.P.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Williams Partners L.P. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Williams Partners L.P.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Williams Partners L.P. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Williams Partners L.P. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Williams Partners L.P. as of December 31, 2006 and 2005, and the related consolidated statements of income, partners’ capital, and cash flows for each of the three years in the period ended December 31, 2006, and our report dated February 22, 2007 expressed an unqualified opinion thereon.
Tulsa, Oklahoma
February 22, 2007
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Williams Partners GP LLC
General Partner of Williams Partners L.P.
and the Limited Partners of Williams Partners L.P.
We have audited the accompanying consolidated balance sheets of Williams Partners L.P. as of December 31, 2006 and 2005, and the related consolidated statements of income, partners’ capital, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Williams Partners L.P. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As described in Note 8,effective December 31, 2005, Williams Partners L.P. adopted Financial Accounting Standards Board Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Williams Partners L.P.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2007, expressed an unqualified opinion thereon.
Tulsa, Oklahoma
February 22, 2007
74
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005* | |
| | (In thousands) | |
|
ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 57,541 | | | $ | 6,839 | |
Accounts receivable: | | | | | | | | |
Trade | | | 18,320 | | | | 17,695 | |
Affiliate | | | 12,420 | | | | — | |
Other | | | 3,991 | | | | 3,472 | |
Gas purchase contract — affiliate | | | 4,754 | | | | 5,320 | |
Prepaid expenses | | | 3,765 | | | | 2,742 | |
Other current assets | | | 2,534 | | | | — | |
| | | | | | | | |
Total current assets | | | 103,325 | | | | 36,068 | |
Investment in Discovery Producer Services | | | 147,493 | | | | 150,260 | |
Property, plant and equipment, net | | | 647,578 | | | | 658,965 | |
Gas purchase contract — noncurrent — affiliate | | | — | | | | 4,754 | |
Other noncurrent assets | | | 34,752 | | | | 25,228 | |
| | | | | | | | |
Total assets | | $ | 933,148 | | | $ | 875,275 | |
| | | | | | | | |
|
LIABILITIES AND PARTNERS’ CAPITAL |
Current liabilities: | | | | | | | | |
Accounts payable: | | | | | | | | |
Trade | | $ | 19,827 | | | $ | 25,572 | |
Affiliate | | | — | | | | 4,729 | |
Product imbalance | | | 651 | | | | 1,765 | |
Deferred revenue | | | 3,382 | | | | 3,552 | |
Accrued liabilities | | | 16,173 | | | | 6,160 | |
| | | | | | | | |
Total current liabilities | | | 40,033 | | | | 41,778 | |
Long-term debt | | | 750,000 | | | | — | |
Environmental remediation liabilities | | | 3,964 | | | | 4,371 | |
Other noncurrent liabilities | | | 3,749 | | | | 1,881 | |
Commitments and contingent liabilities (Note 14) | | | | | | | | |
Partners’ capital: | | | | | | | | |
Common unitholders (25,553,306 and 7,006,146 outstanding at December 31, 2006 and 2005) | | | 733,878 | | | | 108,526 | |
Class B unitholders (6,805,492 outstanding at December 31, 2006) | | | 241,923 | | | | — | |
Subordinated unitholders (7,000,000 outstanding at December 31, 2006 and 2005) | | | 108,862 | | | | 108,491 | |
General partner | | | (949,261 | ) | | | 610,228 | |
| | | | | | | | |
Total partners’ capital | | | 135,402 | | | | 827,245 | |
| | | | | | | | |
Total liabilities and partners’ capital | | $ | 933,148 | | | $ | 875,275 | |
| | | | | | | | |
| | |
* | | Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
75
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005* | | | 2004* | |
| | (In thousands) | |
|
Revenues: | | | | | | | | | | | | |
Gathering and processing: | | | | | | | | | | | | |
Affiliate | | $ | 42,228 | | | $ | 36,755 | | | $ | 30,990 | |
Third-party | | | 206,432 | | | | 198,041 | | | | 194,832 | |
Product sales: | | | | | | | | | | | | |
Affiliate | | | 255,075 | | | | 236,020 | | | | 199,716 | |
Third-party | | | 16,919 | | | | 8,728 | | | | 13,605 | |
Storage | | | 25,237 | | | | 20,290 | | | | 15,318 | |
Fractionation | | | 11,698 | | | | 10,770 | | | | 9,070 | |
Other | | | 5,821 | | | | 4,368 | | | | 5,668 | |
| | | | | | | | | | | | |
Total revenues | | | 563,410 | | | | 514,972 | | | | 469,199 | |
Costs and expenses: | | | | | | | | | | | | |
Product cost and shrink replacement: | | | | | | | | | | | | |
Affiliate | | | 78,201 | | | | 58,780 | | | | 58,193 | |
Third-party | | | 97,307 | | | | 118,747 | | | | 94,770 | |
Operating and maintenance expense: | | | | | | | | | | | | |
Affiliate | | | 53,627 | | | | 46,194 | | | | 39,968 | |
Third-party | | | 101,587 | | | | 83,565 | | | | 76,478 | |
Depreciation, amortization and accretion | | | 43,692 | | | | 42,579 | | | | 44,361 | |
General and administrative expense: | | | | | | | | | | | | |
Affiliate | | | 34,295 | | | | 33,765 | | | | 29,948 | |
Third-party | | | 5,145 | | | | 2,850 | | | | 2,231 | |
Taxes other than income | | | 8,961 | | | | 8,446 | | | | 7,506 | |
Other (income) expense — net | | | (2,473 | ) | | | 630 | | | | 11,147 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 420,342 | | | | 395,556 | | | | 364,602 | |
| | | | | | | | | | | | |
Operating income | | | 143,068 | | | | 119,416 | | | | 104,597 | |
Equity earnings — Discovery Producer Services | | | 12,033 | | | | 8,331 | | | | 4,495 | |
Impairment of investment in Discovery Producer Services | | | — | | | | — | | | | (13,484 | ) |
Interest expense: | | | | | | | | | | | | |
Affiliate | | | (89 | ) | | | (7,461 | ) | | | (11,980 | ) |
Third-party | | | (9,744 | ) | | | (777 | ) | | | (496 | ) |
Interest income | | | 1,600 | | | | 165 | | | | — | |
| | | | | | | | | | | | |
Income before cumulative effect of change in accounting principle | | | 146,868 | | | | 119,674 | | | | 83,132 | |
Cumulative effect of change in accounting principle | | | — | | | | (1,322 | ) | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 146,868 | | | $ | 118,352 | | | $ | 83,132 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Allocation of net income for calculation of earnings per unit: | | | | | | | | | | | | |
Net income | | $ | 146,868 | | | $ | 118,352 | | | | | |
Net income applicable to pre-partnership operations allocated to general partner | | | (116,450 | ) | | | (113,418 | ) | | | | |
| | | | | | | | | | | | |
Net income applicable to partnership operations | | | 30,418 | | | | 4,934 | | | | | |
Allocation of net loss to general partner | | | (2,897 | ) | | | (1,273 | ) | | | | |
| | | | | | | | | | | | |
Allocation of net income to limited partner | | | 33,315 | | | | 6,207 | | | | | |
Basic and diluted earnings per limited partner unit: | | | | | | | | | | | | |
Income before cumulative effect of change in accounting principle: | | | | | | | | | | | | |
Common units | | $ | 1.62 | | | $ | 0.49 | | | | | |
Class B units | | $ | 0.45 | | | | N/A | | | | | |
Subordinated units | | $ | 1.62 | | | $ | 0.49 | | | | | |
Cumulative effect of change in accounting principle: | | | | | | | | | | | | |
Common units | | | — | | | $ | (0.05 | ) | | | | |
Class B units | | | — | | | | N/A | | | | | |
Subordinated units | | | — | | | $ | (0.05 | ) | | | | |
Net income: | | | | | | | | | | | | |
Common units | | $ | 1.62 | | | $ | 0.44 | | | | | |
Class B units | | $ | 0.45 | | | | N/A | | | | | |
Subordinated units | | $ | 1.62 | | | $ | 0.44 | | | | | |
Weighted average number of units outstanding: | | | | | | | | | | | | |
Common units | | | 11,632,110 | | | | 7,001,366 | | | | | |
Class B units | | | 354,258 | | | | N/A | | | | | |
Subordinated units | | | 7,000,000 | | | | 7,000,000 | | | | | |
| | |
* | | Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
76
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL*
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Pre-IPO
| | | | |
| | | | | | | | | | | Owner’s
| | | | |
| | | | | | | | | | | Equity/
| | | Total
| |
| | | | | Limited Partners | | | General
| | | Partners’
| |
| | Common | | | Class B | | | Subordinated | | | Partner | | | Capital | |
| | (Dollars in thousands) | |
|
Balance — December 31, 2004 | | $ | — | | | $ | — | | | $ | — | | | $ | 637,198 | | | $ | 637,198 | |
Accounts receivable not contributed | | | — | | | | — | | | | — | | | | (2,640 | ) | | | (2,640 | ) |
Contribution of net assets of predecessor companies (2,000,000 common units; 7,000,000 subordinated units) | | | 10,471 | | | | — | | | | 106,427 | | | | 49,174 | | | | 166,072 | |
Net income — 2005 | | | 3,104 | | | | — | | | | 3,103 | | | | 112,145 | | | | 118,352 | |
Cash distributions | | | (1,039 | ) | | | — | | | | (1,039 | ) | | | (42 | ) | | | (2,120 | ) |
Issuance of units to public (5,000,000 common units) | | | 100,247 | | | | — | | | | — | | | | — | | | | 100,247 | |
Offering costs | | | (4,291 | ) | | | — | | | | — | | | | — | | | | (4,291 | ) |
Issuance of common units (6,146 common units) | | | 34 | | | | — | | | | — | | | | — | | | | 34 | |
Distributions to The Williams Companies, Inc. — net | | | — | | | | — | | | | — | | | | (187,217 | ) | | | (187,217 | ) |
Contributions pursuant to the omnibus agreement | | | — | | | | — | | | | — | | | | 1,610 | | | | 1,610 | |
| | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2005 | | | 108,526 | | | | — | | | | 108,491 | | | | 610,228 | | | | 827,245 | |
Net income — 2006 | | | 21,181 | | | | 655 | | | | 11,606 | | | | 113,426 | | | | 146,868 | |
Cash distributions | | | (17,887 | ) | | | — | | | | (11,235 | ) | | | (872 | ) | | | (29,994 | ) |
Issuance of units to public (18,545,030 common units) | | | 625,995 | | | | — | | | | — | | | | — | | | | 625,995 | |
Issuance of Class B units through Private placement (6,805,492 Class B units) | | | — | | | | 241,268 | | | | — | | | | — | | | | 241,268 | |
Offering costs | | | (4,168 | ) | | | — | | | | — | | | | — | | | | (4,168 | ) |
Distributions to The Williams Companies, Inc. — net | | | — | | | | — | | | | — | | | | (114,497 | ) | | | (114,497 | ) |
Distributions to general partner for purchase of Four Corners | | | — | | | | — | | | | — | | | | (1,583,000 | ) | | | (1,583,000 | ) |
Contributions pursuant to the omnibus agreement | | | — | | | | — | | | | — | | | | 6,840 | | | | 6,840 | |
Contributions from general partner | | | — | | | | — | | | | — | | | | 18,614 | | | | 18,614 | |
Other | | | 231 | | | | — | | | | — | | | | — | | | | 231 | |
| | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2006 | | $ | 733,878 | | | $ | 241,923 | | | $ | 108,862 | | | $ | (949,261 | ) | | $ | 135,402 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
* | | Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
77
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005* | | | 2004* | |
| | (In thousands) | |
|
OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income | | $ | 146,868 | | | $ | 118,352 | | | $ | 83,132 | |
Adjustments to reconcile to cash provided by operations: | | | | | | | | | | | | |
Cumulative effect of change in accounting principle | | | — | | | | 1,322 | | | | — | |
Depreciation, amortization and accretion | | | 43,692 | | | | 42,579 | | | | 44,361 | |
Provision for loss on property, plant and equipment | | | — | | | | 917 | | | | 7,636 | |
(Gain)/loss on sale of property, plant and equipment | | | (3,055 | ) | | | — | | | | 1,258 | |
Impairment of investment in Discovery Producer Services | | | — | | | | — | | | | 13,484 | |
Amortization of gas purchase contract — affiliate | | | 5,320 | | | | 2,033 | | | | — | |
Distributions in excess of /(undistributed) equity Earnings of Discovery Producer Services | | | 4,367 | | | | (7,051 | ) | | | (4,495 | ) |
Cash provided (used) by changes in assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (13,564 | ) | | | (4,419 | ) | | | 1,559 | |
Prepaid expenses | | | (1,023 | ) | | | (463 | ) | | | (362 | ) |
Other current assets | | | (920 | ) | | | — | | | | — | |
Accounts payable | | | (10,600 | ) | | | 8,801 | | | | 12,146 | |
Product imbalance | | | (1,114 | ) | | | 8,243 | | | | (7,295 | ) |
Accrued liabilities | | | 6,395 | | | | (4,008 | ) | | | (5,464 | ) |
Deferred revenue | | | (170 | ) | | | 247 | | | | 775 | |
Other, including changes in noncurrent assets and liabilities | | | (2,379 | ) | | | (8,621 | ) | | | (9,645 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 173,817 | | | | 157,932 | | | | 137,090 | |
| | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Purchase of Four Corners | | | (607,545 | ) | | | — | | | | — | |
Capital expenditures | | | (32,270 | ) | | | (31,266 | ) | | | (15,603 | ) |
Change in accrued liabilities-capital expenditures | | | 5,078 | | | | — | | | | — | |
Contribution to Discovery Producer Services | | | (1,600 | ) | | | (24,400 | ) | | | — | |
Proceeds from sales of property, plant and equipment | | | 7,757 | | | | — | | | | 149 | |
| | | | | | | | | | | | |
Net cash used by investing activities | | | (628,580 | ) | | | (55,666 | ) | | | (15,454 | ) |
| | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from sales of common units | | | 867,263 | | | | 100,247 | | | | — | |
Proceeds from debt issuances | | | 750,000 | | | | — | | | | — | |
Excess purchase price over the contributed basis of Four Corners | | | (975,455 | ) | | | — | | | | — | |
Payment of debt issuance costs | | | (13,138 | ) | | | — | | | | �� | |
Payment of equity offering costs | | | (4,168 | ) | | | (4,291 | ) | | | — | |
Distributions to The Williams Companies, Inc. | | | (114,497 | ) | | | (187,217 | ) | | | (120,467 | ) |
Changes in advances from affiliates — net | | | — | | | | (3,656 | ) | | | (1,169 | ) |
Distributions to unitholders and general partner | | | (29,994 | ) | | | (2,120 | ) | | | — | |
General partner contributions | | | 18,614 | | | | — | | | | — | |
Contributions per omnibus agreement | | | 6,840 | | | | 1,610 | | | | — | |
| | | | | | | | | | | | |
Net cash provided (used) by financing activities | | | 505,465 | | | | (95,427 | ) | | | (121,636 | ) |
| | | | | | | | | | | | |
Increase in cash and cash equivalents | | | 50,702 | | | | 6,839 | | | | — | |
Cash and cash equivalents at beginning of year | | | 6,839 | | | | — | | | | — | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 57,541 | | | $ | 6,839 | | | $ | — | |
| | | | | | | | | | | | |
| | |
* | | Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
78
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context clearly indicates otherwise, references to “we,” “our,” and “us” include the operations of Discovery Producer Services LLC (“Discovery”) in which we own a 40% interest. When we refer to Discovery by name, we are referring exclusively to its businesses and operations.
We are a Delaware limited partnership that was formed in February 2005, to acquire and own (1) a 40% interest in Discovery; (2) the Carbonate Trend gathering pipeline off the coast of Alabama; (3) three integrated natural gas liquids (“NGL”) product storage facilities near Conway, Kansas; and (4) a 50% undivided ownership interest in a fractionator near Conway, Kansas. Prior to the closing of our initial public offering (the “IPO”) in August 2005, the 40% interest in Discovery was held by Williams Energy, L.L.C. (“Energy”) and Williams Discovery Pipeline LLC; the Carbonate Trend gathering pipeline was held in Carbonate Trend Pipeline LLC (“CTP”), which was owned by Williams Mobile Bay Producers Services, L.L.C.; and the NGL product storage facilities and the interest in the fractionator were owned by Mid-Continent Fractionation and Storage, LLC (“MCFS”). All of these are wholly owned indirect subsidiaries of The Williams Companies, Inc. (collectively “Williams”). Williams Partners GP LLC, a Delaware limited liability company, was also formed in February 2005 to serve as our general partner. We also formed Williams Partners Operating LLC (“OLLC”), an operating limited liability company (wholly owned by us), through which all our activities are conducted.
Initial Public Offering and Related Transactions
On August 23, 2005, we completed our IPO of 5,000,000 common units representing limited partner interests in us at a price of $21.50 per unit. The proceeds of $100.2 million, net of the underwriters’ discount and a structuring fee totaling $7.3 million, were used to:
| | |
| • | distribute $58.8 million to Williams in part to reimburse Williams for capital expenditures relating to the assets contributed to us and for a gas purchase contract contributed to us; |
|
| • | provide $24.4 million to make a capital contribution to Discovery to fund an escrow account required in connection with the Tahiti pipeline lateral expansion project; |
|
| • | provide $12.7 million of additional working capital; and |
|
| • | pay $4.3 million of expenses associated with the IPO and related formation transactions. |
Concurrent with the closing of the IPO, the 40% interest in Discovery and all of the interests in CTP and MCFS were contributed to us by Williams’ subsidiaries in exchange for an aggregate of 2,000,000 common units and 7,000,000 subordinated units. The public, through the underwriters of the offering, contributed $107.5 million ($100.2 million net of the underwriters’ discount and a structuring fee) to us in exchange for 5,000,000 common units representing a 35% limited partner interest in us. Additionally, at the closing of the IPO, the underwriters fully exercised their option to purchase 750,000 common units from Williams’ subsidiaries at the IPO price of $21.50 per unit less the underwriters’ discount and a structuring fee.
Acquisition of Four Corners
On June 20, 2006, we acquired a 25.1% membership interest in Williams Four Corners LLC (“Four Corners”) pursuant to an agreement with Williams Energy Services, LLC (“WES”), Williams Field Services Group LLC (“WFSG”), Williams Field Services Company, LLC (“WFSC”) and OLLC for aggregate consideration of $360.0 million. 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. 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
79
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
990,000 common units at a price of $31.25 per unit. This offering yielded net proceeds of $227.1 million after 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% senior notes due 2011 under a private placement debt agreement. Proceeds from this issuance totaled $146.8 million (net of $3.2 million of related expenses).
On December 13, 2006, we acquired the remaining 74.9% membership interest in Four Corners pursuant to an agreement with WES, WFSG, WFSC and OLLC for aggregate consideration of $1.223 billion. We financed this acquisition with a combination of equity and debt. On December 13, 2006, we issued 7,000,000 common units at a price of $38.00. Additionally, at the closing, the underwriters fully exercised their option to purchase 1,050,000 common units at a price of $38.00 per unit. This offering yielded net proceeds of $293.7 million after payment of underwriting discounts and commissions of $12.2 million but before the payment of other offering expenses. On December 13, 2006, we received $346.5 million in proceeds from the sale of 2,905,030 common units and 6,805,492 unregistered Class B units in a private placement net of $3.5 million in placement agency fees. On December 13, 2006, we also issued $600.0 million aggregate principal of unsecured 7.25% senior notes due 2017 under a private placement debt agreement. Proceeds from this issuance totaled $590.0 million (net of $10.0 million of related expenses).
Because Four Corners was an affiliate of Williams at the time of these acquisitions, these transactions are accounted for as a combination of entities under common control, similar to a pooling of interests, whereby the assets and liabilities of Four Corners are combined with Williams Partners L.P. at their historical amounts for all periods presented. These two acquisitions of a combined 100% membership interest in Four Corners increased net income $113.5 million and $96.6 million for 2005 and 2004, respectively. The restatement to reflect these acquisitions does not impact historical earnings per unit as pre-acquisition earnings were allocated to our general partner.
| |
Note 2. | Description of Business |
We are principally engaged in the business of gathering, transporting, processing and treating natural gas and fractionating and storing NGLs. Operations of our businesses are located in the United States and are organized into three reporting segments: (1) Gathering and Processing-West, (2) Gathering and Processing-Gulf and (3) NGL Services. Our Gathering and Processing-West segment includes the Four Corners gathering and processing operations. Our Gathering and Processing-Gulf segment includes the Carbonate Trend gathering pipeline and our equity investment in Discovery. Our NGL Services segment includes the Conway fractionation and storage operations.
Gathering and Processing-West. Our Four Corners natural gas gathering, processing and treating assets consist of, among other things, (1) a3,500-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, (2) 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 (3) the Milagro and Esperanza natural gas treating plants in New Mexico, which have a combined carbon dioxide treating capacity of 750 MMcf/d.
Gathering and Processing-Gulf . We own a 40% interest in Discovery, which includes a wholly-owned subsidiary, Discovery Gas Transmission LLC. Discovery owns (1) a283-mile natural gas gathering and transportation pipeline system, located primarily off the coast of Louisiana in the Gulf of Mexico, (2) a 600 MMcf/d cryogenic natural gas processing plant in Larose, Louisiana, (3) a 32,000 barrels per day (“bpd”) natural gas liquids fractionator in Paradis, Louisiana and (4) a22-mile mixed NGL pipeline connecting the gas processing plant to the fractionator. Although Discovery includes fractionation operations, which would normally fall within the NGL Services segment, it is primarily engaged in gathering and processing and is
80
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
managed as such. Hence, this equity investment is considered part of the Gathering and Processing-Gulf segment.
Our Carbonate Trend gathering pipeline is an unregulated sour gas gathering pipeline consisting of approximately 34 miles of pipeline off the coast of Alabama.
NGL Services. Our Conway storage facilities include three underground NGL storage facilities in the Conway, Kansas, area with a storage capacity of approximately 20 million barrels. The facilities are connected via a series of pipelines. The storage facilities receive daily shipments of a variety of products, including mixed NGLs and fractionated products. In addition to pipeline connections, one facility offers truck and rail service.
Our Conway fractionation facility is located near Conway, Kansas, and has a capacity of approximately 107,000 bpd. We own a 50% undivided interest in these facilities representing capacity of approximately 53,500 bpd. ConocoPhillips and ONEOK Partners, L. P. are the other owners. Williams operates the facility pursuant to an operating agreement that extends until May 2011. The fractionator separates mixed NGLs into five products: ethane, propane, normal butane, isobutane and natural gasoline. Portions of these products are then transported and stored at our Conway storage facilities.
| |
Note 3. | Summary of Significant Accounting Policies |
Basis of Presentation. The consolidated financial statements have been prepared based upon accounting principles generally accepted in the United States and include the accounts of the parent and our wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include:
| | |
| • | loss contingencies; |
|
| • | environmental remediation obligations; and |
|
| • | asset retirement obligations. |
These estimates are discussed further throughout the accompanying notes.
Proportional Accounting for the Conway Fractionator. No separate legal entity exists for the fractionator. We hold a 50% undivided interest in the fractionator property, plant and equipment, and we are responsible for our proportional share of the costs and expenses of the fractionator. As operator of the facility, we incur the liabilities of the fractionator (except for certain fuel costs purchased directly by one of theco-owners) and are reimbursed by the co-owners for their proportional share of the total costs and expenses. Each co-owner is responsible for the marketing of their proportional share of the fractionator’s capacity. Accordingly, we reflect our proportionate share of the revenues and costs and expenses of the fractionator in the Consolidated Statements of Income, and we reflect our proportionate share of the fractionator property, plant and equipment in the Consolidated Balance Sheets. Liabilities in the Consolidated Balance Sheets include those incurred on behalf of the co-owners with corresponding receivables from the co-owners. Accounts receivable also includes receivables from our customers for fractionation services.
81
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and Cash Equivalents. Cash and cash equivalents include demand and time deposits, certificates of deposit and other marketable securities with maturities of three months or less when acquired.
Accounts Receivable. Accounts receivable are carried on a gross basis, with no discounting, less an allowance for doubtful accounts. No allowance for doubtful accounts is recognized at the time the revenue which generates the accounts receivable is recognized. We estimate the allowance for doubtful accounts based on existing economic conditions, the financial condition of our customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been unsuccessful.
Gas purchase contract. 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. The gas purchase contract is for the purchase of 80,000 MMBtu per month and terminates on December 31, 2007. The initial value of this contract is being amortized to expense over the contract life.
Investments. We account for our investment in Discovery under the equity method since we do not control it. In 2004, we recognized another-than-temporary impairment of our investment. As a result, Discovery’s underlying equity exceeds the carrying value of our investment at December 31, 2006 and 2005.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost. We base the carrying value of these assets on capitalized costs, useful lives and salvage values. Depreciation of property, plant and equipment is provided on the straight-line basis over estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred. Expenditures that enhance the functionality or extend the useful lives of the assets are capitalized. The cost of property, plant and equipment sold or retired and the related accumulated depreciation is removed from the accounts in the period of sale or disposition. Gains and losses on the disposal of property, plant and equipment are recorded in the Consolidated Statements of Income.
We record an asset and a liability equal to the present value of each expected future asset retirement obligation (“ARO”). The ARO asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. We measure changes in the liability due to passage of time by applying an interest method of allocation. This amount is recognized as an increase in the carrying amount of the liability and as a corresponding accretion expense.
Prepaid expenses and leasing activities. Prepaid expenses include the unamortized balance of minimum lease payments made to date under aright-of-way renewal agreement. Land andright-of-way lease payments made at the time of initial construction or placement of plant and equipment on leased land are capitalized as part of the cost of the assets. Lease payments made in connection with subsequent renewals or amendments of these leases are classified as prepaid expenses. The minimum lease payments for the lease term, including any renewal are expensed on a straight-line basis over the lease term.
Product Imbalances. In the course of providing gathering, processing and treating services to our customers, we realize over and under deliveries of our customers’ products and over and under purchases of shrink replacement gas when our purchases vary from operational requirements. In addition, in the course of providing gathering, processing, treating, fractionation and storage services to our customers, we realize gains and losses due to (1) the product blending process at the Conway fractionator, (2) the periodic emptying of storage caverns at Conway and (3) inaccuracies inherent in the gas measurement process. These gains and losses impact our results of operations and are included in operating and maintenance expense in the Consolidated Statements of Income. The sum of these items is reflected as product imbalance receivables or payables on the Consolidated Balance Sheets. These product imbalances are valued based on the market value of the products when the imbalance is identified and are evaluated for the impact of changes in market prices at the balance sheet date.
82
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition. The nature of our businesses result in various forms of revenue recognition. Our Gathering and Processing segments recognize (1) revenue from the gathering and processing of gas in the period the service is provided based on contractual terms and the related natural gas and liquid volumes and (2) product sales revenue when the product has been delivered. Our NGL Services segment recognizes (1) fractionation revenues when services have been performed and product has been delivered, (2) storage revenues under prepaid contracted storage capacity evenly over the life of the contract as services are provided and (3) product sales revenue when the product has been delivered.
Impairment of Long-Lived Assets and Investments. We evaluate our long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. The impairment evaluation of tangible long-lived assets is measured pursuant to the guidelines of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” When an indicator of impairment has occurred, we compare our management’s estimate of undiscounted future cash flows attributable to the assets to the carrying value of the assets to determine whether the carrying value of the assets is recoverable. We apply a probability-weighted approach to consider the likelihood of different cash flow assumptions and possible outcomes. If the carrying value is not recoverable, we determine the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.
We evaluate our investments for impairment when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such investments may have experienced another-than-temporary decline in value. When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and we consider the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment.
Judgments and assumptions are inherent in our management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. The use of alternate judgmentsand/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.
