WILLIAMS ENERGY PARTNERS L P - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

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

FOR THE TRANSITION PERIOD FROM _________ TO _________

COMMISSION FILE NO.: 1-16335

WILLIAMS ENERGY PARTNERS L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 73-1599053
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

ONE WILLIAMS CENTER, P.O. BOX 3448, TULSA, OKLAHOMA 74172
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

(918) 573-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

As of August 12, 2002, there were 13,679,694 common units outstanding.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

1

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

See accompanying notes.

2

WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See accompanying notes.

3

WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes.

4

WILLIAMS ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

In the opinion of management, the accompanying financial statements of
Williams Energy Partners L.P. (the "Partnership"), which are unaudited, except
for the balance sheet as of December 31, 2001 which is derived from audited
financial statements, include all normal and recurring adjustments necessary to
present fairly the Partnership's financial position as of June 30, 2002 and the
results of operations for the three and six month periods ended June 30, 2002
and 2001. The results of operations for the three and six months ended June 30,
2002 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2002.

The historical results for Williams Pipe Line Company ("Williams Pipe
Line") include income and expenses and assets and liabilities that were conveyed
to and assumed by an affiliate of Williams Pipe Line prior to its acquisition by
the Partnership. The assets principally include Williams Pipe Line's interest in
and agreements related to Longhorn Partners Pipeline ("Longhorn"), an inactive
refinery site at Augusta, Kansas and the ATLAS 2000 software system. The
liabilities principally include the environmental liabilities associated with
the inactive refinery site in Augusta, Kansas and the current and deferred
income taxes and affiliate note payable. The current and deferred income taxes
and the affiliate note payable were contributed to the Partnership in the form
of a capital contribution by an affiliate of The Williams Companies, Inc.
("Williams"). The income and expenses associated with Longhorn will not be
included in the future financial results of the Partnership. Also, as agreed
between the Partnership and Williams, revenues from Williams Pipe Line's
blending operations, other than an annual blending fee of approximately $3.0
million, will not be included in the future financial results of the
Partnership. In addition, general and administrative expenses related to the
Williams Pipe Line system that the Partnership will reimburse to its general
partner will be limited to $30.0 million per year, subject to an escalation
provision.

Pursuant to the rules and regulations of the Securities and Exchange
Commission, the financial statements do not include all of the information and
notes normally included with financial statements prepared in accordance with
accounting principles generally accepted in the United States. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Partnership's Annual Report on Form
10-K for the year ended December 31, 2001.

Certain amounts in the financial statements for 2001 have been reclassified
to conform to the current period's presentation.

2. ORGANIZATION

Williams Energy Partners L.P. is a Delaware limited partnership that was
formed in August 2000, to own, operate and acquire a diversified portfolio of
complementary energy assets. At the time of the Partnership's initial public
offering in February 2001, the Partnership owned: (a) selected petroleum
products terminals previously owned by Williams Energy Ventures, Inc., and (b)
an ammonia pipeline system, Williams Ammonia Pipeline Inc., previously owned by
Williams Natural Gas Liquids, Inc. ("WNGL"). Prior to the closing of the
Partnership's initial public offering in February 2001, Williams Energy
Ventures, Inc. was owned by Williams Energy Services, LLC ("WES"). Both WES and
WNGL are wholly owned subsidiaries of Williams. Williams GP LLC ("General
Partner"), a Delaware limited liability company, was also formed in August 2000,
to serve as general partner for the Partnership.

On February 9, 2001, the Partnership completed its initial public offering
of 4 million common units representing limited partner interests in the
Partnership at a price of $21.50 per unit. The proceeds of $86.0 million were
used to pay underwriting discounts and commissions of $5.6 million and legal,
professional fees and costs associated with the initial public offering of $3.1
million, with the remainder used to reduce affiliate note balances with
Williams.

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As part of the initial public offering, the underwriters exercised their
over-allotment option and purchased 600,000 common units, also at a price of
$21.50 per unit. The net proceeds of $12.1 million, after underwriting discounts
and commissions of $0.8 million, from this over-allotment option were used to
redeem 600,000 of the common units held by WES to reimburse it for capital
expenditures related to the Partnership's assets. The Partnership maintained the
historical costs of the net assets in connection with the initial public
offering. Following the exercise of the underwriters' over-allotment option, 40%
of the Partnership was owned by the public and 60%, including the General
Partner's ownership, was owned by affiliates of the Partnership. Generally, the
limited partners' liability in the Partnership is limited to their investment.

On April 11, 2002, the Partnership acquired all of the membership interests
of Williams Pipe Line for approximately $1.0 billion (see Note 3 -
Acquisitions). Because Williams Pipe Line was an affiliate of the Partnership at
the time of the acquisition, the transaction was between entities under common
control and, as such, has been accounted for similarly to a pooling of
interests. Accordingly, the consolidated financial statements and notes of the
Partnership have been restated to reflect the combined historical results of
operations, financial position and cash flows of Williams Energy Partners and
Williams Pipe Line throughout the periods presented. Williams Pipe Line's
operations are presented as a separate operating segment of the Partnership (see
Note 4 - Segment Disclosures).

On April 11, 2002, the Partnership issued 7,830,924 Class B units
representing limited partner interests to its general partner, Williams GP LLC.
The securities, valued at $304.4 million, were issued as partial payment for the
acquisition of Williams Pipe Line (See Note 3 - Acquisitions). The Partnership
has the right to redeem the Class B units for cash based on the 15-day average
closing price of the common units prior to the redemption date. If the Class B
units are not redeemed by April 11, 2003, upon the request of the General
Partner and approval of the holders of a majority of the common units voting at
a meeting of the unitholders, the Class B units will convert into common units.
If the approval of the conversion by the common unitholders is not obtained
within 120 days of our General Partner's request, our General Partner will be
entitled to receive distributions with respect to its Class B units, on a per
unit basis, equal to 115% of the amount of distributions paid on a common unit.

In May 2002, the Partnership issued 8 million common units representing
limited partner interests in the Partnership at a price of $37.15 per unit. A
portion of the total proceeds of $297.2 million was used to pay underwriting
discounts and commissions of $12.6 million. Legal, professional fees and costs
associated with this offering are estimated at $1.5 million. The remaining cash
proceeds were used to partially repay the $700.0 million short-term note assumed
by the Partnership to help finance the Williams Pipe Line acquisition (see Note
7 - Debt).

