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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-32599
 WILLIAMS PARTNERS L.P.
  DELAWARE
    
    20-2485124(State or other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)ONE WILLIAMS CENTERTULSA, OKLAHOMA
    
    74172-0172(Address of principal executive offices)
    
    (Zip Code)
 
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o o þ
 o þ




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##### 



WILLIAMS PARTNERS L.P.
INDEX
 PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Income  Three and Nine Months Ended September 30, 2006 and 2005
    
    
    3Consolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statement of Partners Capital from January 1, 2006 to September 30, 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 6. Exhibits
    
    
    47Rule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certifications
  FORWARD-LOOKING STATEMENTS
   §
    
    amounts and nature of future capital expenditures;§
    
    expansion and growth of our business and operations;§
    
    business strategy;§
    
    cash flow from operations;§
    
    seasonality of certain business segments; and§
    
    natural gas liquids and gas prices and demand.
 1




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
    
    We may not have sufficient cash from operations to enable us to pay the minimum
quarterly distribution following establishment of cash reserves and payment of fees and
expenses, including payments to our general partner.
    
    Because of the natural decline in production from existing wells and competitive
factors, the success of our gathering and transportation businesses depends on our ability
to connect new sources of natural gas supply, which is dependent on factors beyond our
control. Any decrease in supplies of natural gas could adversely affect our business and
operating results.
    
    Our processing, fractionation and storage businesses could be affected by any decrease
in the price of natural gas liquids or a change in the price of natural gas liquids
relative to the price of natural gas.
    
    Lower natural gas and oil prices could adversely affect our fractionation and storage
businesses.
    
    We depend on certain key customers and producers for a significant portion of our
revenues and supply of natural gas and natural gas liquids. The loss of any of these key
customers or producers could result in a decline in our revenues and cash available to pay
distributions.
    
    If third-party pipelines and other facilities interconnected to our pipelines and
facilities become unavailable to transport natural gas and natural gas liquids or to treat
natural gas, our revenues and cash available to pay distributions could be adversely
affected.
    
    Our future financial and operating flexibility may be adversely affected by restrictions
in our indenture and by our leverage.
    
    Williams credit agreement and Williams public indentures contain financial and
operating restrictions that may limit our access to credit. In addition, our ability to
obtain credit in the future will be affected by Williams credit ratings.
    
    Our general partner and its affiliates have conflicts of interest and limited fiduciary
duties, which may permit them to favor their own interests to the detriment of our
unitholders.
    
    Our partnership agreement limits our general partners fiduciary duties to our
unitholders and restricts the remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of fiduciary duty.
    
    Even if unitholders are dissatisfied, they cannot currently remove our general partner without its consent.
    
    You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
    
    Our operations are subject to operational hazards and unforeseen interruptions for which
we may or may not be adequately insured.
   2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 WILLIAMS PARTNERS L.P.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in thousands, except per-unit amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005*
    
    
    2006
    
    
    2005*Revenues:Storage
    
    $
    6,581
    
    
    $
    5,409
    
    
    $
    17,610
    
    
    $
    14,435Fractionation
    
    
    2,708
    
    
    
    2,386
    
    
    
    9,650
    
    
    
    7,123Gathering
    
    
    632
    
    
    
    649
    
    
    
    2,041
    
    
    
    2,295Product sales:Affiliate
    
    
    2,920
    
    
    
    2,726
    
    
    
    11,963
    
    
    
    9,234Third-party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Other
    
    
    1,138
    
    
    
    1,006
    
    
    
    3,170
    
    
    
    2,571Total revenues
    
    
    13,979
    
    
    
    12,176
    
    
    
    44,434
    
    
    
    35,721Costs and expenses:Operating and maintenance expense (excluding depreciation):Affiliate
    
    
    3,658
    
    
    
    2,592
    
    
    
    11,041
    
    
    
    7,938Third-party
    
    
    3,961
    
    
    
    5,680
    
    
    
    11,312
    
    
    
    8,854Product cost
    
    
    2,880
    
    
    
    2,258
    
    
    
    11,522
    
    
    
    8,320Depreciation and accretion
    
    
    909
    
    
    
    896
    
    
    
    2,709
    
    
    
    2,694General and administrative expense:Affiliate
    
    
    1,652
    
    
    
    1,170
    
    
    
    4,593
    
    
    
    2,708Third-party
    
    
    562
    
    
    
    385
    
    
    
    1,690
    
    
    
    431Taxes other than income
    
    
    182
    
    
    
    194
    
    
    
    550
    
    
    
    532Other expense
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    Total costs and expenses
    
    
    13,804
    
    
    
    13,175
    
    
    
    43,422
    
    
    
    31,477Operating income (loss)
    
    
    175
    
    
    
    (999
    )
    
    
    1,012
    
    
    
    4,244Equity earnings-Williams Four Corners
    
    
    10,538
    
    
    
    8,565
    
    
    
    26,842
    
    
    
    21,795Equity earnings-Discovery Producer Services
    
    
    4,055
    
    
    
    66
    
    
    
    10,183
    
    
    
    2,969Interest expense:Affiliate
    
    
    (15
    )
    
    
    (1,822
    )
    
    
    (45
    )
    
    
    (7,439
    )Third-party
    
    
    (3,256
    )
    
    
    (192
    )
    
    
    (4,110
    )
    
    
    (561
    )Interest income
    
    
    462
    
    
    
    76
    
    
    
    642
    
    
    
    76Net income
    
    $
    11,959
    
    
    $
    5,694
    
    
    $
    34,524
    
    
    $
    21,084Allocation of net income:Net income
    
    
    11,959
    
    
    
    5,694
    
    
    
    34,524
    
    
    
    21,084Allocation of net income (loss) to general partner
    
    
    (622
    )
    
    
    5,950
    
    
    
    13,249
    
    
    
    21,340Allocation of net income (loss) to limited partners
    
    $
    12,581
    
    
    $
    (256
    )
    
    $
    21,275
    
    
    $
    (256
    )Basic and diluted net income (loss) per limited partner unit:Common units
    
    $
    0.58
    
    
    $
    (0.02
    )
    
    $
    1.19
    
    
    $
    (0.02
    )Subordinated units
    
    
    0.58
    
    
    
    (0.02
    )
    
    
    1.19
    
    
    
    (0.02
    )Weighted average number of units outstanding:Common units
    
    
    14,597,072
    
    
    
    7,000,000
    
    
    
    9,870,084
    
    
    
    7,000,000Subordinated units
    
    
    7,000,000
    
    
    
    7,000,000
    
    
    
    7,000,000
    
    
    
    7,000,000
 
 *
    
    Restated as discussed in Note 1.  3




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WILLIAMS PARTNERS L.P.
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005*(Unaudited)(Thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,150
    
    
    $
    6,839Accounts receivable:Trade
    
    
    2,483
    
    
    
    1,840Other
    
    
    3,124
    
    
    
    2,104Gas purchase contract  affiliate
    
    
    4,888
    
    
    
    5,320Product imbalance
    
    
    428
    
    
    
    760Prepaid expense
    
    
    2,133
    
    
    
    1,133Other current assets
    
    
    628
    
    
    
    Total current assets
    
    
    45,834
    
    
    
    17,996Investment in Williams Four Corners
    
    
    157,874
    
    
    
    152,003Investment in Discovery Producer Services
    
    
    148,443
    
    
    
    150,260Property, plant and equipment, net
    
    
    69,280
    
    
    
    67,931Gas purchase contract  noncurrent  affiliate
    
    
    1,188
    
    
    
    4,754Other
    
    
    2,327
    
    
    
    Total assets
    
    $
    424,946
    
    
    $
    392,944LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable:Trade
    
    $
    4,459
    
    
    $
    3,906Affiliate
    
    
    2,167
    
    
    
    4,729Deferred revenue
    
    
    6,818
    
    
    
    3,552Accrued liabilities
    
    
    5,507
    
    
    
    2,373Total current liabilities
    
    
    18,951
    
    
    
    14,560Long-term debt
    
    
    150,000
    
    
    
    Environmental remediation liabilities
    
    
    3,964
    
    
    
    3,964Other noncurrent liabilities
    
    
    769
    
    
    