Environmental. Environmental expenditures that relate to current or future revenues are expensed or capitalized based upon the nature of the expenditures. Expenditures that relate to an existing contamination caused by past operations that do not contribute to current or future revenue generation are expensed. Accruals related to environmental matters are generally determined based on site-specific plans for remediation, taking into account our prior remediation experience. Environmental contingencies are recorded independently of any potential claim for recovery.
Capitalized Interest. We capitalize interest on major projects during construction to the extent we incur interest expense. Historically, Williams provided the financing for capital expenditures; hence, the rates used to calculate the interest were based on Williams’ average interest rate on debt during the applicable period in time. Capitalized interest for the periods presented is immaterial.
Income Taxes. We are not a taxable entity for federal and state income tax purposes. The tax on our net income is borne by the individual partners through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income of unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes in us is not available to us.
83
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings Per Unit. In accordance with SFAS No. 128, “Earnings Per Share,” as clarified by the Emerging Issues Task Force (“EITF”) Issue03-6, we use the two-class method to calculate basic and diluted earnings per unit whereby net income, adjusted for items specifically allocated to our general partner, is allocated on a pro-rata basis between unitholders and our general partner. Basic and diluted earnings per unit are based on the average number of common, Class B and subordinated units outstanding. Basic and diluted earnings per unit are equivalent as there are no dilutive securities outstanding.
Recent Accounting Standards. In January 2006, Williams adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment” (SFAS No. 123(R)), using the modified-prospective method. Accordingly, payroll costs charged to us by our general partner reflect additional compensation costs related to the adoption of this accounting standard. These costs relate to Williams’ common stock equity awards made between Williams and its employees. The cost is charged to us through specific allocations of certain employees if they directly support our operations, and through an allocation methodology among all Williams affiliates if they provide indirect support. These allocated costs are based on a three-factor formula, which considers revenues; property, plant and equipment; and payroll. Our and Williams’ adoption of this Statement did not have a material impact on our Consolidated Financial Statements.
In January 2006 we adopted SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The Statement amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify that abnormal amounts of certain costs should be recognized as current period charges and that the allocation of overhead costs should be based on the normal capacity of the production facility. The impact of this Statement on our Consolidated Financial Statements was not material.
In January 2006 we adopted SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” The Statement amends Accounting Principles Board (“APB”) Opinion No. 29, “Accounting for Nonmonetary Transactions.” The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged but includes certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The impact of this Statement on our Consolidated Financial Statements was not material.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” This Statement establishes a framework for fair value measurements in the financial statements by providing a single definition of fair value, provides guidance on the methods used to estimate fair value and increases disclosures about estimates of fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is generally applied prospectively. We will assess the impact of this Statement on our Consolidated Financial Statements.
In December 2006, the FASB issued FASB Staff Position (FSP) EITF00-19-2, “Accounting for Registration Payment Arrangements.” This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to December 21, 2006, the guidance in the FSP is effective for fiscal years beginning after December 15, 2006. We do not expect this FSP to have a material impact on our Consolidated Financial Statements.
84
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
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 years ended December 31, 2006 and 2005 are as follows (in thousands):
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Allocation of net income to general partner: | | | | | | | | |
Net income | | $ | 146,868 | | | $ | 118,352 | |
Net income applicable to pre-partnership operations allocated to general partner | | | (116,450 | ) | | | (113,418 | ) |
Charges allocated directly to general partner: | | | | | | | | |
Reimbursable general and administrative costs | | | 3,200 | | | | 1,400 | |
Core drilling indemnified costs | | | 784 | | | | — | |
| | | | | | | | |
Total charges allocated directly to general partner | | | 3,984 | | | | 1,400 | |
| | | | | | | | |
Income subject to 2% allocation of general partner interest | | | 34,402 | | | | 6,334 | |
General partner’s share of net income | | | 2.0 | % | | | 2.0 | % |
| | | | | | | | |
General partner’s allocated share of net income before items directly allocable to general partner interest | | | 688 | | | | 127 | |
Incentive distributions paid to general partner* | | | 272 | | | | — | |
Charges allocated directly to general partner | | | (3,984 | ) | | | (1,400 | ) |
Pre-partnership net income allocated to general partner interest | | | 116,450 | | | | 113,418 | |
| | | | | | | | |
Net income allocated to general partner | | $ | 113,426 | | | $ | 112,145 | |
| | | | | | | | |
Net income | | $ | 146,868 | | | $ | 118,352 | |
Net income allocated to general partner | | | 113,426 | | | | 112,145 | |
| | | | | | | | |
Net income allocated to limited partners | | $ | 33,442 | | | $ | 6,207 | |
| | | | | | | | |
| | |
* | | Under the “two class” method of computing earnings per share, prescribed by SFAS 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 twelve months ended December 31, 2006 is $0.4 million. This results in an allocation of income for the calculation of earnings per limited partner unit as follows: |
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Net income allocated to general partner | | $ | 113,553 | | | $ | 112,145 | |
Net income allocated to limited partners | | $ | 33,315 | | | $ | 6,207 | |
| | | | | | | | |
Net income | | $ | 146,868 | | | $ | 118,352 | |
| | | | | | | | |
Pursuant to the partnership agreement, income allocations are made on a quarterly basis; therefore, earnings per limited partner unit for 2006 is calculated as the sum of the quarterly earnings per limited partner unit for each of the four quarters of 2006. Common, Class B and subordinated unitholders share equally, on aper-unit basis, in the net income allocated to limited partners.
85
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reimbursable general and administrative and core drilling costs represent the costs charged against our income that are required to be reimbursed to us by our general partner under the terms of the omnibus agreement.
We paid or have authorized payment of the following cash distributions during 2005 and 2006 (in thousands, except for per unit amounts):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Per Unit
| | | Common
| | | Subordinated
| | | Class B
| | | General
| | | Total Cash
| |
Payment Date | | Distribution | | | Units | | | Units | | | Units | | | Partner | | | Distribution | |
|
11/14/2005(a) | | $ | 0.1484 | | | $ | 1,039 | | | $ | 1,039 | | | | | | | $ | 42 | | | $ | 2,120 | |
2/14/2006 | | $ | 0.3500 | | | $ | 2,452 | | | $ | 2,450 | | | | | | | $ | 100 | | | $ | 5,002 | |
5/15/2006 | | $ | 0.3800 | | | $ | 2,662 | | | $ | 2,660 | | | | | | | $ | 109 | | | $ | 5,431 | |
8/14/2006(b) | | $ | 0.4250 | | | $ | 6,204 | | | $ | 2,975 | | | | | | | $ | 263 | | | $ | 9,442 | |
11/14/2006(c ) | | $ | 0.4500 | | | $ | 6,569 | | | $ | 3,150 | | | | | | | $ | 401 | | | $ | 10,120 | |
2/14/2007(d) | | $ | 0.4700 | | | $ | 12,010 | | | $ | 3,290 | | | $ | 3,198 | | | $ | 993 | | | $ | 19,491 | |
| | |
(a) | | This distribution represents the $0.35 per unit minimum quarterly distribution pro-rated for the39-day period following the IPO closing date (August 23, 2005 through September 30, 2005). |
|
(b) | | Includes $0.1 million incentive distribution rights payment to the general partner. |
|
(c) | | Includes $0.2 million incentive distribution rights payment to the general partner. |
|
(d) | | On February 14, 2007, we paid a cash distribution of $0.47 per unit on our outstanding common, subordinated and Class B units to unitholders of record on February 7, 2007. This amount includes $0.6 million incentive distribution rights payment to the general partner. |
| |
Note 5. | Related Party Transactions |
The employees of our operated assets and all of our general and administrative employees are employees of Williams. Williams directly charges us for the payroll costs associated with the operations employees and certain general and administrative employees. Williams carries the obligations for most employee-related benefits in its financial statements, including the liabilities related to the employee retirement and medical plans and paid time off. Certain of the payroll costs associated with the operations employees are charged back to the other Conway fractionator co-owners. Our share of those costs are charged to us through affiliate billings and reflected in Operating and maintenance expense — Affiliate in the accompanying Consolidated Statements of Income.
We are charged for certain administrative expenses by Williams and its Midstream segment of which we are a part. These charges are either directly identifiable or allocated to our assets. Direct charges are for goods and services provided by Williams and Midstream at our request. Allocated charges are either (1) charges allocated to the Midstream segment by Williams and then reallocated from the Midstream segment to us or (2) Midstream-level administrative costs that are allocated to us. These allocated corporate administrative expenses are based on a three-factor formula, which considered revenues; property, plant and equipment; and payroll. Certain of these costs are charged back to the other Conway fractionator co-owners. Our share of these costs is reflected in General and administrative expense — Affiliate in the accompanying Consolidated Statements of Income. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing business incurred by Williams. Under the omnibus agreement, Williams gives us a quarterly credit for general and administrative expenses. These amounts are reflected as a capital contribution from our general partner. The annual amounts of the credits are as follows: $3.9 million in 2005 ($1.4 million pro-rated for the portion of the year from August 23 to December 31), $3.2 million in 2006, $2.4 million in 2007, $1.6 million in 2008 and $0.8 million in 2009.
86
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2006 and 2005 we have a contribution receivable from our general partner of $0.4 million and $0.3 million, respectively, which is netted against Partners’ capital on the Consolidated Balance Sheets, for amounts reimbursable to us under the omnibus agreement.
We purchase natural gas for shrink replacement and fuel for Four Corners and the Conway fractionator, including fuel on behalf of the Conway co-owners, from Williams Power Company (“Power”), a wholly owned subsidiary of Williams. Natural gas purchased for fuel is reflected in Operating and maintenance expense — Affiliate, and natural gas purchased for shrink replacement is reflected in Product cost and shrink replacement — Affiliate in the accompanying Consolidated Statements of Income. These purchases are made at market rates at the time of purchase. 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. The amortization of this contract is reflected in Operating and maintenance expense — Affiliate in the accompanying Consolidated Statements of Income. The carrying value of this contract is reflected as Gas purchase contract — affiliate and Gas purchase contract — noncurrent — affiliate on the Consolidated Balance Sheets.
We purchase natural gas for delivery of waste heat from Power that we use to generate steam at our Milagro treating plant. The natural gas cost charged to us by Power has been favorably impacted by Power’s fixed price natural gas fuel contracts. This impact was approximately $9.0 million annually during the periods presented as compared to estimated market prices. These agreements expired in the fourth quarter of 2006 and were replaced with new agreements. We expect that our Milagro natural gas fuel costs will increase due to our expectation that future market prices will exceed prices associated with the prior agreements.
The operation of the Four Corners gathering system includes the routine movement of gas across gathering systems. We refer to this activity as “crosshauling.” Crosshauling typically involves the movement of some natural gas between gathering systems at established interconnect points to optimize flow, reduce expenses or increase profitability. As a result, we must purchase gas for delivery to customers at certain plant outlets and we have excess volumes to sell at other plant outlets. These purchase and sales transactions are conducted for us by Power, at current market prices at each location and are included in Product sales — Affiliate and Product cost and shrink replacement — Affiliate on the Consolidated Statements of Income. Historically, Power has not charged us a fee for providing this service, but has occasionally benefited from price differentials that historically existed from time to time between the plant outlets.
We sell the NGLs to which we take title on the Four Corners system to Williams Midstream Marketing and Risk Management, LLC (“WMMRM”), a wholly owned subsidiary of Williams. Revenues associated with these activities are reflected as Product sales — Affiliate on the Consolidated Statements of Income. These transactions are conducted at current market prices for the products.
One of our major customers is Williams Production Company (“WPC”), a wholly owned subsidiary of Williams. WPC is one of the largest natural gas producers in the San Juan Basin and we provide natural gas gathering, treating and processing services to WPC under several contracts. Revenues associated with these activities are reflected in the Gathering and processing — Affiliate on the Consolidated Statements of Income.
In December 2004, we began selling Conway’s surplus propane and other NGLs to Power, which takes title to the product and resells it, for its own account, to end users. Revenues associated with these activities are reflected as Product sales — Affiliate on the Consolidated Statements of Income. Correspondingly, we purchase ethane and other NGLs for Conway from Power to replenish deficit product inventory positions. The transactions conducted between us and Power are transacted at current market prices for the products.
87
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the general and administrative expenses directly charged and allocated to us, fuel purchases from Power and NGL purchases from Power for the periods stated is as follows:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | (In thousands) | |
|
General and administrative expenses, including amounts subsequently charged to co-owners: | | | | | | | | | | | | |
Allocated | | $ | 18,512 | | | $ | 29,400 | | | $ | 24,293 | |
Directly charged | | | 10,574 | | | | 4,607 | | | | 5,655 | |
Operating and maintenance expenses, including amounts subsequently charged to co-owners: | | | | | | | | | | | | |
Fuel purchases, including amortization of gas contract | | | 38,197 | | | | 38,996 | | | | 28,851 | |
Salaries and benefits | | | 26,860 | | | | 21,812 | | | | 21,657 | |
NGL purchases | | | 14,884 | | | | 15,657 | | | | 1,271 | |
Theper-unit gathering fee associated with two of our Carbonate Trend gathering contracts was negotiated on a bundled basis that includes transportation along a segment of a pipeline system owned by Transcontinental Gas Pipe Line Company (“Transco”), a wholly owned subsidiary of Williams. The fees we realize are dependent upon whether our customer elects to utilize this Transco capacity. When they make this election, our gathering fee is determined by subtracting the Transco tariff from the total negotiated fee. The rate associated with the capacity agreement is based on a Federal Energy Regulatory Commission tariff that is subject to change. Accordingly, if the Transco rate increases, our net gathering fees for these two contracts may be reduced. The customers with these bundled contracts must make an annual election to receive this capacity. For 2005 and 2006, only one of our customers elected to utilize this capacity.
Prior to its acquisition by us, Four Corners participated in Williams’ cash management program under an unsecured promissory note agreement with Williams for both advances to and from Williams. As of December 31, 2005 and 2004, Four Corners’ net advances to Williams were classified as a component of general partner’s capital because Williams has not historically required repayment or repaid amounts owed us. In addition, upon Four Corners’ acquisition by us, the outstanding advances were distributed to Williams. Changes in these advances to Williams are presented as distributions to Williams in the Consolidated Statement of Partners’ Capital and Consolidated Statements of Cash Flows.
For 2005 and 2004, affiliate interest expense includes interest on the advances with Williams calculated using Williams’ weighted average cost of debt applied to the outstanding balance of the advances with Williams. For 2006 and 2005, affiliate interest expense also includes commitment fees on the working capital credit facility (see Note 11). The interest rate on the advances with Williams was 7.70% at December 31, 2005.
With the transition to a stand-alone cash management program, amounts owed by us or to us by Williams or its subsidiaries are shown as Accounts payable-Affiliate or Accounts receivable-Affiliate in the accompanying Consolidated Balance Sheets.
| |
Note 6. | Investment in Discovery Producer Services |
Our 40% investment in Discovery is accounted for using the equity method of accounting since we do not control it. At December 31, 2006 and 2005, Williams owned an additional 20% ownership interest in Discovery through Energy.
In October, 2006 and September 2005, we made $1.6 million and $24.4 million capital contributions, respectively, to Discovery for a substantial portion of our share of the estimated future capital expenditures for the Tahiti pipeline lateral expansion project.
88
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Williams is the operator of Discovery. Discovery reimburses Williams for actual payroll and employee benefit costs incurred on its behalf. In addition, Discovery pays Williams a monthly operations and management fee to cover the cost of accounting services, computer systems and management services provided to it. Discovery also has an agreement with Williams pursuant to which (1) Discovery purchases a portion of the natural gas from Williams to meet its fuel and shrink replacement needs at its processing plant and (2) Williams purchases the NGLs and excess natural gas to which Discovery takes title.
During 2004, we performed an impairment review of this investment because of Williams’ planned purchase of an additional interest in Discovery at an amount below its carrying value. As a result, we recorded a $13.5 million impairment of our investment in Discovery based on a probability-weighted estimation of fair value of our investment.
During 2006 and 2005 we received total distributions of $16.4 million and $1.3 million, respectively, from Discovery.
The summarized financial position and results of operations for 100% of Discovery are presented below (in thousands).
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005 | |
|
Current assets | | $ | 73,841 | | | $ | 70,525 | |
Non-current restricted cash | | | 28,773 | | | | 44,559 | |
Property, plant and equipment | | | 355,304 | | | | 344,743 | |
Current liabilities | | | (40,559 | ) | | | (45,070 | ) |
Non-current liabilities | | | (3,728 | ) | | | (1,121 | ) |
| | | | | | | | |
Members’ capital | | $ | 413,631 | | | $ | 413,636 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Revenues: | | | | | | | | | | | | |
Affiliate | | $ | 160,825 | | | $ | 76,864 | | | $ | 68,766 | |
Third-party | | | 36,488 | | | | 45,881 | | | | 31,110 | |
Costs and expenses: | | | | | | | | | | | | |
Affiliate | | | 74,316 | | | | 24,895 | | | | 4,945 | |
Third-party | | | 97,394 | | | | 77,702 | | | | 83,811 | |
Interest income | | | (2,404 | ) | | | (1,685 | ) | | | (550 | ) |
Foreign exchange (gain) loss | | | (2,076 | ) | | | 1,005 | | | | — | |
| | | | | | | | | | | | |
Income before cumulative effect of change in accounting principle | | $ | 30,083 | | | $ | 20,828 | | | $ | 11,670 | |
| | | | | | | | | | | | |
Net income | | $ | 30,083 | | | $ | 20,652 | | | $ | 11,670 | |
| | | | | | | | | | | | |
89
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 7. | Other Costs and Expenses — Net |
Other (income) expense — net reflected on the Consolidated Statements of Income consists of the following items:
| | | | | | | | | | | | |
| | Years Ended December 31, | |
�� | | 2006 | | | 2005 | | | 2004 | |
|
Impairment of LaMaquina carbon dioxide treating facility | | $ | — | | | $ | — | | | $ | 7,636 | |
Gain on sale of LaMaquina carbon dioxide treating facility | | | (3,619 | ) | | | — | | | | — | |
Other | | | 1,146 | | | | 630 | | | | 3,511 | |
| | | | | | | | | | | | |
Total | | $ | (2,473 | ) | | $ | 630 | | | $ | 11,147 | |
| | | | | | | | | | | | |
LaMaquina Carbon Dioxide Treating Facility. This Four Corners facility consisted of two amine trains and seven gas powered generator sets. The facility was shut down in 2002 due to a reduced need for treating. In 2003, management estimated that only one amine train would be returned to service. As a result, we recognized an impairment of the carrying value of the other train to its estimated fair value based on estimated salvage values and sales prices. Further developments in 2004 led management to conclude that the facility would not return to service. Thus, we recognized an additional impairment of the carrying value to its estimated fair value. The facility was sold in the first quarter of 2006 resulting in the recognition of a gain on the sale in 2006.
Other. In 2004, other expense included losses from Four Corners asset dispositions and materials and supplies inventory adjustments.
| |
Note 8. | Property, Plant and Equipment |
Property, plant and equipment, at cost, is as follows:
| | | | | | | | | | | | |
| | | | | | | | Estimated
| |
| | December 31, | | | Depreciable
| |
| | 2006 | | | 2005 | | | Lives | |
| | (In thousands) | | | | |
|
Land and right of way | | $ | 41,721 | | | $ | 44,363 | | | | | |
Gathering pipelines and related equipment | | | 821,478 | | | | 801,385 | | | | 20-30 years | |
Processing plants and related equipment | | | 147,241 | | | | 164,257 | | | | 30 years | |
Fractionation plant and related equipment | | | 16,697 | | | | 16,646 | | | | 30 years | |
Storage plant and related equipment | | | 69,017 | | | | 65,892 | | | | 30 years | |
Buildings and other equipment | | | 90,082 | | | | 90,070 | | | | 3-45 years | |
Construction work in progress | | | 19,447 | | | | 20,323 | | | | | |
| | | | | | | | | | | | |
Total property, plant and equipment | | | 1,205,683 | | | | 1,202,936 | | | | | |
Accumulated depreciation | | | 558,105 | | | | 543,971 | | | | | |
| | | | | | | | | | | | |
Net property, plant and equipment | | $ | 647,578 | | | $ | 658,965 | | | | | |
| | | | | | | | | | | | |
Effective December 31, 2005, we adopted FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the liability’s fair value can be reasonably estimated. The Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. As required by the new standard, we reassessed the estimated remaining life of all our assets with a conditional ARO. We recorded additional liabilities totaling $1.4 million equal to the present value of expected future asset retirement obligations at December 31, 2005. The liabilities are slightly offset
90
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
by a $0.1 million increase in property, plant and equipment, net of accumulated depreciation, recorded as if the provisions of the Interpretation had been in effect at the date the obligation was incurred. The net $1.3 million reduction to earnings is reflected as a cumulative effect of a change in accounting principle for the year ended 2005. An additional $0.1 million reduction of earnings is reflected as a cumulative effect of a change in accounting principle for our 40% interest in Discovery’s cumulative effect of a change in accounting principle related to the adoption of FIN No. 47. If the Interpretation had been in effect at the beginning of 2004, the impact to our income from continuing operations and net income would have been immaterial.
The obligations relate to gas processing and compression facilities located on leased land, wellhead connections on federal land, underground storage caverns and the associated brine ponds. At the end of the useful life of each respective asset, we are legally or contractually obligated to remove certain surface equipment and cap certain gathering pipelines at the wellhead connections, properly abandon the storage caverns, empty the brine ponds and restore the surface, and remove any related surface equipment.
A rollforward of our asset retirement obligation for 2006 and 2005 is presented below.
| | | | | | | | |
| | 2006 | | | 2005 | |
| | (In thousands) | |
|
Balance, January 1 | | $ | 1,880 | | | $ | 1,090 | |
Liabilities incurred during the period | | | — | | | | 91 | |
Liabilities settled during the period | | | (510 | ) | | | (204 | ) |
Accretion expense | | | 86 | | | | 1 | |
Estimate revisions | | | 2,943 | | | | (460 | ) |
FIN No. 47 revisions | | | — | | | | 1,362 | |
Loss on settlements | | | 77 | | | | — | |
| | | | | | | | |
Balance, December 31 | | $ | 4,476 | | | $ | 1,880 | |
| | | | | | | | |
| |
Note 9. | Accrued Liabilities |
Accrued liabilities are as follows:
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005 | |
| | (In thousands) | |
|
Environmental remediation — current portion | | $ | 2,636 | | | $ | 1,752 | |
Customer deposit for construction | | | 5,078 | | | | — | |
Accrued interest | | | 2,796 | | | | — | |
Taxes other than income | | | 2,347 | | | | 2,431 | |
Other | | | 3,316 | | | | 1,977 | |
| | | | | | | | |
| | $ | 16,173 | | | $ | 6,160 | |
| | | | | | | | |
| |
Note 10. | Major Customers, Concentrations of Credit Risk and Financial Instruments |
Major customers
Our largest customer, on a percentage of revenues basis, is WMMRM, which purchases and resells substantially all of the NGLs to which we take title. WMMRM accounted for 43%, 46% and 42% of revenues
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in 2006, 2005 and 2004, respectively. The percentages for the remaining two largest customers, both from our Gathering and Processing — West segment, are as follows:
| | | | | | | | | | | | |
| | 2006 | | 2005 | | 2004 |
|
ConocoPhillips | | | 12 | % | | | 14 | % | | | 14 | % |
Burlington Resources | | | 9 | | | | 10 | | | | 11 | |
Burlington Resources was acquired by ConocoPhillips on March 31, 2006.
Concentrations of Credit Risk
Our cash equivalents consist of high-quality securities placed with various major financial institutions with credit ratings at or above AA by Standard & Poor’s or Aa by Moody’s Investor’s Service.
The following table summarizes the concentration of accounts receivable by service and segment.
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005 | |
| | (In thousands) | |
|
Gathering and Processing — West: | | | | | | | | |
Natural gas gathering and processing | | $ | 16,709 | | | $ | 15,855 | |
Other | | | 561 | | | | 1,368 | |
Gathering and Processing — Gulf: | | | | | | | | |
Natural gas gathering | | | 468 | | | | 525 | |
Other | | | 1,343 | | | | — | |
NGL Services: | | | | | | | | |
Fractionation services | | | 320 | | | | 532 | |
Amounts due from fractionator partners | | | 1,833 | | | | 1,834 | |
Storage | | | 825 | | | | 793 | |
Other | | | 36 | | | | 260 | |
Accrued interest | | | 216 | | | | — | |
| | | | | | | | |
| | $ | 22,311 | | | $ | 21,167 | |
| | | | | | | | |
For the years ended December 31, 2006 and 2005, a substantial portion of our accounts receivable result from product sales and gathering and processing services provided to four of our customers. This concentration of customers may impact our overall credit risk either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. As a general policy, collateral is not required for receivables, but customers’ financial conditions and credit worthiness are evaluated regularly. Our credit policy and the relatively short duration of receivables mitigate the risk of uncollectible receivables.
Financial Instruments
We used the following methods and assumptions to estimate the fair value of financial instruments.
Cash and cash equivalents. The carrying amounts reported in the balance sheets approximate fair value due to the short-term maturity of these instruments.
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-term debt. The fair value of our private long-term debt is based on the prices of similar securities with similar terms and credit ratings.
| | | | | | | | | | | | | | | | |
| | 2006 | | 2005 |
| | Carrying
| | Fair
| | Carrying
| | Fair
|
| | Amount | | Value | | Amount | | Value |
| | (In thousands) |
|
Cash and cash equivalents | | $ | 57,541 | | | $ | 57,541 | | | $ | 6,839 | | | $ | 6,839 | |
Long-term debt (see Note 11) | | $ | 750,000 | | | $ | 768,844 | | | | — | | | | — | |
| |
Note 11. | Long-Term Debt, Credit Facilities and Leasing Activities |
Long-Term Debt
On December 13, 2006, we and Williams Partners Finance Corporation issued $600.0 million aggregate principal of 7.25% senior unsecured notes in a private debt placement. Williams Partners Finance Corporation is our wholly owned subsidiary organized for the sole purpose of co-issuing our debt securities. The maturity date of the notes is February 1, 2017. Interest is payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2007. Debt issuance costs associated with the notes totaled $10.0 million and are being amortized over the life of the notes.
On June 20, 2006, we and Williams Partners Finance Corporation issued $150.0 million aggregate principal of 7.5% 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 $600.0 million and $150.0 million senior unsecured notes, sold in private debt placements to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States in accordance with Regulations under the Securities Act, we entered into registration rights agreements with the initial purchasers of the senior unsecured notes whereby we agreed to conduct a registered exchange offer of exchange notes in exchange for the senior unsecured notes or cause to become effective a shelf registration statement providing for resale of the senior unsecured notes. If we fail to file a registration statement with the SEC within 270 days of the respective closing dates, we will be required to pay liquidated damages in the form of additional cash interest to the holders of the senior unsecured notes. Upon the occurrence of such a failure to comply, the interest rate on the senior unsecured notes shall be increased by 0.25% per annum during the90-day period immediately following the occurrence of such failure to comply and shall increase by 0.25% per annum 90 days thereafter until all defaults have been cured, but in no event shall such aggregate additional interest exceed 0.50% per annum.
The terms of the senior unsecured 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. Our investment in Discovery will not be classified as our subsidiary under the indenture so long as we continue to own a minority interest in such entity. As a result, Discovery will not 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 unsecured notes may declare all outstanding senior unsecured notes to be due and payable immediately.
We may redeem the $600.0 million senior unsecured notes and the $150.0 million senior unsecured notes at our option in whole or in part at any time or from time to time prior to February 1, 2017 and June 15,
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2011, respectively, 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 (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date that is on or prior 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 unsecured notes will have the right to require us to repurchase all or any part of such holder’s senior unsecured notes at a price equal to 101% of the principal amount of the senior unsecured notes plus accrued and unpaid interest, if any, to the date of settlement. Except upon a change of control as described in the prior sentence, we are not required to make mandatory redemption or sinking fund payments with respect to the senior unsecured notes or to repurchase the senior unsecured notes at the option of the holders.