3. ACQUISITIONS

On April 11, 2002, the Partnership acquired all of the membership interests
of Williams Pipe Line for approximately $1.0 billion. The Partnership financed
the transaction through short-term debt and equity issued to Williams.
Consideration of $304.4 million was given to Williams in the form of Class B
units representing limited partner interests in the Partnership issued to the
General Partner. Williams retained $15.0 million of Williams Pipe Line's
accounts receivable and the remaining $680.6 million of the consideration for
Williams Pipe Line was settled by the Partnership remitting to Williams $674.4
million in cash, after netting Williams' $6.2 million required contribution to
maintain its 2% general partner interest. The Partnership borrowed $700.0
million from a group of financial institutions, paid Williams Energy Services
$674.4 million and used $7.1 million of the borrowed funds to pay debt fees. The
Partnership reserved $3.5 million of the borrowed funds to pay transaction costs
and retained $15.0 million to meet working capital needs.

As a result of recording Williams Pipe Line's assets and liabilities at
their historical book values, as required by generally accepted accounting
principles, while acquiring Williams Pipe Line at market value, the General
Partner's capital account was decreased by $415.1 million. Because of this
unusual adjustment, the Partnership's debt to total capitalization ratio is
56.8%; however, excluding this adjustment, the debt to total capitalization
ratio is 39.9%.

In May, the Partnership issued 8.0 million common units, representing
limited partner interests, to the public for proceeds of $297.2 million.
Associated with this offering, Williams paid the Partnership $6.1 million to
maintain its 2% general partner interest. After paying underwriting discounts
and commissions and estimated legal, professional fees and other associated
offering costs, the Partnership made a $289.0 million payment on the $700.0
million acquisition borrowing, leaving a balance of $411.0 million.

6

4. SEGMENT DISCLOSURES

Management evaluates performance based upon segment profit or loss from
operations, which includes revenues from affiliate and external customers,
operating expenses, depreciation and affiliate general and administrative
expenses. Affiliate revenues are accounted for as if the sales were to
unaffiliated third parties.

The Partnership's reportable segments are strategic business units that
offer different products and services. The segments are managed separately
because each segment requires different marketing strategies and business
knowledge.

5. RELATED PARTY TRANSACTIONS

The Partnership has entered into agreements with various Williams
subsidiaries. Agreements with Williams Energy Marketing & Trading Company
("EM&T") provide for sales of pipeline inventory overages and product blending
and fractionation services, as well as lease storage capacity and, historically,
for sales of blended gasoline. (See Note 1 - Basis of Presentation for more
information about income and expenses associated with Williams Pipe Line
historical operations that are no longer being conducted by the Partnership).
Because of the nature of the Partnership's agreements with Williams, the
Partnership has limited product price exposure. The Partnership has several
agreements with EM&T, which provide for: (i) the access to and utilization of
one of the Partnership's inland terminals, (ii) approximately 2.8 million
barrels of storage and other ancillary services at the Partnership's marine
terminal facilities, (iii) capacity utilization rights to substantially all of
the capacity of the Gibson, Louisiana marine terminal facility and (iv)
throughput commitments with Williams Pipe Line that allows Williams Pipe Line to
satisfy its throughput commitments on third party pipe lines. Williams Pipe Line
has entered into agreements with Mid-America Pipeline Company and Williams
Bio-Energy, LLC, affiliate companies of Williams, to provide tank storage and
pipeline system storage, respectively. Both EM&T and Williams Refining &
Marketing, L.L.C. ship product on the Williams Pipe Line system. Additionally,
the Partnership has agreements with Williams Refining & Marketing for the access
and utilization of the Partnership's inland terminal facilities. The following
are revenues from various Williams subsidiaries (in thousands):

Beginning with the closing date of the initial public offering, the General
Partner, through provisions included in the omnibus agreement, has limited the
amount of general and administrative costs charged to the Partnership for the
petroleum products terminals and ammonia pipeline system operations. In
addition, beginning with the acquisition of Williams Pipe Line, the General
Partner has limited the amount of general and administrative expense charged to
the Partnership for these operations. The additional general and administrative
costs incurred by the General Partner, but not charged to the Partnership,
totaled $6.3 million and $2.4 million for the three months ended June 30, 2002
and 2001, respectively, and $9.1 million for the six months ended June 30, 2002
and $3.2 million for the period February 10, 2001 through June 30, 2001.

On August 1, 2002, Williams announced that it had sold 98% of Mapletree
LLC, which owns Mid-America Pipeline Company to Enterprise Products Partners
L.P. ("Enterprise). The Partnership has a shared operating cost agreement
between Williams Ammonia Pipeline L.P. and Mid-America Pipeline Company that
Enterprise has agreed to continue for a six-month transition period, which can
be extended to one-year agreement unless either party provides a 90-day written
notification to cancel the agreement. The operating costs of the ammonia
pipeline could increase substantially when this transition period ends. Williams
Pipe Line's operating expense could also increase as a result of the sale of
Mid-America Pipeline due to the certain cost sharing arrangements between
Williams Pipe Line and Mid-America Pipeline.

8

6. INVENTORIES

Inventories at June 30, 2002 and December 31, 2001 were as follows (in
thousands):

The decrease in the natural gas liquids inventory is the result of the
Partnership changing its butane blending operations to that of a service
provider only.

7. DEBT

At June 30, 2002, the Partnership had a $175.0 million bank credit facility
with $148.0 million borrowed under that facility and $27.0 million of additional
borrowing capacity. The credit facility was comprised of a $90.0 million term
loan facility and an $85.0 million revolving credit facility, which includes a
$73.0 million acquisition sub-facility and a $12.0 million working capital
sub-facility. As of June 30, 2002, the Partnership had borrowed $90.0 million
under the term loan facility and $58.0 million under the acquisition facility.
The credit facility's term extends through February 5, 2004, with all amounts
due at that time. Borrowings under the credit facility carry an interest rate
equal to the Eurodollar rate plus a spread from 1.0% to 1.5%, depending on
Williams OLP, L.P.'s ("OLP") leverage ratio. Interest is also assessed on the
unused portion of the credit facility at a rate from 0.2% to 0.4%, depending on
the OLP's leverage ratio. The OLP's leverage ratio is defined as the ratio of
consolidated total debt to consolidated earnings before interest, income taxes,
depreciation and amortization for the period of the four fiscal quarters ending
on such date. Closing fees associated with the initiation of the credit facility
were $0.9 million, which are being amortized over the life of the facility. The
average interest rates at June 30, 2002 and 2001 were 3.3% and 5.6%,
respectively, on the credit facility.

In April 2002, the Partnership borrowed $700.0 million from a group of
financial institutions. This note, used to help finance the Partnership's
acquisition of Williams Pipe Line, has a maturity date of October 8, 2002 and
carries an interest rate, adjusted monthly, equal to the Eurodollar rate plus
2.5%. On August 9, 2002 the rate on this short-term note increased to the
Eurodollar rate plus 4.0%. The interest rate on this note at June 30, 2002, was
4.3%. Closing fees associated with the note were $7.1 million and are being
amortized over the life of the note. In the current quarter, the Partnership
amortized $4.8 million of the debt closing fees associated with this short-term
note. In May 2002, the Partnership issued 8.0 million common units to the
public. The net proceeds of $283.1 million, after underwriting discounts and
commissions and estimated legal, professional fees and other associated offering
costs, were used to partially repay the note. Also, the Partnership made an
additional $6.0 million partial repayment in June 2002 from the funds received
from Williams to maintain its 2% general partner interest following the equity
issuance. The net short-term borrowings as of June 30, 2002, were $411.0
million.