    762Commitments and contingent liabilities (Note 7)Partners capital
    
    
    251,262
    
    
    
    373,658Total liabilities and partners capital
    
    $
    424,946
    
    
    $
    392,944
 
 *
    
    Restated as discussed in Note 1.  4




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WILLIAMS PARTNERS L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005*(Thousands)OPERATING ACTIVITIES:Net income
    
    $
    34,524
    
    
    $
    21,084Adjustments to reconcile to cash provided by operations:Depreciation and accretion
    
    
    2,709
    
    
    
    2,694Amortization of gas purchase contract  affiliate
    
    
    3,998
    
    
    
    581Distributions in excess of/(undistributed) equity earnings of:Discovery Producer Services
    
    
    1,817
    
    
    
    (2,969
    )Williams Four Corners
    
    
    (17,132
    )
    
    
    (21,795
    )Cash provided (used) by changes in assets and liabilities:Accounts receivable
    
    
    (1,663
    )
    
    
    (2,538
    )Prepaid expense
    
    
    (1,000
    )
    
    
    (126
    )Accounts payable
    
    
    (2,135
    )
    
    
    3,685Accrued liabilities
    
    
    3,219
    
    
    
    45Deferred revenue
    
    
    3,266
    
    
    
    3,571Other, including changes in non-current liabilities
    
    
    706
    
    
    
    3,045Net cash provided by operating activities
    
    
    28,309
    
    
    
    7,277INVESTING ACTIVITIES:Purchase of equity investment
    
    
    (156,129
    )
    
    
    Capital expenditures
    
    
    (4,009
    )
    
    
    (1,860
    )Contribution to Discovery Producer Services LLC
    
    
    
    
    
    
    (24,400
    )Net cash used by investing activities
    
    
    (160,138
    )
    
    
    (26,260
    )FINANCING ACTIVITIES:Proceeds from sale of common units
    
    
    227,107
    
    
    
    100,247Proceeds from debt issuance
    
    
    150,000
    
    
    
    Excess purchase price over contributed basis of equity
investment
    
    
    (203,871
    )
    
    
    Distributions to unitholders
    
    
    (19,875
    )
    
    
    Distributions to The Williams Companies, Inc
    
    
    
    
    
    
    (58,756
    )Payment of debt issuance costs
    
    
    (3,138
    )
    
    
    Payment of offering costs
    
    
    (2,168
    )
    
    
    (4,291
    )General partner contributions
    
    
    4,841
    
    
    
    Contributions per omnibus agreement
    
    
    4,244
    
    
    
    Changes in advances from affiliates  net
    
    
    
    
    
    
    (3,735
    )Net cash provided by financing activities
    
    
    157,140
    
    
    
    33,465Increase in cash and cash equivalents
    
    
    25,311
    
    
    
    14,482Cash and cash equivalents at beginning of period
    
    
    6,839
    
    
    
    Cash and cash equivalents at end of period
    
    $
    32,150
    
    
    $
    14,482
 
 *
    
    Restated as discussed in Note 1.  5




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WILLIAMS PARTNERS L.P.
 
 CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
 (Unaudited)
 TotalLimited Partners
    
    
    General
    
    
    PartnersCommon
    
    
    Subordinated
    
    
    Partner
    
    
    Capital(Thousands)Balance  January 1, 2006*
    
    $
    108,526
    
    
    $
    108,491
    
    
    $
    156,641
    
    
    $
    373,658Net income
    
    
    13,410
    
    
    
    8,385
    
    
    
    12,729
    
    
    
    34,524Cash distributions
    
    
    (11,318
    )
    
    
    (8,085
    )
    
    
    (472
    )
    
    
    (19,875
    )Contributions pursuant to the omnibus agreement
    
    
    
    
    
    
    
    
    
    
    4,244
    
    
    
    4,244Issuance of units to public
(7,590,000 common units)
    
    
    227,107
    
    
    
    
    
    
    
    
    
    
    
    227,107Contributions from general partner
    
    
    
    
    
    
    
    
    
    
    4,841
    
    
    
    4,841Distribution to general partner in exchange for
interest in Williams Four Corners
    
    
    
    
    
    
    
    
    
    
    (360,000
    )
    
    
    (360,000
    )Adjustment in basis of investment in Williams
Four Corners
    
    
    
    
    
    
    
    
    
    
    (11,261
    )
    
    
    (11,261
    )Offering costs
    
    
    (2,168
    )
    
    
    
    
    
    
    
    
    
    
    (2,168
    )Other
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    192Balance  September 30, 2006
    
    $
    335,749
    
    
    $
    108,791
    
    
    $
    (193,278
    )
    
    $
    251,262
 
 *
    
    Restated as discussed in Note 1.  6




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WILLIAMS PARTNERS L.P.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1. Organization and Basis of Presentation
        7




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Note 2. Recent Accounting Standards
  Note 3. Acquisition of 25.1 Percent Interest in Four Corners
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands)Equity earnings:Without Four
Corners
    
    $
    4,055
    
    
    $
    66
    
    
    $
    10,183
    
    
    $
    2,969Four
Corners
    
    
    10,538
    
    
    
    8,565
    
    
    
    26,842
    
    
    
    21,795Combined equity earnings
    
    $
    14,593
    
    
    $
    8,631
    
    
    $
    37,025
    
    
    $
    24,764Net income (loss):Without Four
Corners
    
    $
    1,421
    
    
    $
    (2,871
    )
    
    $
    7,682
    
    
    $
    (711
    )Four
Corners
    
    
    10,538
    
    
    
    8,565
    
    
    
    26,842
    
    
    
    21,795Combined net
income
    
    $
    11,959
    
    
    $
    5,694
    
    
    $
    34,524
    
    
    $
    21,084
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Note 4. Allocation of Net Income and Distributions
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Allocation to general partner:Net income
    
    $
    11,959
    
    
    $
    5,694
    
    
    $
    34,524
    
    
    $
    21,084Pre-June 20, 2006 Four Corners equity earnings allocated
to general partner interest
    
    
    
    
    
    
    (8,565
    )
    
    
    (15,386
    )
    
    
    (21,795
    )Pre-partnership net loss applicable to period
through August 22, 2005
    
    
    
    
    
    
    2,192
    
    
    
    
    
    
    
    32Charges direct to general partner:Reimbursable general and administrative costs
    
    
    807
    
    
    
    417
    
    
    
    2,393
    
    
    
    417Core drilling indemnified costs
    
    
    679
    
    
    
    
    
    
    
    784
    
    
    
    Total charges direct to general partner
    
    
    1,486
    
    
    
    417
    
    
    
    3,177
    
    
    
    417Income (loss) subject to 2% allocation of
general partner interest
    
    
    13,445
    
    
    
    (262
    )
    
    
    22,315
    
    
    
    (262
    )General partners share of net income (loss)
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    2.0
    %General partners allocated share of net income (loss) before
items directly allocable to general partner interest
    
    
    269
    
    
    
    (6
    )
    
    
    446
    
    
    
    (6
    )Incentive distributions paid to general
partner*
    
    
    74
    
    
    
    
    
    
    
    74
    
    
    
    Direct charges to general partner
    
    
    (1,486
    )
    
    
    (417
    )
    
    
    (3,177
    )
    
    
    (417
    )Pre-partnership net loss applicable to period
through August 22, 2005
    
    
    
    
    
    
    (2,192
    )
    
    
    
    
    
    
    (32
    )Pre June 20, 2006 Four Corners equity earnings applicable to
general partner interest
    
    
    
    
    
    
    8,565
    
    
    
    15,386
    
    
    
    21,795Net income (loss) allocated to general partner
    
    $
    (1,143
    )
    
    $
    5,950
    
    
    $
    12,729
    
    
    $
    21,340Net income
    
    $
    11,959
    
    
    $
    5,694
    
    
    $
    34,524
    
    
    $
    21,084Net income (loss) allocated to general partner
    
    
    (1,143
    )
    
    
    5,950
    
    
    
    12,729
    
    
    
    21,340Net income (loss) allocated to limited partners
    
    $
    13,102
    
    
    $
    (256
    )
    
    $
    21,795
    
    
    $
    (256
    )
 