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.
Cash payments for interest for 2006 and 2005 were $5.5 million and $0.3 million, respectively.
Credit Facilities
In May 2006, Williams replaced its $1.275 billion secured credit facility with a $1.5 billion unsecured credit facility (“Williams facility”). The new facility, which also allows us to borrow up to $75.0 million, contains substantially similar terms and covenants as the prior facility, but contains additional restrictions on asset sales, certain subsidiary debt and sale-leaseback transactions. Borrowings under the Williams facility mature in May 2009. Our $75.0 million borrowing limit under the Williams 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. Letters of credit totaling $29.0 million at December 31, 2006 had been issued on behalf of Williams by the participating institutions under the Williams facility and no revolving credit loans were outstanding.
Interest on any borrowings under the Williams facility is calculated based on our choice of two methods: (i) a fluctuating rate equal to the facilitating bank’s base rate plus an applicable margin or (ii) a periodic fixed rate equal to LIBOR plus an applicable margin. We are also required to pay or reimburse Williams for a commitment fee based on the unused portion of our $75.0 million borrowing limit under the Williams facility, 0.25% at December 31, 2006 and 0.325% at December 31, 2005. The applicable margins, which were 1.25% at December 31, 2006 and 1.75% at December 31, 2005 related to LIBOR and 0.25% at December 31, 2006 and 0.75% at December 31, 2005 related to the facilitating bank’s base rate, and the commitment fee are based on Williams’ senior unsecured long-term debt rating. Under the Williams facility, Williams and certain of its subsidiaries, other than us, are required to comply with certain financial and other covenants. Significant financial covenants under the Williams facility to which Williams is subject, and in compliance with, include the following:
| | |
| • | ratio of debt to net worth no greater than 65%; |
|
| • | ratio of debt to net worth no greater than 55% for Northwest Pipeline Corporation, a wholly owned subsidiary of Williams, and Transco; and |
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | ratio of EBITDA to interest, on a rolling four quarter basis, no less than (i) 2.5 for any period through December 31, 2007 and (ii) 3.0 for the remaining term of the agreement. |
On August 7, 2006 we amended and restated the $20.0 million revolving credit facility (the “credit facility”) with Williams as the lender. The credit facility is available exclusively to fund working capital requirements. Borrowings under the credit facility mature on June 20, 2009 and bear interest at the one-month LIBOR. We pay a commitment fee to Williams on the unused portion of the credit facility of 0.30% annually. We are required to reduce all borrowings under the credit facility to zero for a period of at least 15 consecutive days once each12-month period prior to the maturity date of the credit facility. As of December 31, 2006, we have had no borrowings under the working capital credit facility.
Leasing Activities
We lease the land on which a significant portion of Four Corners’ pipeline assets are located. The primary landowners are the Bureau of Land Management (“BLM”) and several Indian tribes. The BLM leases are for thirty years with renewal options. The most significant of the Indian tribal leases will expire at the end of 2022 and will then be subject to renegotiation. Four Corners leases compression units under a lease agreement with Hanover Compression, Inc. The initial term of this agreement expired on June 30, 2006. We continue to lease these units on amonth-to-month basis during the ongoing renegotiation. Themonth-to-month arrangement can be terminated by either party upon thirty days advance written notice. We also lease other minor office, warehouse equipment and automobiles under non-cancelable leases. The future minimum annual rentals under these non-cancelable leases as of December 31, 2006 are payable as follows:
| | | | |
| | (In thousands) | |
|
2007 | | | 2,426 | |
2008 | | | 2,188 | |
2009 | | | 1,837 | |
2010 | | | 1,410 | |
2011 and thereafter | | | 2,030 | |
| | | | |
| | $ | 9,891 | |
| | | | |
Total rent expense was $19.4 million, $18.9 million and $14.8 million for 2006, 2005 and 2004, respectively.
| |
Note 12. | Partners’ Capital |
Of the 25,553,306 common units outstanding at December 31, 2006, 21,398,276 are held by the public, 2,905,030 are privately held, and the remaining 1,250,000 held by our affiliates. The 6,805,492 Class B units outstanding at December 31, 2006 are privately held. All of the 7,000,000 subordinated units are held by our affiliates.
Description of Class B Units
The Class B units are subordinated to common units and senior to subordinated units with respect to the payment of the minimum quarterly distribution, including any arrearages with respect to minimum quarterly distributions from prior periods. The Class B units are subordinated to common units and senior to subordinated units with respect to the right to receive distributions upon our liquidation.
The Class B units will convert into common units on aone-for-one basis upon the approval of a majority of the votes cast by common unitholders provided that the total number of votes cast is at least a majority of common units eligible to vote (excluding common units held by Williams). We are required to seek such approval as promptly as practicable after issuance of the Class B units and not later than June 11, 2007. If the
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requisite approval is not obtained, we will be obligated to resubmit the conversion proposal to holders of our common units, but not more frequently than once every six months. If we have not obtained the requisite unitholder approval of the conversion of the Class B units by June 11, 2007, the Class B units will be entitled to receive 115% of the quarterly distribution and distributions on liquidation payable on each common unit, subject to the subordination provisions described above.
The Class B units have the same voting rights as our outstanding common units and are entitled to vote as a separate class on any matters that adversely affect the rights or preferences of the Class B units in relation to other classes of partnership interests or as required by law. The Class B units are not entitled to vote on the approval of the conversion of the Class B units into common units.
Subordinated Units
Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. The subordination period will end on the first day of any quarter beginning after June 30, 2008 or when we meet certain financial tests provided for in our partnership agreement.
Limited Partners’ Rights
Significant information regarding rights of the limited partners includes the following:
| | |
| • | Right to receive distributions of available cash within 45 days after the end of each quarter. |
|
| • | No limited partner shall have any management power over our business and affairs; the general partner shall conduct, direct and manage our activities. |
|
| • | The general partner may be removed if such removal is approved by the unitholders holding at least 662/3% of the outstanding units voting as a single class, including units held by our general partner and its affiliates. |
|
| • | Right to receive information reasonably required for tax reporting purposes within 90 days after the close of the calendar year. |
Incentive Distribution Rights
Our general partner is entitled to incentive distributions if the amount we distribute to unitholders with respect to any quarter exceeds specified target levels shown below:
| | | | | | | | |
| | | | | General
| |
Quarterly Distribution Target Amount (per unit) | | Unitholders | | | Partner | |
|
Minimum quarterly distribution of $0.35 | | | 98 | % | | | 2 | % |
Up to $0.4025 | | | 98 | | | | 2 | |
Above $0.4025 up to $0.4375 | | | 85 | | | | 15 | |
Above $0.4375 up to $0.5250 | | | 75 | | | | 25 | |
Above $0.5250 | | | 50 | | | | 50 | |
In the event of a liquidation, all property and cash in excess of that required to discharge all liabilities will be distributed to the unitholders and our general partner, in proportion to their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 13. | Long-Term Incentive Plan |
In November 2005, our general partner adopted the Williams Partners GP LLC Long-Term Incentive Plan (the “Plan”) for employees, consultants and directors of our general partner and its affiliates who perform services for us. The Plan permits the grant of awards covering an aggregate of 700,000 common units. These awards may be in the form of options, restricted units, phantom units or unit appreciation rights.
During 2006 and 2005, our general partner granted 2,130 and 6,146 restricted units, respectively, pursuant to the Plan to members of our general partner’s board of directors who are not officers or employees of our general partner or its affiliates. These restricted units vested six months from grant date. We recognized compensation expense of $229,000 and $34,000 associated with these awards in 2006 and 2005, respectively.
| |
Note 14. | Commitments and Contingencies |
Environmental Matters-Four Corners. Current federal regulations require that certain unlined liquid containment pits located near named rivers and catchment areas be taken out of use, and current state regulations required all unlined, earthen pits to be either permitted or closed by December 31, 2005. Operating under a New Mexico Oil Conservation Division-approved work plan, we have physically closed all of our pits that were slated for closure under those regulations. We are presently awaiting agency approval of the closures for 40 to 50 of those pits.
We are also a participant in certain hydrocarbon removal and groundwater monitoring activities associated with certain well sites in New Mexico. Of nine remaining active sites, product removal is ongoing at seven and groundwater monitoring is ongoing at each site. As groundwater concentrations reach and sustain closure criteria levels and state regulator approval is received, the sites will be properly abandoned. We expect the remaining sites will be closed within four to eight years.
We have accrued liabilities totaling $0.7 million at December 31, 2006 and December 31, 2005 for these environmental activities. It is reasonably possible that we will incur costs in excess of our accrual for these matters. However, a reasonable estimate of such amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by governmental authorities and other factors.
We are subject to extensive federal, state and local environmental laws and regulations which affect our operations related to the construction and operation of our facilities. Appropriate governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements and injunctions as to future compliance. We have not been notified and are not currently aware of any material noncompliance under the various applicable environmental laws and regulations.
Environmental Matters-Conway. We are a participant in certain environmental remediation activities associated with soil and groundwater contamination at our Conway storage facilities. These activities relate to four projects that are in various remediation stages including assessment studies, cleanupsand/or remedial operations and monitoring. We continue to coordinate with the Kansas Department of Health and Environment (“KDHE”) to develop screening, sampling, cleanup and monitoring programs. The costs of such activities will depend upon the program scope ultimately agreed to by the KDHE and are expected to be paid over the next two to nine years.
In 2004, we purchased an insurance policy that covers up to $5.0 million of remediation costs until an active remediation system is in place or April 30, 2008, whichever is earlier, excluding operation and maintenance costs and ongoing monitoring costs, for these projects to the extent such costs exceed a $4.2 million deductible, of which $0.7 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
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 has agreed to indemnify us for the $4.2 million deductible not covered by the insurance policy, excluding costs of project management and soil and groundwater monitoring. There is a $14.0 million cap on the total amount of indemnity coverage under the omnibus agreement, which will be reduced by actual recoveries under the environmental insurance policy. There is also a three-year time limitation from the August 23, 2005 IPO closing date. The benefit of this indemnification will be accounted for as a capital contribution to us by Williams as the costs are reimbursed. We estimate that the approximate cost of this project management and soil and groundwater monitoring associated with the four remediation projects at the Conway storage facilities and for which we will not be indemnified will be approximately $200,000$0.2 million to $400,000$0.4 million per year following the completion of the remediation work.
At December 31, 2006 and 2005, we had accrued liabilities totaling $5.9 million and $5.4 million, respectively, 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 suchany excess amounts cannot be determined at this time because actual costs incurred will depend on the actual number of contaminated sites identified, the amount and extent of contamination discovered, the final cleanup standards mandated by KDHE and other governmental authorities and other factors.
Will Price. In 2001, we were named, along with other subsidiaries of Williams, as defendants in a nationwide class action lawsuit in Kansas state court that had been pending against other defendants, generally pipeline and gathering companies, since 2000. The plaintiffs alleged that the defendants have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs and sought an unspecified amount of damages. The defendants have opposed class certification and a hearing on plaintiffs’ second motion to certify the class was held on April 1, 2005. We are awaiting a decision from the court.
Grynberg. In 1998, the Department of Justice informed Williams that Jack Grynberg, an individual, had filed claims on behalf of himself and the federal government, in the United States District Court for the District of Colorado under the False Claims Act against Williams and certain of its wholly owned subsidiaries, including us. The claims sought an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys’ fees, and costs. Grynberg has also filed claims against approximately 300 other energy companies alleging that the defendants violated the False Claims Act in connection with the measurement, royalty valuation and purchase of hydrocarbons. In 1999, the Department of Justice announced that it was declining to intervene in any of the Grynberg cases, including the action filed in federal court in Colorado against us. Also in 1999, the Panel on Multi-District Litigation transferred all of these cases, including those filed against us, to the federal court in Wyoming for pre-trial purposes. Grynberg’s measurement claims remain pending against us and the other defendants; the court previously dismissed Grynberg’s royalty valuation claims. In May 2005, the court-appointed special master entered a report which recommended that the claims against certain Williams’ subsidiaries, including us, be dismissed. On October 20, 2006, the court dismissed all claims against us. In November 2006, Grynberg filed his notice of appeals with the Tenth Circuit Court of Appeals.
Vendor Dispute. We are parties to an agreement with a service provider for work on turbines at our Ignacio, New Mexico plant. A dispute has arisen between us as to the quality of the service provider’s work and the appropriate compensation. The service provider claims it is entitled to additional extra work charges under the agreement, which we deny are due.
Other. We are not currently a party to any other legal proceedings but are a party to various administrative and regulatory proceedings that have arisen in the ordinary course of our business.
Summary. Litigation, arbitration, regulatory matters and environmental matters are subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the ruling occurs. Management, including internal counsel,
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WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
currently believes that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, insurance coverage, recovery from customers or other indemnification arrangements, will not have a materialmaterially adverse effect upon our future financial position.
84
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 14.15. | Segment Disclosures |
Our reportable segments are strategic business units that offer different products and services. The segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies. The accounting policies of the segments are the same as those described in Note 3, Summary of Significant Accounting Policies. Long-lived assets are comprised of property, plant and equipment.
| | | | | | | | | | | | | | |
| | Gathering & | | | NGL | | | |
| | Processing | | | Services | | | Total | |
| | | | | | | | | |
| | (In thousands) | |
2005 | | | | | | | | | | | | |
Segment revenues | | $ | 3,515 | | | $ | 48,254 | | | $ | 51,769 | |
Operating and maintenance expense | | | 714 | | | | 24,397 | | | | 25,111 | |
Product cost | | | — | | | | 11,821 | | | | 11,821 | |
Depreciation and accretion | | | 1,200 | | | | 2,419 | | | | 3,619 | |
Direct general and administrative expenses | | | 2 | | | | 1,068 | | | | 1,070 | |
Other, net | | | — | | | | 694 | | | | 694 | |
| | | | | | | | | |
Segment operating income | | | 1,599 | | | | 7,855 | | | | 9,454 | |
Equity earnings | | | 8,331 | | | | — | | | | 8,331 | |
| | | | | | | | | |
Segment profit | | $ | 9,930 | | | $ | 7,855 | | | $ | 17,785 | |
| | | | | | | | | |
Reconciliation to the Statement of Operations: | | | | | | | | | | | | |
| Segment operating income | | | | | | | | | | $ | 9,454 | |
| General and administrative expenses: | | | | | | | | | | | | |
| | Allocated — affiliate | | | | | | | | | | | (3,194 | ) |
| | Third-party direct | | | | | | | | | | | (1,059 | ) |
| | | | | | | | | |
| Combined operating income | | | | | | | | | | $ | 5,201 | |
| | | | | | | | | |
Other financial information: | | | | | | | | | | | | |
Segment assets | | $ | 171,009 | | | $ | 64,579 | | | $ | 235,588 | |
Other assets and eliminations | | | | | | | | | | | 5,353 | |
| | | | | | | | | |
Total assets | | | | | | | | | | $ | 240,941 | |
| | | | | | | | | |
Equity method investments | | $ | 150,260 | | | $ | — | | | $ | 150,260 | |
Additions to long-lived assets | | | — | | | | 3,688 | | | | 3,688 | |
| | | | | | | | | | | | | | | | |
| | Gathering &
| | | Gathering &
| | | | | | | |
| | Processing -
| | | Processing -
| | | NGL
| | | | |
| | West | | | Gulf | | | Services | | | Total | |
| | (In thousands) | |
|
| | | | | | | | | | | | | | | | |
2006 | | | | | | | | | | | | | | | | |
Segment revenues: | | | | | | | | | | | | | | | | |
Product sales | | $ | 255,907 | | | $ | — | | | $ | 16,087 | | | $ | 271,994 | |
Gathering and processing | | | 246,004 | | | | 2,656 | | | | — | | | | 248,660 | |
Storage | | | — | | | | | | | | 25,237 | | | | 25,237 | |
Fractionation | | | — | | | | — | | | | 11,698 | | | | 11,698 | |
Other | | | 402 | | | | — | | | | 5,419 | | | | 5,821 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 502,313 | | | | 2,656 | | | | 58,441 | | | | 563,410 | |
Product cost and shrink replacement | | | 159,997 | | | | — | | | | 15,511 | | | | 175,508 | |
Operating and maintenance expense | | | 124,763 | | | | 1,660 | | | | 28,791 | | | | 155,214 | |
Depreciation, amortization and accretion | | | 40,055 | | | | 1,200 | | | | 2,437 | | | | 43,692 | |
Direct general and administrative expenses | | | 11,920 | | | | 1 | | | | 1,149 | | | | 13,070 | |
Other, net | | | 5,769 | | | | — | | | | 719 | | | | 6,488 | |
| | | | | | | | | | | | | | | | |
Segment operating income (loss) | | | 159,809 | | | | (205 | ) | | | 9,834 | | | | 169,438 | |
Equity earnings | | | — | | | | 12,033 | | | | — | | | | 12,033 | |
| | | | | | | | | | | | | | | | |
Segment profit | | $ | 159,809 | | | $ | 11,828 | | | $ | 9,834 | | | $ | 181,471 | |
| | | | | | | | | | | | | | | | |
Reconciliation to the Consolidated Statement of Income: | | | | | | | | | | | | | | | | |
Segment operating income | | | | | | | | | | | | | | $ | 169,438 | |
General and administrative expenses: | | | | | | | | | | | | | | | | |
Allocated — affiliate | | | | | | | | | | | | | | | (23,721 | ) |
Third-party direct | | | | | | | | | | | | | | | (2,649 | ) |
| | | | | | | | | | | | | | | | |
Combined operating income | | | | | | | | | | | | | | $ | 143,068 | |
| | | | | | | | | | | | | | | | |
Other financial information: | | | | | | | | | | | | | | | | |
Segment assets | | $ | 653,949 | | | $ | 207,390 | | | $ | 76,502 | | | $ | 937,841 | |
Other assets and eliminations | | | | | | | | | | | | | | | (4,693 | ) |
| | | | | | | | | | | | | | | | |
Total assets | | | | | | | | | | | | | | $ | 933,148 | |
| | | | | | | | | | | | | | | | |
Equity method investments | | $ | — | | | $ | 147,493 | | | $ | — | | | $ | 147,493 | |
Additions to long-lived assets | | | 25,889 | | | | — | | | | 6,381 | | | | 32,270 | |
85
99
WILLIAMS PARTNERS L.P.L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | |
| | Gathering & | | | NGL | | | |
| | Processing | | | Services | | | Total | |
| | | | | | | | | |
| | (In thousands) | |
2004 | | | | | | | | | | | | |
Segment revenues | | $ | 4,833 | | | $ | 36,143 | | | $ | 40,976 | |
Operating and maintenance expense | | | 572 | | | | 18,804 | | | | 19,376 | |
Product cost | | | — | | | | 6,635 | | | | 6,635 | |
Depreciation and accretion | | | 1,200 | | | | 2,486 | | | | 3,686 | |
Direct general and administrative expenses | | | — | | | | 535 | | | | 535 | |
Other, net | | | — | | | | 625 | | | | 625 | |
| | | | | | | | | |
Segment operating income | | | 3,061 | | | | 7,058 | | | | 10,119 | |
Equity earnings | | | 4,495 | | | | — | | | | 4,495 | |
Impairment of investment | | | (13,484 | ) | | | — | | | | (13,484 | ) |
| | | | | | | | | |
Segment profit (loss) | | $ | (5,928 | ) | | $ | 7,058 | | | $ | 1,130 | |
| | | | | | | | | |
Reconciliation to the Statement of Operations: | | | | | | | | | | | | |
| Segment operating income | | | | | | | | | | $ | 10,119 | |
| Allocated general and administrative expenses | | | | | | | | | | | (2,078 | ) |
| | | | | | | | | |
| Combined operating income | | | | | | | | | | $ | 8,041 | |
| | | | | | | | | |
Other financial information: | | | | | | | | | | | | |
Total assets | | $ | 166,985 | | | $ | 52,376 | | | $ | 219,361 | |
Equity method investments | | | 147,281 | | | | — | | | | 147,281 | |
Additions to long-lived assets | | | — | | | | 1,622 | | | | 1,622 | |
2003 | | | | | | | | | | | | |
Segment revenues | | $ | 5,513 | | | $ | 22,781 | | | $ | 28,294 | |
Operating and maintenance expense | | | 379 | | | | 13,581 | | | | 13,960 | |
Product cost | | | — | | | | 1,263 | | | | 1,263 | |
Depreciation and accretion | | | 1,200 | | | | 2,507 | | | | 3,707 | |
Direct general and administrative expenses | | | — | | | | 421 | | | | 421 | |
Other, net | | | — | | | | 507 | | | | 507 | |
| | | | | | | | | |
Segment operating income | | | 3,934 | | | | 4,502 | | | | 8,436 | |
Equity earnings | | | 3,447 | | | | — | | | | 3,447 | |
| | | | | | | | | |
Segment profit | | $ | 7,381 | | | $ | 4,502 | | | $ | 11,883 | |
| | | | | | | | | |
Reconciliation to the Statement of Operations: | | | | | | | | | | | | |
| Segment operating income | | | | | | | | | | $ | 8,436 | |
| Allocated general and administrative expenses | | | | | | | | | | | (1,392 | ) |
| | | | | | | | | |
| Combined operating income | | | | | | | | | | $ | 7,044 | |
| | | | | | | | | |
Other financial information: | | | | | | | | | | | | |
Total assets | | $ | 177,769 | | | $ | 52,381 | | | $ | 230,150 | |
Equity method investments | | | 156,269 | | | | — | | | | 156,269 | |
Additions to long-lived assets | | | — | | | | 1,176 | | | | 1,176 | |
| | | | | | | | | | | | | | | | |
| | Gathering &
| | | Gathering &
| | | | | | | |
| | Processing -
| | | Processing -
| | | NGL
| | | | |
| | West | | | Gulf | | | Services | | | Total | |
| | (In thousands) | |
|
| | | | | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | |
Segment revenues: | | | | | | | | | | | | | | | | |
Product sales | | $ | 231,285 | | | $ | — | | | $ | 13,463 | | | $ | 244,748 | |
Gathering and processing | | | 231,733 | | | | 3,063 | | | | — | | | | 234,796 | |
Storage | | | — | | | | | | | | 20,290 | | | | 20,290 | |
Fractionation | | | — | | | | — | | | | 10,770 | | | | 10,770 | |
Other | | | 185 | | | | 452 | | | | 3,731 | | | | 4,368 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 463,203 | | | | 3,515 | | | | 48,254 | | | | 514,972 | |
Product cost and shrink replacement | | | 165,706 | | | | — | | | | 11,821 | | | | 177,527 | |
Operating and maintenance expense | | | 104,648 | | | | 714 | | | | 24,397 | | | | 129,759 | |
Depreciation, amortization and accretion | | | 38,960 | | | | 1,200 | | | | 2,419 | | | | 42,579 | |
Direct general and administrative expenses | | | 12,230 | | | | 2 | | | | 1,068 | | | | 13,300 | |
Other, net | | | 8,382 | | | | — | | | | 694 | | | | 9,076 | |
| | | | | | | | | | | | | | | | |
Segment operating income | | | 133,277 | | | | 1,599 | | | | 7,855 | | | | 142,731 | |
Equity earnings | | | — | | | | 8,331 | | | | — | | | | 8,331 | |
| | | | | | | | | | | | | | | | |
Segment profit | | $ | 133,277 | | | $ | 9,930 | | | $ | 7,855 | | | $ | 151,062 | |
| | | | | | | | | | | | | | | | |
Reconciliation to the Consolidated Statement of Income: | | | | | | | | | | | | | | | | |
Segment operating income | | | | | | | | | | | | | | $ | 142,731 | |
General and administrative expenses: | | | | | | | | | | | | | | | | |
Allocated — affiliate | | | | | | | | | | | | | | | (22,256 | ) |
Third-party direct | | | | | | | | | | | | | | | (1,059 | ) |
| | | | | | | | | | | | | | | | |
Combined operating income | | | | | | | | | | | | | | $ | 119,416 | |
| | | | | | | | | | | | | | | | |
Other financial information: | | | | | | | | | | | | | | | | |
Segment assets | | $ | 635,094 | | | $ | 171,009 | | | $ | 63,819 | | | $ | 869,922 | |
Other assets and eliminations | | | | | | | | | | | | | | | 5,353 | |
| | | | | | | | | | | | | | | | |
Total assets | | | | | | | | | | | | | | $ | 875,275 | |
| | | | | | | | | | | | | | | | |
Equity method investments | | $ | — | | | $ | 150,260 | | | $ | — | | | $ | 150,260 | |
Additions to long-lived assets | | | 27,578 | | | | — | | | | 3,688 | | | | 31,266 | |
86
100
WILLIAMS PARTNERS L.P.L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | Gathering &
| | | Gathering &
| | | | | | | |
| | Processing -
| | | Processing -
| | | NGL
| | | | |
| | West | | | Gulf | | | Services | | | Total | |
| | (In thousands) | |
|
| | | | | | | | | | | | | | | | |
2004 | | | | | | | | | | | | | | | | |
Segment revenues: | | | | | | | | | | | | | | | | |
Product sales | | $ | 204,868 | | | $ | — | | | $ | 8,453 | | | $ | 213,321 | |
Gathering and processing | | | 221,939 | | | | 3,883 | | | | — | | | | 225,822 | |
Storage | | | — | | | | | | | | 15,318 | | | | 15,318 | |
Fractionation | | | — | | | | — | | | | 9,070 | | | | 9,070 | |
Other | | | 1,416 | | | | 950 | | | | 3,302 | | | | 5,668 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 428,223 | | | | 4,833 | | | | 36,143 | | | | 469,199 | |
Product cost and shrink replacement | | | 146,328 | | | | — | | | | 6,635 | | | | 152,963 | |
Operating and maintenance expense | | | 97,070 | | | | 572 | | | | 18,804 | | | | 116,446 | |
Depreciation, amortization and accretion | | | 40,675 | | | | 1,200 | | | | 2,486 | | | | 44,361 | |
Direct general and administrative expenses | | | 8,500 | | | | — | | | | 535 | | | | 9,035 | |
Other, net | | | 18,028 | | | | — | | | | 625 | | | | 18,653 | |
| | | | | | | | | | | | | | | | |
Segment operating income | | | 117,622 | | | | 3,061 | | | | 7,058 | | | | 127,741 | |
Equity earnings | | | — | | | | 4,495 | | | | — | | | | 4,495 | |
Impairment of investment | | | — | | | | (13,484 | ) | | | — | | | | (13,484 | ) |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 117,622 | | | $ | (5,928 | ) | | $ | 7,058 | | | $ | 118,752 | |
| | | | | | | | | | | | | | | | |
Reconciliation to the Consolidated Statement of Income: | | | | | | | | | | | | | | | | |
Segment operating income | | | | | | | | | | | | | | $ | 127,741 | |
Allocated general and administrative expenses | | | | | | | | | | | | | | | (23,144 | ) |
| | | | | | | | | | | | | | | | |
Combined operating income | | | | | | | | | | | | | | $ | 104,597 | |
| | | | | | | | | | | | | | | | |
Other financial information: | | | | | | | | | | | | | | | | |
Total assets | | $ | 645,294 | | | $ | 166,985 | | | $ | 51,305 | | | $ | 863,584 | |
Equity method investments | | | — | | | | 147,281 | | | | — | | | | 147,281 | |
Additions to long-lived assets | | | 14,069 | | | | — | | | | 1,622 | | | | 15,691 | |
101
WILLIAMS PARTNERS L. P.