8. COMMITMENTS AND CONTINGENCIES

WES has agreed to indemnify the Partnership against any covered
environmental losses, up to $15.0 million, relating to assets it contributed to
the Partnership at the time of the initial public offering that arose prior to
February 9, 2001, that become known within three years after February 9, 2001,
and that exceed all amounts recovered or recoverable by the Partnership under
contractual indemnities from third parties or under any applicable insurance
policies. Covered environmental losses are those non-contingent terminal and
ammonia system environmental losses, costs, damages and expenses suffered or
incurred by the Partnership arising from correction of violations of, or
performance of remediation required by, environmental laws in effect at February
9, 2001, due to events and conditions associated with the operation of the
assets and occurring before February 9, 2001.

9

In connection with the acquisition of Williams Pipe Line, WES agreed to
indemnify the Partnership for any breach of a representation or warranty that
results in losses and damages of up to $110.0 million after the payment of a
$6.0 million deductible. With respect to any amount exceeding $110.0 million,
WES will be responsible for one-half of that amount up to $140.0 million. In no
event will WES' liability exceed $125.0 million. These indemnification
obligations will survive for one year, except that those relating to employees
and employee benefits will survive for the applicable statute of limitations and
those relating to real property, including title to WES' assets, will survive
for ten years. This indemnity also provides that the Partnership will be
indemnified for an unlimited amount of losses and damages related to tax
liabilities. In addition, any losses and damages related to environmental
liabilities that arose prior to the acquisition will be subject only to a $2.0
million deductible, which will survive for six years.

Estimated liabilities for environmental costs were $14.4 million and $16.9
million at June 30, 2002 and December 31, 2001, respectively. Management
estimates that expenditures associated with these environmental remediation
liabilities will be paid over the next two to five years. Receivables associated
with these environmental liabilities of $12.5 million and $5.1 million at June
30, 2002 and December 31, 2001, respectively, have been recognized as
recoverable from affiliates and third parties. These estimates, provided on an
undiscounted basis, were determined based primarily on data provided by a
third-party environmental evaluation service. These liabilities have been
classified as current or non-current based on management's estimates regarding
the timing of actual payments.

In conjunction with the 1999 acquisition of the Gulf Coast marine terminals
from Amerada Hess Corporation ("Hess"), Hess has disclosed to the Partnership
all suits, actions, claims, arbitrations, administrative, governmental
investigation or other legal proceedings pending or threatened, against or
related to the assets acquired by the Partnership, which arise under
environmental law. In the event that any pre-acquisition releases of hazardous
substances at the Partnership's Corpus Christi and Galena Park, Texas and
Marrero, Louisiana marine terminal facilities that were unknown at closing but
subsequently identified by the Partnership prior to July 30, 2004, the
Partnership will be liable for the first $2.5 million of environmental
liabilities, Hess will be liable for the next $12.5 million of losses and the
Partnership will assume responsibility for any losses in excess of $15.0
million. Also, Hess agreed to indemnify the Partnership through July 30, 2014,
against all known and required environmental remediation costs at the Corpus
Christi and Galena Park, Texas marine terminal facilities from any matters
related to pre-acquisition actions. Hess has indemnified the Partnership for a
variety of pre-acquisition fines and claims that may be imposed or asserted
against the Partnership under certain environmental laws. At both June 30, 2002
and December 31, 2001, the Partnership had accrued $0.6 million for costs that
may not be recoverable under Hess' indemnification.

During 2001, the Partnership recorded an environmental liability of $2.6
million at its New Haven, Connecticut facility, which was acquired in September
2000. This liability was based on third-party environmental engineering
estimates completed as part of a Phase II environmental assessment, routinely
required by the State of Connecticut to be conducted by the purchaser following
the acquisition of a petroleum storage facility. The Partnership has begun a
Phase III environmental assessment at this facility, which is expected to be
completed during the third quarter of 2002, and the environmental liability
could change materially based on this more thorough analysis. The seller of
these assets agreed to indemnify the Partnership for certain of these
environmental liabilities. In addition, the Partnership purchased insurance for
up to $25.0 million of environmental liabilities associated with these assets,
which carries a deductible of $0.3 million. Any environmental liabilities at
this location not covered by the seller's indemnity and not covered by insurance
are covered by the WES environmental indemnifications to the Partnership,
subject to the $15.0 million limitation.

As a result of an Environmental Protection Agency investigation and
associated report of benzene contamination in Corpus Christi, Texas, Elementis
Chromium Inc. brought suit against El Paso CGP Company ("El Paso"), formerly
Coastal Corporation, Hess, Citgo Petroleum Corporation and Koch Industries, Inc.
asserting that these entities should share liability for the associated clean up
and remediation costs. As a result of being named in the suit, El Paso sent a
demand letter to the Partnership, which presented a claim for $5.3 million,
representing El Paso's costs to date. El Paso has asserted that the property
acquired by the Partnership from Hess in 1999 is a contributing source of
benzene contamination from historical Hess operations and the terminal facility,
which currently operates on that site. The Partnership has denied responsibility
for any of the contamination at issue in this litigation and believes that

10

any contamination that may have migrated from the property was present at the
time the property was purchased from Hess. The Partnership has subsequently
received from Hess a complete indemnification and, as such, believes that El
Paso's claim against Partnership will not have a material impact on the
financial position, results of operations or cash flows of the Partnership.

During 2001, the Environmental Protection Agency ("EPA"), pursuant to
Section 308 of the Clean Water Act, preliminarily determined that Williams may
have systemic problems with petroleum discharges from pipeline operations. The
inquiry primarily focused on Williams Pipe Line, which was subsequently acquired
by the Partnership. The response to the EPA's information request was submitted
during November 2001. Any claims the EPA may assert, relative to this inquiry,
would be covered by the Partnership's environmental indemnifications with
Williams.

WNGL will indemnify the Partnership for right-of-way defects or failures in
the ammonia pipeline easements for 15 years after the initial public offering
closing date. WES has also indemnified the Partnership for right-of-way defects
or failures associated with the marine terminal facilities at Galena Park,
Corpus Christi and Marrero for 15 years after the initial public offering
closing date. In addition, WES has indemnified the Partnership for right-of-way
defects or failures in Williams Pipe Line's easements for 10 years after the
closing date of its acquisition by the Partnership up to a maximum of $125.0
million with a deductible of $6.0 million. This $125.0 million amount will also
be subject to indemnification claims made by the Partnership for breaches of
other representations and warranties.