 *
    
    Under the two class method of computing earnings per share, prescribed by Statement of
Financials Accounting Standards No. 128, Earnings Per Share, earnings are to be allocated to
participating securities as if all of the earnings for the period had been distributed. As a
result, the general partner receives an additional allocation of income in quarterly periods where
an assumed incentive distribution, calculated as if all earnings for the period had been
distributed, exceeds the actual incentive distribution. The assumed incentive distribution for the
three months ended September 30, 2006 is $595,000. This results in an allocation of income for the
calculation of earnings per limited partner unit as follows: Three Months EndedSeptember 30,2006
    
    
    2005Net income (loss) allocated to general partner
    
    $
    (622
    )
    
    $
    5,950Net income (loss) allocated to limited partners
    
    
    12,581
    
    
    
    (256
    )Net income
    
    $
    11,959
    
    
    $
    5,694
 9




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Per Unit
    
    Common
    
    Subordinated
    
    General
    
    Total CashPayment Date
    
    Distribution
    
    Units
    
    Units
    
    Partner
    
    Distribution2/14/2006
    
    $
    0.3500
    
    
    $
    2,452
    
    
    $
    2,450
    
    
    $
    100
    
    
    $
    5,0025/15/2006
    
    $
    0.3800
    
    
    $
    2,662
    
    
    $
    2,660
    
    
    $
    109
    
    
    $
    5,4318/14/2006 (a)
    
    $
    0.4250
    
    
    $
    6,204
    
    
    $
    2,975
    
    
    $
    263
    
    
    $
    9,44211/14/2006 (b)
    
    $
    0.4500
    
    
    $
    6,569
    
    
    $
    3,150
    
    
    $
    401
    
    
    $
    10,120
 
 (a)
    
    Includes $74,000 incentive distribution rights payment.(b)
    
    The board of directors of our general partner declared this cash distribution on October 25,
2006 to be paid on November 14, 2006 to unitholders of record at the close of business on
November 6, 2006. Includes $198,000 incentive distribution rights payment. Note 5. Equity Investments
   Williams Four Corners LLC
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)Current assets
    
    $
    50,948
    
    
    $
    18,832Non-current assets
    
    
    24,020
    
    
    
    25,228Property, plant and equipment, net
    
    
    574,463
    
    
    
    591,034Current liabilities
    
    
    (19,335
    )
    
    
    (27,978
    )Non-current liabilities
    
    
    (1,118
    )
    
    
    (1,526
    )Members capital
    
    $
    628,978
    
    
    $
    605,590
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)Revenues:Affiliate
    
    $
    75,784
    
    
    $
    67,747
    
    
    $
    209,196
    
    
    $
    185,340Third-party
    
    
    56,819
    
    
    
    52,417
    
    
    
    166,873
    
    
    
    150,807Costs and expenses:Affiliate
    
    
    32,260
    
    
    
    25,975
    
    
    
    106,968
    
    
    
    77,099Third-party
    
    
    58,360
    
    
    
    60,066
    
    
    
    162,161
    
    
    
    172,215Net income
    
    $
    41,983
    
    
    $
    34,123
    
    
    $
    106,940
    
    
    $
    86,833
 10




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##### Table of Contents



Discovery Producer Services LLC
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)Current assets
    
    $
    59,769
    
    
    $
    70,525Non-current restricted cash and cash equivalents
    
    
    30,781
    
    
    
    44,559Property, plant and equipment, net
    
    
    349,236
    
    
    
    344,743Current liabilities
    
    
    (23,103
    )
    
    
    (45,070
    )Non-current liabilities
    
    
    (1,198
    )
    
    
    (1,121
    )Members capital
    
    $
    415,485
    
    
    $
    413,636
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)RevenuesAffiliate
    
    $
    38,755
    
    
    $
    8,231
    
    
    $
    113,992
    
    
    $
    38,395Third-party
    
    
    8,663
    
    
    
    10,869
    
    
    
    28,462
    
    
    
    31,019Costs and expensesAffiliate
    
    
    13,071
    
    
    
    3,613
    
    
    
    53,822
    
    
    
    11,931Third-party
    
    
    24,817
    
    
    
    15,819
    
    
    
    65,009
    
    
    
    51,230Interest income
    
    
    (608
    )
    
    
    (498
    )
    
    
    (1,835
    )
    
    
    (1,171
    )Net income
    
    $
    10,138
    
    
    $
    166
    
    
    $
    25,458
    
    
    $
    7,424
 11




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##### Table of Contents



Note 6. Credit Facilities and Long-Term Debt
         12




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##### Table of Contents



Note 7. Commitments and Contingencies
 Environmental Matters.
   Other.
 13




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##### Table of Contents



Note 8. Segment Disclosures
  Gathering &
    
    
    NGLProcessing
    
    
    Services
    
    
    Total(Thousands)Three Months Ended September 30, 2006:Segment revenues
    
    $
    632
    
    
    $
    13,347
    
    
    $
    13,979Operating and maintenance expense
    
    
    399
    
    
    
    7,220
    
    
    
    7,619Product cost
    
    
    
    
    
    
    2,880
    
    
    
    2,880Depreciation and accretion
    
    
    300
    
    
    
    609
    
    
    
    909Direct general and administrative expense
    
    
    
    
    
    
    279
    
    
    
    279Taxes other than income
    
    
    
    
    
    
    182
    
    
    
    182Segment operating income (loss)
    
    
    (67
    )
    
    
    2,177
    
    
    
    2,110Equity earnings-Williams Four Corners
    
    
    10,538
    
    
    
    
    
    
    
    10,538Equity earnings-Discovery Producer Services
    
    
    4,055
    
    
    
    
    
    
    
    4,055Segment profit
    
    $
    14,526
    
    
    $
    2,177
    
    
    $
    16,703Reconciliation to the Consolidated Statements of Income:Segment operating income
    
    
    
    
    
    
    
    
    
    $
    2,110General and administrative expenses:Allocated-affiliate
    
    
    
    
    
    
    
    
    
    
    (1,375
    )Third party-direct
    
    
    
    
    
    
    
    
    
    
    (560
    )Combined operating income
    
    
    
    
    
    
    
    
    
    $
    175Three Months Ended September 30, 2005:Segment revenues
    
    $
    650
    
    
    $
    11,526
    
    
    $
    12,176Operating and maintenance expense
    
    
    101
    
    
    
    8,171
    
    
    
    8,272Product cost
    
    
    
    
    
    
    2,258
    
    
    
    2,258Depreciation and accretion
    
    
    300
    
    
    
    596
    
    
    
    896Direct general and administrative expense
    
    
    
    
    
    
    308
    
    
    
    308Taxes other than income
    
    
    
    
    
    
    194
    
    
    
    194Segment operating income (loss)
    
    
    249
    
    
    
    (1
    )
    
    
    248Equity earnings-Williams Four Corners
    
    
    8,565
    
    
    
    
    
    
    
    8,565Equity earnings-Discovery Producer Services
    
    
    66
    
    
    
    
    
    
    
    66Segment profit (loss)
    
    $
    8,880
    
    
    $
    (1
    )
    
    $
    8,879Reconciliation to the Consolidated Statements of Income:Segment operating income
    
    
    
    
    
    
    
    
    
    $
    248General and administrative expenses:Allocated-affiliate
    
    
    
    
    
    
    
    
    
    
    (895
    )Third party-direct
    
    
    
    
    
    
    
    
    
    
    (352
    )Combined operating loss
    
    
    
    
    
    
    
    
    
    $
    (999
    )
 14




---



##### Table of Contents



Gathering &
    
    
    NGLProcessing
    
    
    Services
    
    
    Total(Thousands)Nine Months Ended September 30, 2006:Segment revenues
    
    $
    2,041
    
    
    $
    42,393
    
    
    $
    44,434Operating and maintenance expense
    
    
    872
    
    
    
    21,481
    
    
    
    22,353Product cost
    
    
    
    
    
    
    11,522
    
    
    
    11,522Depreciation and accretion
    
    
    900
    
    
    
    1,809
    
    
    
    2,709Direct general and administrative expense
    
    
    9
    
    
    
    815
    
    
    
    824Taxes other than income
    
    
    
    
    
    
    550
    
    
    