QUARTERLY FINANCIAL DATA
(Unaudited)
Summarized quarterly financial data are as follows (thousands, exceptper-unit amounts):
| | | | | | | | | | | | | | | | | | |
| | First | | | Second | | | Third | | | Fourth | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | |
Revenues | | $ | 11,369 | | | $ | 12,176 | | | $ | 12,176 | | | $ | 16,048 | |
Costs and operating expenses | | | 10,266 | | | | 8,036 | | | | 13,175 | | | | 15,091 | |
Income (loss) before cumulative effect of change in accounting principle | | | 311 | | | | 1,849 | | | | (2,871 | ) | | | 6,170 | |
Net income (loss) | | | 311 | | | | 1,849 | | | | (2,871 | ) | | | 5,542 | |
Basic and diluted net income (loss) per limited partner unit: | | | | | | | | | | | | | | | | |
| Income (loss) before cumulative effect of change in accounting principle: | | | | | | | | | | | | | | | | |
| | Common units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.51 | |
| | Subordinated units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.51 | |
| Cumulative effect of change in accounting principle: | | | | | | | | | | | | | | | | |
| | Common units | | | NA | | | | NA | | | $ | — | | | $ | (0.05 | ) |
| | Subordinated units | | | NA | | | | NA | | | $ | — | | | $ | (0.05 | ) |
| Net income (loss): | | | | | | | | | | | | | | | | |
| | Common units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.46 | |
| | Subordinated units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.46 | |
| | | | | | | | | | | | | | | | |
| | First | | | Second | | | Third | | | Fourth | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| | | | | | | | | | | | |
2004 | | | | | | | | | | | | | | | | |
Revenues | | $ | 7,953 | | | $ | 9,043 | | | $ | 10,457 | | | $ | 13,523 | |
Costs and operating expenses | | | 5,256 | | | | 8,289 | | | | 8,956 | | | | 10,434 | |
Income (loss) before cumulative effect of change in accounting principle | | | 1,569 | | | | (1,125 | ) | | | (1,684 | ) | | | (12,184 | ) |
Net income (loss) | | | 1,569 | | | | (1,125 | ) | | | (1,684 | ) | | | (12,184 | ) |
| | | | | | | | | | | | | | | | |
| | First
| | | Second
| | | Third
| | | Fourth
| |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | |
|
2006 | | | | | | | | | | | | | | | | |
Revenues | | | 132,735 | | | | 141,186 | | | | 146,582 | | | | 142,907 | |
Costs and operating expenses | | | 98,726 | | | | 109,401 | | | | 104,424 | | | | 107,791 | |
Net income | | | 37,624 | | | | 33,594 | | | | 43,404 | | | | 32,246 | |
Basic and diluted net income per limited partner unit: | | | | | | | | | | | | | | | | |
Income before cumulative effect of change in accounting principle: | | | | | | | | | | | | | | | | |
Common units | | $ | 0.35 | | | $ | 0.25 | | | $ | 0.57 | | | $ | 0.45 | |
Class B units | | $ | — | | | $ | — | | | $ | — | | | $ | 0.45 | |
Subordinated units | | $ | 0.35 | | | $ | 0.25 | | | $ | 0.57 | | | $ | 0.45 | |
Net income: | | | | | | | | | | | | | | | | |
Common units | | $ | 0.35 | | | $ | 0.25 | | | $ | 0.57 | | | $ | 0.45 | |
Class B units | | $ | — | | | $ | — | | | $ | — | | | $ | 0.45 | |
Subordinated units | | $ | 0.35 | | | $ | 0.25 | | | $ | 0.57 | | | $ | 0.45 | |
| | |
| • | Net income for fourth-quarter 2005 includes our 40 percent share of Discovery’s favorable adjustment of $10.7 million related to amounts previously deferred for net system gains from 2002 through 2004 that were reversed following the acceptance in 2005 of a filing with the FERC. |
|
| • | Net loss for third-quarter 2005 includes a $3.4 million unfavorable product imbalance adjustments included in NGL services. |
|
| • | Net loss for fourth-quarter 2004 includes a $13.5 million impairment of our investment in Discovery Producer Services (see Note 6). |
87
| | | | | | | | | | | | | | | | |
| | First
| | | Second
| | | Third
| | | Fourth
| |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | |
|
2005 | | | | | | | | | | | | | | | | |
Revenues | | $ | 119,272 | | | $ | 120,256 | | | $ | 132,340 | | | $ | 143,104 | |
Costs and operating expenses | | | 92,274 | | | | 89,301 | | | | 99,216 | | | | 114,765 | |
Income before cumulative effect of change in accounting principle | | | 26,206 | | | | 28,664 | | | | 31,252 | | | | 33,552 | |
Net income | | | 26,206 | | | | 28,664 | | | | 31,252 | | | | 32,230 | |
Basic and diluted net income (loss) per limited partner unit: | | | | | | | | | | | | | | | | |
Income (loss) before cumulative effect of change in accounting principle: | | | | | | | | | | | | | | | | |
Common units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.51 | |
Subordinated units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.51 | |
Cumulative effect of change in accounting principle: | | | | | | | | | | | | | | | | |
Common units | | | NA | | | | NA | | | $ | — | | | $ | (0.05 | ) |
Subordinated units | | | NA | | | | NA | | | $ | — | | | $ | (0.05 | ) |
Net income (loss): | | | | | | | | | | | | | | | | |
Common units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.46 | |
Subordinated units | | | NA | | | | NA | | | $ | (0.02 | ) | | $ | 0.46 | |
| |
Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
102
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15(d) — (e) of the Securities Exchange Act) (“Disclosure Controls”) was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our general 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.
The current contact information is as follows:
| |
| Williams Partners L.P. |
| One Williams Center, Suite 4700 |
| Tulsa, Oklahoma 74172 |
| Attn: Corporate Secretary |
|
| Williams Partners L.P. |
| One Williams Center, Suite 4700 |
| Tulsa, Oklahoma 74172 |
| Attn: Presiding Director |
|
| Email:brian.shore@williams.com |
Williams Partners L.P.
c/o Williams Partners GP LLC
One Williams Center, Suite 4700
Tulsa, Oklahoma 74172
Attn: Corporate Secretary
Williams Partners L.P.
c/o Williams Partners GP LLC
One Williams Center, Suite 4700
Tulsa, Oklahoma 74172
Attn: Presiding Director
E-mail:brian.shore@williams.com
Board Committees
The board of directors of our general partner has a separately-designated standing audit committee established in accordance with sectionSection 3(a)(58)(A) of the Securities Exchange Act of 1934 a conflicts
92
committee and a compensationconflicts committee. The following is a description of each of the committees and committee membership as of February 28, 2006.26, 2007.
Board Committee Membership
| |
| Board Committee Membership |
| | | | | | | | | | | | |
| | Audit |
| | Conflicts | | | Compensation |
|
| | Committee | | | Committee | | | Committee | |
| | | | | | | | | |
Thomas C. Knudson | | | ü | | | | ü | | | | • | |
Bill Z. Parker | | | • | | | | ü | | | | ü | • |
Alice M. Peterson | | | ü | | | | • | | | | ü | |
ü = committee member
| | |
ü | | = committee member |
|
• | | = chairperson |
Audit Committee
Our general partner’s board of directors has determined that all members of the audit committee meet the heightened independence requirements of the New York Stock Exchange for audit committee members and that all members are financially literate as defined by the rules of the New York Stock Exchange. The board of directors has further determined that Ms. Alice M. Peterson is an audit committee “financial expert” as defined by the rules of the SEC. Ms. Peterson’s biographical information is set forth above under the caption “Directors and Executive Officers of the Registrant.”above. The audit committee is governed by a written charter adopted by the board of directors. For further information about the audit committee, please read the “Report of the Audit Committee” below and Principal“Principal Accountant Fees and Services.”
Conflicts Committee
Our general partner’s board of directors has established a compensation committee to administer the Williams Partners GP LLC Long-Term Incentive Plan for employees, consultants and directors of our general partner and employees and consultants of its affiliates who perform services for our general partner and its affiliates. The long-term incentive plan consists of four components: restricted units, phantom units, unit options and unit appreciation rights. The plan permits the grant of awards covering an aggregate of 700,000 units. To date, the only grants made pursuant to the plan are restricted units related to director compensation. For more information about the long-term incentive plan, please read “Compensation of Directors” and “Long-Term Incentive Plan” under Executive Compensation and “Securities Authorized Under Equity Compensation Plans” under Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The compensation committee is governed by a written charter adopted by the board of directors.
The conflicts committee of our general partner’s board of directors reviews specific matters that the board believes may involve conflicts of interest. The conflicts committee determines if resolution of the conflict is fair and reasonable to us. The members of the conflicts committee may not be officers or employees of our general partner or directors, officers or employees of its affiliates, and must meet the independence and experience requirements established by the New York Stock Exchange and the Sarbanes-Oxley Act of 2002 and other federal securities laws. Any matters approved by the conflicts committee will be conclusively deemed fair and reasonable to us, approved by all of our partners and not a breach by our general partner of any duties it may owe to us or our unitholders.
Internet Access to Governance Documents
108
Our general partner’s code of business conduct and ethics, governance guidelines and the charters for the audit and compensation committees are available on our Internet website athttp://www.williamslp.comunder the “Investor Relations” caption. We will provide, free of charge, a copy of our code of business conduct and
93
ethics or any of our other governance documents listed above upon written request to our general partner’s secretary at Williams Partners L.P., One Williams Center, Suite 4700, Tulsa, Oklahoma 74172.Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our general partner’s officers and directors, and persons who own more than 10 percent of a registered class of our equity securities to file with the SEC and the New York Stock Exchange reports of ownership of Company securities and changes in reported ownership. Officers and directors of our general partner and greater than 10 percent common unitholders are required to by SEC rules to furnish to us copies of all Section 16(a) reports that they file. Based solely on a review of reports furnished to our general partner, or written representations from reporting persons that all reportable transactions were reported, we believe that during the fiscal year ended December 31, 2005 our general partner’s officers, directors and greater than 10 percent common unitholders filed all reports they were required to file under Section 16(a).
Code of Business Conduct and Ethics
Our general partner has adopted a code of business conduct and ethics for directors, officers and employees. We intend to disclose any amendments to or waivers of the code of business conduct and ethics on behalf of our general partner’s chief executive officer, chief financial officer, controller and persons performing similar functions on our Internet website athttp://www.williamslp.comunder the “Investor Relations” caption, promptly following the date of any such amendment or waiver.
Internet Access to Governance Documents
Our general partner’s code of business conduct and ethics, governance guidelines and the charter for the audit committee are available on our Internet website athttp://www.williamslp.comunder the “Investor Relations” caption. We will provide, free of charge, a copy of our code of business conduct and ethics or any of our other governance documents listed above upon written request to our general partner’s secretary at Williams Partners L.P., One Williams Center, Suite 4700, Tulsa, Oklahoma 74172.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our general partner’s officers and directors, and persons who own more than 10% of a registered class of our equity securities to file with the SEC and the New York Stock Exchange reports of ownership of our securities and changes in reported ownership. Officers and directors of our general partner and greater than 10% common unitholders are required to by SEC rules to furnish to us copies of all Section 16(a) reports that they file. Based solely on a review of reports furnished to our general partner, or written representations from reporting persons that all reportable transactions were reported, we believe that during the fiscal year ended December 31, 2006 our general partner’s officers, directors and greater than 10% common unitholders filed all reports they were required to file under Section 16(a).
Transfer Agent and Registrar
Computershare Trust Company, N.A. serves as registrar and transfer agent for our common units. Contact information for Computershare is as follows:
Computershare Trust Company, N.A.
P.O. Box 43069
Providence, Rhode Island02940-3069
Phone:(781) 575-2879 or toll-free,(877) 498-8861
Hearing impaired:(800) 952-9245
Internet: www.computershare.com/investor
Send overnight mail to:
Computershare
250 Royall St.
Canton, Massachusetts 02021
CEO/CFO Certifications
We submitted the certification of Steven J. Malcolm, our general partner’s chairman of the board and chief executive officer, to the New York Stock Exchange pursuant to NYSE Section 303A.12(a) on September 11, 2006. In addition, the certificates of our chief executive officer and chief financial officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2 to this annual report.
REPORT OF THE AUDIT COMMITTEE
The audit committee oversees our financial reporting process on behalf of the board of directors. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. The audit committee operates under a written charter approved by the board. The
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charter, among other things, provides that the audit committee has full authority to appoint, retain and oversee the independent auditor. In this context, the audit committee:
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| • | reviewed and discussed the audited financial statements in this annual report onForm 10-K with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements; |
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| • | reviewed with Ernst & Young LLP, the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality and acceptability of Williams Partners L.P.’s accounting principles and such other matters as are required to be discussed with the audit committee under generally accepted auditing standards; |
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| • | received the written disclosures and the letter required by standard No. 1 of the independence standards board (independence discussions with audit committees) provided to the audit committee by Ernst & Young LLP; |
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| • | discussed with Ernst & Young LLP its independence from management and Williams Partners L.P. and considered the compatibility of the provision of nonaudit services by the independent auditors with the auditors’ independence; |
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| • | discussed with Ernst & Young LLP the matters required to be discussed by statement on auditing standards No. 61 (communications with audit committees); |
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| • | discussed with Williams Partners L.P.’s internal auditors and Ernst & Young LLP the overall scope and plans for their respective audits. The audit committee meets with the internal auditors and Ernst & Young LLP, with and without management present, to discuss the results of their examinations, their |
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| | evaluations of Williams Partners L.P.’s internal controls and the overall quality of Williams Partners L.P.’s financial reporting; |
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| • | based on the foregoing reviews and discussions, recommended to the board of directors that the audited financial statements be included in the annual report onForm 10-K for the year ended December 31, 2005,2006, for filing with the SEC; and |
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| • | approved the selection and appointment of Ernst & Young LLP to serve as Williams Partners L.P.’s independent auditors for 2006.auditors. |
This report has been furnished by the members of the audit committee of the board of directors:
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| • Bill Z. Parker— | Alice M. Peterson — chairman |
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• Alice M. Peterson | — | Bill Z. Parker |
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| • — | Thomas C. Knudson |
February 24, 200620, 2007
The report of the audit committee in this report shall not be deemed incorporated by reference into any other filing by Williams Partners L.P. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.
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Item 11. | Executive Compensation |
Compensation Discussion and Analysis
We and our general partner, Williams Partners GP LLC, were formed in February 2005. We have no employees. We are managed by the executive officers of our general partner.partner who are also executive officers of Williams. We have no compensation committee and the compensation committee of our general partner was dissolved on November 28, 2006. The executive officers of our general partner are compensated directly by Williams. All
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decisions as to the compensation of the executive officers of our general partner who are involved in our management are made by the compensation committee of Williams. Therefore, we do not have any policies or programs relating to compensation of the executive officers of our general partner and we make no decisions relating to such compensation. A full discussion of the policies and programs of the compensation committee of Williams will be set forth in the proxy statement for Williams’ 2007 annual meeting of stockholders which will be available upon its filing on the SEC’s website athttp://www.sec.govand on Williams’ website athttp://www.williams.comunder the heading “Investors — SEC Filings.” We reimburse Williamsour general partner for direct and indirect general and administrative expenses incurred onattributable to our behalf. Formanagement (which expenses include the fiscal year ended December 31, 2005, Williams allocated approximately $22,341 of salary and bonus expense to us (and our predecessor for the portionshare of the year priorcompensation paid to the executive officers of our formation)general partner attributable to the time they spend managing our business). Please read “Certain Relationships and Related Transactions, and Director Independence — Reimbursement of Expenses of Our General Partner” for more information regarding this arrangement.
Executive Compensation
None of the executive officers of our general partner received, other than Messrs. Armstrong and Malcolm, directly or indirectly, more than $100,000 for services performed for us in 2006.
Further information regarding the compensation of our principal executive officer, Steven J. Malcolm, who also serves as the chairman, of the boardpresident and chief executive officer of Williams, and our general partner, and approximately $27,659 for all other expenses related to his compensation. Forprincipal financial officer, Donald R. Chappel, who also serves as the fiscal year ended December 31, 2004, Williams allocated approximately $19,846 of salary and bonus expense to our predecessor for Mr. Malcolm and approximately $14,873 for all other expenses related to his compensation. Allocated expenses related to Mr. Malcolm’s compensation other than salary and bonus included Williams deferred stock awards, matching contributions made under a Williams 401(k) plan, and premiums for life insurance. We also allocated a portion of Williams’ expenses related to perquisites which did not exceed $50,000 or 10 percent of Mr. Malcolm’s salary and bonus from Williams. The foregoing amounts exclude expenses allocated by Williams to Discovery. Total compensation received by Mr. Malcolm, who is also the chairman, president and chief executivefinancial officer of Williams, will be set forth in the proxy statement for Williams’ 20062007 annual meeting of shareholdersstockholders which will be available upon its filing on the SEC’s website athttp://www.sec.govand on Williams’ website athttp://www.williams.comunder the heading “Investors — SEC Filings.” No otherFurther information regarding the portion of Mr. Armstrong’s, Mr. Chappel’s and Mr. Malcolm’s compensation and employment-related expenses allocable to us may be found in this filing under the heading “Certain Relationships and Related Transactions, and Director Independence — Reimbursement of Expenses of Our General Partner.”
Compensation Committee Interlocks and Insider Participation
As previously discussed, our general partner’s board of directors is not required to maintain, and does not maintain, a compensation committee. Steven J. Malcolm, our general partner’s chief executive officer and chairman of the board of directors serves as the chairman of the board and chief executive officer of our general partner received salaryWilliams. Alan S. Armstrong, Donald R. Chappel and bonus compensation allocable to us or our predecessor in excess of $100,000 and no awards were granted to our general partner’s executive officers under the Williams Partners GP LLC Long-Term Incentive Plan in 2004 or 2005.
Employment Agreements
The executive officersPhillip D. Wright, who are directors of our general partner, are also executive officers of Williams. These executive officers do not have employment agreements in their capacity as officersHowever, all compensation decisions with respect to each of these persons are made by Williams and none of these individuals receive any compensation directly from us or our general partner. Please read “Certain Relationships and Related Transactions, and Director Independence” below for information about relationships among us, our general partner and Williams.
Board Report on Compensation
Neither we nor our general partner has a compensation committee. The board of directors of our general partner.partner has reviewed and discussed the Compensation Discussion and Analysis set forth above and based on this review and discussion has approved it for inclusion in thisForm 10-K.
The Board of Directors of Williams Partners GP LLC:
Alan S. Armstrong, Donald R. Chappel,
Thomas C. Knudson, Steven J. Malcolm
Bill Z. Parker, Alice M. Peterson,
Phillip D. Wright
Compensation of Directors
Members of
We are managed by the board of directors of our general partnerpartner. Members of the board of directors who are also officers or employees of our affiliatesWilliams or an affiliate of us or Williams do not receive additional compensation for serving on the board of directors. Subject to the proration provisions of the policy, members of the board ofNon-employee directors who are not officers or employees of our affiliates (each a “Non-Employee Director”) each receive an annual
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compensation package consisting of the following: (a) $50,000 cash;cash retainer; (b) restricted units representing our limited partnership interests in us valued at $25,000;$25,000 in the aggregate; and
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(c) $5,000 cash each for service on the conflicts andor audit committees of the board.board of directors. The annual compensation package is paid to each non-employee director based on their service on the board of directors for the period beginning on August 22 of each fiscal year and ending on August 21 of each fiscal year. If a non-employee director’s service on the board of directors commences on or after December 1 of a fiscal year, such non-employee director will receive a prorated annual compensation package for such fiscal year. In addition to the annual compensation package, each Non-Employee Directornon-employee director receives a one-time grant of restricted units valued at $25,000.$25,000 on the date of first election to the board of directors. Restricted units awarded to non-employee directors under the annual compensation package or upon first election to the board of directors are granted under the Williams Partners GP LLC Long-Term Incentive Plan and vest 180 days after the date of grant. Cash distributions willare be paid on thethese restricted units granted to the Non-Employee Directors.units. Each Non-Employee Directornon-employee director is also reimbursed forout-of-pocket expenses in connection with attending meetings of the board of directors or its committees. Each director will be fully indemnified by us for actions associated with being a director to the extent permitted under Delaware law. We also reimburse Non-Employeenon-employee directors for the costs of education programs relevant to their duties as board members.
For their service, non-management directors received the following compensation in 2006:
Director Compensation Fiscal Year 2006
| | | | | | | | | | | | | | | | |
| | Fees Earned or Paid
| | | | All Other
| | |
Name | | in Cash | | Unit Awards(1) | | Compensation | | Total |
|
Thomas C. Knudson | | $ | 60,000 | | | $ | 63,394.66 | (2) | | $ | 0 | | | $ | 123,394.66 | |
Bill Z. Parker | | $ | 60,000 | | | $ | 82,738.39 | (3) | | $ | 0 | | | $ | 142,738.39 | |
Alice M. Peterson | | $ | 60,000 | | | $ | 82,738.39 | (4) | | $ | 0 | | | $ | 142,738.39 | |
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(1) | | Awards were granted under the Williams Partners GP LLC Long-Term Incentive Plan. Awards are in the form of restricted units and are shown using a dollar value equal to the 2006 compensation expense computed in accordance with FAS 123(R). Cash distributions are paid on these restricted units at the same time and same rate as dividends paid to our unitholders. |
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(2) | | The grant date fair value for the 2006 restricted units for Mr. Knudson is $25,013. At fiscal year end, Mr. Knudson had an aggregate of 710 restricted units outstanding. |
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(3) | | The grant date fair value for the 2006 restricted units for Mr. Parker is $25,013. At fiscal year end, Mr.��Parker had an aggregate of 710 restricted units outstanding. |
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(4) | | The grant date fair value for the 2006 restricted units for Ms. Peterson is $25,013. At fiscal year end, Ms. Peterson had an aggregate of 710 restricted units outstanding. |
Long-Term Incentive Plan
In connection with our IPO, our general partner adopted the Williams Partners GP LLC Long-Term Incentive Plan for employees, consultants and directors of our general partner and employees and consultants of its affiliates who perform services for our general partner or its affiliates. To date, the only grants under the plan have been grants of restricted units to Non-Employee Directors.directors who are not officers or employees of us or our affiliates. On November 28, the board of directors of our general partner dissolved its compensation committee. The only function performed by the committee prior to its dissolution was to administer the Williams Partners GP LLC Long-Term Incentive Plan. Accordingly, also on November 28, 2006, the board of directors approved an amendment to the long-term incentive plan to allow the full board of directors to administer the plan. The long-term incentive plan consists of four components: restricted units, phantom units, unit options and unit appreciation rights. The long-term incentive plan currently permits the grant of awards covering an aggregate of 700,000 units. The plan is administered by the compensation committee of the board of directors of our general partner.
Our general partner’s board of directors, or its compensation committee, in its discretion may terminate, suspend or discontinue the long-term incentive plan at any time with respect to any award that has not yet been granted. Our general partner’s board of directors or its compensation committee, also has the right to alter or amend the long-term incentive plan or any part of the plan
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from time to time, including increasing the number of units that may be granted subject to unitholder approval as required by the exchange upon which the common units are listed at that time. However, no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.
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| Restricted Units and Phantom Units |
Restricted Units and Phantom Units
A restricted unit is a common unit subject to forfeiture prior to the vesting of the award. A phantom unit will be a notional unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, cash equivalent to the value of a common unit. The compensation committeeboard of directors of our general partner may determine to make grants under the plan of restricted units and phantom units to employees, consultants and directors containing such terms as the compensation committeeboard of directors shall determine. The compensation committeeboard of directors determines the period over which restricted units and phantom units granted to employees, consultants and directors will vest. The committeeboard of directors may base its determination upon the achievement of specified financial objectives. In addition, the restricted units and phantom units will vest upon a change of control of Williams Partners L.P., our general partner or Williams, unless provided otherwise by the compensation committee.board of directors.
If a grantee’s employment, service relationship or membership on the board of directors terminates for any reason, the grantee’s restricted units and phantom units will be automatically forfeited unless, and to the extent, the compensation committeeboard of directors provides otherwise. Common units to be delivered in connection with the grant of restricted units or upon the vesting of phantom units may be common units acquired by our general partner on the open market, common units already owned by our general partner, common units acquired by our general partner directly from us or any other person or any combination of the foregoing. Our general partner is entitled to reimbursement by us for the cost incurred in acquiring common units. Thus, the cost of the restricted units and delivery of common units upon the vesting of phantom units will be borne by us. If we issue new common units in connection with the grant of restricted units or upon vesting of the phantom units, the total number of common units outstanding will increase. The compensation committee,board of directors of our general partner, in its discretion, may grant tandem distribution rights with respect to restricted units and tandem distribution equivalent rights with respect to phantom units.
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| Unit Options and Unit Appreciation Rights |
Unit Options and Unit Appreciation Rights
The long-term incentive plan permits the grant of options covering common units and the grant of unit appreciation rights. A unit appreciation right is an award that, upon exercise, entitles the participant to receive the excess of the fair market value of a unit on the exercise date over the exercise price established for the unit appreciation right. Such excess may be paid in common units, cash or a combination thereof, as determined by the compensation committeeboard of directors in its discretion. The compensation committeeOur general partner’s board of directors may make grants of unit options and unit appreciation rights under the plan to employees, consultants and directors containing such terms as the committeeboard of directors shall determine. Unit options and unit appreciation rights may not have an exercise price that is less than the fair market value of the common units on the date of grant. In general, unit options and unit appreciation rights granted will become exercisable over a period determined by the compensation committee.board of directors. In addition, the unit options and unit appreciation rights will become exercisable upon a change in control of Williams Partners L.P., our general partner or Williams, unless provided otherwise by the committee.board of directors. The compensation committee,board of directors, in its discretion may grant tandem distribution equivalent rights with respect to unit options and unit appreciation rights.
Upon exercise of a unit option (or a unit appreciation right settled in common units), our general partner will acquire common units on the open market or directly from us or any other person or use common units already owned by our general partner, or any combination of the foregoing. Our general partner will be entitled to reimbursement by us for the difference between the cost incurred by our general partner in acquiring these common units and the proceeds received from a participant at the time of exercise. Thus, the cost of the unit options (or a unit appreciation right settled in common units) will be borne by us. If we issue new common units upon exercise of the unit options (or a unit appreciation right settled in common units), the total number of common units outstanding will increase, and our general partner will pay us the proceeds it
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receives from an optionee upon exercise of a unit option. The availability of unit options and unit appreciation rights is intended to furnish additional compensation to employees, consultants and directors and to align their economic interests with those of common unitholders.
Reimbursement of Expenses of Our General Partner
Our general partner will not receive any management fee or other compensation for its management of Williams Partners L.P. Our general partner and its affiliates are reimbursed for expenses incurred on our behalf, including the compensation of employees of an affiliate of our general partner that perform services on our behalf. These expenses include all expenses necessary or appropriate to the conduct of the business of, and allocable to, Williams Partners L.P. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to Williams Partners L.P. There is no cap on the amount that may be paid or reimbursed to our general partner for compensation or expenses incurred on our behalf, except that pursuant to the omnibus agreement, Williams will provide a partial credit for general and administrative expenses that we incur for a period of five years following our IPO of common units in August 2005. Please read “Certain Relationships and Related Transactions — Omnibus Agreement.”
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth the beneficial ownership of units of Williams Partners L.P. that as of February 28, 2006, are owned by:
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| • | each person known by us to be a beneficial owner of more than five percent5% of the units; |
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| • | each of the directors of our general partner; |
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| • | each of the named executive officers of our general partner; and |
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| • | all directors and executive officers of our general partner as a group. |
The amounts and percentage of units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is
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deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest.
Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect to all units shown as beneficially owned by them, subject to community property laws where applicable.
Percentage of total units beneficially ownershipowned is based on 14,006,14639,358,798 units outstanding. Unless otherwise noted below, the address for the beneficial owners listed below is One Williams Center, Tulsa, Oklahoma74172-0172.