On May 31, 2002, Farmland Industries, Inc. ("Farmland") and several of its
subsidiaries filed for Chapter 11 bankruptcy protection. Farmland, the largest
customer on the ammonia pipeline system, is also a customer of Williams Pipe
Line and petroleum products terminals. Prior to Farmland's bankruptcy filing,
the Partnership placed Farmland on a pre-payment basis for its ammonia
shipments. As a result, the receivable amount owed by Farmland to the
Partnership at June 30, 2002 was less than $0.1 million. The Partnership
received approximately $2.3 million in payments from Farmland during the
preference period prior to Farmland filing for bankruptcy. Management believes
that the Partnership will not be required to reimburse these funds to the
bankruptcy trustee because they were received in the ordinary course of business
with Farmland.

The Partnership is party to various other claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate resolution of all claims, legal actions and complaints
after consideration of amounts accrued, insurance coverage or other
indemnification arrangements will not have a material adverse effect upon the
Partnership's future financial position, results of operations or cash flows.

9. RESTRICTED UNITS

In February 2001, the General Partner adopted the Williams Energy Partners'
Long-Term Incentive Plan for Williams' employees who perform services for
Williams Energy Partners L.P. and directors of the General Partner. The
Long-Term Incentive Plan consists of two components: phantom units and unit
options. The Long-Term Incentive Plan permits the grant of awards covering an
aggregate of 700,000 common units. The Long-Term Incentive Plan is administered
by the compensation committee of the General Partner's board of directors.

In April 2001, the General Partner issued grants of 92,500 restricted
units, which are also referred to as phantom units, to certain key employees
associated with the Partnership's initial public offering in February 2001.
These one-time initial public offering phantom units will vest over a 34-month
period ending on February 9, 2004, and are subject to forfeiture if employment
is terminated prior to vesting. These units are subject to early vesting if the
Partnership achieves certain performance measures. The Partnership achieved the
first of two performance measures in February 2002 and as a result, 46,250 of
the phantom units vested, resulting in a charge to compensation expense of
approximately $1.0 million. The Partnership recognized additional compensation
expense of $0.1 million and $0.3 million related to the remaining non-vested
units associated with these grants in the three and six months ended June 30,
2002, respectively. The Partnership expects that in the fourth quarter of 2002
it will achieve the final performance measure associated with the initial public
offering unit awards and that the remaining awards will vest at that time. The
Partnership expects that it will recognize an expense of $0.7 million associated
with the vesting of these awards. The fair market value of the phantom units
associated with this grant was $2.8 million on the grant date.

11

In April 2001, the General Partner issued grants of 64,200 phantom units
associated with the annual incentive compensation plan. The actual number of
units that will be awarded under this grant will be determined by the
Partnership on February 9, 2004. At that time, the Partnership will assess
whether certain performance criteria have been met and determine the number of
units that will be awarded, which could range from zero units up to a total of
128,400 units. These units are also subject to forfeiture if employment is
terminated prior to February 9, 2004. These awards do not have an early vesting
feature, unless there is a change in control of the Partnership's general
partner. The Partnership is assuming that the full 128,400 will ultimately be
awarded and recognized $0.2 million and $0.5 million of deferred compensation
expense associated with these awards for the three months and six months ended
June 30, 2002. The fair market value of the phantom units associated with this
grant was $4.3 million on June 30, 2002.

10. DISTRIBUTIONS

Distributions paid by the Partnership during 2001 and 2002 are as follows:

(a) This distribution represented the prorated minimum quarterly
distribution for the 50-day period following the initial public offering closing
date, which included February 10, 2001 through March 31, 2001.

(b) The General Partner declared this cash distribution on July 24, 2002,
to be paid on August 14, 2002, to unitholders of record at the close of business
on August 5, 2002. Total cash distributions of $19.2 million include $5.3
million of distributions associated with the Class B units. These distributions
will be reserved but will not be actually distributed until the short-term note,
used to help finance the Williams Pipe Line acquisition, is paid off. This
short-term note matures in October 2002 but the Partnership expects to pay the
note off during the third quarter of 2002. The $19.2 million cash distribution
includes an incentive distribution to the Partnership's General Partner of $0.5
million.

11. NET INCOME PER UNIT

The following table provides details of the basic and diluted net income
per unit computations (in thousands, except per unit amounts):

Units reported as dilutive securities are related to restricted unit grants
associated with the one-time initial public offering award (see Note 9).

12. SUBSEQUENT EVENTS

The Board of Directors of the Partnership's General Partner approved 22,150
units associated with the 2002 incentive compensation plan. Based on the closing
price of $33.50 per unit at June 30, 2002, these units were valued at $0.7
million. The Partnership will begin expensing the costs associated with these
units in the third quarter of 2002.

On July 30, 2002, the Partnership entered into a throughput and deficiency
agreement with a connecting carrier, which provides the Partnership with space
on the connecting carrier's pipeline. The agreement runs until December 31,
2005, and obligates the Partnership to pay approximately $1.2 million per year
for pipeline tariffs, or a total obligation for the length of the agreement of
approximately $6.0 million.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and notes thereto. Williams Energy Partners L.P. is a publicly traded
limited partnership formed by The Williams Companies, Inc. ("Williams") to own,
operate and acquire a diversified portfolio of complementary energy assets. We
are principally engaged in the transportation, storage and distribution of
refined petroleum products and ammonia. Our current asset portfolio consists of:

- the Williams Pipe Line system;

- five marine terminal facilities;

- 25 inland terminals (some of which are partially owned); and

- an ammonia pipeline system.

On April 11, 2002, we acquired for approximately $1.0 billion all of the
membership interests of Williams Pipe Line Company ("Williams Pipe Line"), which
owns and operates the Williams Pipe Line system. Because Williams Pipe Line was
an affiliate of ours at the time of the acquisition, the transaction was between
entities under common control and, as such, was accounted for similarly to a
pooling of interest. Accordingly, our consolidated financial statements and
notes have been restated to reflect the historical results of operations,
financial position and cash flows of Williams Energy Partners and Williams Pipe
Line on a combined basis throughout the periods presented.

The historical results for Williams Pipe Line include revenue and expenses
and assets and liabilities that were conveyed to and assumed by an affiliate of
Williams Pipe Line prior to our acquisition of it. These assets primarily
include Williams Pipe Line's interest in and agreements related to Longhorn
Partners Pipeline ("Longhorn"), an inactive refinery site at Augusta, Kansas and
the ATLAS 2000 software system. The results from these assets will not be
included in our future financial results. In addition, revenues from Williams
Pipe Line's blending operations, other than an annual blending fee of
approximately $3.0 million, will not be included in our future financial
results. We have reported the Williams Pipe Line system's operations as a
separate operating segment.