    550Other expense
    
    
    
    
    
    
    5
    
    
    
    5Segment operating income
    
    
    260
    
    
    
    6,211
    
    
    
    6,471Equity earnings-Williams Four Corners
    
    
    26,842
    
    
    
    
    
    
    
    26,842Equity earnings-Discovery Producer Services
    
    
    10,183
    
    
    
    
    
    
    
    10,183Segment profit
    
    $
    37,285
    
    
    $
    6,211
    
    
    $
    43,496Reconciliation to the Consolidated Statements of Income:Segment operating income
    
    
    
    
    
    
    
    
    
    $
    6,471General and administrative expenses:Allocated-affiliate
    
    
    
    
    
    
    
    
    
    
    (3,785
    )Third party-direct
    
    
    
    
    
    
    
    
    
    
    (1,674
    )Combined operating income
    
    
    
    
    
    
    
    
    
    $
    1,012Nine Months Ended September 30, 2005:Segment revenues
    
    $
    2,295
    
    
    $
    33,426
    
    
    $
    35,721Operating and maintenance expense
    
    
    477
    
    
    
    16,315
    
    
    
    16,792Product cost
    
    
    
    
    
    
    8,320
    
    
    
    8,320Depreciation and accretion
    
    
    900
    
    
    
    1,794
    
    
    
    2,694Direct general and administrative expense
    
    
    
    
    
    
    782
    
    
    
    782Taxes other than income
    
    
    
    
    
    
    532
    
    
    
    532Segment operating income
    
    
    918
    
    
    
    5,683
    
    
    
    6,601Equity earnings-Williams Four Corners
    
    
    21,795
    
    
    
    
    
    
    
    21,795Equity earnings-Discovery Producer Services
    
    
    2,969
    
    
    
    
    
    
    
    2,969Segment profit
    
    $
    25,682
    
    
    $
    5,683
    
    
    $
    31,365Reconciliation to the Consolidated Statements of Income:Segment operating income
    
    
    
    
    
    
    
    
    
    $
    6,601General and administrative expenses:Allocated-affiliate
    
    
    
    
    
    
    
    
    
    
    (2,005
    )Third party-direct
    
    
    
    
    
    
    
    
    
    
    (352
    )Combined operating income
    
    
    
    
    
    
    
    
    
    $
    4,244
 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Please read the following discussion of our financial condition and results of operations in
conjunction with the consolidated financial statements included in Item 1 of Part I of this
quarterly report.
 Overview
  
    
    Gathering and Processing.Our Gathering and Processing segment includes (1) our 25.1
percent ownership interest in Williams Four Corners LLC (Four Corners), (2) our 40
percent ownership interest in Discovery Producer Services LLC (Discovery) and (3) the
Carbonate Trend gathering pipeline off the coast of Alabama. The Four Corners system
gathers and processes or treats approximately 37 percent of the natural gas produced in
the San Juan Basin and connects with the five pipeline systems that transport natural gas
to end markets from the basin. Discovery owns an integrated natural gas gathering and
transportation pipeline system extending from offshore in the Gulf of Mexico to a natural
gas processing facility and an NGL fractionator in Louisiana. These assets generate
revenues by providing natural gas gathering, transporting and processing services and
integrated NGL fractionating services to customers under a range of contractual
arrangements. Although Discovery includes fractionation operations, which would normally
fall within the NGL Services segment, it is primarily engaged in gathering and processing
and is managed as such.
    
    NGL Services.Our NGL Services segment includes three integrated NGL storage
facilities and a 50 percent undivided interest in a fractionator near Conway, Kansas.
These assets generate revenues by providing stand-alone NGL fractionation and storage
services using various fee-based contractual arrangements where we receive a fee or fees
based on actual or contracted volumetric measures.
 Recent Events
 Issuance of Common Units.
 Issuance of Senior Unsecured Notes.
 Acquisition of Interest in Four Corners.
 (i)
    
    a 3,500-mile natural gas gathering system in the San Juan
Basin in New Mexico and Colorado with a capacity of two
billion cubic feet per day;(ii)
    
    the Ignacio natural gas processing plant in Colorado and
the Kutz and Lybrook natural gas processing plants in New
Mexico, which have a combined processing capacity of 760
million cubic feet per day (MMcf/d); and
 16




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##### Table of Contents



(iii)
    
    the Milagro and Esperanza natural gas treating plants in
New Mexico, which have a combined carbon dioxide treating
capacity of 750 MMcf/d.
  Future Acquisitions.
 New Credit Facility with Williams.
 17




---



##### Table of Contents



Results of Operations
 Consolidated Overview
  Three months ended
    
    
    % Change
    
    
    Nine months ended
    
    
    % ChangeSeptember 30,
    
    
    from
    
    
    September 30,
    
    
    from2006
    
    
    2005
    
    
    2005(1)
    
    
    2006
    
    
    2005
    
    
    2005(1)(Thousands)
    
    
    
    
    
    
    (Thousands)Revenues
    
    $
    13,979
    
    
    $
    12,176
    
    
    
    +15
    %
    
    $
    44,434
    
    
    $
    35,721
    
    
    
    +24
    %Costs and expenses:Operating and maintenance
expense
    
    
    7,619
    
    
    
    8,272
    
    
    
    +8
    %
    
    
    22,353
    
    
    
    16,792
    
    
    
    -33
    %Product cost
    
    
    2,880
    
    
    
    2,258
    
    
    
    -28
    %
    
    
    11,522
    
    
    
    8,320
    
    
    
    -38
    %Depreciation and accretion
    
    
    909
    
    
    
    896
    
    
    
    -1
    %
    
    
    2,709
    
    
    
    2,694
    
    
    
    -1
    %General and administrative
expense
    
    
    2,214
    
    
    
    1,555
    
    
    
    -42
    %
    
    
    6,283
    
    
    
    3,139
    
    
    
    -100
    %Taxes other than income
    
    
    182
    
    
    
    194
    
    
    
    +6
    %
    
    
    550
    
    
    
    532
    
    
    
    -3
    %Other expense
    
    
    
    
    
    
    
    
    
    NM
    
    
    
    5
    
    
    
    
    
    
    NMTotal costs and expenses
    
    
    13,804
    
    
    
    13,175
    
    
    
    -5
    %
    
    
    43,422
    
    
    
    31,477
    
    
    
    -38
    %Operating income (loss)
    
    
    175
    
    
    
    (999
    )
    
    NM
    
    
    
    1,012
    
    
    
    4,244
    
    
    
    -76
    %Equity earnings  Four Corners
    
    
    10,538
    
    
    
    8,565
    
    
    
    +23
    %
    
    
    26,842
    
    
    
    21,795
    
    
    
    +23
    %Equity earnings  Discovery
    
    
    4,055
    
    
    
    66
    
    
    NM
    
    
    
    10,183
    
    
    
    2,969
    
    
    NMInterest expense
    
    
    (3,271
    )
    
    
    (2,014
    )
    
    
    -62
    %
    
    
    (4,155
    )
    
    
    (8,000
    )
    
    
    +48
    %Interest income
    
    
    462
    
    
    
    76
    
    
    NM
    
    
    
    642
    
    
    
    76
    
    
    NMNet income
    
    $
    11,959
    
    
    $
    5,694
    
    
    
    +110
    %
    
    $
    34,524
    
    
    $
    21,084
    
    
    
    +64
    %
 
 (1)
    
    + = Favorable Change;  = Unfavorable Change; NM = A percentage
calculation is not meaningful due to change in signs, a zero-value
denominator or a percentage change greater than 200. Three months ended September 30, 2006 vs. three months ended September 30, 2005
    18




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Nine months ended September 30, 2006 vs. nine months ended September 30, 2005
        19




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Results of Operations  Gathering and Processing
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands)Segment revenues
    
    $
    632
    
    
    $
    650
    
    
    $
    2,041
    
    
    $
    2,295Costs and expenses:Operating and maintenance expense
    
    
    399
    
    
    
    101
    
    
    
    872
    
    
    
    477Depreciation
    
    
    300
    
    
    
    300
    
    
    
    900
    
    
    
    900General and administrative expense
 direct
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    Total costs and expenses
    
    
    699
    
    
    