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| | | | Percentage of | | | | | | | |
| | Common | | | Common | | | Subordinated | | | Percentage of | | | Percentage of | |
| | Units | | | Units | | | Units | | | Subordinated | | | Total Units | |
| | Beneficially | | | Beneficially | | | Beneficially | | | Beneficially | | | Beneficially | |
Name of Beneficial Owner | | Owned | | | Owned | | | Owned | | | Owned | | | Owned | |
| | | | | | | | | | | | | | | |
The Williams Companies, Inc.(a) | | | 1,250,000 | | | | 17.9 | % | | | 7,000,000 | | | | 100.0 | % | | | 58.9 | % |
Williams Energy Services, LLC | | | 821,761 | | | | 11.7 | | | | 4,601,861 | | | | 65.7 | | | | 38.7 | |
Williams Energy, L.L.C. | | | 447,308 | | | | 6.4 | | | | 2,504,925 | | | | 35.8 | | | | 23.0 | |
Williams Discovery Pipeline LLC | | | 215,980 | | | | 3.1 | | | | 1,209,486 | | | | 17.3 | | | | 10.2 | |
Williams Partners Holdings LLC | | | 428,239 | | | | 6.1 | | | | 2,398,139 | | | | 34.2 | | | | 20.2 | |
MAPCO Inc.(a) | | | 447,308 | | | | 6.4 | | | | 2,504,925 | | | | 35.8 | | | | 23.0 | |
Fiduciary Asset Management, L.L.C.(b) | | | 632,465 | | | | 9.0 | | | | — | | | | — | | | | 4.5 | |
Alan S. Armstrong | | | 10,000 | | | | * | | | | — | | | | — | | | | * | |
James J. Bender | | | 2,000 | | | | * | | | | — | | | | — | | | | * | |
Donald R. Chappel | | | 10,000 | | | | * | | | | — | | | | — | | | | * | |
Steven J. Malcolm(c) | | | 25,100 | | | | * | | | | — | | | | — | | | | * | |
Bill Z. Parker(d) | | | 7,326 | | | | * | | | | — | | | | — | | | | * | |
Alice M. Peterson(d) | | | 2,326 | | | | * | | | | — | | | | — | | | | * | |
Thomas C. Knudson(d) | | | 1,494 | | | | * | | | | — | | | | — | | | | * | |
Phillip D. Wright | | | 2,000 | | | | * | | | | — | | | | — | | | | * | |
All directors and executive officers as a group (eight persons) | | | 60,246 | | | | * | | | | — | | | | — | | | | * | |
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| | | | | Percentage
| | | | | | | | | | | | Percentage
| | | Percentage
| |
| | Common
| | | of Common
| | | Subordinated
| | | Percentage of
| | | Class B
| | | of Class B
| | | of Total
| |
Name of
| | Units
| | | Units
| | | Units
| | | Subordinated
| | | Units
| | | Units
| | | Units
| |
Beneficial
| | Beneficially
| | | Beneficially
| | | Beneficially
| | | Beneficially
| | | Beneficially
| | | Beneficially
| | | Beneficially
| |
Owner | | Owned | | | Owned | | | Owned | | | Owned | | | Owned | | | Owned | | | Owned | |
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The Williams Companies, Inc.(a) | | | 1,250,000 | | | | 4.9 | % | | | 7,000,000 | | | | 100.0 | % | | | — | | | | — | | | | 21 | % |
Williams Energy Services, LLC(a) | | | 821,761 | | | | 3.2 | | | | 4,601,861 | | | | 65.7 | | | | — | | | | — | | | | 13.8 | |
Williams Energy, L.L.C. | | | 447,308 | �� | | | 1.8 | | | | 2,504,925 | | | | 35.8 | | | | — | | | | — | | | | 7.5 | |
Williams Discovery Pipeline LLC | | | 215,980 | | | | .8 | | | | 1,209,486 | | | | 17.3 | | | | — | | | | — | | | | 3.6 | |
Williams Partners Holdings LLC | | | 428,239 | | | | 1.7 | | | | 2,398,139 | | | | 34.2 | | | | — | | | | — | | | | 7.2 | |
MAPCO Inc.(a) | | | 447,308 | | | | 1.8 | | | | 2,504,925 | | | | 35.8 | | | | — | | | | — | | | | 7.5 | |
Prudential Financial, Inc.(b) | | | 2,776,949 | | | | 10.87 | | | | — | | | | — | | | | — | | | | — | | | | 7.06 | |
Jennison Utility Fund(c) | | | 714,680 | | | | 2.8 | | | | — | | | | — | | | | 2,062,269 | | | | 30.3 | % | | | 7.1 | |
Goldman Sachs & Co.(d) | | | 357,340 | | | | 1.4 | | | | — | | | | — | | | | 1,031,134 | | | | 15.2 | | | | 3.5 | |
GPS Income Fund (Cayman) LTD(e) | | | 164,376 | | | | .6 | | | | — | | | | — | | | | 474,321 | | | | 7.0 | | | | 1.6 | |
Tortoise Capital Advisors L.L.C.(f) | | | 1,487,094 | | | | 1.0 | | | | — | | | | — | | | | 721,796 | | | | 10.6 | | | | 5.6 | |
Perry Partners L.P.(g) | | | 178,670 | | | | .7 | | | | — | | | | — | | | | 515,566 | | | | 6 | | | | 8 | |
The Cushing MLP Opportunity Fund I, LP(h) | | | 178,670 | | | | .7 | | | | — | | | | — | | | | 515,566 | | | | 7.6 | | | | 1.8 | |
Alan S. Armstrong | | | 10,000 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
James J. Bender | | | 2,000 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
Donald R. Chappel | | | 10,000 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
Steven J. Malcolm(i) | | | 25,100 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
Bill Z. Parker | | | 8,036 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
Alice M. Peterson | | | 3,036 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
Thomas C. Knudson | | | 2,204 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
Phillip D. Wright | | | 2,000 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
All directors and executive officers as a group (eight persons) | | | 62,376 | | | | | * | | | — | | | | — | | | | — | | | | — | | | | * | |
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* | * | Less than one percent.1%. |
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(a) | | As noted in the Schedule 13D13D/A filed with the SEC on September 2, 2005,December 19, 2006, The Williams Companies, Inc. is the ultimate parent company of Williams Energy Services, LLC, Williams Energy, L.L.C., Williams Discovery Pipeline LLC and Williams Partners Holdings LLC and may, therefore, be deemed to beneficially own the units held by Williams Energy Services, LLC, Williams Energy, L.L.C., Williams Discovery Pipeline LLC and Williams Partners Holdings LLC. The Williams Companies, Inc.’s common stock is listed on the New York Stock Exchange under the symbol “WMB.” The Williams Companies, Inc. files information with or furnishes information to, the Securities and Exchange Commission pursuant to the information requirements of the Securities Exchange Act of 1934 (the “Act”). Williams Energy Services, LLC is the record owner of 158,473 common units and 887,450 subordinated units and, as the sole stockholder of MAPCO Inc. and the sole member of Williams Discovery Pipeline LLC, may, pursuant toRule 13d-3, be deemed to beneficially own the units beneficially owned by MAPCO Inc. and Williams Discovery Pipeline LLC. MAPCO Inc., as the sole member of Williams Energy, L.L.C., may, pursuant toRule 13d-3, be deemed to beneficially own the units held by Williams Energy, L.L.C. |
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(b) | | Based solely on the Schedule 13G filed with the SEC on February 16, 2006, Fiduciary Asset Management,9, 2007, Prudential Financial, Inc. (“Prudential”), a Parent Holding Company as defined in the Securities Exchange Act of 1934, may be deemed to be the beneficial owner of securities beneficially owned by the Registered Investment Advisors listed in such Schedule 13G, of which Prudential is the direct or indirect parent, and may have direct or |
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| | indirect voting power over 2,776,949 common units which are held for Prudential’s benefit or for the benefit of its clients by its separate accounts, externally managed accounts, registered investment companies subsidiariesand/or affiliates. The Schedule 13G notes that Prudential reported the combined holdings of these entities for the purpose of administrative convenience. The address of Prudential is 751 Broad Street, Newark, New Jersey07102-3777. |
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(c) | | The address of Jennison Utility Fund is 466 Lexington Avenue, New York, New York 10017. |
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(d) | | The address of Goldman Sachs & Co. is 85 Broad Street, 29th Floor, New York, New York 10004. |
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(e) | | Also includes 64,321 common units and 185,604 Class B units held by GPS Income Fund LP and 20,011 common units and 57,743 Class B units held by GPS High Yield Equities Fund. The address of GPS Income Fund (Cayman) LTD is 1000 Wilshire Blvd., Suite 900, Santa Monica, California, 90401. |
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(f) | | According to the Schedule 13G filed with the SEC on February 13, 2007, Tortoise Capital Advisors, L.L.C. (“FAMCO”TCA”), acts as an investment sub-adviseradvisor to certain closed-end investment companies registered under the Investment Company Act of 1940 as well as to private individuals, may be deemed the beneficial owner of 632,465 common units. FAMCO1940. TCA, by virtue of investment advisory agreements with these clientsinvestment companies, has all investment and voting power over securitiesthe units owned of record by these clients. However, despite their delegation ofcompanies. In addition, TCA acts as an investment advisor to certain managed accounts. Under contractual agreements with individual account holders, TCA, with respect to the units held in the managed accounts, shares investment and voting power to FAMCO, these clients may be deemed to be the beneficial owners under Rule 13d-3 of the Act of the securities they own of record because they have the right to acquire investmentwith certain account holders, and has no voting power through termination of theirbut shares investment advisory agreementpower with FAMCO. Thus, FAMCO reported that it shares voting power and dispositive power over the securities owned of record by these clients. FAMCO may be deemed the beneficial owner of the securities covered by this statement under Rule 13-3 of the Act. None of the securities listed below are owned of record by FAMCO and FAMCO disclaims any beneficial interest in the securities. The filing further indicates that except for Fiduciary/ Claymore MLP Opportunity Fund, a Delaware statutory Trust, whichcertain other account holders. Accordingly, TCA may be deemed to beneficially own 426,4001,487,094 common units the interest of any one person does not exceed five percent of our outstanding common units. The Schedule 13G notes that each of FAMCO and Fiduciary/ Claymore have shared voting and investment power with respect to their common721,796 Class B units. The address of FAMCOTCA is 8112 Maryland Avenue,10801 Mastin Boulevard, Suite 400, St. Louis, Missouri, 63105.222 Overland Park, Kansas 66210. |
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(c)(g) | | Also includes 5,717 common units and 16,498 Class B units held by Perry Commitment Fund L.P. The address of Perry Partners L.P. is 767 5th Ave, 19th Floor, New York, New York 10153. |
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(h) | | Also includes 35,734 common units and 103,113 Class B units held by Swank MLP Convergence Fund, LP. The address of The Cushing MLP Opportunity Fund I, LP is 3300 Oak Lawn Avenue, Suite 650 Dallas, Texas 75219. |
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(i) | | Represents units beneficially owned by Mr. Malcolm that are held by the Steven J. Malcolm Revocable Trust. |
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(d) | | Includes unvested restricted units granted pursuant to the Williams Partners GP LLC Long-Term Incentive Plan which may be voted by the grantees as follows: Mr. Knudson, 1,494; Mr. Parker, 2,326; and Ms. Peterson, 2,326. |
The following table sets forth, as of February 28, 2006,20, 2007, the number of shares of common stock of Williams owned by each of the executive officers and directors of our general partner and all directors and executive officers of our general partner as a group.
| | | | | | | | | | | | | | | | |
| | Shares of Common | | | | | | | |
| | Stock Owned | | | Shares Underlying | | | | | |
| | Directly or | | | Options Exercisable | | | | | |
Name of Beneficial Owner | | Indirectly(a) | | | Within 60 Days(b) | | | Total | | | Percent of Class | |
| | | | | | | | | | | | |
Alan S. Armstrong | | | 88,975 | | | | 13,333 | | | | 102,308 | | | | * | |
James J. Bender | | | 126,334 | | | | 13,333 | | | | 139,667 | | | | * | |
Donald R. Chappel | | | 223,731 | | | | 118,333 | | | | 342,064 | | | | * | |
Steven J. Malcolm | | | 670,210 | | | | 75,000 | | | | 745,210 | | | | * | |
Bill Z. Parker | | | — | | | | — | | | | — | | | | — | |
Alice M. Peterson | | | — | | | | — | | | | — | | | | — | |
Thomas C. Knudson | | | — | | | | — | | | | — | | | | — | |
Phillip D. Wright | | | 172,631 | | | | 13,333 | | | | 185,964 | | | | * | |
All directors and executive officers as a group (eight persons) | | | 1,281,881 | | | | 233,332 | | | | 1,515,213 | | | | * | |
| | | | | | | | | | | | | | | | |
| | Shares of Common
| | | | | | | | | | |
| | Stock Owned
| | | Shares Underlying
| | | | | | | |
| | Directly or
| | | Options Exercisable
| | | | | | | |
Name of Beneficial Owner | | Indirectly(a) | | | Within 60 Days(b) | | | Total | | | Percent of Class | |
|
Alan S. Armstrong | | | 123,999 | | | | 21,378 | | | | 145,377 | | | | * | |
James J. Bender | | | 139,732 | | | | 21,378 | | | | 161,110 | | | | * | |
Donald R. Chappel | | | 229,077 | | | | 32,306 | | | | 261,383 | | | | * | |
Steven J. Malcolm | | | 794,117 | | | | 158,333 | | | | 952,450 | | | | * | |
Bill Z. Parker | | | — | | | | — | | | | — | | | | — | |
Alice M. Peterson | | | — | | | | — | | | | — | | | | — | |
Thomas C. Knudson | | | — | | | | — | | | | — | | | | — | |
Phillip D. Wright | | | 217,385 | | | | 21,378 | | | | 238,763 | | | | * | |
All directors and executive officers as a group (eight persons) | | | 1,504,310 | | | | 254,773 | | | | 1,759,083 | | | | * | |
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* | * | Less than one percent.1%. |
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(a) | | Includes shares held under the terms of incentive and investment plans as follows: Mr. Armstrong, 14 shares in The Williams Companies Investment Plus Plan, 68,660 deferred shares88,368 restricted stock units and 20,30135,617 beneficially owned shares; Mr. Bender, 3,0006,000 shares owned by children, 68,600 deferred shares88,368 restricted stock units and 54,674 |
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| | 45,364 beneficially owned shares; Mr. Chappel, 141,608 deferred shares of which 50,000 vest on April 16, 2006129,434 restricted stock units and 82,12399,643 beneficially owned shares; Mr. Malcolm, 44,62345,297 shares in The Williams Companies Investment Plus Plan, 374,758 deferred shares393,092 restricted stock units and 250,829355,728 beneficially owned shares; and Mr. Wright, 14,74214,964 shares in The Williams Investment Plus Plan, 68,660 deferred shares88,368 restricted stock units and 89,229114,053 beneficially owned shares. Restricted stock units do not provide the holder with voting or investment power. |
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(b) | | The shares indicated represent stock options granted under Williams’ current or previous stock option plans, which are currently exercisable or which will become exercisable within 60 days of February 28, 2006.20, 2007. Shares subject to options cannot be voted. |
Securities Authorized for Issuance Under Equity Compensation Plans(1)
The following table provides information concerning common units that may be issuedwere potentially subject to issuance under the Williams Partners GP LLC Long-Term Incentive Plan.Plan as of December 31, 2006. For more information about this plan, which did not require approval by our limited partners, please read Note 913 of our Notes to Consolidated Financial Statements and “Executive Compensation — Long-Term Incentive Plan.” Please read “Executive Compensation — Long Term Incentive Plan” for a description of the material features of the plan, including the awards that may be granted under the plan.
| | | | | | | | | | | | | |
| | | | | | Number of Securities | |
| | Number of Securities | | | | | Remaining Available for | |
| | to be Issued Upon | | | Weighted-Average | | | Future Issuance Under | |
| | Exercise of Outstanding | | | Exercise Price of | | | Equity Compensation Plan | |
| | Options, Warrants | | | Outstanding Options, | | | (Excluding Securities | |
Plan Category | | and Rights | | | Warrants and Rights | | | Reflected in Column (a)) | |
| | | | | | | | | |
| | (a) | | | (b) | | | (c) | |
Equity compensation plans approved by security holders | | | — | | | | — | | | | — | |
Equity compensation plans not approved by security holders | | | 6,146 | | | | — | | | | 693,854 | |
| Total | | | 6,146 | (1) | | | — | | | | 693,854 | (2) |
| | | | | | | | | | | | |
| | | | | | | | Number of Securities
| |
| | | | | | | | Remaining Available
| |
| | Number of Securities
| | | Weighted-Average
| | | for Future Issuance
| |
| | to be Issued Upon
| | | Exercise Price of
| | | Under Equity
| |
| | Exercise of Outstanding
| | | Outstanding
| | | Compensation Plan
| |
| | Options, Warrants
| | | Options, Warrants
| | | (Excluding Securities
| |
| | and Rights
| | | and Rights
| | | Reflected in Column(a))
| |
Plan category | | (a) | | | (b) | | | (c) | |
|
Equity compensation plans approved by security holders | | | — | | | | — | | | | — | |
Equity compensation plans not approved by security holders | | | 2,130 | | | | — | | | | 691,724 | |
Total | | | 2,130 | (1) | | | — | | | | 691,724 | |
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(1) | | Represents unvested restricted units granted pursuant to the Williams Partners GP LLC Long-Term Incentive Plan.Plan as of December 31, 2006. The restricted units vested on February 18, 2007. No value is shown in column (b) of the table because the restricted units do not have an exercise price. To date, the only grants under the plan have been grants of restricted units. |
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(2) | Please read “Executive Compensation — Long-Term Incentive Plan” for a description of the material features of the plan, including the awards that may be granted under the plan. |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Our
Transactions with Related Persons
Affiliates of our general partner and its affiliates own 1,250,000 common units and 7,000,000 subordinated units representing a 59 percent20.5% limited partner interest in us. Williams also indirectly owns 100% of our general partner, which allows it to control us. Certain officers and directors of our general partner also serve as officersand/or directors of Williams. In addition, our general partner owns a two percent2% general partner interest and incentive distribution rights in us.
In addition to the related transactions and relationships discussed below, information about such transactions and relationships is included in Note 5 of our Notes to Consolidated Financial Statements and is incorporated herein by reference in its entirety.
Distributions and Payments to Our General Partner and Its Affiliates
The following table summarizes the distributions and payments made or to be made by us to our general partner and its affiliates, which include Williams, in connection with the ongoing operation and liquidation of
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Williams Partners L.P. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of arm’s-length negotiations.
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| | Operational Stage | | | Distributions of available cash to our general partner and its affiliates | | We will generally make cash distributions 98 percent to unitholders, including our general partner and its affiliates, as holders of an aggregate of 1,250,000 common units, all of the subordinated units and the remaining two percent to our general partner. |
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| | | | | In addition, if distributions exceed the minimum quarterly distribution and other higher target levels, our general partner will be entitled to increasing percentages of the distributions, up to 50 percent of the distributions above the highest target level. We refer to the rights to increasing distribution as “incentive distribution rights.” For further information about distributions, please read “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” | | Payments to our general partner and its affiliates | | We will generally make cash distributions 98% to unitholders, including our general partner and its affiliates as holders of an aggregate of 1,250,000 common units and all of the subordinated units, and the remaining 2% to our general partner. | | | In addition, if distributions exceed the minimum quarterly distribution and other higher target levels, our general partner will be entitled to increasing percentages of the distributions, up to 50% of the distributions above the highest target level. We refer to the rights to the increasing distributions as “incentive distribution rights.” For further information about distributions, please read “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” | Reimbursement of expenses to our general partner and its affiliates | | Our general partner does not receive a management fee or other compensation for the management of our partnership. Our general partner and its affiliates are reimbursed, however, for all direct and indirect expenses incurred on our behalf. Our general partner determines the amount of these expenses. | | Withdrawal or removal of our general partner | | If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests. |
| | Liquidation Stage | | | Liquidation | | Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their particular capital account balances. |
Agreements Governing the IPO Transactions
We, our general partner, our operating company and other parties entered into agreementswill be entitled to effect the transactions relatedreceive liquidating distributions according to their particular capital account balances.
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Reimbursement of Expenses of Our General Partner
Our general partner will not receive any management fee or other compensation for its management of our business. However, we reimburse our general partner for expenses incurred on our behalf, including expenses incurred in compensating employees of an affiliate of our general partner who perform services on our behalf. These expenses include all allocable expenses necessary or appropriate to the conduct of our business. The expenses that are allocable to us vary for each employee of an affiliate of our general partner performing services on our behalf and are based on the amount of time such employee devotes to matters related to our business as compared to the amount of time such employee devotes to matters related to the business Williams and its other affiliates. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. There is no cap on the amount that may be paid or reimbursed to our general partner for expenses incurred on our behalf, except that pursuant to the omnibus agreement, Williams will provide a partial credit for general and administrative expenses that we incur for a period of five years following our IPO of common units in August 2005, including the vesting of assets in, and the assumption of liabilities by, us and our subsidiaries, and the application of the proceeds of this offering. These agreements were not be the result of arm’s-length negotiations, and they, or any of the transactions that they provided may not have been effected on terms at least as favorable to the parties to these agreements as they could have been obtained from unaffiliated third parties. From the proceeds of the IPO, we paid approximately $4.3 million of expenses associated with the IPO and the related formation transactions.
Omnibus Agreement
Upon the closing of the IPO of common units in August 2005. Please read “— Omnibus Agreement” below for more information.
For the fiscal year ended December 31, 2006, our general partner allocated $35,822 of salary and non-equity incentive plan compensation expense to us for Steven J. Malcolm, the chairman of the board and chief executive officer of our general partner, $17,985 of salary and non-equity incentive plan compensation expense to us for Donald R. Chappel, the chief financial officer of our general partner and $156,115 of salary and non-equity incentive plan compensation expense to us for Alan S. Armstrong, the chief operating officer of our general partner. Our general partner also allocated to us $71,449 for Steven J. Malcolm, $21,100 for Don Chappel and $91,475 for Alan Armstrong, which expenses are attributable to additional compensation paid to each of them and other employment-related expenses, including Williams restricted stock unit and stock option awards, retirement plans, health and welfare plans, employer-related payroll taxes, matching contributions made under a Williams 401(k) plan and premiums for life insurance. Our general partner also allocated to us a portion of Williams’ expenses related to perquisites for each of Messrs. Malcolm, Chappel and Armstrong,
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which allocation did not exceed $10,000 for any of these persons. The foregoing amounts exclude expenses allocated by Williams to Discovery. No awards were granted to our general partner’s executive officers under the Williams Partners GP LLC Long-Term Incentive Plan in 2005 or 2006 and no other executive officer of our general partner, other than Messrs. Armstrong and Malcolm received total compensation allocable to us in excess of $100,000. The total compensation received by Mr. Malcolm, the chairman of the board and chief executive officer of our general partner who is also the chairman, president and chief executive officer of Williams, and Mr. Chappel, the chief financial officer of our general partner who is also the chief financial officer of Williams, will be set forth in the proxy statement for Williams’ 2007 annual meeting of stockholders which will be available upon its filing on the SEC’s website athttp://www.sec.govand on Williams’ website athttp://www.williams.comunder the heading “Investors — SEC Filings.”
For the year ended December 31, 2006, we incurred approximately $87.3 million in operating and maintenance and general and administrative expenses from Williams incurred on our behalf pursuant to the partnership agreement.
Omnibus Agreement
Upon the closing of our initial public offering, we entered into an omnibus agreement with Williams and its affiliates that was not the result of arm’s-length negotiations. The omnibus agreement governs our relationship with Williams and its affiliates that governs our relationship with them regarding the following matters:
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| • | reimbursement of certain general and administrative expenses; |
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| • | indemnification for certain environmental liabilities, tax liabilities andright-of-way defects; |
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| • | reimbursement for certain expenditures; and |
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| • | a license for the use of certain software and intellectual property. |
General and Administrative Expenses
Williams will provide us with a five-year partial credit for general and administrative, or G&A, expenses incurred on our behalf. For 2005, the amount of this credit was $3.9 million on an annualized basis but was pro rated from the closing of our initial public offering in August 2005 through the end of the year, resulting in a $1.4 million credit. In 2006, the amount of the G&A credit was $3.2 million, and the amount of the credit will decrease by $800,000 for each subsequent year. As a result, after 2009, we will no longer receive any credit and will be required to reimburse Williams for all of the general and administrative expenses incurred on our behalf.
Indemnification for Environmental and Related Liabilities
Williams agreed to indemnify us after the closing of our initial public offering against certain environmental and related liabilities arising out of or associated with the operation of the assets before the closing date of our initial public offering. These liabilities include both known and unknown environmental and related liabilities, including:
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| • | reimbursement of certain general and administrative expenses; |
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| • | indemnification for certain environmental liabilities, tax liabilities andright-of-way defects; |
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| • | reimbursement for certain expenditures; and |
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| • | a license for the use of certain software and intellectual property. |
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| General and Administrative Expenses |
Williams will provide us with a five-year partial credit for general and administrative, or G&A, expenses incurred on our behalf. For 2005, the amount of this credit was $3.9 million on an annualized basis but was pro rated from the closing of our initial public offering in August 2005 through the end of the year. In 2006, the
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amount of the G&A credit will be $3.2 million, and the amount of the credit will decrease by $800,000 for each subsequent year. As a result, after 2009, we will no longer receive any credit and will be required to reimburse Williams for all of the general and administrative expenses incurred on our behalf.
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| Indemnification for Environmental and Related Liabilities |
Williams agreed to indemnify us after the closing of our IPO against certain environmental and related liabilities arising out of or associated with the operation of the assets before the closing date of the IPO. These liabilities include both known and unknown environmental and related liabilities, including:
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| • | remediation costs associated with the KDHE Consent Orders and certain fugitive NGLs associated with our Conway storage facilities; |
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| • | the costs associated with the installation of wellhead control equipment and well meters at our Conway storage facility; |
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| • | KDHE-related cavern compliance at our Conway storage facility; and |
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| • | the costs relating to the restoration of the overburden along our Carbonate Trend pipeline in connection with erosion caused by Hurricane Ivan in September 2004. |
Williams will not be required to indemnify us for any project management or monitoring costs. This indemnification obligation will terminate three years after the closing of the IPO, except in the case of the remediation costs associated with the KDHE Consent Orders
which will survive for an unlimited periodand certain fugitive NGLs associated with our Conway storage facilities; |
| • | the costs associated with the installation of time. There is an aggregate capwellhead control equipment and well meters at our Conway storage facility; |
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| • | KDHE-related cavern compliance at our Conway storage facility; and |
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| • | the costs relating to the restoration of $14.0 million on the amount of indemnity coverage, including any amounts recoverable underoverburden along our insurance policy covering those remediation costs and unknown claims at Conway. For further information about the indemnity obligation, please read “Environmental” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.Carbonate Trend pipeline in connection with erosion caused by Hurricane Ivan in September 2004. |
Williams will not be required to indemnify us for any project management or monitoring costs. This indemnification obligation will terminate three years after the closing of our initial public offering, except in
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the case of the remediation costs associated with the KDHE Consent Orders which will survive for an unlimited period of time. There is an aggregate cap of $14.0 million on the amount of indemnity coverage, including any amounts recoverable under our insurance policy covering those remediation costs and unknown claims at Conway. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental.” In addition, we are not entitled to indemnification until the aggregate amounts of claims exceed $250,000. Liabilities resulting from a change of law after the closing of our initial public offering are excluded from the environmental indemnity by Williams for the unknown environmental liabilities.