13

RECENT DEVELOPMENTS

On July 24, 2002, our general partner declared an increase in the quarterly
cash distribution from $0.6125 to $0.675 per unit, representing a 10% increase
over the previous quarter's distribution and a 29% increase since our initial
public offering in February 2001. The distribution increase is for the period of
April 1 through June 30, 2002. The distribution will be paid on August 14, 2002
to unitholders of record at the close of business on August 5, 2002.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO JUNE 30, 2001

- ----------------

(a) For the three months ended June 30, 2002, represents throughput at the
Gibson and New Haven marine facilities. As the Gibson facility was acquired
in October 2001, the three months ended June 30, 2001 represents throughput
at the New Haven facility only.

Combined revenues excluding product and construction revenues for the three
months ended June 30, 2002 were $91.6 million compared to $86.9 million for the
three months ended June 30, 2001, an increase of $4.7 million, or 5%. This
increase was a result of:

14

o an increase in Williams Pipe Line system's transportation and related
activities revenues of $4.0 million, or 6%. This increase was partially
attributable to higher transportation revenue per barrel shipped, resulting from
a tariff increase on July 1, 2001 and customers transporting products longer
distances. Williams Pipe Line revenue further increased due to increased storage
utilization, higher rates imposed on data services and increased ethanol
terminalling rates;

o an increase in petroleum products terminals revenues of $2.4 million, or
14%, primarily due to the acquisition of the Gibson marine facility that was
acquired in October 2001 and the two Little Rock inland terminals that were
acquired in June 2001. Revenues were further increased by higher utilization at
the Gulf Coast marine facilities due to a favorable marketing environment;

o a decrease in ammonia pipeline system revenues of $1.7 million, or 40%,
primarily due to a throughput deficiency billing in the prior year that resulted
from a shipper not meeting its minimum annual throughput commitment for the
contract year ended June 2001. Revenue also declined due to a 46,000 ton, or
26%, decrease in ammonia shipped through our pipeline due to poor spring
planting conditions coupled with high customer inventory levels, partially
offset by a higher weighted average tariff of $16.90 compared to $16.01 during
second quarter 2001.

Operating expenses excluding product purchases for the three months ended
June 30, 2002 were $37.3 million compared to $36.7 million for the three months
ended June 30, 2001, an increase of $0.6 million, or 2%. This increase consisted
of:

o a decrease in Williams Pipe Line system expenses of $0.1 million.
Reductions in environmental expenses and reduced power costs were primarily
offset by increased pipeline lease expenses. Power costs were lower primarily
due to lower power rates in the current quarter. The pipeline lease expenses are
costs, which are charged back to our customers, for tariffs paid on connecting
pipelines to move a customer's product to its ultimate destination. This service
began in the current year, hence, there are no associated pipeline lease
expenses in the prior year quarter;

o an increase in petroleum products terminals expenses of $0.6 million, or
8%, primarily due to the addition of the Gibson marine facility and the Little
Rock inland terminals. Lower utility expenses, reflecting lower natural gas
prices in the current quarter compared to last year at the Gulf Coast
facilities, were offset by higher maintenance expenses at the inland terminals.
The increase in maintenance costs was primarily attributable to the timing of
tank cleaning and American Petroleum Institute ("API") 653 inspection expenses;

o an increase in ammonia pipeline system expenses of $0.1 million primarily
due to higher property taxes.

Revenues from product sales were $12.5 million for the three months ended
June 30, 2002, while product purchases were $12.0 million, resulting in a net
margin of $0.5 million in 2002. The 2002 net margin represents a decrease of
$2.7 million compared to a net margin in 2001 of $3.2 million. This margin
decline primarily results from butane blending activities prior to the
partnership's ownership. In conjunction with our acquisition of Williams Pipe
Line, we will provide butane blending services for a fee of $0.8 million per
quarter rather than operating on a margin basis.

Affiliate construction and management fee revenues for the three months
ended June 30, 2002 were zero compared to $0.2 million for the three months
ended June 30, 2001. Historically, Williams Pipe Line received a fee to manage
Longhorn and to provide consulting services associated with the pipeline's
construction and start-up, as needed. Prior to our acquisition of Williams Pipe
Line, this Longhorn obligation was transferred to an affiliate of Williams Pipe
Line and will not be provided by us.

Depreciation and amortization expense for the three months ended June 30,
2002 was unchanged from 2001 at $8.6 million. Additional depreciation associated
with acquisitions and capital improvements was offset by the elimination of
depreciation associated with assets we did not acquire as part of the Williams
Pipe Line acquisition.

General and administrative expenses for the three months ended June 30, 2002
were $9.5 million compared to $11.4 million for the three months ended June 30,
2001, a decrease of $1.9 million, or 17%. General and administrative expenses
are allocated from Williams as defined by the omnibus agreement. For 2002, these
expense allocations are limited to $9.2 million per quarter plus actual
equity-based

15

incentive compensation expenses related to Williams Energy Partners'
performance. The amount of general and administrative expenses incurred by the
General Partner but not allocated to us was $6.3 million for the three months
ended June 30, 2002. Incentive compensation costs associated with our
equity-based long-term incentive plan are specifically excluded from the expense
limitation and were $0.3 million during the three months ended June 30, 2002.
Prior to our acquisition, Williams Pipe Line was allocated general and
administrative costs from Williams based on a three-factor formula that
considers operating margin, payroll costs and property, plant and equipment. The
limit on general and administrative expenses that can be charged by our general
partner to us will continue to be adjusted in the future to reflect additional
general and administrative expenses incurred with acquisitions.

Net interest expense for the three months ended June 30, 2002 was $6.6
million compared to $2.1 million for the three months ended June 30, 2001. The
increase in interest expense was primarily related to the financing associated
with the acquisition of Williams Pipe Line. Partially offsetting the higher debt
was a reduction in our average interest rate on borrowings from 5.2% at June 30,
2001 to 4.1% at June 30, 2002.

We do not pay income taxes because we are a partnership. However, Williams
Pipe Line was subject to income taxes prior to our acquisition of it in April
2002, and our pre-initial public offering earnings in 2001 were also taxable. We
primarily based our income tax rate of 38.0% and 37.9% for the three months
ended June 30, 2002 and 2001, respectively, upon the effective income tax rate
for Williams. The effective income tax rate exceeds the U.S. federal statutory
income tax rate primarily due to state income taxes.