    401
    
    
    
    1,781
    
    
    
    1,377Segment operating income (loss)
    
    
    (67
    )
    
    
    249
    
    
    
    260
    
    
    
    918Equity earnings  Four Corners
    
    
    10,538
    
    
    
    8,565
    
    
    
    26,842
    
    
    
    21,795Equity earnings  Discovery
    
    
    4,055
    
    
    
    66
    
    
    
    10,183
    
    
    
    2,969Segment profit
    
    $
    14,526
    
    
    $
    8,880
    
    
    $
    37,285
    
    
    $
    25,682
 Carbonate Trend
  20




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Four Corners
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands)Revenues
    
    $
    132,603
    
    
    $
    120,164
    
    
    $
    376,069
    
    
    $
    336,147Costs and expenses, including interest:Product cost and shrink replacement
    
    
    41,821
    
    
    
    42,235
    
    
    
    121,898
    
    
    
    115,087Operating and maintenance expense
    
    
    29,950
    
    
    
    24,429
    
    
    
    93,570
    
    
    
    76,810Depreciation and amortization
    
    
    10,035
    
    
    
    9,673
    
    
    
    29,801
    
    
    
    29,107General and administrative expense
    
    
    6,554
    
    
    
    6,783
    
    
    
    21,248
    
    
    
    21,092Taxes other than income
    
    
    2,170
    
    
    
    1,976
    
    
    
    5,842
    
    
    
    5,909Other (income) expense, net
    
    
    90
    
    
    
    945
    
    
    
    (3,230
    )
    
    
    1,309Total costs and expenses, including interest
    
    
    90,620
    
    
    
    86,041
    
    
    
    269,129
    
    
    
    249,314Net income
    
    $
    41,983
    
    
    $
    34,123
    
    
    $
    106,940
    
    
    $
    86,833Williams
Partners 25.1 percent interest 
Equity earnings per our Consolidated
Statements of Income$
    10,538
    
    
    $
    8,565
    
    
    $
    26,842
    
    
    $
    21,795
 Three months ended September 30, 2006 vs. three months ended September 30, 2005
   
    
    $6.3 million related to a 17 percent increase in average NGL sales prices realized on
sales of NGLs that Four Corners received under certain processing contracts. This increase
resulted from general increases in market prices for these commodities between the two
periods;
    
    $3.8 million related to an 11 percent increase in NGL volumes that Four Corners received
under certain processing contracts. This increase was related primarily to equipment
outages in the third quarter of 2005; and
    
    $0.7 million of higher liquefied natural gas (LNG) sales related primarily to an
increase in volumes sold.
    
    These product sales increases were partially offset by $1.6 million lower sales of NGLs
on behalf of third party producers who have Four Corners market their NGLs for a fee in
accordance with their contracts. Under these arrangements, Four Corners purchases the NGLs
from the third party producers and sells them to an affiliate. This decrease is offset by
lower associated product costs of $1.6 million discussed below.
  21




---



##### Table of Contents




    
    $1.2 million net increase from a $3.6 million increase caused by 23 percent higher
volumetric shrink requirements under Four Corners keep-whole processing contracts,
partially offset by a $2.4 million decrease from 13 percent lower average natural gas
prices; and
    
    $1.6 million decrease from third party producers who elected to have Four Corners market
their NGLs. This increase is offset by the corresponding increase in product sales
discussed above.
  
    
    $4.2 million increase in materials and supplies and outside services expense related
primarily to increased compression, environmental and maintenance costs;
    
    $2.3 million in other increases including a $2.0 million correction of understated
leased compression expense in the second quarter of 2006. Our management concluded that
the effect of this correction was not material to our consolidated results for the third
quarter of 2006, or the prior period or to our trend in earnings; and
    
    $1.6 million increase in labor and benefits increases primarily caused by adjustments to
Williams annual incentive program.
    
    These increases were partially offset by a $2.6 million decrease in non-shrink natural
gas purchases due primarily to lower system losses.
   Nine months ended September 30, 2006 vs. nine months ended September 30, 2005
  
    
    $21.0 million related to a 23 percent increase in average NGL sales prices realized on
sales of NGLs which Four Corners received under certain processing contracts. This
increase resulted from general increases in market prices for these commodities between the
two periods;
    
    $4.1 million related to a five percent increase in NGL volumes that Four Corners
received under certain processing contracts. This increase was related primarily to
reduced equipment outages in 2005;
    
    $3.5 million of higher condensate sales, which includes $1.9 million resulting from the
recognition of two additional months of condensate revenue in 2006. Prior to 2006,
condensate revenue had been recognized two months in arrears. As a result of more timely
sales information now made available from third parties, we have recorded these on a
current basis and thus have fully recognized this activity through September 30, 2006. Our
management concluded that the effect of recording the additional two months was not
material to our results for 2006, prior periods or our trend of earnings; and
    
    $3.1 million of higher LNG sales related primarily to an increase in volumes sold.
    
    These product sales increases were partially offset by $1.4 million lower sales of NGLs
on behalf of third party producers who have Four Corners market their NGLs for a fee in
accordance with their contracts.
 22




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Under these arrangements, Four Corners purchases the NGLs from the third party producers and
sells them to an affiliate. This decrease is offset by lower associated product costs of
$1.4 million discussed below.
   
    
    $4.9 million increase from 12 percent higher volumetric shrink requirements under Four
Corners keep-whole processing contracts;
    
    $1.3 million increase from three percent higher average natural gas prices;
    
    $2.0 million increase related to increased condensate and LNG sales; and
    
    $1.4 million decrease from third party producers who elected to have Four Corners market
their NGLs. This increase is offset by the corresponding increase in product sales
discussed above.
  
    
    $11.3 million increase in materials and supplies, outside services and other operating
expenses related primarily to increased compression and maintenance costs;
    
    $2.8 million increase in labor and benefits caused by adjustments to Williams annual
incentive program and the addition of new personnel; and
    
    $2.7 million increase in non-shrink natural gas purchases due primarily to higher
volumetric gathering fuel requirements and higher system losses.
   23




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Discovery Producer Services
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands)Revenues
    
    $
    47,418
    
    
    $
    19,100
    
    
    $
    142,454
    
    
    $
    69,414Costs and expenses, including interest:Product cost and shrink replacement
    
    
    25,631
    
    
    
    7,763
    
    
    
    83,079
    
    
    
    28,598Operating and maintenance expense
    
    
    5,095
    
    
    
    4,063
    
    
    
    15,149
    
    
    
    13,174Depreciation and accretion
    
    
    6,380
    
    
    
    6,127
    
    
    
    19,133
    
    
    
    18,366General and administrative expense
    
    
    372
    
    
    
    517
    
    
    
    1,606
    
    
    
    1,535Interest income
    
    
    (608
    )
    
    
    (498
    )
    
    
    (1,835
    )
    
    
    (1,171
    )Other (income) expense, net
    
    
    410
    
    
    
    962
    
    
    
    (136
    )
    
    
    1,488Total costs and expenses, including interest
    
    
    37,280
    
    
    
    18,934
    
    
    
    116,996
    
    
    
    61,990Net income
    
    $
    10,138
    
    
    $
    166
    
    
    $
    25,458
    
    
    $
    7,424Williams Partners 40 percent interest 
Equity earnings per our Consolidated
Statements of Income$
    4,055
    
    
    $
    66
    
    
    $
    10,183
    
    
    $
    2,969
 Three months ended September 30, 2006 vs. three months ended September 30, 2005
  
    
    Product sales increased $18.2 million for NGL sales related to third-party processing
customers elections to have Discovery market their NGLs for a fee under an option in their
contracts. Under these arrangements, Discovery purchases the NGLs from the third-party
processing customers and sells them to an affiliate. These sales were offset by higher
associated product costs of $18.2 million discussed below.
    
    Product sales also increased approximately $9.7 million due to NGL sales that Discovery received under certain processing contracts of
approximately 14.0 million gallons in 2006 compared to 4.4 million gallons in 2005. NGL
sales volumes in 2005 were lower due primarily to the temporary shutdown of the Discovery
assets for hurricanes.
    
    Transportation revenue increased $1.6 million, including $0.8 million due to additional
fee-based revenues related to the TETCO open season agreement discussed above.
    