Williams will also indemnify us for liabilities related to:
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| • | certain defects in the easement rights or fee ownership interests in and to the lands on which any assets contributed to us in connection with our initial public offering are located and failure to obtain certain consents and permits necessary to conduct our business that arise within three years after the closing of our IPO are excluded from the environmental indemnity by Williams for the unknown environmental liabilities. Williams will also indemnify us for liabilities related to:
| | | | • | certain defects in the easement rights or fee ownership interests in and to the lands on which any assets contributed to us in connection with the IPO are located and failure to obtain certain consents and permits necessary to conduct our business that arise within three years after the closing of the IPO;initial public offering; and | | | • | certain income tax liabilities attributable to the operation of the assets contributed to us in connection with the IPO prior to the time they were contributed. |
| | | Reimbursement for Certain Expenditures Attributable to Discovery |
We expect the cost of the Tahiti pipeline lateral expansion project will be approximately $69.5 million, of whichassets contributed to us in connection with our 40 percent share will be approximately $27.8 million. Williams will reimburse us forinitial public offering prior to the excess (up to $3.4 million) of our 40 percent share of the total cost of the Tahiti pipeline lateral expansion project above the amount of the required escrow deposit ($24.4 million) attributable to our 40 percent interest in Discovery. Williams will reimburse us for these capital expenditures upon the earlier to occur of a capital call from Discovery or Discovery actually incurring the expenditure.
| | | Intellectual Property Licensetime they were contributed. |
For the year ended December 31, 2006, Williams indemnified us $2.0 million, primarily for KDHE related compliance. Including 2006, Williams has indemnified us for an aggregate of $2.5 million pursuant to the omnibus agreement. Reimbursement for Certain Expenditures Attributable to Discovery Williams has agreed to reimburse us for certain capital expenditures, subject to limits, including for certain “excess” capital expenditures in connection with Discovery’s Tahiti pipeline lateral expansion project. We expect the cost of the Tahiti pipeline lateral expansion project will be approximately $69.5 million, of which our 40% share will be approximately $27.8 million. Williams will reimburse us for the excess (up to $3.4 million) of our 40% share of the total cost of the Tahiti pipeline lateral expansion project above the amount of the required escrow deposit ($24.4 million) attributable to our 40% interest in Discovery. Williams will reimburse us for these capital expenditures upon the earlier to occur of a capital call from Discovery or Discovery actually incurring the expenditure. During 2006, Williams indemnified us $1.6 million for our 40% of Discovery’s capital call related to this project. Intellectual Property License Williams and its affiliates granted a license to us for the use of certain marks, including our logo, for as long as Williams controls our general partner, at no charge. Amendments The omnibus agreement may not be amended without the prior approval of the conflicts committee if the proposed amendment will, in the reasonable discretion of our general partner, adversely affect holders of our common units. Competition Williams is not restricted under the omnibus agreement from competing with us. Williams may acquire, construct or dispose of additional midstream or other assets in the future without any obligation to offer us the opportunity to purchase or construct those assets. Credit Facilities Working Capital Facility At the closing of our initial public offering in August 2005, we entered into a $20.0 million revolving credit facility with Williams as the lender. The facility was amended and restated on August 7, 2006. The 120
facility is available exclusively to fund working capital borrowings. Borrowings under the facility will mature on June 20, 2009 and bear interest at the same rate as would be available for borrowings under the Williams credit agreement described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity — Credit Facilities.” We are required to reduce all borrowings under our working capital credit facility to zero for a period of at least 15 consecutive days once each12-month period prior to the maturity date of the facility. Williams Credit Agreement In addition, we also have the ability to borrow up to $75.0 million under the Williams credit agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity — Credit Facilities,” and “Risk Factors — Risks Inherent in Our Business — 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.” Discovery Limited Liability Company Agreement We, an affiliate of Williams and Duke Energy Field Services have entered into an amended and restated limited liability company agreement for Discovery. This agreement governs the ownership and management of Discovery and provides for quarterly distributions of available cash to the members. The amount of any such distributions is determined by majority approval of Discovery’s management committee, which consists of representatives from each of the three owners. In addition, to the extent Discovery requires working capital in excess of applicable reserves, the Williams affiliate that is a Discovery member (Williams Energy, L.L.C.) must make capital advances to Discovery up to the amount of Discovery’s two most recent prior quarterly distributions of available cash, but Discovery must repay these advances before it makes any future distributions. In addition, the owners are required to offer to Discovery all opportunities to construct pipeline laterals within an “area of interest.” Under the Discovery limited liability company agreement, each member is subject to a right of first refusal in favor of the other members, except in the case of certain related-party transfers, such as between Williams and us. Accordingly, if a member identifies a potential third-party purchaser for all or a portion of its interest, that member must first offer the other members the opportunity to acquire the interest that it proposes to sell on the same terms and conditions as proposed by such potential purchaser. Discovery Operating and Maintenance Agreements Discovery is party to three operating and maintenance agreements with Williams: one relating to Discovery Producer Services LLC, one relating to Discovery Gas Transmission LLC and another relating to the Paradis Fractionation Facility and the Larose Gas Processing Plant. Under these agreements, Discovery is required to reimburse Williams for direct payroll and employee benefit costs incurred on Discovery’s behalf. Most costs for materials, services and other charges are third-party charges and are invoiced directly to Discovery. Discovery is required to pay Williams a monthly operation and management fee to cover the cost of accounting services, computer systems and management services provided to Discovery under each of these agreements. Discovery also pays Williams a project management fee to cover the cost of managing capital projects. This fee is determined on a project by project basis. For the year ended December 31, 2006, Discovery reimbursed Williams $4.5 million for direct payroll and employee benefit costs, as well as $0.4 million for capitalized labor costs, pursuant to the operating and maintenance agreements and paid Williams $2.2 million for operation and management fees, as well as a $0.5 million fee for managing capitalized projects, pursuant to the operating and maintenance agreements. 121
Four Corners Purchase and Sale Agreements On April 6, 2006, we entered into a Purchase and Sale Agreement with Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field Services Company, LLC, our general partner and Williams Partners Operating. Pursuant to the Purchase and Sale Agreement, on June 20, 2006, we acquired a 25.1% membership interest in Four Corners for $360.0 million. The conflicts committee of the board of directors of our general partner recommended approval of the acquisition of the 25.1% interest in Four Corners. The committee retained independent legal and financial advisors to assist it in evaluating and negotiating the transaction. In recommending approval of the transaction, the committee based its decision in part on an opinion from the committee’s independent financial advisor that the consideration paid by us to Williams was fair, from a financial point of view, to us and our public unitholders. In connection with the transactions contemplated by the Purchase and Sale Agreement, we contributed the 25.1% interest in Four Corners to our wholly owned subsidiary, Williams Partners Operating LLC, on June 20, 2006. On November 16, 2006, we entered into a Purchase and Sale Agreement with Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field Services Company, LLC, our general partner and Williams Partners Operating LLC. Pursuant to the Purchase and Sale Agreement, on December 13, 2006, we acquired the remaining 74.9% membership interest in Four Corners for $1.223 billion, subject to possible adjustment in our favor. The conflicts committee of the board of directors of our general partner recommended approval of our acquisition of the remaining interest in Four Corners. The committee retained independent legal and financial advisors to assist it in evaluating and negotiating the transaction. In recommending approval of the transaction, the committee based its decision in part on an opinion from the committee’s independent financial advisor that the consideration to be paid by was fair, from a financial point of view, to us and our public unitholders. In connection with the transactions contemplated by the Purchase and Sale Agreement, we contributed the remaining 74.9% interest in Four Corners to Williams Partners Operating LLC on December 13, 2006. Natural Gas and NGL Purchasing Contracts Certain subsidiaries of Williams market substantially all of the NGLs and excess natural gas to which Discovery, our Conway fractionation and storage facility and our Four Corners system take title. Discovery, our Conway fractionation and storage facility and our Four Corners system conduct the sales of the NGLs and excess natural gas to which they take title pursuant to base contracts for sale and purchase of natural gas and a natural gas liquids master purchase, sale and exchange agreement. These agreements contain the general terms and conditions governing the transactions such as apportionment of taxes, timing and manner of payment, choice of law and confidentiality. Historically, the sales of natural gas and NGLs to which Discovery, our Conway fractionation and storage facility and our Four Corners system take title have been conducted at market prices with certain subsidiaries of Williams as the counter parties. Additionally, Discovery, our Conway fractionation and storage facility and our Four Corners system may purchase natural gas to meet their fuel and other requirements and our Conway storage facility may purchase NGLs as needed to maintain inventory balances. For the year ended December 31, 2006, we sold $255.1 million of products to a subsidiary of Williams that purchases substantially all of the NGLs and excess natural gas to which our Conway fractionation and storage facility and our Four Corners system take title based on market pricing, and Discovery sold $148.4 million of NGLs to a subsidiary of Williams that purchases substantially all of the NGLs and excess natural gas to which Discovery takes title based on market pricing. Gathering, Processing and Treating Contracts We maintain two contracts with an affiliate of Williams, a gas gathering and treating contract and a gas gathering and processing contract. Pursuant to the gas gathering and treating contract, our Four Corners system gathers and treats coal seam gas delivered by the affiliate to our Four Corners’ gathering systems. Deliveries of gas under this agreement averaged approximately 52 MMcf/d during 2006. The term of this agreement expires on December 31, 2022, but will continue thereafter on ayear-to-year basis subject to termination by 122
either party giving at least six months written notice of termination prior to the expiration of each one year period Pursuant to gas gathering and processing contracts, our Four Corners system gathers and processes conventional and coal seam gas delivered by the affiliate to our Four Corners gathering systems. Deliveries of gas under these agreements averaged approximately 109 MMcf/d during 2006. The primary terms of these agreements ended on March 1, 2004, but continue to remain in effect on ayear-to-year basis subject to termination by either party giving at least three months written notice of termination prior to the expiration of each one-year period. Revenues recognized pursuant to these contracts totaled $42.2 million in 2006. Natural Gas Purchases We purchase natural gas for fuel and shrink replacement from Williams Power Company, an affiliate of Williams. With the exception of volumes purchased pursuant to the contract discussed in the immediately following paragraph, these purchases are made at market rates at the time of purchase. We purchased approximately $78.2 million of natural gas for fuel and shrink replacement from Williams Power Company during 2006. Four Corners maintains a contract with two affiliates of Williams, Williams Power Company, Inc. and Williams Flexible Generation, LLC under which natural gas is supplied for consumption at the co-generation plant. The co-generation plant produces waste heat that assists in the operation of the Milagro treating plant. During 2006, pursuant to a predecessor contract that expired on December 31, 2006, Four Corners purchased $23.1 million of natural gas from Williams Flexible Generation, LLC. This contract was renegotiated with a term that will expire on December 31, 2012, or when the companies are no longer affiliated with each other, whichever occurs earlier. For the year ended December 31, 2006 we purchased a gross amount of $16.2 million of natural gas for our Conway fractionator from an affiliate of Williams. Balancing Services Agreement We maintain a balancing services contract with Williams Power Company, Inc., an affiliate of Williams. Pursuant to this agreement, Williams Power Company balances deliveries of natural gas processed by us between certain points on our Four Corners gathering system. We determine on a daily basis the volumes of natural gas to be moved between gathering systems at established interconnect points to optimize flow, an activity referred to as “crosshauling.” Under the balancing services contract, Williams Power Company purchases gas for delivery to customers at certain plant outlets and sells such volumes at other designated plant outlets to implement the crosshaul. These purchase and sales transactions are conducted for us by Williams Power Company at current market prices. Historically, Williams Power Company has not charged a fee for providing this service, but has occasionally benefited from price differentials that historically existed from time to time between the designated plant outlets. The revenues and costs related to the purchases and sales pursuant to this arrangement have historically tended to offset each other. The term of this agreement will expire upon six months or more written notice of termination from either party. To date, neither party has provided six months notice to terminate the agreement. Summary of Other Transactions with Williams For the year ended December 31, 2006: | | | | • | we distributed $15.0 million to affiliates of Williams as quarterly distributions on their common units, subordinated units, 2% general partner interest and incentive distribution rights; | | | • | we purchased $14.9 million of NGLs to replenish deficit product positions from a subsidiary of Williams based on market pricing; and |
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| | | | • | we previously sold electricity and capacity to Williams Power Company at the Ignacio plant. The revenue from these sales during 2006 were $0.4 million. |
Review, Approval or Ratification of Transactions with Related Persons Our partnership agreement contains specific provisions that address potential conflicts of interest between our general partner and its affiliates, including Williams, on one hand, and the Partnership and its subsidiaries, on the other hand. Whenever such a conflict of interest arises, our general partner will resolve the conflict. Our general partner may, but is not required to, seek the approval of such resolution from the conflicts committee of the board of directors of our general partner, which is comprised of independent directors. The partnership agreement provides that our general partner will not be in breach of its obligations under the partnership agreement or its duties to the Partnership or to unitholders if the resolution of the conflict is: | | | | • | approved by the conflicts committee; | | | • | approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner or any of its affiliates; | | | • | on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or | | | • | fair and reasonable to us, taking into account the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us. |
If our general partner does not seek approval from the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the conflicts committee may consider any factors it determines in good faith to consider when resolving a conflict. When our partnership agreement requires someone to act in good faith, it requires that person to reasonably believe that he is acting in the best interests of the partnership, unless the context otherwise requires. See “Directors, Executive Officers and Corporate Governance — Governance — Board Committees — Conflict Committee.” In addition, our code of business conduct and ethics requires that all employees, including employees of affiliates of Williams who perform services for us and our general partner, avoid or disclose any activity that may interfere, or have the appearance of interfering, with their responsibilities to us and our unitholders. Conflicts of interest that cannot be avoided must be disclosed to a supervisor who is then responsible for establishing and monitoring procedures to ensure that we are not disadvantaged. Director Independence Please read “— Directors, Executive Officers and Corporate Governance — Governance — Director Independence” above for information about the independence of our general partner’s board of directors and its committees, which information is incorporated herein by reference in its entirety. 124
| | Item 14. | Principal Accountant Fees and Services |
Fees for professional services provided by our independent auditors, Ernst & Young LLP, for each of the last two fiscal years in each of the following categories are: | | | | | | | | | | | 2006 | | | 2005 | | | | (Thousands) | | | Audit Fees | | $ | 1,459 | | | $ | 1,624 | | Audit-Related Fees | | | — | | | | — | | Tax Fees | | | 25 | | | | — | | All Other Fees | | | — | | | | — | | | | | | | | | | | | | $ | 1,484 | | | $ | 1,624 | | | | | | | | | | |
Fees for audit services in 2006 and 2005 include fees associated with the annual audit, the reviews of our quarterly reports onForm 10-Q, and services provided in connection with other filings with the SEC. Tax fees for 2006 include fees for review of our federal tax return. The audit fees for 2006 and 2005 included in the table above include $0.4 million for services provided in connection with the acquisition of Four Corners and $1.2 million for services rendered in connection with our initial public offering, respectively. The audit committee has established a policy regarding pre-approval of all audit and non-audit services provided by Ernst & Young LLP. On an ongoing basis, our general partner’s management presents specific projects and categories of service to our general partner’s audit committee for which advance approval is requested. The audit committee reviews those requests and advises management if the audit committee approves the engagement of Ernst & Young LLP. On a quarterly basis, the management of the general partner reports to the audit committee regarding the services rendered by, including the fees of, the independent accountant in the previous quarter and on a cumulative basis for the fiscal year. The audit committee may also delegate the ability to pre-approve permissible services, excluding services related to our internal control over financial reporting, to any two committee members, provided that any such pre-approvals are reported at a subsequent audit committee meeting. In 2006, 100% of Ernst & Young LLP’s fees were pre-approved by the audit committee. The audit committee’s pre-approval policy with respect to audit and non-audit services is provided as an exhibit to this report. PART IV | | Item 15. | Exhibits and Financial Statement Schedules |
(a) 1 and 2. Williams Partners L.P. financials | | | | | | | Page | | Covered by reports of independent auditors: | | | | | | | | 75 | | | | | 76 | | | | | 77 | | | | | 78 | | | | | 79 | | Not covered by reports of independent auditors: | | | | | Quarterly financial data (unaudited) | | | 102 | |
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All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. (a)3 and(b). The exhibits listed below are furnished or filed as part of this annual report: The exhibits listed below are filed as part of this annual 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 onForm 8-K (FileNo. 001-32599) filed with the SEC on April 7, 2006. | | *§Exhibit 2 | .2 | | — | | Purchase and Sale Agreement, dated November 16, 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 onForm 8-K (File001-32599) filed with the SEC on November 21, 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 onForm S-1 (FileNo. 333-124517) filed with the SEC on May 2, 2005). | | *Exhibit 3 | .2 | | — | | Certificate of Formation of Williams Partners GP LLC (attached as Exhibit 3.3 to Williams Partners L.P.’s registration statement onForm S-1 (FileNo. 333-124517) filed with the SEC on May 2, 2005). | | +Exhibit 3 | .3 | | — | | Amended and Restated Agreement of Limited Partnership of Williams Partners L.P. (including form of common unit certificate), as amended by Amendments Nos. 1, 2 and 3. | | *Exhibit 3 | .4 | | — | | Amended and Restated Limited Liability Company Agreement of Williams Partners GP LLC (attached as Exhibit 3.2 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). | | *Exhibit 4 | .1 | | — | | Indenture, dated June 20, 2006, by and among Williams Partners L.P., Williams Partners Finance Corporation and JPMorgan Chase Bank, N.A. (attached as Exhibit 4.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 4 | .2 | | — | | Form of 71/2% Senior Note due 2011 (included as Exhibit 1 to Rule 144A/Regulation S Appendix of Exhibit 4.1 attached to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 4 | .3 | | — | | Registration Rights Agreement, dated June 20, 2006, by and between Williams Partners L.P., Williams Partners Finance Corporation, Citigroup Global Markets Inc. and Lehman Brothers Inc. (attached as Exhibit 4.3 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 4 | .4 | | — | | Certificate of Incorporation of Williams Partners Finance Corporation (attached as Exhibit 4.5 to Williams Partners L.P.’s registration statement onForm S-3 (FileNo. 333-137562) filed with the SEC on September 22, 2006). | | *Exhibit 4 | .5 | | — | | Bylaws of Williams Partners Finance Corporation (attached as Exhibit 4.6 to Williams Partners L.P.’s registration statement onForm S-3 (FileNo. 333-137562) filed with the SEC on September 22, 2006). | | *Exhibit 4 | .6 | | — | | Indenture, dated December 13, 2006, by and among Williams Partners L.P., Williams Partners Finance Corporation and The Bank of New York (attached as Exhibit 4.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). | | *Exhibit 4 | .7 | | — | | Form of 71/4% Senior Note due 2017 (included as Exhibit 1 to Rule 144A/Regulation S Appendix of Exhibit 4.1 attached to Williams Partners L.P. current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). |
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| | | Amendments | Exhibit
| | | | | Number | | | | Description | | | *Exhibit 4 | .8 | | — | | Registration Rights Agreement, dated December 13, 2006, by and between Williams Partners L.P., Williams Partners Finance Corporation, Citigroup Global Markets Inc., Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (attached as Exhibit 4.3 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). | | *Exhibit 4 | .9 | | — | | Registration Rights Agreement, dated December 13, 2006, by and between Williams Partners L.P. and the purchasers named therein (attached as Exhibit 4.4 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). | | *Exhibit 4 | .10 | | — | | Common Unit and Class B Unit Purchase Agreement, dated December 1, 2006, by and among Williams Partners L.P. and the purchasers names therein (attached as Exhibit 1.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 4, 2006) | | *Exhibit 10 | .1 | | — | | Omnibus Agreement among Williams Partners L.P., Williams Energy Services, LLC, Williams Energy, L.L.C., Williams Partners Holdings LLC, Williams Discovery Pipeline LLC, Williams Partners GP LLC, Williams Partners Operating LLC and (for purposes of Articles V and VI thereof only) The omnibus agreement may not be amended withoutWilliams Companies, Inc. (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the prior approvalSEC on August 26, 2005). | | *#Exhibit 10 | .2 | | — | | Williams Partners GP LLC Long-Term Incentive Plan (attached as Exhibit 10.2 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). | | *#Exhibit 10 | .3 | | — | | Amendment to the Williams Partners GP LLC Long-Term Incentive Plan, dated November 28, 2006 (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 4, 2006). | | *Exhibit 10 | .4 | | — | | Contribution, Conveyance and Assumption Agreement, dated August 23, 2005, by and among Williams Partners L.P., Williams Energy, L.L.C., Williams Partners GP LLC, Williams Partners Operating LLC, Williams Energy Services, LLC, Williams Discovery Pipeline LLC, Williams Partners Holdings LLC and Williams Natural Gas Liquids, Inc. (attached as Exhibit 10.3 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). | | *Exhibit 10 | .5 | | — | | Amended and Restated Credit Agreement dated as of May 20, 2005 among The Williams Companies, Inc., Williams Partners L.P., Northwest Pipeline Corporation, Transcontinental Gas Pipe Line Corporation, and the conflicts committee ifBanks, Citibank, N.A. and Bank of America, N.A., and Citicorp USA, INC. as administrative agent (attached as Exhibit 1.1 to The Williams Companies, Inc.’s current report onForm 8-K (FileNo. 001-04174) filed with the proposed amendment will, in the reasonable discretion of our general partner, adversely affect holders of our common units. Williams is not restricted under the omnibus agreement from competing with us. Williams may acquire, construct or dispose of additional midstream or other assets in the future without any obligation to offer us the opportunity to purchase or construct those assets.
Credit Facilities
At the closing of the IPO, we entered into a $20 million revolving credit facility with Williams as the lender. The facility is available exclusively to fund working capital borrowings. Borrowings under the facility will matureSEC on May 3, 200726, 2005).
| | *Exhibit 10 | .6 | | — | | Third Amended and bear interest at the same rate as would be available for borrowings under the Williams revolving credit facility described in please read “Management’s Discussion and Analysis of Financial Condition — Financial Condition and Liquidity — Sources of Liquidity — Credit Facility.” We are required to reduce all borrowings under our working capital credit facility to zero for a period of at least 15 consecutive days once each12-month period prior to the maturity date of the facility.
| | | Williams Revolving Credit Facility |
In addition we also have the ability to borrow up to $75 million under the Williams revolving credit facility. For further information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity — Sources of Liquidity — Credit Facilities” and “Risk Factors — Risks Inherent in Our Business — Williams’ revolving credit facility and Williams’ public indentures contain financial and operating restrictions that may limit our access to credit. In addition, our ability to obtain credit in the future will be affected by Williams’ credit ratings.”
DiscoveryRestated Limited Liability Company Agreement
We, an affiliate of Williams and Duke Energy Field Services have entered into an amended and restated limited liability company agreement for Discovery Producer Services LLC. This agreement governsLLC (attached as Exhibit 10.7 to Amendment No. 1 to Williams Partners L.P.’s registration statement onForm S-1 (FileNo. 333-124517) filed with the ownershipSEC on June 24, 2005).
| | *Exhibit 10 | .7 | | — | | Amendment No. 1 to Third Amended and management of Discovery and providesRestated Limited Liability Company Agreement for quarterly distributions of available cash to the members. The amount of any such distributions are determined by majority approval of Discovery’s management committee, which consists of representatives from each of the three owners. In addition, to the extent Discovery requires working capital in excess of applicable reserves, the Williams affiliate that is a Discovery member (Williams Energy, L.L.C.) must make capital advances to Discovery up to the amount of Discovery’s two most recent prior quarterly distributions of available cash, but Discovery must repay these advances before it makes any future distributions. In addition, the owners are required to offer to Discovery all opportunities to construct pipeline laterals within an “area of interest.”Discovery Operating and Maintenance Agreements
Discovery is party to three operating and maintenance agreements with Williams: one relating to Discovery Producer Services LLC one relating(attached as Exhibit 10.6 to Discovery Gas Transmission LLC and another relatingWilliams Partners L.P.’s quarterly report onForm 10-Q (FileNo. 001-32599) filed with the SEC on August 8, 2006).
| | *#Exhibit 10 | .8 | | — | | Director Compensation Policy dated November 29, 2005 (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the Paradis Fractionation Facility andSEC on December 1, 2005). | | *#Exhibit 10 | .9 | | — | | Form of Grant Agreement for Restricted Units (attached as Exhibit 10.2 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the Larose Gas Processing Plant. Under these agreements, Discovery is required to reimburse Williams for direct payroll and employee benefit costs incurredSEC on Discovery’s behalf. Most costs for materials, services and other charges are third-party charges and are invoiced directly to Discovery. Discovery is required to pay Williams a monthly operation and management fee to cover the cost of accounting services, computer systems and management services provided to Discovery under each of theseDecember 1, 2005). |
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agreements. Discovery also pays | | | | | | | Exhibit
| | | | | Number | | | | Description | | | *Exhibit 10 | .10 | | — | | Credit agreement dated as of May 1, 2006 among Williams a project management feePartners L.P., The Williams Companies, Inc., Northwest Pipeline Corporation, Transcontinental Gas Pipeline Corporation, and Citibank, N.A., as administrative agent (attached as Exhibit 10.1 to coverThe Williams Companies, Inc’s current report onForm 8-K (FileNo. 001-04174) filed with the costSEC on May 1, 2006). | | *Exhibit 10 | .12 | | — | | Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and among Williams Energy Services, LLC, Williams Field Services Company, LLC, Williams Field Services Group, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners Operating LLC (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 10 | .13 | | — | | Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and among Williams Field Services Company, LLC and Williams Four Corners LLC (attached as Exhibit 10.4 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 10 | .14 | | — | | 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 onForm 10-Q (FileNo. 001-32599) filed with the SEC on August 8, 2006). | | *Exhibit 10 | .15 | | — | | Contribution, Conveyance and Assumption Agreement, dated December 13, 2006, by and among Williams Energy Services, LLC, Williams Field Services Company, LLC, Williams Field Services Group, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners Operating LLC (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). | | +Exhibit 12 | | | — | | Computation of managing capital projects. This fee is determined on a project by project basis.Gas Purchase Contract
Upon the closingRatio of our IPO, an affiliateEarnings to Fixed Charges
| | +Exhibit 21 | | | — | | List of subsidiaries of Williams transferred to us a contract for the purchasePartners L.P. | | +Exhibit 23 | | | — | | Consent of a sufficient quantity of natural gas from a wholly owned subsidiary of Williams at a price not to exceed a specified price to satisfy our fuel requirements under this fractionation contract. The fair value of this gas purchase contract was an equity contribution to us by Williams. This gas purchase contract will terminate on December 31, 2007.Natural Gas and NGL Marketing Contracts
A subsidiary of Williams markets substantially all of the NGLs and excess natural gas to which Discovery and our Conway fractionation and storage facility take title. Discovery and our Conway fractionation and storage facility conduct the sales of the NGLs and excess natural gas to which they take title pursuant to a base contract for sale and purchase of natural gas and a natural gas liquids master purchase, sale and exchange agreement. These agreements contain the general terms and conditions governing the transactions such as apportionment of taxes, timing and manner of payment, choice of law and confidentiality. Historically, the sales of natural gas and NGLs to which Discovery and our Conway fractionation and storage facility take title have been conducted at market prices with a subsidiary of Williams as the counter party. Additionally, Discovery and our Conway fractionation and storage facility may purchase natural gas to meet their fuel and other requirements and our Conway storage facility may purchase NGLs as needed to maintain inventory balances.