Net income for the three months ended June 30, 2002 was $24.6 million
compared to $22.9 million for the three months ended June 30, 2001, an increase
of $1.7 million, or 7%. The operating margin increased by $1.2 million during
the period, largely as a result of increased revenues on the Williams Pipe Line
system and enhanced earnings from the acquisitions of the Little Rock and Gibson
terminal facilities, partially offset by reduced ammonia revenues and product
sales margins. General and administrative expenses decreased by $1.9 million
while net interest expenses increased by $4.5 million. Debt placement fee
amortization expense increased $4.8 million primarily due to the amortization of
the debt costs associated with the financing and early redemption of a portion
of the debt associated with the acquisition of Williams Pipe Line. Other income
decreased $1.0 million because the 2001 quarter included amounts received by
Williams Pipe Line from certain insurance settlements. Income taxes decreased
$8.9 million due to the elimination of income taxes on Williams Pipe Line in the
partnership structure.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO JUNE 30, 2001

16

OPERATING STATISTICS
Williams Pipe Line system:
Transportation revenue per barrel shipped (cents per barrel) ................. 92.1 89.5
Transportation barrels shipped (million barrels) ............................. 111.6 115.0
Barrel miles (billions) ...................................................... 32.7 33.5
Petroleum products terminals:
Marine terminal facilities:
Average storage capacity utilized per month (barrels in millions) ......... 16.3 15.5
Throughput (barrels in millions) (a) ...................................... 10.4 5.6
Inland terminals:
Throughput (barrels in millions) .......................................... 29.1 25.2
Ammonia pipeline system:
Volume shipped (tons in thousands) ........................................... 391 340

- ----------

(a) For the six months ended June 30, 2002, represents throughput at the Gibson
and New Haven marine facilities. As the Gibson facility was acquired in
October 2001, the six months ended June 30, 2001 represents throughput at
the New Haven facility only.

Combined revenues excluding product and construction revenues for the six
months ended June 30, 2002 were $172.5 million compared to $164.7 million for
the six months ended June 30, 2001, an increase of $7.8 million, or 5%. This
increase consisted of:

o an increase in Williams Pipe Line system's transportation and related
activities revenues of $3.2 million, or 3%, primarily attributable to increased
storage utilization, higher rates imposed on data services and increased ethanol
terminalling rates. Transportation revenue was unchanged between periods as
reduced shipments were offset by higher tariffs, primarily resulting from a July
1, 2001 tariff increase;

o an increase in petroleum products terminals revenues of $4.6 million, or
13%, primarily due to the Gibson marine facility which was acquired in October
2001 and the two Little Rock inland terminals which were acquired in June 2001.
Revenues were further increased by higher utilization at the Gulf Coast marine
facilities due to a favorable marketing environment;

o ammonia pipeline system revenues were unchanged at $6.9 million. Revenue
during 2002 increased due to 51,000 additional tons shipped during the period,
representing a 15% increase, due to lower natural gas prices compared with the
previous year. In addition, 2002 benefited from a higher weighted average tariff
of $16.66 compared to $16.09 during second quarter 2001. These increases were
offset by a throughput deficiency billing in the prior year that resulted from a
shipper not meeting its minimum annual throughput commitment for the contract
year ended June 2001.

Operating expenses excluding product purchases for the six months ended June
30, 2002 were $70.3 million compared to $74.0 million for the six months ended
June 30, 2001, a decrease of $3.7 million, or 5%. This increase consisted of:

o a decrease in Williams Pipe Line system expenses of $4.9 million, or 9%,
primarily due to reduced power associated with less volume transported coupled
with reduced power rates and lower environmental expenses;

o an increase in petroleum products terminals expenses of $0.9 million, or
6%, primarily due to the addition of the Gibson marine facility and the Little
Rock inland terminals. Lower utility expenses at the Gulf Coast facilities were
offset by higher maintenance expenses at the inland terminals. The increase in
maintenance costs was primarily attributable to the timing of tank cleaning and
API 653 inspection expenses;

o an increase in ammonia pipeline system expenses of $0.3 million primarily
due to higher property taxes and increased costs associated with larger volume
shipments.

Revenues from product sales were $34.1 million for the six months ended June
30, 2002, while product purchases were $30.4 million, resulting in a net margin
of $3.7 million in 2002. The 2002 net margin represents a decrease of $1.1
million compared to a net margin in 2001 of $4.8 million resulting from product
sales in 2001 of $51.3 million and product purchases of $46.5 million. This
margin decline results from butane blending activities prior to the
partnership's ownership. In conjunction with our acquisition of Williams Pipe
Line, we will provide butane blending services for a fee of $0.8 million per
quarter rather than operating on a margin basis.

17

Affiliate construction and management fee revenues for the six months ended
June 30, 2002 were $0.2 million compared to $0.6 million for the six months
ended June 30, 2001. Historically, Williams Pipe Line received a fee to manage
Longhorn and to provide consulting services associated with the pipeline's
construction and start-up, as needed. Prior to our acquisition of Williams Pipe
Line, this Longhorn obligation was transferred to an affiliate of Williams Pipe
Line and will not be provided by us.

Depreciation and amortization expense for the six months ended June 30, 2002
was $17.6 million, representing a $0.1 million decrease from 2001 at $17.7
million. Additional depreciation associated with acquisitions and capital
improvements primarily offset the elimination of depreciation associated with
assets we did not acquire as part of the Williams Pipe Line acquisition.

General and administrative expenses for the six months ended June 30, 2002
were $23.0 million compared to $22.0 million for the six months ended June 30,
2001, an increase of $1.0 million, or 5%. General and administrative expenses
are allocated from Williams as defined by the omnibus agreement. For 2002, these
expense allocations are limited to $9.2 million per quarter plus actual
incentive compensation expenses related to Williams Energy Partners'
performance. The amount of general and administrative expenses incurred by the
General Partner but not allocated to us was $9.3 million for the six months
ended June 30, 2002. Incentive compensation costs associated with our long-term
incentive plan are specifically excluded from the expense limitation and were
$1.8 million during the six months ended June 30, 2002. The first-quarter
incentive compensation costs included a $1.0 million charge associated with the
early vesting of a portion of the phantom units issued to key employees at the
time of our initial public offering. The early vesting was triggered as a result
of our growth in cash distributions paid to unitholders. Prior to our
acquisition, Williams Pipe Line was allocated general and administrative costs
from Williams based on a three-factor formula that considers operating margin,
payroll costs and property, plant and equipment. The limit on general and
administrative expenses that can be charged by our general partner to us will
continue to be adjusted in the future to reflect additional general and
administrative expenses incurred with acquisitions.

Net interest expense for the six months ended June 30, 2002 was $7.4 million
compared to $6.3 million for the six months ended June 30, 2001. The increase in
interest expense was primarily related to the financing associated with the
acquisition of Williams Pipe Line. Partially offsetting the higher debt was a
reduction in our average interest rate on borrowings from 5.2% at June 30, 2001
to 4.1% at June 30, 2002.