    Processing and fractionation revenue increased $1.6 million in additional fee-based
revenues related to the TETCO open season agreement.
  
    
    Product sales decreased $2.3 million due to the absence of excess fuel and shrink
replacement gas sales in 2006.
 24




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##### Table of Contents




    
    Gathering revenues decreased $0.4 million due to a rate decrease partially offset by
increased gathered volumes.
      Nine months ended September 30, 2006 vs. Nine months ended September 30, 2005
  
    
    Product sales increased $63.7 million for NGL sales related to third-party processing
customers elections to have Discovery market their NGLs for a fee under an option in their
contracts. These sales were offset by higher associated product costs of $63.7 million
discussed below.
    
    Fee-based processing and fractionation revenues increased $7.3 million, including $8.3
million in additional fee-based revenues related to the TGP and TETCO open seasons
discussed above, $1.7 million from increased volumes and fees from the wells that came
on-line in 2006 and $0.6 million from increased volumes from existing wells, partially
offset by a $3.3 million decrease in by-pass revenues and other throughput declines.
    
    Transportation revenues increased $4.6 million, including $4.7 million in additional
fee-based revenues related to the TGP and TETCO open seasons discussed above, $1.8 million
in revenues from wells that came on-line in 2006 and $1.0 million in other tariff rate
changes, partially offset by $2.8 million related to other throughput declines.
    
    Product sales also increased approximately $4.0 million as a result of $5.3 million from
19 percent higher average NGL sales prices, partially offset by $1.3 million from a four
percent decrease in sales volumes.
  
    
    Product sales decreased $3.2 million due to the absence of excess fuel and shrink
replacement gas sales in 2006.
    
    Gathering revenues decreased $3.2 million due primarily to a $1.8 million decrease
related to a decline in both gathered volumes and rates and a $1.4 million deficiency
payment received in the first quarter of 2005.
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##### Table of Contents



Outlook
 Carbonate Trend
   Four Corners
  
    
    In 2007, we anticipate that sustained drilling activity, expansion opportunities and
production enhancement activities by existing customers should be sufficient to more than
offset the historical decline and increase gathered and processed volumes.
    
    Four Corners has realized above average margins at its gas processing plants in recent
years because of volatile natural gas and crude oil markets. We expect per-unit margins in
2006 will remain strong in relation to historical averages. Additionally, we anticipate
that Four Corners contract mix and commodity management activities will continue to allow
it to realize greater margins relative to industry averages.
    
    We anticipate that operating costs, excluding compression, will increase in 2006.
Compression cost increases are dependent upon the extent and amount of additional
compression needed to meet the needs of Four Corners customers and the cost at which
compression can be purchased, leased and operated.
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Additionally, Four Corners has made unbudgeted expenditures in 2006 that are expected to
have a positive long-term economic impact.
    
    We anticipate that the natural gas fuel cost associated with the operation of the
Milagro treating plant will increase due to the expiration, in October 2006, of a natural
gas purchase contract with Williams that contained pricing that has recently been below
market.
    
    We are conducting negotiations with the Jicarilla Apache Nation (JAN) in Northern New
Mexico for the renewal of certain rights of way on reservation lands. The current right of
way agreement, which covers certain gathering system assets in Rio Arriba County, NM,
expires on December 31, 2006. JAN has recently advised us that they do not intend to extend
the existing right of way agreement and asked that we enter into negotiations for the sale
of those gathering system assets to JAN. We anticipate further discussions that could
include renewal, sale or other options that might be in the mutual interest of both
parties.
 Discovery
  
    
    The Tahiti pipeline lateral expansion project is currently on schedule. We anticipate
initial throughput will begin in April 2008. We expect this agreement will have a
significant favorable impact on Discoverys revenues.
    
    Discovery signed a one-year processing contract with TETCO effective October 2006 for a
minimum volume of 100 billion British Thermal Units a day (BBtu/d) and a maximum of 300
BBtu/d.
    
    With the current oil and natural gas price environment, drilling activity across the
shelf and the deepwater of the Gulf of Mexico has been robust. However, the availability
of specialized rigs necessary to drill in the deepwater areas, such as those in and around
Discoverys gathering areas, limits the ability of producers to bring identified reserves
to market quickly. This will prolong the timeframe over which these reserves will be
developed. We expect Discovery to be successful in competing for a portion of these new
volumes.
    
    On March 31, 2006, Discovery connected a new well in ATP Oil & Gas Corporations Gomez
prospect; currently the rate is approximately 40 BBtu/d. We expect the rate to increase
from this level in the first quarter of 2007.
    
    Insurance premiums have increased dramatically from approximately $2.3 million in 2005
to the current level of $4.9 million in 2006 on an annual basis. We have no reason to
expect premiums to materially change from this amount in the near term.
    
    During the second quarter of 2006, Discovery began receiving additional production at
South Timbalier 41, and is currently flowing approximately 100 BBtu/d.
    
    In September 2006, Discovery began receiving additional production at South Timbalier
219/220, and is currently flowing approximately 25 BBtu/d.
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Results of Operations  NGL Services
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands)Segment revenues
    
    $
    13,347
    
    
    $
    11,526
    
    
    $
    42,393
    
    
    $
    33,426Costs and expenses:Operating and maintenance expense
    
    
    7,220
    
    
    
    8,171
    
    
    
    21,481
    
    
    
    16,315Product cost
    
    
    2,880
    
    
    
    2,258
    
    
    
    11,522
    
    
    
    8,320Depreciation and accretion
    
    
    609
    
    
    
    596
    
    
    
    1,809
    
    
    
    1,794General and administrative expense  direct
    
    
    279
    
    
    
    308
    
    
    
    815
    
    
    
    782Taxes other than income
    
    
    182
    
    
    
    194
    
    
    
    550
    
    
    
    532Other expense
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    Total costs and expenses
    
    
    11,170
    
    
    
    11,527
    
    
    
    36,182
    
    
    
    27,743Segment profit (loss)
    
    $
    2,177
    
    
    $
    (1
    )
    
    $
    6,211
    
    
    $
    5,683
 Three months ended September 30, 2006 vs. three months ended September 30, 2005
  
    
    Storage revenues increased $1.2 million due primarily to higher average storage
volumes from additional short-term storage leases caused by the reduced demand for
propane during the mild 2006 winter.
    
    Fractionation revenues increased $0.3 million due primarily to 16 percent higher
fractionation volumes.
    
    Product sales were $0.2 million higher due to higher sales volumes.
    Nine months ended September 30, 2006 vs. nine months ended September 30, 2005
  
    
    Storage revenues increased $3.2 million due primarily to higher average storage
volumes from additional short-term storage leases caused by the reduced demand for
propane during the mild 2006 winter.
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
    
    Product sales were $2.7 million higher due to higher sales volumes.
    
    Fractionation revenues increased $2.5 million due primarily to 26 percent higher
volumes and a seven percent increase in the average fractionation rate related to the
pass through to customers of increased fuel and power costs.
    Outlook
 
    
    For the fourth quarter of 2006, we anticipate that fractionation volumes will average
approximately 34,000 barrels per day, which is a decrease from the third quarters average
of 38,500 barrels per day. The commodity differential between Conway and Mont Belvieu
currently favors fractionation at Mont Belvieu. One of our customers is forecasting
sending certain volumes south to Mont Belvieu in accordance with their contract option. We
expect continued income from the blending and segregation of various products.
    
    During the first quarter of 2006, we received storage volume nominations for the storage
year beginning April 1, 2006 that will generate revenues equal to last years record
levels. We have experienced record physical storage volumes and generated 1.7 million
barrels of short-term storage leases during the third quarter of 2006. We expect minimal
additional short-term leases during the remainder of 2006 as storage volumes are near
capacity for a number of products.
    