Summary of Transactions with Williams
In connection with the closing of our IPO:
| | | | • | we contributed 2,000,000 common units, 7,000,000 subordinated units, a two percent general partner interest and incentive distribution rights to affiliates of Williams in exchange for the interests in our operating subsidiaries and Discovery; | | | • | we distributed $58.8 million to affiliates of Williams to reimburse Williams for certain capital expenditures incurred prior to our formation and for the contribution by an affiliate of Williams to one of our operating subsidiaries of a gas purchase contract that provides for the purchase of a sufficient quantity of natural gas from a wholly owned subsidiary of Williams at a price not to exceed a specified price to satisfy our fuel requirements under a fractionation contract; | | | • | we provided $24.4 million to make a capital contribution to Discovery to fund an escrow account in connection with the Tahiti pipeline lateral expansion project; and | | | • | Williams forgave $186.0 million in intercompany advances to us. |
For the year ended December 31, 2005:
| | | | • | we incurred $17.6 million from Williams for direct and indirect expenses incurred on our behalf pursuant to the partnership agreement; | | | • | we distributed $1.3 million to affiliates of Williams as quarterly distributions on their common units, subordinated units and 2 percent general partner interest; | | | • | we received from Williams $1.4 million of general and administrative credits pursuant to the omnibus agreement; | | | • | Williams indemnified us $0.5 million, primarily for KDHE-required compliance costs, pursuant to the omnibus agreement; |
104
| | | | • | Discovery reimbursed Williams $3.4 million for direct payroll and employee benefit costs pursuant to the operating and maintenance agreements; | | | • | Discovery paid Williams $2.2 million for operation and management fees pursuant to the operating and maintenance agreements; | | | • | we purchased a gross amount of $22.4 million of natural gas for the Conway fractionator from an affiliate of Williams; | | | • | we purchased $15.7 million of NGLs from a subsidiary of Williams based on market pricing; | | | • | we sold $13.4 million to a subsidiary of Williams that markets substantially all of the NGLs and excess natural gas to which our Conway fractionation and storage facility takes title; and | | | • | Discovery sold $70.8 million to a subsidiary of Williams that markets substantially all of the NGLs and excess natural gas to which Discovery takes title. |
| | Item 14. | Principal Accountant Fees and Services |
We and our general partner we formed in February 2005 and our IPO occurred in August 2005. Fees for professional services provided by our independent auditors,Independent Registered Public Accounting Firm, Ernst & Young LLP, for the last fiscal year in eachLLP.
| | +Exhibit 24 | | | — | | Power of the following categories are: | | | | | | | 2005 | | | | | | | | (Thousands) | | Audit Fees | | $ | 1,624 | | Audit-Related Fees | | | — | | Tax Fees | | | — | | All Other Fees | | | — | | | | | | | | $ | 1,624 | | | | | |
We did not rely on thede minimus exception provided for by the SEC’s rules for any fee approvals.
Fees for audit services in 2005 include fees associatedattorney together with the annual audit, the reviewscertified resolution.
| | +Exhibit 31 | .1 | | — | | Rule 13a-14(a)/15d-14(a) Certification of our quarterly reports on Form Chief Executive Officer. | | +Exhibit 31 | .2 | | — | | 10-Q,Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | | +Exhibit 32 | | | — | | Section 1350 Certifications of Chief Executive Officer and services provided in connection with other filings with the SEC. The audit fees included in the table above include $1.2 million for services rendered in connection with our IPO. On an ongoing basis, our management presents specific projects and categories of service to our general partner’s audit committee for which advance approval is requested. The audit committee reviews those requests and advises management if the audit committee approves the engagement of Ernst & Young LLP. On a periodic basis, the management of the general partner reports to the audit committee regarding the actual spending for such projects and services compared to the approved amounts. The audit committee may also delegate the ability to pre-approve audit and permitted non-audit services, excluding services related to our internal control over financial reporting, to any two committee members, provided that any such pre-approvals are reported at a subsequent audit committee meeting. The audit committee’s pre-approvalChief Financial Officer.
| | +Exhibit 99 | .1 | | — | | Pre-approval policy with respect to audit and non-audit services is provided as an exhibit to this report.PART IV
| | Item 15. | Exhibits and Financial Statement Schedules |
(a) 1 and 2.of the audit committee of the board of directors of Williams Partners L.P. financials
105
GP LLC. | | | | | +Exhibit 99 | .2 | | — | | Williams Partners GP LLC Financial Statements. | | | Page | | | | | | Covered by reports of independent auditors: | | | | | | Consolidated balance sheets at December 31, 2005 and 2004 | | | 67 | | | Consolidated statements of operations for each of the three years ended December 31, 2005 | | | 68 | | | Consolidated statement of partners’ capital for each of the three years ended
December 31, 2005 | | | 69 | | | Consolidated statements of cash flows for each of the three years ended December 31, 2005 | | | 70 | | | Notes to consolidated financial statements | | | 71-86 | | Not covered by reports of independent auditors: | | | | | | Quarterly financial data (unaudited) | | | 87 | | |
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
(a) 3 and (b). The exhibits listed below are filed as part of this annual report:
| | | | | | | Exhibit | | | | | Number | | | | Description | | | | | | | *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 | | — | | Certificate of Formation of Williams Partners GP LLC (attached as Exhibit 3.3 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 | .3 | | — | | Amended and Restated Agreement of Limited Partnership of Williams Partners L.P. (attached as Exhibit 3.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *Exhibit 3 | .4 | | — | | Amended and Restated Limited Liability Company Agreement of Williams Partners GP LLC (attached as Exhibit 3.2 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *†Exhibit 10 | .1 | | — | | Fractionation Agreement dated July 18, 1997, by and between MAPCO Natural Gas Liquids Inc. and Amoco Oil Company (attached as Exhibit 10.6 to Amendment No. 1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on June 24, 2005). | | | *Exhibit 10 | .2 | | — | | Omnibus Agreement among Williams Partners L.P., Williams Energy Services, LLC, Williams Energy, L.L.C., Williams Partners Holdings LLC, Williams Discovery Pipeline LLC, Williams Partners GP LLC, Williams Partners Operating LLC and (for purposes of Articles V and VI thereof only) The Williams Companies, Inc. (attached as Exhibit 10.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *#Exhibit 10 | .3 | | — | | Williams Partners GP LLC Long-Term Incentive Plan (attached as Exhibit 10.2 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *Exhibit 10 | .4 | | — | | Contribution, Conveyance and Assumption Agreement, dated August 23, 2005, by and among Williams Partners L.P., Williams Energy, L.L.C., Williams Partners GP LLC, Williams Partners Operating LLC, Williams Energy Services, LLC, Williams Discovery Pipeline LLC, Williams Partners Holdings LLC and Williams Natural Gas Liquids, Inc. (attached as Exhibit 10.3 to Williams Partners L.P.’s current report on Form 8-K filed with the SEC on August 26, 2005). | | | *Exhibit 10 | .5 | | — | | Working Capital Loan Agreement, dated August 23, 2005, between The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.4 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). |
106
| | | | | | | Exhibit | | | | | Number | | | | Description | | | | | | | | *Exhibit 10 | .6 | | — | | Amended and Restated Credit Agreement dated as of May 20, 2005 among The Williams Companies, Inc., Williams Partners L.P., Northwest Pipeline Corporation, Transcontinental Gas Pipe Line Corporation, and the Banks, Citibank, N.A. and Bank of America, N.A., and Citicorp USA, INC. as administrative agent (attached as Exhibit 1.1 to The Williams Companies, Inc.’s current report on Form 8-K (File No. 001-04174) filed with the SEC on May 26, 2005). | | | *Exhibit 10 | .7 | | — | | Third Amended and Restated Limited Liability Company Agreement for Discovery Producer Services LLC (attached as Exhibit 10.7 to Amendment No. 1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on June 24, 2005). | | | *Exhibit 10 | .8 | | — | | Base Contract for Sale and Purchase of Natural Gas between Williams Natural Gas Liquids, Inc. and Williams Power Company, Inc., dated August 15, 2005 (attached as Exhibit 10.7 to Williams Partners L.P.’s quarterly report on Form 10-Q filed with the SEC on September 22, 2005). | | | *#Exhibit 10 | .9 | | — | | Director Compensation Policy dated November 29, 2005 (attached as Exhibit 10.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on December 1, 2005). | | | *#Exhibit 10 | .10 | | — | | Form of Grant Agreement for Restricted Units (attached as Exhibit 10.2 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on December 1, 2005). | | | *Exhibit 21 | | | — | | List of subsidiaries of Williams Partners L.P. (attached as Exhibit 21.1 to Amendment No. 1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on June 24, 2005) | | | +Exhibit 23 | | | — | | Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP. | | | +Exhibit 24 | | | — | | Power of attorney together with certified resolution. | | | +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. | | | +Exhibit 99 | .1 | | — | | Pre-approval policy with respect to audit and non-audit services of the audit committee of the board of directors of Williams Partners GP LLC. | | +Exhibit 99 | .2 | | — | | Williams Partners GP LLC Financial Statements. |
| | | * | | | | * | Each such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference. |
| + | | Filed herewith. | |
| | |
§ | | Pursuant to item 601(b) (2) ofRegulation S-K, the registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request. |
|
# | | Management contract or compensatory plan or arrangement. |
128
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
| | |
| † | Confidential treatment requested for omitted portions. |
| |
# | Management contract or compensatory plan or arrangement. |
(c) Discovery Producer Services LLC financial statements and notes thereto
107
REPORT OF INDEPENDENT AUDITORS
To the Management Committee of
Discovery Producer Services LLC
We have audited the accompanying consolidated balance sheets of Discovery Producer Services LLC as of December 31, 2005 and 2004, and the related consolidated statements of income and comprehensive income, members’ capital, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Discovery Producer Services LLC at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States.
As described in Note 4, effective January 1, 2003, Discovery Producer Services LLC adopted Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement Obligations.
Tulsa, Oklahoma
February 27, 2005
108
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
ASSETS |
Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 21,378 | | | $ | 55,222 | |
| Accounts receivable: | | | | | | | | |
| | Affiliate | | | 31,448 | | | | 4,399 | |
| | Other | | | 14,451 | | | | 5,761 | |
| Inventory | | | 924 | | | | 840 | |
| Other current assets | | | 2,324 | | | | 1,312 | |
| | | | | | |
| Total current assets | | | 70,525 | | | | 67,534 | |
Restricted cash | | | 44,559 | | | | — | |
Property, plant and equipment, net | | | 344,743 | | | | 356,385 | |
| | | | | | |
Total assets | | $ | 459,827 | | | $ | 423,919 | |
| | | | | | |
|
LIABILITIES AND MEMBERS’ CAPITAL |
Current liabilities: | | | | | | | | |
| Accounts payable: | | | | | | | | |
| | Affiliate | | $ | 9,334 | | | $ | 682 | |
| | Other | | | 26,796 | | | | 14,622 | |
| Accrued liabilities | | | 6,205 | | | | 14,197 | |
| Other current liabilities | | | 2,735 | | | | 2,071 | |
| | | | | | |
| Total current liabilities | | | 45,070 | | | | 31,572 | |
Noncurrent accrued liabilities | | | 1,121 | | | | 702 | |
Commitments and contingent liabilities (Note 7) | | | | | | | | |
Members’ capital | | | 413,636 | | | | 391,645 | |
| | | | | | |
Total liabilities and members’ capital | | $ | 459,827 | | | $ | 423,919 | |
| | | | | | |
See accompanying notes to consolidated financial statements.
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DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | (In thousands) | |
Revenues: | | | | | | | | | | | | |
| Product sales: | | | | | | | | | | | | |
| | Affiliate | | $ | 70,848 | | | $ | 57,838 | | | $ | 54,145 | |
| | Third-party | | | 4,271 | | | | 1,611 | | | | 1,943 | |
| Gas and condensate transportation services: | | | | | | | | | | | | |
| | Affiliate | | | 1,908 | | | | 3,966 | | | | 4,611 | |
| | Third-party | | | 13,498 | | | | 12,052 | | | | 13,225 | |
| Gathering and processing services: | | | | | | | | | | | | |
| | Affiliate | | | 3,585 | | | | 6,962 | | | | 7,549 | |
| | Third-party | | | 26,133 | | | | 14,168 | | | | 16,974 | |
| Other revenues | | | 2,502 | | | | 3,279 | | | | 4,731 | |
| | | | | | | | | |
| Total revenues | | | 122,745 | | | | 99,876 | | | | 103,178 | |
| | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
| Product cost and shrink replacement: | | | | | | | | | | | | |
| | Affiliate | | | 7,911 | | | | 423 | | | | 7,832 | |
| | Third-party | | | 56,556 | | | | 44,932 | | | | 35,082 | |
| Operating and maintenance expenses: | | | | | | | | | | | | |
| | Affiliate | | | 3,355 | | | | 3,098 | | | | 3,035 | |
| | Third-party | | | 6,810 | | | | 14,756 | | | | 12,794 | |
| Depreciation and accretion | | | 24,794 | | | | 22,795 | | | | 22,875 | |
| General and administrative expenses — affiliate | | | 2,053 | | | | 1,424 | | | | 1,400 | |
| Taxes other than income | | | 1,151 | | | | 1,382 | | | | 1,602 | |
| Other — net | | | (33 | ) | | | (54 | ) | | | (101 | ) |
| | | | | | | | | |
| Total costs and expenses | | | 102,597 | | | | 88,756 | | | | 84,519 | |
| | | | | | | | | |
| Operating income | | | 20,148 | | | | 11,120 | | | | 18,659 | |
Interest expense | | | — | | | | — | | | | 9,611 | |
Interest income | | | (1,685 | ) | | | (550 | ) | | | — | |
Foreign exchange loss | | | 1,005 | | | | — | | | | — | |
| | | | | | | | | |
Income before cumulative effect of change in accounting principle | | | 20,828 | | | | 11,670 | | | | 9,048 | |
Cumulative effect of change in accounting principle | | | (176 | ) | | | — | | | | (267 | ) |
| | | | | | | | | |
Net income | | $ | 20,652 | | | $ | 11,670 | | | $ | 8,781 | |
| | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | |
| Cash flow hedging activities: | | | | | | | | | | | | |
| | Losses reclassified to earnings during year | | $ | — | | | $ | — | | | $ | 5,196 | |
| | Unrealized losses during year | | | — | | | | — | | | | (291 | ) |
| | | | | | | | | |
| Other comprehensive income | | | — | | | | — | | | | 4,905 | |
| | | | | | | | | |
Comprehensive income | | $ | 20,652 | | | $ | 11,670 | | | $ | 13,686 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
110
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED STATEMENT OF MEMBERS’ CAPITAL
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | |
| | | | Williams | | | Duke Energy | | | | | Other | | | |
| | Williams | | | Operating | | | Field | | | Eni BB | | | Comprehensive | | | |
| | Energy LLC | | | Partners LLC | | | Services, LLC | | | Pipelines LLC | | | Income (Loss) | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | (In thousands) | |
Balance, December 31, 2002 | | $ | 58,541 | | | $ | — | | | $ | 39,028 | | | $ | 19,515 | | | $ | (4,905 | ) | | $ | 112,179 | |
| Contributions | | | 127,055 | | | | — | | | | 84,695 | | | | 42,360 | | | | — | | | | 254,110 | |
| Net income — 2003 | | | 4,391 | | | | — | | | | 2,927 | | | | 1,463 | | | | — | | | | 8,781 | |
| Other comprehensive (loss) | | | — | | | | — | | | | — | | | | — | | | | 4,905 | | | | 4,905 | |
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2003 | | | 189,987 | | | | — | | | | 126,650 | | | | 63,338 | | | | — | | | | 379,975 | |
| Net income — 2004 | | | 5,835 | | | | — | | | | 3,890 | | | | 1,945 | | | | — | | | | 11,670 | |
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | | 195,822 | | | | — | | | | 130,540 | | | | 65,283 | | | | — | | | | 391,645 | |
| Contributions | | | 16,269 | | | | 24,400 | | | | 7,634 | | | | — | | | | — | | | | 48,303 | |
| Distributions | | | (30,030 | ) | | | (1,280 | ) | | | (15,654 | ) | | | — | | | | — | | | | (46,964 | ) |
| Net income — 2005 | | | 8,063 | | | | 4,651 | | | | 6,909 | | | | 1,029 | | | | — | | | | 20,652 | |
| Sale of Eni 16.67% interest to subsidiaries of Williams Energy LLC | | | 66,312 | | | | — | | | | — | | | | (66,312 | ) | | | — | | | | — | |
| Sale of Williams Energy LLC and subsidiaries 40% interest to Williams Operating Partners LLC | | | (142,761 | ) | | | 142,761 | | | | — | | | | — | | | | — | | | | — | |
| Sale of Williams Energy LLC 6.67% interest to Duke Energy Field Services LLC | | | (25,869 | ) | | | — | | | | 25,869 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | $ | 87,806 | | | $ | 170,532 | | | $ | 155,298 | | | $ | — | | | $ | — | | | $ | 413,636 | |
| | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
111
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | (In thousands) | |
OPERATING ACTIVITIES: | | | | | | | | | | | | |
Income before cumulative effect of change in accounting principle | | $ | 20,828 | | | $ | 11,670 | | | $ | 9,048 | |
Adjustments to reconcile to cash provided by operations: | | | | | | | | | | | | |
| Depreciation and accretion | | | 24,794 | | | | 22,795 | | | | 22,875 | |
| Cash provided (used) by changes in assets and liabilities: | | | | | | | | | | | | |
| | Accounts receivable | | | (35,739 | ) | | | (1,658 | ) | | | 7,860 | |
| | Inventory | | | (84 | ) | | | (240 | ) | | | (229 | ) |
| | Other current assets | | | (1,012 | ) | | | (1 | ) | | | (761 | ) |
| | Accounts payable | | | 29,355 | | | | 1,256 | | | | (1,415 | ) |
| | Other current liabilities | | | 664 | | | | (668 | ) | | | 2,223 | |
| | Accrued liabilities | | | (7,992 | ) | | | 2,469 | | | | 4,424 | |
| | | | | | | | | |
| | Net cash provided by operating activities | | | 30,814 | | | | 35,623 | | | | 44,025 | |
| | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Property, plant and equipment: | | | | | | | | | | | | |
| Capital expenditures | | | (12,906 | ) | | | (46,701 | ) | | | (14,746 | ) |
| Change in accounts payable — capital expenditures | | | (8,532 | ) | | | 7,586 | | | | 2,673 | |
Increase in restricted cash | | | (44,559 | ) | | | — | | | | — | |
| | | | | | | | | |
| | Net cash used by investing activities | | | (65,997 | ) | | | (39,115 | ) | | | (12,073 | ) |
| | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Payments of long-term debt | | | — | | | | — | | | | (253,701 | ) |
| Distributions to members | | | (46,964 | ) | | | — | | | | — | |
| Capital contributions | | | 48,303 | | | | — | | | | 254,110 | |
| | | | | | | | | |
| | Net cash provided by financing activities | | | 1,339 | | | | — | | | | 409 | |
| | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | (33,844 | ) | | | (3,492 | ) | | | 32,361 | |
Cash and cash equivalents at beginning of period | | | 55,222 | | | | 58,714 | | | | 26,353 | |
| | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 21,378 | | | $ | 55,222 | | | $ | 58,714 | |
| | | | | | | | | |
Supplemental Disclosure of Cash Flow Information | | | | | | | | | | | | |
Cash paid during the year for interest | | $ | — | | | $ | — | | | $ | 9,855 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
112
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 1. | Organization and Description of Business |
Our company consists of Discovery Producer Services LLC (“DPS”), a Delaware limited liability company formed on June 24, 1996, and its wholly owned subsidiary, Discovery Gas Transmission LLC (“DGT”), a Delaware limited liability company formed on June 24, 1996. DPS was formed for the purpose of constructing and operating a 600 million cubic feet per day (“MMcf/d”) cryogenic natural gas processing plant near Larose, Louisiana and a 32,000 barrel per day (“bpd”) natural gas liquids fractionator plant near Paradis, Louisiana. DGT was formed for the purpose of constructing and operating a natural gas pipeline from offshore deep water in the Gulf of Mexico to DPS’s gas processing plant in Larose, Louisiana. The pipeline has a design capacity of 600 million cubic feet per day and consists of approximately 173 miles of pipe. DPS has since connected several laterals to the DGT pipeline to expand its presence in the Gulf. Herein, DPS and DGT are collectively referred to in the first person as “we,” “us” or “our” and sometimes as “the Company”.
Until April 14, 2005, we were owned 50 percent by Williams Energy, L.L.C. (a wholly owned subsidiary of The Williams Companies, Inc.), 33.33 percent by Duke Energy Field Services, LP (“Duke”) and 16.67 percent by Eni BB Pipeline, LLC (“Eni”) (formerly British-Borneo Pipeline LLC). Williams Energy is our operator. Herein, The Williams Companies, Inc. and its subsidiaries are collectively referred to as “Williams.”
On April 14, 2005, Williams acquired the 16.67 percent ownership interest in us previously held by Eni. As a result we became 66.67 percent owned by Williams and 33.33 percent owned by Duke.
On August 22, 2005, we distributed cash of $44 million to the members based on 66.67 percent ownership by Williams and 33.33 percent ownership by Duke.
On August 23, 2005, Williams Partners Operating LLC (a wholly owned subsidiary of Williams Partners L.P.) (“WPZ”) acquired a 40 percent interest in us previously held by Williams Energy. As a result we became 40 percent owned by WPZ, 26.67 percent owned by Williams and 33.33 percent owned by Duke. In connection with this Williams, Duke and WPZ amended our limited liability company agreement including provisions for (1) quarterly distributions of available cash, as defined in the amended agreement and (2) pursuit of capital projects for the benefit of one or more of our members when there is not unanimous consent.
On December 22, 2005, Duke acquired 6.67 percent interest in us previously held by Williams Energy. As a result we became 40 percent owned by WPZ, 20 percent owned by Williams and 40 percent owned by Duke.
| |
Note 2. | Summary of Significant Accounting Policies |
Basis of Presentation. The consolidated financial statements have been prepared based upon accounting principles generally accepted in the United States and include the accounts of DPS and its wholly owned subsidiary, DGT. Intercompany accounts and transactions have been eliminated.
Reclassifications. Certain prior years amounts have been reclassified to conform with the current year presentation. These include the reclassification of certain costs charged by Williams under operation and maintenance agreements. We have reclassified these costs, which relate to accounting services, computer systems and management services, to General and administrative expenses — affiliate on the Consolidated Statements of Income.
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
113
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and Cash Equivalents. Cash and cash equivalents include demand and time deposits, certificates of deposit and other marketable securities with maturities of three months or less when acquired.
Accounts Receivable. Accounts receivable are carried on a gross basis, with no discounting, less an allowance for doubtful accounts. No allowance for doubtful accounts is recognized at the time the revenue that generates the accounts receivable is recognized. We estimate the allowance for doubtful accounts based on existing economic conditions, the financial condition of the customers and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. There was no allowance for doubtful accounts at December 31, 2005, and 2004.
Gas Imbalances. In the course of providing transportation services to customers, DGT may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. This results in gas transportation imbalance receivables and payables which are recovered or repaid in cash, based on market-based prices, or through the receipt or delivery of gas in the future and are recorded in the balance sheet. Settlement of imbalances requires agreement between the pipelines and shippers as to allocations of volumes to specific transportation contracts and the timing of delivery of gas based on operational conditions. In accordance with its tariff, DGT is required to account for this imbalance (cash-out) liability/receivable and refund or invoice the excess or deficiency when the cumulative amount exceeds $400,000. To the extent that this difference, at any year end, is less than $400,000 such amount would carry forward and be included in the cumulative computation of the difference evaluated at the following year end.
Inventory. Inventory includes fractionated products at our Paradis facility and is carried at the lower cost of market.
Restricted cash. Restricted cash within non-current assets relates to escrow funds contributed by our members for the construction of the Tahiti pipeline lateral expansion. The restricted cash is classified as non-current because the funds will be used to construct a long-term asset. The restricted cash is primarily invested in short-term money market accounts with financials institutions.
Property, Plant and Equipment. Property, plant and equipment are carried at cost. We base the carrying value of these assets on estimates, assumptions and judgments relative to capitalized costs, useful lives and salvage values. The natural gas and natural gas liquids maintained in the pipeline facilities necessary for their operation (line fill) are included in property, plant and equipment.
Depreciation for DPS’s facilities and equipment is computed primarily using the straight-line method with25-year lives. Depreciation for DGT’s facilities and equipment is computed using the straight-line method with15-year lives.
We record an asset and a liability equal to the present value of each expected future asset retirement obligation (“ARO”). The ARO asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. We measure changes in the liability due to passage of time by applying an interest method of allocation. This amount is recognized as an increase in the carrying amount of the liability and as a corresponding accretion expense included in operating income.
Revenue Recognition. Revenue for sales of products are recognized in the period of delivery and revenues from the gathering, transportation and processing of gas are recognized in the period the service is provided based on contractual terms and the related natural gas and liquid volumes. DGT is subject to Federal Energy Regulatory Commission (“FERC”) regulations, and accordingly, certain revenues collected may be subject to possible refunds upon final orders in pending cases. DGT records rate refund liabilities considering regulatory proceedings by DGT and other third parties, advice of counsel, and estimated total exposure as
114
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
discounted and risk weighted, as well as collection and other risks. There were no rate refund liabilities accrued at December 31, 2005 or 2004.
Derivative Instruments and Hedging Activities. The accounting for changes in the fair value of a derivative depends upon whether we have designated it in a hedging relationship and, further, on the type of hedging relationship. To qualify for designation in a hedging relationship, specific criteria must be met and the appropriate documentation maintained in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. We establish hedging relationships pursuant to our risk management policies. We initially and regularly evaluate the hedging relationships to determine whether they are expected to be, and have been, highly effective hedges. If a derivative ceases to be a highly effective hedge, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative are recognized in earnings each period.
We entered into interest rate swap agreements to reduce the impact of changes in interest rates on our floating rate debt. These instruments were designated as cash flow hedges under SFAS No. 133. The effective portion of the change in fair value of the derivatives is reported in other comprehensive income and reclassified into earnings and included in interest expense in the period in which the hedged item affects earnings. There are no amounts excluded from the effectiveness calculation, and there was no ineffective portion of the change in fair value in 2003. The interest rate swap expired on December 31, 2003, and we have no other derivative instruments.
Impairment of Long-Lived Assets. We evaluate long-lived assets for impairment on an individual asset or asset group basis when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such assets may not be recoverable. When such a determination has been made, we compare our management’s estimate of undiscounted future cash flows attributable to the assets to the carrying value of the assets to determine whether impairment has occurred. If an impairment of the carrying value has occurred, we determine the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.
Judgments and assumptions are inherent in our management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. These judgments and assumptions include such matters as the estimation of additional tie-ins of customers, strategic value, rate adjustments, and capital expenditures. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.
Accounting for Repair and Maintenance Costs. We expense the cost of maintenance and repairs as incurred; significant improvements are capitalized and depreciated over the remaining useful life of the asset.
Capitalization of Interest. We capitalize interest on major projects during construction. Interest is capitalized on borrowed funds. Rates are based on the average interest rate on debt.
Income Taxes. For federal tax purposes, we have elected to be treated as a partnership with each member being separately taxed on its ratable share of our taxable income. This election, to be treated as a pass-through entity, also applies to our wholly owned subsidiary, DGT. Therefore, no income taxes or deferred income taxes are reflected in the consolidated financial statements.
Foreign Currency Transactions. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains or losses which are reflected in the Consolidated Statements of Income.