We do not pay income taxes because we are a partnership. However, Williams
Pipe Line was subject to income taxes prior to our acquisition of it in April
2002, and our pre-initial public offering earnings in 2001 were also taxable. We
primarily based our income tax rate of 38.2% and 38.1% for the six months ended
June 30, 2002 and 2001, respectively, upon the effective income tax rate for
Williams. The effective income tax rate exceeds the U.S. federal statutory
income tax rate primarily due to state income taxes.

Net income for the six months ended June 30, 2002 was $45.8 million compared
to $35.9 million for the six months ended June 30, 2001, an increase of $9.9
million, or 28%. The operating margin increased by $10.0 million during the
period, largely as a result of increased revenues and decreased expenses on the
Williams Pipe Line system, earnings from the acquisitions of the Little Rock and
Gibson terminal facilities and enhanced utilization of the Gulf Coast marine
facilities, partially offset by lower product sales margins. Depreciation
expense decreased by $0.1 million while general and administrative expenses
increased by $1.0 million and net interest expenses increased by $1.1 million.
Debt placement fee amortization expense increased $5.0 million primarily due to
the amortization of the debt costs associated with the financing and early
redemption of a portion of the debt associated with the acquisition of Williams
Pipe Line. Other income decreased $0.1 million. Income taxes decreased $6.9
million due to the elimination of income taxes on Williams Pipe Line in the
partnership structure.

OTHER KNOWN TRENDS OR EVENTS

The Partnership has significant relationships with Williams, the owner of
its general partner and Farmland. Farmland has filed for bankruptcy and Williams
has recently completed certain asset sales and entered into secure credit
facilities to address its liquidity needs. Our relationships with these two
entities are described below:

18

Williams - The Partnership and Williams are engaged contractually on several
fronts, including commercial relationships, contracted services and indemnities.
The extent of these relationships include:

o Williams is the owner of our General Partner and owns approximately 55%
of the Partnership.

o Williams is our customer, representing approximately 13% of the
Partnership's $402 million of revenues for the year ended December 31,
2001 on a pro forma basis for the Williams Pipe Line system that was
acquired April 2002. Management has indicated that it expects to replace
a majority of these earnings if Williams is unable to perform on its
obligations.

In addition, EM&T, a subsidiary of Williams, has contracted to fully
utilize our Gibson, Louisiana, marine facility. If EM&T is unable to
perform under the agreement, we believe that we have several options
available for future utilization of this facility.

o Williams provides various services for us. Through these services,
Williams operates our assets and provides general and administrative
services. All employees supporting the Partnership are employees of
Williams. We pay full cost for the operating expenses associated with
our assets which amount to approximately $40 million per year for
general and administrative services. Management considers the amounts
paid for these services to be reasonable and does not expect an
interruption in the services provided, except as described below.

One of the services provided by Williams and its affiliates is the
shared operating costs of the ammonia pipeline system with Mid-America
Pipeline Company. On August 1, 2002, Williams announced that it had sold
98% of Mapletree LLC, which owns Mid-America Pipeline Company to
Enterprise Products Partners L.P. ("Enterprise"). Enterprise has agreed
to continue this cost sharing agreement for a six-month transition
period which can be extended to a one-year agreement unless either party
provides a 90-day written notification to cancel the agreement. The
operating costs of the ammonia pipeline system could increase
substantially when this transition period ends. Williams Pipe Line's
operating expense could also increase as a result of the sale of
Mid-America Pipeline due to the certain cost sharing arrangements
between Williams Pipe Line and Mid-America Pipeline.

o For assets included in the initial public offering, Williams will
provide maintenance capital reimbursements for expenditures in excess of
$4.9 million during 2002. In addition, Williams has agreed to pay
maintenance capital associated with the Williams Pipe Line system in
excess of $19 million per year for 2002, 2003 and 2004 up to a
cumulative maximum of $15 million. Management expects to spend less than
$19 million annually for maintenance capital for the Williams Pipe Line
system and does not expect a reimbursement obligation from Williams
associated with these assets.

o Williams has provided various indemnifications to us. The most
significant indemnification covers environmental remediation costs
associated with assets purchased from Williams relating to events prior
to the purchase. For assets involved in the initial public offering,
this indemnification extends until February 2004 up to an aggregate
liability of $15 million. For the Williams Pipe Line system, this
indemnification extends until April 2008 up to an aggregate liability of
$125 million.

Farmland - Farmland filed for Chapter 11 bankruptcy protection on May 31,
2002. Farmland is the largest customer on the ammonia pipeline system. Farmland
also owns and operates a refinery in Coffeyville, Kansas, with its products
marketed through a third party shipper on Williams Pipe Line. This third party
shipper is not affiliated with either Farmland or Williams. Combined total
revenues associated with Farmland's ammonia shipments and from this third-party
shipper on the Williams Pipe Line were $16.4 million and $14.6 million for the
six months ended June 30, 2002 and 2001, respectively, and $43.0 million for the
year ended December 31, 2001, representing 7.9%, 6.7% and 9.6% of total revenues
for the six months ended June 30, 2002, June 30, 2001 and the twelve months
ended December 31, 2001, respectively. Management is uncertain as to what impact
Farmland's bankruptcy may have on our financial position, results of operations
or cash flows. However, demand for products from Farmland's Coffeyville, Kansas
refinery have continued to be strong and there is nothing in the foreseeable
future which the Partnership believes will significantly change that demand.
Also, Management believes that Farmland will either continue to operate its
Coffeyville, Kansas refinery or will sell it to a third party who will continue
its operation. Additionally, demand for anhydrous ammonia has not changed
significantly and Management believes that the Partnership will ship a
significant portion of Farmland's anhydrous ammonia tons either through
continued business with Farmland or through one of our other ammonia pipeline
customers.

19

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS AND CAPITAL EXPENDITURES

Net cash provided by operating activities for the six months ended June 30,
2002 was $67.9 million compared to $71.1 million for the six months ended June
30, 2001. The $3.2 million decrease in cash from 2001 to 2002 was primarily a
result of a decrease in our cash flows from accounts receivables, taxes other
than income and other current assets, partially offset by increases in our cash
flows from net income and inventories. The change in the accounts receivable
balances resulted in reduced cash flows of $14.5 million. The primary reason
for this reduction was because an affiliate company retained $15.0 million of
Williams Pipe Line's accounts receivable at the time we acquired it in April
2002. During the second quarter of 2002, those receivable balances were largely
replaced as part of our normal on-going operations. Cash flows associated with
accrued taxes other than income taxes decreased $4.2 million from 2001 to 2002.
Most of this difference is due to the fact that the 2001 accruals were
over-accrued by $4.4 million, which was corrected by year-end 2001. The $5.4
million decrease in cash flows from other current assets is primarily
attributable to increases in prepaid insurance, prepaid Department of
Transportation user fees and prepaid storage. These negative changes were
partially offset by increased cash flows from inventories of $9.5 million and an
increase in net income of $9.8 million. The change in inventories resulted
primarily from the reduction of inventories in the current quarter associated
with the Williams Pipe Line's butane blending operations.