    We continue to execute a large number of storage cavern workovers and wellhead
modifications to comply with KDHE regulatory requirements. We expect outside service costs
to continue at current levels throughout 2006 and 2007 to ensure that we meet the
regulatory compliance requirement to complete cavern wellhead modifications before the end
of 2008. Our forecast for the end of 2006 is to complete approximately 38 cavern workovers
compared to 30 in 2005.
 Financial Condition and Liquidity
 Outlook for 2006
  
    
    Cash and cash equivalents;
    
    Cash generated from operations;
    
    Cash distributions from Four Corners and Discovery;
    
    Capital contributions from Williams pursuant to an omnibus agreement; and
    
    Credit facilities, as needed.
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
    
    Maintenance capital expenditures for our Conway assets;
    
    Quarterly distributions to our unitholders; and
    
    Carbonate Trend overburden restoration.
 Four Corners
  Date of Distribution
    
    Total Distribution to Members
    
    Our 25.1% Share8/31/06
    
    $
    17,164
    
    
    $
    4,3089/30/06
    
    $
    21,522
    
    
    $
    5,402
 Discovery
  Date of Distribution
    
    Total Distribution to Members
    
    Our 40% Share1/31/06
    
    $
    11,000
    
    
    $
    4,4004/28/06
    
    $
    9,000
    
    
    $
    3,6007/31/06
    
    $
    10,000
    
    
    $
    4,00010/30/06
    
    $
    11,000
    
    
    $
    4,400
   Capital Contributions from Williams
  
    
    Indemnification of environmental and related expenditures for a period of three years
(for certain of those expenditures) up to $14 million, which includes between $3.4 million
and $4.6 million for the restoration activities due to the partial erosion of the Carbonate
Trend pipeline overburden by Hurricane Ivan, approximately $3.1 million for capital
expenditures related to KDHE-related cavern compliance at our Conway storage facilities,
and approximately $1.0 million for our 40 percent share of Discoverys costs for
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marshland restoration and repair or replacement of Paradis emission-control flare. As of
September 30, 2006 we have received $2.4 million from Williams for these items.
 
    
    An annual credit for general and administrative expenses of $3.2 million in 2006, $2.4
million in 2007, $1.6 million in 2008 and $0.8 million in 2009. For the nine months ended
September 30, 2006 we have received $2.4 million in credits.
    
    Up to $3.4 million to fund our 40 percent share of the expected total cost of
Discoverys Tahiti pipeline lateral expansion project in excess of the $24.4 million we
contributed during September 2005.
 Credit Facilities
    Senior Unsecured Notes
    31




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Capital Requirements
  
    
    Maintenance capital expenditures, which are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing operating capacity
of our assets and to extend their useful lives; and
    
    Expansion capital expenditures such as those to acquire additional assets to grow our
business, to expand and upgrade plant or pipeline capacity and to construct new plants,
pipelines and storage facilities.
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Working Capital Attributable to Deferred Revenues
  Cash Distributions to Unitholders
  Results of Operations  Cash Flows
 Williams Partners L.P.
 Nine months endedSeptember 30,2006
    
    2005(Thousands)Net cash provided by operating activities
    
    $
    28,309
    
    
    $
    7,277Net cash used by investing activities
    
    $
    (160,138
    )
    
    $
    (26,260
    )Net cash provided by financing activities
    
    $
    157,140
    
    
    $
    33,465
  
    
    $12.0 million increase in distributed earnings from Discovery;
    
    $9.7 million increase in distributed earnings from Four Corners; and
    
    $3.9 million net lower interest from the forgiveness of the advances from Williams in
conjunction with the closing of our IPO on August 23, 2005 offset by interest on our $150
million senior unsecured notes issued to finance a portion of our acquisition of a 25.1
percent interest in Four Corners.
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
    
    $172.7 million in net cash flows from transactions related to our acquisition of a 25.1
percent interest in Four Corners;
    
    $19.9 million of distributions paid to unitholders; and
    
    $4.2 million in indemnifications and reimbursements received from Williams pursuant to
the omnibus agreement.
  Four Corners and Discovery
  Four Corners  100 percent
 Nine months endedSeptember 30,2006
    
    
    2005(Thousands)Operating Activities:Net income
    
    $
    106,940
    
    
    $
    86,833Adjustments to reconcile to cash provided by operations:Depreciation and accretion
    
    
    29,801
    
    
    
    29,107Gain on sale of equipment
    
    
    (2,622
    )
    
    
    Cash used by changes in assets and liabilities
    
    
    (34,380
    )
    
    
    (9,393
    )Net cash provided by operating activities
    
    
    99,739
    
    
    
    106,547Investing Activities:Property, plant and equipment:Capital expenditures
    
    
    (17,506
    )
    
    
    (13,301
    )Proceeds from sales of equipment
    
    
    7,299
    
    
    
    Net cash used by investing activities
    
    
    (10,207
    )
    
    
    (13,301
    )Financing Activities:Distributions to Williams under cash management program
    
    
    (44,865
    )
    
    
    (93,246
    )Distributions to members
    
    
    (38,686
    )
    
    
    Net cash used by financing activities
    
    
    (83,551
    )
    
    
    (93,246
    )Net increase in cash and cash equivalents
    
    $
    5,981
    
    
    $
    
  34




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Discovery  100 percent
 Nine months endedSeptember 30,2006
    
    
    2005(Thousands)Operating Activities:Net income
    
    $
    25,458
    
    
    $
    7,424Adjustments to reconcile to cash provided by operations:Depreciation and accretion
    
    
    19,133
    
    
    
    18,366Cash provided (used) by changes in assets and liabilities
    
    
    (5,657
    )
    
    
    3,094Net cash provided by operating activities
    
    
    38,934
    
    
    
    28,884Investing Activities:Property, plant and equipment:Capital expenditures
    
    
    (23,549
    )
    
    
    (9,327
    )Change in accounts payable  capital expenditures
    
    
    285
    
    
    
    (10,224
    )(Increase) decrease in restricted cash
    
    
    13,778
    
    
    
    (45,501
    )Net cash used by investing activities
    
    
    (9,486
    )
    
    
    (65,052
    )Financing Activities:Contributions from members
    
    
    8,989
    
    
    
    48,303Distributions to members
    
    
    (32,598
    )
    
    
    (43,764
    )Net cash provided (used) by financing activities
    
    
    (23,609
    )
    
    
    4,539Net increase (decrease) in cash and cash equivalents
    
    $
    5,839
    
    
    $
    (31,629
    )
   35




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
    
    $32.6 million of distributions paid to members, including three quarterly distributions
totaling $30.0 million; and
    
    $9.0 million of capital contributions from members other than us for the construction of
the Tahiti pipeline lateral expansion.
  Contractual Obligations
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Commodity Price Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  36




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Third-Quarter 2006 Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Limited partner interests are inherently different from the capital stock of a corporation,
although many of the business risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. The following new or modified risk factors,
most of which relate to our recent acquisition of a 25.1 percent interest in Williams Four Corners
LLC and our recent issuance of $150.0 million aggregate principal amount of senior unsecured notes,
should be read in conjunction with the risk factors disclosed in Part I, Item 1A, Risk Factors,
in our annual report on Form 10-K for the year ended December 31, 2005. In addition to the
information contained elsewhere in this quarterly report, the following risk factors, along with
the risk factors contained in our annual report on Form 10-K for the year ended December 31, 2005,
should be carefully considered by each unitholder in evaluating an investment in us. If any of the
following risks or those risks included in our Form 10-K were actually to occur, our business,
results of operations and financial condition could be materially adversely affected. In that case,
we might not be able to pay distributions on our common units and the trading price of our common
units could decline and unitholders could lose all or part of their investment.
 Risks Inherent in Our Business
 We may not have sufficient cash from operations to enable us to pay the minimum quarterly
distribution following establishment of cash reserves and payment of fees and expenses, including
payments to our general partner.
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
    
    the prices we obtain for our services;
    
    the prices of, level of production of, and demand for, natural gas and NGLs;
    
    the volumes of natural gas we gather, transport and process and the volumes of
NGLs we fractionate and store;
    
    the level of our operating costs, including payments to our general partner; and
    
    prevailing economic conditions.
  