115
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Standards. In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised SFAS No. 123, “Share-Based Payment.” The Statement requires that compensation costs for all share-based awards to employees be recognized in the financial statements at fair value. The Statement, as issued by the FASB, was to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that delayed the effective date for revised SFAS No. 123 to the beginning of the next fiscal year that begins after June 15, 2005. We intend to adopt the revised Statement as of January 1, 2006. Payroll costs directly charged to us by Williams and general and administrative costs allocated to us by Williams (see Note 3) will include such compensation costs beginning January 1, 2006. Our adoption of this Statement will not have a material impact on our Consolidated Financial Statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will be applied prospectively for inventory costs incurred in fiscal years beginning after June 15, 2005. The Statement amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify that abnormal amounts of certain costs should be recognized as current period charges and that the allocation of overhead costs should be based on the normal capacity of the production facility. The impact of this Statement on our Consolidated Financial Statements will not be material.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and will be applied prospectively. The Statement amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged but includes certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which is effective prospectively for reporting a change in accounting principle for fiscal years beginning after December 15, 2005. The Statement changes the reporting of a change in accounting principle to require retrospective application to prior periods’ financial statements, except for explicit transition provisions provided for in any existing accounting pronouncements, including those in the transition phase when SFAS No. 154 becomes effective.
| |
Note 3. | Related Party Transactions |
We have no employees. Pipeline and plant operations were performed under operation and maintenance agreements with Williams. Under this agreement, we reimburse Williams for direct payroll and employee benefit costs incurred on our behalf. Most costs for materials, services and other charges are third-party charges and are invoiced directly to us. Additionally, we purchase a portion of the natural gas from Williams to meet our fuel and shrink requirements at our processing plant. These costs are presented as Operating and maintenance expenses — affiliate and Product costs and shrink replacement — affiliate on the Consolidated Statements of Income.
We pay Williams a monthly operation and management fee to cover the cost of accounting services, computer systems and management services provided to us. This fee is presented as General and administrative expenses — affiliate on the Consolidated Statements of Income.
We also pay Williams a project management fee to cover the cost of managing capital projects. This fee is determined on a project by project basis and is capitalized as part of the construction costs.
116
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the payroll costs and project fees charged to us by Williams and capitalized are as follows:
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
Capitalized labor | | $ | 351 | | | $ | 288 | | | $ | 204 | |
Capitalized project fee | | | 115 | | | | 854 | | | | 147 | |
| | | | | | | | | |
| | $ | 466 | | | $ | 1,142 | | | $ | 351 | |
| | | | | | | | | |
We have various business transactions with our members and other subsidiaries and affiliates of our members, including an agreement with Williams pursuant to which Williams markets the NGLs and natural gas to which we take title. Under the terms of this agreement, Williams purchases the NGLs and excess natural gas and resells it, for its own account, to end users. During 2005, we had transactions with Texas Eastern Corporation, a subsidiary of Duke. These transactions primarily included processing and sales of natural gas liquids and transportation of gas and condensate. We have business transactions with Eni that primarily include processing and transportation of gas and condensate. The following table summarizes these related-party revenues during 2005, 2004 and 2003.
| | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | (In thousands) | |
Eni* | | $ | 2,830 | | | $ | 10,928 | | | $ | 12,160 | |
Texas Eastern Corporation | | | 2,663 | | | | — | | | | — | |
Williams | | | 70,848 | | | | 57,838 | | | | 54,145 | |
| | | | | | | | | |
| Total | | $ | 76,341 | | | $ | 68,766 | | | $ | 66,305 | |
| | | | | | | | | |
Note 4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2005 and 2004:
| | | | | | | | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
Property, plant and equipment: | | | | | | | | |
| Construction work in progress | | $ | 5,444 | | | $ | 11,739 | |
| Buildings | | | 4,406 | | | | 4,393 | |
| Land and land rights | | | 1,530 | | | | 1,165 | |
| Transportation lines | | | 302,252 | | | | 286,661 | |
| Plant and other equipment | | | 198,837 | | | | 195,429 | |
| | | | | | |
| | | 512,469 | | | | 499,387 | |
Less accumulated depreciation and amortization | | | 167,726 | | | | 143,002 | |
| | | | | | |
| | $ | 344,743 | | | $ | 356,385 | |
| | | | | | |
Commitments for construction and acquisition of property, plant and equipment for Tahiti are approximately $64 million at December 31, 2005.
We adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” on January 1, 2003. As a result, we recorded a liability of $549,000 representing the present value of expected future asset retirement obligations at January 1, 2003, and a decrease to earnings of $267,000 reflected as a cumulative effect of a change in accounting principle.
117
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective December 31, 2005, we adopted Financial Accounting Standards Board Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the liability’s fair value can be reasonably estimated. The Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. As required by the new standard, we reassessed the estimated remaining life of all our assets with a conditional ARO. We recorded additional liabilities totaling $327,000 equal to the present value of expected future asset retirement obligations at December 31, 2005. The liabilities are slightly offset by a $151,000 increase in property, plant and equipment, net of accumulated depreciation, recorded as if the provisions of the Interpretation had been in effect at the date the obligation was incurred. The net $176,000 reduction to earnings is reflected as a cumulative effect of a change in accounting principle for the year ended 2005. If the Interpretation had been in effect at the beginning of 2003, the impact to our income from continuing operations and net income would have been immaterial.
The obligations relate to an offshore platform and our onshore processing and fractionation facilities. At the end of the useful life of each respective asset, we are legally or contractually obligated to dismantle the offshore platform, remove the onshore facilities and related surface equipment and restore the surface of the property.
A rollforward of our asset retirement obligation for 2005 and 2004 is presented below.
| | | | | | | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | (In thousands) | |
Balance, January 1 | | $ | 702 | | | $ | 621 | |
Accretion expense | | | 92 | | | | 81 | |
FIN No. 47 revisions | | | 327 | | | | — | |
| | | | | | |
Balance, December 31 | | $ | 1,121 | | | $ | 702 | |
| | | | | | |
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Note 5. | Leasing Activities |
We lease the land on which the Paradis fractionator plant and the Larose processing plant are located. The initial terms of the leases are 20 years with renewal options for an additional 30 years. We entered into a 10 year leasing agreement for pipeline capacity from Texas Eastern Transmission, LP, as part of our Market Expansion project which began in June 2005 (see Note 7). The lease includes renewal options and options to increase capacity which would also increase rentals. The future minimum annual rentals under these non-cancelable leases as of December 31, 2005 are payable as follows:
| | | | |
| | (In thousands) | |
2006 | | $ | 854 | |
2007 | | | 854 | |
2008 | | | 858 | |
2009 | | | 858 | |
2010 | | | 858 | |
Thereafter | | | 4,109 | |
| | | |
| | $ | 8,391 | |
| | | |
Total rent expense for 2005, 2004 and 2003, including a cancelable platform space lease andmonth-to-month leases, was $994,610, $866,000 and $1,050,000, respectively.
118
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 6. | Financial Instruments and Concentrations of Credit Risk |
| |
| Financial Instruments Fair Value |
We used the following methods and assumptions to estimate the fair value of financial instruments:
Cash and cash equivalents. The carrying amounts reported in the balance sheets approximate fair value due to the short-term maturity of these instruments.
Restricted cash. The carrying amounts reported in the balance sheets approximate fair value as these instruments have interest rates approximating market.
| | | | | | | | | | | | | | | | |
| | 2005 | | | 2004 | |
| | | | | | |
| | Carrying | | | Fair | | | Carrying | | | Fair | |
Asset | | Amount | | | Value | | | Amount | | | Value | |
| | | | | | | | | | | | |
| | (In thousands) | |
Cash and cash equivalents | | $ | 21,378 | | | $ | 21,378 | | | $ | 55,222 | | | $ | 55,222 | |
Restricted cash | | | 44,559 | | | | 44,559 | | | | — | | | | — | |
| |
| Concentrations of Credit Risk |
Our cash equivalents and restricted cash consist of high-quality securities placed with various major financial institutions with credit ratings at or above AA by Standard & Poor’s or Aa by Moody’s Investor’s Service.
Substantially all of our accounts receivable result from gas transmission services for and natural gas liquids sales to our two largest customers at December 31, 2005 and 2004. This concentration of customers may impact our overall credit risk either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. As a general policy, collateral is not required for receivables, but customers’ financial condition and credit worthiness are evaluated regularly. Our credit policy and the relatively short duration of receivables mitigate the risk of uncollected receivables. We did not incur any credit losses on receivables during 2005 and 2004.
Major Customers. Williams and Eni accounted for approximately $70.8 million (58 percent) and $8.5 million (7 percent), respectively, of our total revenues in 2005, and $57.8 million (58 percent) and $10.9 million (11 percent), respectively, of our total revenues in 2004. Three customers, Williams, Eni and Pogo Producing Company accounted for approximately $54 million (52 percent), $12.2 million (12 percent) and $12 million (12 percent), respectively, of our total revenues in 2003.
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Note 7. | Rate and Regulatory Matters and Contingent Liabilities |
Rate and Regulatory Matters. In 2002, DGT filed a request with the FERC to change the lost and unaccounted-for gas percentage to be allocated to shippers from 0.5 percent to 0.1 percent to be effective for the period from July 1, 2002 to June 30, 2003. On June 26, 2002, the FERC approved DGT’s request. Additionally, DGT filed to reduce the lost and unaccounted-for gas percentage to zero to be effective for the period from July 1, 2003 to June 30, 2004. On June 19, 2003, the FERC approved this request. On June 1, 2004, DGT filed to maintain a lost and unaccounted-for percentage of zero for the period from July 1, 2004 to June 30, 2005 due to the continued absence of system gas losses. On June 22, 2004, the FERC approved this request. In this filing, DGT explained that management determined the reasons for the gas gains and established new procedures in July 2003 that significantly reduced the amount of gains occurring thereafter. On April 28, 2005, DGT filed to maintain a lost and unaccounted-for gas percentage of zero for the period from July 1, 2005 to June 30, 2006. DGT also filed to retain net system gains that are unrelated to the lost and unaccounted-for gas over-recovered from its shippers. These system gas gains totaled approximately $2.5 million, $2.5 million and $5.5 million respectively in 2005, 2004, and 2003. Certain shippers protested the net system gains filing and the FERC requested additional information in a May 27, 2005 Letter Order. DGT
119
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
responded to the information request and on October 31, 2005, the FERC accepted the filing and no requests for rehearing were filed. As a result, we recognized system gains for 2002 — 2004 of $10.7 million in 2005. As of December 31, 2005 and 2004, DGT has deferred amounts of $6 million and $14.2 million, respectively, included in current accrued liabilities in the accompanying Consolidated Balance Sheets representing amounts collected from customers pursuant to prior years’ lost and unaccounted for gas percentage and unrecognized net system gains for 2005.
On July 23, 2003, DGT applied to the FERC for a Certificate of Public Convenience and Necessity authorizing DGT’s market expansion to acquire, lease or construct and/or to own and operate certain new delivery points, pipeline, compression services and metering and appurtenant facilities to enable DGT to deliver natural gas to four additional delivery points to new markets in southern Louisiana. This application was amended on December 30, 2003. On the same dates, DPS applied to the FERC and amended its application for a Limited Jurisdiction Certificate authorizing DPS to provide the compression services to DGT to enable DGT to provide service through the Market Expansion facilities. The capital cost of the expansion facilities was approximately $11 million. On May 6, 2004, the FERC granted DGT’s and DPS’s applications. On July 13, 2004, the FERC granted an additional approval on a rate design issue requested by DGT. On January 6, 2005, the FERC granted DGT permission to commence construction of the Market Expansion facilities. The Market Expansion facilities became operational in June 2005.
On November 25, 2003, the FERC issued Order No. 2004 promulgating new standards of conduct applicable to natural gas pipelines. On August 10, 2004, the FERC granted DGT a partial exemption allowing the continuation of DGT’s current ownership structure and management subject to compliance with many of the other standards of conduct. DGT continues to evaluate the effect of the partial exemption and the compliance with the remaining requirements. The effect of complying with the new standards is not expected to have a material effect on the consolidated financial statements.
On October 11, 2005, DGT applied to the FERC for permission to construct and operate facilities to allow temporary re-routing of gas to DGT from other facilities that were impacted by Hurricane Katrina. The FERC granted emergency exemptions and waivers permitting such actions the same day, allowing emergency service for up to one year or until certain third-party processing facilities were restored to service. DGT conducted two open seasons for shippers wishing to take advantage of the new service.
On January 16, 2006, DPS and DGT received notice of a claim by POGO Producing Company (“POGO”) relating to the results of a POGO audit performed in April 2004. POGO claims that DPS and DGT overcharged POGO and its working interest owners of approximately $600,000 relating to condensate transportation and handling during 2000 — 2004. The underlying agreements limit audit claims to a two-year period from the date of the audit, and DPS and DGT dispute the validity of the claim.
Environmental Matters. We are subject to extensive federal, state and local environmental laws and regulations which affect our operations related to the construction and operation of our facilities. Appropriate governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements and injunctions as to future compliance. We have not been notified and are not currently aware of any noncompliance under the various environmental laws and regulations.
Other. We are party to various other claims, legal actions and complaints arising in the ordinary course of business. Litigation, arbitration and environmental matters are subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the ruling occurs. Management, including internal counsel, currently believes that the ultimate resolution of the foregoing matters, taken as a whole, and after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a material adverse effect upon our future financial position.
120
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
its general partner
| |
| |
| William H. Gault |
| Attorney-inWilliam H. Gault Attorney-in-fact-fact |
Date: March 3, 2006
Date: February 28, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | |
Signature | | Title | | Date |
|
/s/ Steven J. Malcolm* Steven J. Malcolm | | President, Chief Executive Officer and Chairman of the Securities Exchange ActBoard (Principal Executive Officer) | | February 28, 2007 |
| | | | |
/s/ Donald R. Chappel* Donald R. Chappel | | Chief Financial Officer and Director (Principal Financial Officer) | | February 28, 2007 |
| | | | |
/s/ Ted T. Timmermans* Ted T. Timmermans | | Chief Accounting Officer and Controller (Principal Accounting Officer) | | February 28, 2007 |
| | | | |
/s/ Alan S. Armstrong* Alan S. Armstrong | | Chief Operating Officer and Director | | February 28, 2007 |
| | | | |
/s/ Bill Z. Parker* Bill Z. Parker | | Director | | February 28, 2007 |
| | | | |
/s/ Alice M. Peterson* Alice M. Peterson | | Director | | February 28, 2007 |
| | | | |
/s/ Thomas C. Knudson* Thomas C. Knudson | | Director | | February 28, 2007 |
| | | | |
/s/ Phillip D. Wright* Phillip D. Wright | | Director | | February 28, 2007 |
| | | | |
*By: /s/ William H. Gault William H. GaultAttorney-in-fact | | | | February 28, 2007 |
129
INDEX TO EXHIBITS
| | | | | | |
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 onForm 8-K (FileNo. 001-32599) filed with the SEC on April 7, 2006. |
| *§Exhibit 2 | .2 | | — | | Purchase and Sale Agreement, dated November 16, 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 onForm 8-K (File001-32599) filed with the SEC on November 21, 2006). |
| *Exhibit 3 | .1 | | — | | Certificate of 1934, thisLimited Partnership of Williams Partners L.P. (attached as Exhibit 3.1 to Williams Partners L.P.’s registration statement onForm S-1 (FileNo. 333-124517) filed with the SEC on May 2, 2005). |
| *Exhibit 3 | .2 | | — | | Certificate of Formation of Williams Partners GP LLC (attached as Exhibit 3.3 to Williams Partners L.P.’s registration statement onForm S-1 (FileNo. 333-124517) filed with the SEC on May 2, 2005). |
| +Exhibit 3 | .3 | | — | | Amended and Restated Agreement of Limited Partnership of Williams Partners L.P. (including form of common unit certificate), as amended by Amendments Nos. 1, 2 and 3. |
| *Exhibit 3 | .4 | | — | | Amended and Restated Limited Liability Company Agreement of Williams Partners GP LLC (attached as Exhibit 3.2 to Williams Partners L.P.’s current report has been signed belowonForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). |
| *Exhibit 4 | .1 | | — | | Indenture, dated June 20, 2006, by and among Williams Partners L.P., Williams Partners Finance Corporation and JPMorgan Chase Bank, N.A. (attached as Exhibit 4.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the following personsSEC on behalfJune 20, 2006). |
| *Exhibit 4 | .2 | | — | | Form of 71/2% Senior Note due 2011 (included as Exhibit 1 to Rule 144A/Regulation S Appendix of Exhibit 4.1 attached to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the registrantSEC on June 20, 2006). |
| *Exhibit 4 | .3 | | — | | Registration Rights Agreement, dated June 20, 2006, by and inbetween Williams Partners L.P., Williams Partners Finance Corporation, Citigroup Global Markets Inc. and Lehman Brothers Inc. (attached as Exhibit 4.3 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the capacitiesSEC on June 20, 2006). |
| *Exhibit 4 | .4 | | — | | Certificate of Incorporation of Williams Partners Finance Corporation (attached as Exhibit 4.5 to Williams Partners L.P.’s registration statement onForm S-3 (FileNo. 333-137562) filed with the SEC on September 22, 2006). |
| *Exhibit 4 | .5 | | — | | Bylaws of Williams Partners Finance Corporation (attached as Exhibit 4.6 to Williams Partners L.P.’s registration statement onForm S-3 (FileNo. 333-137562) filed with the SEC on September 22, 2006). |
| *Exhibit 4 | .6 | | — | | Indenture, dated December 13, 2006, by and among Williams Partners L.P., Williams Partners Finance Corporation and The Bank of New York (attached as Exhibit 4.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). |
| *Exhibit 4 | .7 | | — | | Form of 71/4% Senior Note due 2017 (included as Exhibit 1 to Rule 144A/Regulation S Appendix of Exhibit 4.1 attached to Williams Partners L.P. current report onForm 8-K (FileNo. 001-32599) filed with the dates indicated.SEC on December 19, 2006). | | | | | | *Exhibit 4 | .8 | | — | | Registration Rights Agreement, dated December 13, 2006, by and between Williams Partners L.P., Williams Partners Finance Corporation, Citigroup Global Markets Inc., Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (attached as Exhibit 4.3 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). | Signature | | Title | | Date | | | | | | | *
Steven J. Malcolm | | President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer) | | March 3, 2006 | | *
Donald R. Chappel | | Chief Financial Officer and Director (Principal Financial Officer) | | March 3, 2006 | | *
Ted T. Timmermans | | Chief Accounting Officer and Controller (Principal Accounting Officer) | | March 3, 2006 | | *
Alan S. Armstrong | | Chief Operating Officer and Director | | March 3, 2006 | | *
Bill Z. Parker | | Director | | March 3, 2006 | | *
Alice M. Peterson | | Director | | March 3, 2006 | | *
Thomas C. Knudson | | Director | | March 3, 2006 | | *
Phillip D. Wright | | Director | | March 3, 2006 | | By: | | /s/ William H. Gault
William H. Gault
Attorney-in-fact | | | | March 3, 2006 | 121
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INDEX TO EXHIBITSExhibit
| | | | |
Number | | | | Description |
|
| *Exhibit 4 | .9 | | — | | Registration Rights Agreement, dated December 13, 2006, by and between Williams Partners L.P. and the purchasers named therein (attached as Exhibit 4.4 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). |
| *Exhibit 4 | .10 | | — | | Common Unit and Class B Unit Purchase Agreement, dated December 1, 2006, by and among Williams Partners L.P. and the purchasers names therein (attached as Exhibit 1.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 4, 2006) |
| *Exhibit 10 | .1 | | — | | Omnibus Agreement among Williams Partners L.P., Williams Energy Services, LLC, Williams Energy, L.L.C., Williams Partners Holdings LLC, Williams Discovery Pipeline LLC, Williams Partners GP LLC, Williams Partners Operating LLC and (for purposes of Articles V and VI thereof only) The exhibits listed below areWilliams Companies, Inc. (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). |
| *#Exhibit 10 | .2 | | — | | Williams Partners GP LLC Long-Term Incentive Plan (attached as partExhibit 10.2 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). |
| *#Exhibit 10 | .3 | | — | | Amendment to the Williams Partners GP LLC Long-Term Incentive Plan, dated November 28, 2006 (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 4, 2006). |
| *Exhibit 10 | .4 | | — | | Contribution, Conveyance and Assumption Agreement, dated August 23, 2005, by and among Williams Partners L.P., Williams Energy, L.L.C., Williams Partners GP LLC, Williams Partners Operating LLC, Williams Energy Services, LLC, Williams Discovery Pipeline LLC, Williams Partners Holdings LLC and Williams Natural Gas Liquids, Inc. (attached as Exhibit 10.3 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on August 26, 2005). |
| *Exhibit 10 | .5 | | — | | Amended and Restated Credit Agreement dated as of this annual report:May 20, 2005 among The Williams Companies, Inc., Williams Partners L.P., Northwest Pipeline Corporation, Transcontinental Gas Pipe Line Corporation, and the Banks, Citibank, N.A. and Bank of America, N.A., and Citicorp USA, INC. as administrative agent (attached as Exhibit 1.1 to The Williams Companies, Inc.’s current report onForm 8-K (FileNo. 001-04174) filed with the SEC on May 26, 2005). | | | | | | *Exhibit 10 | .6 | | — | | Third Amended and Restated Limited Liability Company Agreement for Discovery Producer Services LLC (attached as Exhibit 10.7 to Amendment No. 1 to Williams Partners L.P.’s registration statement onForm S-1 (FileNo. 333-124517) filed with the SEC on June 24, 2005). | | *Exhibit 10 | .7 | | — | | Amendment No. 1 to Third Amended and Restated Limited Liability Company Agreement for Discovery Producer Services LLC (attached as Exhibit 10.6 to Williams Partners L.P.’s quarterly report onForm 10-Q (FileNo. 001-32599) filed with the SEC on August 8, 2006). | | *#Exhibit 10 | .8 | | — | | Director Compensation Policy dated November 29, 2005 (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 1, 2005). | | *#Exhibit 10 | .9 | | — | | Form of Grant Agreement for Restricted Units (attached as Exhibit 10.2 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 1, 2005). | | *Exhibit 10 | .10 | | — | | Credit agreement dated as of May 1, 2006 among Williams Partners L.P., The Williams Companies, Inc., Northwest Pipeline Corporation, Transcontinental Gas Pipeline Corporation, and Citibank, N.A., as administrative agent (attached as Exhibit 10.1 to The Williams Companies, Inc’s current report onForm 8-K (FileNo. 001-04174) filed with the SEC on May 1, 2006). | Exhibit | 131
| | | | | | | Exhibit
| | | | | Number | | | | Description | | | *Exhibit 10 | .12 | | — | | Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and among Williams Energy Services, LLC, Williams Field Services Company, LLC, Williams Field Services Group, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners Operating LLC (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 10 | .13 | | — | | Contribution, Conveyance and Assumption Agreement, dated June 20, 2006, by and among Williams Field Services Company, LLC and Williams Four Corners LLC (attached as Exhibit 10.4 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on June 20, 2006). | | *Exhibit 10 | .14 | | — | | 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 onForm 10-Q (FileNo. 001-32599) filed with the SEC on August 8, 2006). | | *Exhibit 10 | .15 | | — | | Contribution, Conveyance and Assumption Agreement, dated December 13, 2006, by and among Williams Energy Services, LLC, Williams Field Services Company, LLC, Williams Field Services Group, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams Partners Operating LLC (attached as Exhibit 10.1 to Williams Partners L.P.’s current report onForm 8-K (FileNo. 001-32599) filed with the SEC on December 19, 2006). | | +Exhibit 12 | | | — | | Computation of Ratio of Earnings to Fixed Charges | | +Exhibit 21 | | | — | | List of subsidiaries of Williams Partners L.P. | | +Exhibit 23 | | | — | | Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP. | | +Exhibit 24 | | | — | | Power of attorney together with certified resolution. | | +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. | | +Exhibit 99 | .1 | | — | | Pre-approval policy with respect to audit and non-audit services of the audit committee of the board of directors of Williams Partners GP LLC. | | +Exhibit 99 | .2 | | — | | Williams Partners GP LLC Financial Statements. | Number | | | | Description | | | | | | | *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 | | — | | Certificate of Formation of Williams Partners GP LLC (attached as Exhibit 3.3 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 | .3 | | — | | Amended and Restated Agreement of Limited Partnership of Williams Partners L.P. (attached as Exhibit 3.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *Exhibit 3 | .4 | | — | | Amended and Restated Limited Liability Company Agreement of Williams Partners GP LLC (attached as Exhibit 3.2 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *†Exhibit 10 | .1 | | — | | Fractionation Agreement dated July 18, 1997, by and between MAPCO Natural Gas Liquids Inc. and Amoco Oil Company (attached as Exhibit 10.6 to Amendment No. 1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on June 24, 2005). | | | *Exhibit 10 | .2 | | — | | Omnibus Agreement among Williams Partners L.P., Williams Energy Services, LLC, Williams Energy, L.L.C., Williams Partners Holdings LLC, Williams Discovery Pipeline LLC, Williams Partners GP LLC, Williams Partners Operating LLC and (for purposes of Articles V and VI thereof only) The Williams Companies, Inc. (attached as Exhibit 10.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *#Exhibit 10 | .3 | | — | | Williams Partners GP LLC Long-Term Incentive Plan (attached as Exhibit 10.2 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *Exhibit 10 | .4 | | — | | Contribution, Conveyance and Assumption Agreement, dated August 23, 2005, by and among Williams Partners L.P., Williams Energy, L.L.C., Williams Partners GP LLC, Williams Partners Operating LLC, Williams Energy Services, LLC, Williams Discovery Pipeline LLC, Williams Partners Holdings LLC and Williams Natural Gas Liquids, Inc. (attached as Exhibit 10.3 to Williams Partners L.P.’s current report on Form 8-K filed with the SEC on August 26, 2005). | | | *Exhibit 10 | .5 | | — | | Working Capital Loan Agreement, dated August 23, 2005, between The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.4 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on August 26, 2005). | | | *Exhibit 10 | .6 | | — | | Amended and Restated Credit Agreement dated as of May 20, 2005 among The Williams Companies, Inc., Williams Partners L.P., Northwest Pipeline Corporation, Transcontinental Gas Pipe Line Corporation, and the Banks, Citibank, N.A. and Bank of America, N.A., and Citicorp USA, INC. as administrative agent (attached as Exhibit 1.1 to The Williams Companies, Inc.’s current report on Form 8-K (File No. 001-04174) filed with the SEC on May 26, 2005). | | | *Exhibit 10 | .7 | | — | | Third Amended and Restated Limited Liability Company Agreement for Discovery Producer Services LLC (attached as Exhibit 10.7 to Amendment No. 1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on June 24, 2005). | | | *Exhibit 10 | .8 | | — | | Base Contract for Sale and Purchase of Natural Gas between Williams Natural Gas Liquids, Inc. and Williams Power Company, Inc., dated August 15, 2005 (attached as Exhibit 10.7 to Williams Partners L.P.’s quarterly report on Form 10-Q filed with the SEC on September 22, 2005). |
122
| | | | | | | Exhibit | | | | | Number | | | | Description | | | | | | | *#Exhibit 10 | .9 | | — | | Director Compensation Policy dated November 29, 2005 (attached as Exhibit 10.1 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on December 1, 2005). | | | *#Exhibit 10 | .10 | | — | | Form of Grant Agreement for Restricted Units (attached as Exhibit 10.2 to Williams Partners L.P.’s current report on Form 8-K (File No. 001-32599) filed with the SEC on December 1, 2005). | | | *Exhibit 21 | | | — | | List of subsidiaries of Williams Partners L.P. (attached as Exhibit 21.1 to Amendment No. 1 to Williams Partners L.P.’s registration statement on Form S-1 (File No. 333-124517) filed with the SEC on June 24, 2005). | | | +Exhibit 23 | | | — | | Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP. | | | +Exhibit 24 | | | — | | Power of attorney together with certified resolution. | | | +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. | | | +Exhibit 99 | .1 | | — | | Pre-approval policy with respect to audit and non-audit services of the audit committee of the board of directors of Williams Partners GP LLC. | | | +Exhibit 99 | .2 | | — | | Williams Partners GP LLC Financial Statements. |
| | | * | | Each such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference. |
| + | | Filed herewith. | § | | Pursuant to item 601(b) (2) ofRegulation S-K, the registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request. | | # | | Management contract or compensatory plan or arrangement. | † | Confidential treatment requested for omitted portions. | | # | Management contract or compensatory plan or arrangement. |
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