    
    the level of capital expenditures we make;
    
    the restrictions contained in our and Williams debt agreements and our debt service requirements;
    
    the cost of acquisitions, if any;
    
    fluctuations in our working capital needs;
    
    our ability to borrow for working capital or other purposes;
    
    the amount, if any, of cash reserves established by our general partner;
    
    the amount of cash that each of Discovery and Four Corners distributes to us; and
    
    reimbursement payments to us by, and credits from, Williams under the omnibus agreement.
  Because of the natural decline in production from existing wells and competitive factors, the
success of our gathering and transportation businesses depends on our ability to connect new
sources of natural gas supply, which is dependent on factors beyond our control. Any decrease in
supplies of natural gas could adversely affect our business and operating results.
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Lower natural gas and oil prices could adversely affect our fractionation and storage businesses.
   
    
    worldwide economic conditions;
    
    weather conditions and seasonal trends;
    
    the levels of domestic production and consumer demand;
    
    the availability of imported natural gas and NGLs;
    
    the availability of transportation systems with adequate capacity;
    
    the price and availability of alternative fuels;
    
    the effect of energy conservation measures;
    
    the nature and extent of governmental regulation and taxation; and
    
    the anticipated future prices of natural gas, NGLs and other commodities.
 Our processing, fractionation and storage businesses could be affected by any decrease in NGL
prices or a change in NGL prices relative to the price of natural gas.
  39




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We depend on certain key customers and producers for a significant portion of our revenues and
supply of natural gas and NGLs. The loss of any of these key customers or producers could result in
a decline in our revenues and cash available to pay distributions.
   If third-party pipelines and other facilities interconnected to our pipelines and facilities become
unavailable to transport natural gas and NGLs or to treat natural gas, our revenues and cash
available to pay distributions could be adversely affected.
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##### Table of Contents



Our future financial and operating flexibility may be adversely affected by restrictions in our
indenture and by our leverage.
   
    
    make it more difficult for us to satisfy our obligations with respect to our outstanding notes and our
other indebtedness, which could in turn result in an event of default on such other indebtedness or
our outstanding notes;
    
    impair our ability to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes;
    
    adversely affect our ability to pay cash distributions to our unitholders;
    
    diminish our ability to withstand a downturn in our business or the economy generally;
    
    require us to dedicate a substantial portion of our cash flow from operations to debt service
payments, thereby reducing the availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate; and
    
    place us at a competitive disadvantage compared to our competitors that have proportionately less debt.
  41




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##### Table of Contents



Neither Four Corners nor Discovery is prohibited from incurring indebtedness, which may affect our
ability to make distributions to our unitholders.
  We do not own all of the interests in the Conway fractionator, in Discovery or in Four Corners,
which could adversely affect our ability to operate and control these assets in a manner beneficial
to us.
  Discovery and Four Corners may reduce their cash distributions to us in some situations.
   We do not operate all of our assets. This reliance on others to operate our assets and to provide
other services could adversely affect our business and operating results.
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##### Table of Contents



Our industry is highly competitive, and increased competitive pressure could adversely affect our
business and operating results.
       The only pipeline that provides NGL transportation capacity in the San Juan Basin has filed at FERC
to increase certain of its tariff rates. If the requested increase is granted, Four Corners
operating costs would increase, which could have an adverse effect on our business and operating
results.
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##### Table of Contents



Pipeline integrity programs and repairs may impose significant costs and liabilities on us.
  
    
    perform ongoing assessments of pipeline integrity;
    
    identify and characterize applicable threats to pipeline segments that
could impact a high consequence area;
    
    improve data collection, integration and analysis;
    
    repair and remediate the pipeline as necessary; and
    
    implement preventive and mitigating actions.
    We do not own all of the land on which our pipelines and facilities are located, which could
disrupt our operations.
  44




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Our operations are subject to governmental laws and regulations relating to the protection of the
environment, which may expose us to significant costs and liabilities.
  
    
    the Federal Clean Air Act and analogous state laws, which impose obligations related to air emissions;
    
    the Federal Water Pollution Control Act of 1972, as renamed and amended as the Clean Water Act, or
CWA, and analogous state laws, which regulate discharge of wastewaters from our facilities to state
and federal waters;
    
    the federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as
CERCLA or the Superfund law, and analogous state laws that regulate the cleanup of hazardous
substances that may have been released at properties currently or previously owned or operated by us
or locations to which we have sent wastes for disposal; and
    
    the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous state laws that
impose requirements for the handling and discharge of solid and hazardous waste from our facilities.
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##### Table of Contents



The natural gas gathering operations in the San Juan Basin may be subjected to regulation by the
state of New Mexico, which could negatively affect Four Corners.
  Risks Inherent in an Investment in Us
 We have a holding company structure in which our subsidiaries conduct our operations and own our
operating assets, which may affect our ability to make payments on our outstanding notes and
distributions on our common units.
  Our common units have a limited trading history and a limited trading volume compared to other
units representing limited partner interests.
   
    
    our quarterly distributions;
    
    our quarterly or annual earnings or those of other companies in our industry;
    
    loss of a large customer;
    
    announcements by us or our competitors of significant contracts or acquisitions;
    
    changes in accounting standards, policies, guidance, interpretations or principles;
    
    general economic conditions;
    
    the failure of securities analysts to cover our common units or changes in
financial estimates by analysts;
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##### Table of Contents




    
    future sales of our common units; and
    
    the other factors described in the Risk Factors set forth in our annual report
on Form 10-K for the year ended December 31, 2005 and our quarterly reports on
Form 10-Q.
 
 Item 6. Exhibits
  ExhibitNumber
    
    Description*#Exhibit 2.1
    
    Purchase and Sale Agreement, dated April 6, 2006, by and among Williams Energy
Services, LLC, Williams Field Services Group, LLC, Williams Field Services
Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams
Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7,
2006).*Exhibit 3.1
    
    Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit
3.1 to Williams Partners L.P.s registration statement on Form S-1 (File No.
333-124517) filed with the SEC on May 2, 2005).*Exhibit 3.2
    
    Amended and Restated Agreement of Limited Partnership of Williams Partners L.P.
(including form of common unit certificate), as amended by Amendments Nos. 1 and 2
(attached as Exhibit 4.2 to Williams Partners L.P.s registration statement on
Form S-3 (File No. 333-137562) filed with the SEC on September 22, 2006).*Exhibit 10.1
    
    Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between
The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.7
to Williams Partners L.P.s quarterly report on Form 10-Q (File No. 001-32599)
filed with the SEC on August 8, 2006).+Exhibit 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.+Exhibit 31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.+Exhibit 32
    
    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
 
 +
    
    Filed herewith.*
    
    Such exhibit has heretofore been filed with the SEC as part of the
filing indicated and is incorporated herein by reference.#
    
    Pursuant to item 601(b) (2) of Regulation S-K, the registrant
agrees to furnish supplementally a copy of any omitted exhibit or
schedule to the SEC upon request. 47




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SIGNATURES
  WILLIAMS PARTNERS
L.P.(Registrant)By: Williams Partners GP LLC, its general partner/s/ Ted T. TimmermansTed. T. TimmermansController (Duly Authorized Officer and Principal Accounting Officer)November 2, 2006
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description*#Exhibit 2.1
    
    Purchase and Sale Agreement, dated April 6, 2006, by and among Williams Energy
Services, LLC, Williams Field Services Group, LLC, Williams Field Services
Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams
Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7,
2006).*Exhibit 3.1
    
    Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit
3.1 to Williams Partners L.P.s registration statement on Form S-1 (File No.
333-124517) filed with the SEC on May 2, 2005).*Exhibit 3.2
    
    Amended and Restated Agreement of Limited Partnership of Williams Partners L.P.
(including form of common unit certificate), as amended by Amendments Nos. 1 and 2
(attached as Exhibit 4.2 to Williams Partners L.P.s registration statement on
Form S-3 (File No. 333-137562) filed with the SEC on September 22, 2006).*Exhibit 10.1
    
    Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between
The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.7
to Williams Partners L.P.s quarterly report on Form 10-Q (File No. 001-32599)
filed with the SEC on August 8, 2006).+Exhibit 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.+Exhibit 31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.+Exhibit 32
    
    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
 
 +
    
    Filed herewith.*
    
    Such exhibit has heretofore been filed with the SEC as part of the
filing indicated and is incorporated herein by reference.#
    
    Pursuant to item 601(b) (2) of Regulation S-K, the registrant
agrees to furnish supplementally a copy of any omitted exhibit or
schedule to the SEC upon request. 49