Net cash used by investing activities for the six months ended June 30, 2002
and 2001 was $706.9 million and $18.4 million, respectively. Investing
activities in 2002 include the acquisition of Williams Pipe Line and the Aux
Sable pipeline. Maintenance capital for the period ended June 30, 2002 was $12.7
million, compared with $10.3 million during 2001. Please see Capital
Requirements below for more discussion of capital expenditures.

Net cash provided by financing activities for the six months ended June 30,
2002 was $668.2 million compared to net cash used of $14.8 million in 2001. The
cash provided for the six months of 2002 principally involved the debt and
equity funding associated with the acquisition of Williams Pipe Line. The cash
inflow during 2001 is comprised of proceeds from debt borrowings and equity
issued at the time of our initial public offering used to repay an affiliate
note. In addition, Williams Pipe Line also partially repaid an affiliate note
during both 2001 and 2002.

Federal Energy Regulatory Commission ("FERC") Notice of Proposed Rulemaking
- - On August 1, 2002, the FERC issued a Notice of Proposed Rulemaking that, if
adopted, would amend its Uniform Systems of Accounts for public utilities,
natural gas companies and oil pipeline companies by requiring specific written
documentation concerning the management of funds from a FERC-regulated
subsidiary by a non-FERC-regulated parent. Under the proposed rule, as a
condition for participating in a cash management or money pool arrangement, the
FERC-regulated entity would be required to maintain a minimum proprietary
capital balance (stockholder's equity) of 30 percent, and the FERC-regulated
entity and its parent would be required to maintain investment grade credit
ratings. If either of these conditions is not met, the FERC-regulated entity
would not be eligible to participate in the cash management or money pool
arrangement. This proposed rule is subject to a comment period of 15 days after
its publication in the Federal Register. We do not know when or if the rule will
be enacted. Although it appears that, if enacted, the rule may affect the way in
which we manage cash, we are unable to predict the full impact of this proposed
regulation on our business.

Subsequent Event - On July 30, 2002, the Partnership entered into a
throughput and deficiency agreement with a connecting carrier, which provides
the Partnership with space on the connecting carrier's pipeline. The agreement
runs until December 31, 2005, and obligates the Partnership to pay approximately
$1.2 million per year for pipeline tariffs, or a total obligation for the length
of the agreement of approximately $6.0 million.

CAPITAL REQUIREMENTS

The transportation, storage and distribution business requires continual
investment to upgrade or enhance existing operations and to ensure compliance
with safety and environmental regulations. The capital requirements of our
businesses consist primarily of:

o maintenance capital expenditures, such as those required to maintain and
upgrade equipment reliability and safety and to address environmental
regulations; and

o expansion capital expenditures to acquire additional complementary
assets to grow our business and to expand or upgrade our existing
facilities, such as projects that increase storage or throughput volumes
or develop pipeline connections to new supply sources.

Williams has agreed to reimburse us for maintenance capital expenditures
incurred in 2001 and 2002 in excess of $4.9 million per year related to the
assets contributed to us at the time of our initial public offering. This
reimbursement obligation is subject to a maximum combined reimbursement for 2001
and 2002 of $15.0 million. We incurred $8.8 million of maintenance capital
expenditures for these assets in 2001 and recorded a reimbursement from Williams
of $3.9 million during 2001. As a result of these reimbursements, the maximum
reimbursement obligation of Williams with respect to these assets has been
reduced to $11.1 million for 2002. We have recorded a reimbursement from
Williams of $1.4 million as of June 30, 2002. For 2002 we expect to incur
maintenance capital expenditures for these assets of approximately $16.0
million, with $11.1 million being reimbursed by Williams.

In connection with the acquisition of the Williams Pipe Line system,
Williams has agreed to reimburse us for maintenance capital expenditures
incurred in 2002, 2003 and 2004 in excess of $19.0 million per year related to
the Williams Pipe Line system, subject to a maximum combined reimbursement for
all years

20

of $15.0 million. In 2002, we expect to incur maintenance capital expenditures
related to the Williams Pipe Line system of approximately $15.0 million and,
therefore, do not anticipate any reimbursements from Williams associated with
Williams Pipe Line's 2002 maintenance capital expenditures.

We expect to incur aggregate maintenance capital expenditures for 2002 for
all of our businesses, net of reimbursements from Williams, of $19.9 million.

In addition to maintenance capital, we are also planning to incur expansion
and upgrade capital expenditures at our existing facilities, including pipeline
connections. The total we plan to spend for expansion is approximately $13.0
million in 2002, not including capital needs associated with additional
acquisitions, if any. We expect to fund our expansion capital expenditures,
including any acquisitions, from:

o cash provided by operations;

o borrowings under the revolving credit facility discussed below and other
borrowings; and

o the issuance of additional common units.

LIQUIDITY

Operating Partnership Credit Facility. Subsequent to the closing of our
initial public offering on February 9, 2001, we have relied on cash generated
from internal operations as our primary source of funding for uses other than
expansion capital expenditures. Additional funding requirements are met by a
$175.0 million credit facility of our operating partnership that expires on
February 5, 2004. This credit facility is comprised of a $90.0 million term loan
and an $85.0 million revolving credit facility. The revolving credit facility is
comprised of a $73.0 million acquisition sub-facility and a $12.0 million
working capital sub-facility. As of June 30, 2002, $15.0 million was available
under the acquisition sub-facility and $12.0 million was available under the
working capital sub-facility.

The credit facility contains various operational and financial covenants.
Management believes that we are in compliance with all of these covenants.

Williams Pipe Line Short-term Loan. In connection with the acquisition of
the Williams Pipe Line system, we and our subsidiary, Williams Pipe Line,
entered into a six-month $700.0 million credit agreement. All of the proceeds
from this loan were used to finance this acquisition. During May 2002, we
issued an additional 8.0 million common units to the public at a price of $37.15
per unit. After paying underwriter discounts and commissions and equity issuance
fees, we received net proceeds of $283.1 million from the common equity
issuance. In addition, Williams paid us $6.1 million to maintain its 2% general
partner interest. Using these proceeds, we paid $289.0 million on the loan,
resulting in an outstanding balance of $411.0 million at June 30, 2002.

Our obligations under this short-term loan are unsecured. This indebtedness
ranks equally with all of our outstanding unsecured and non-subordinated debt.
Our operating partnership is not a borrower under this credit agreement. We may
prepay this short-term loan at any time, in whole or in part, without penalty.
This indebtedness will bear interest, at our election, at the Eurodollar rate
plus 2.5% or the prime rate plus 1.5%, for the first 120 days of the short-term
loan and, thereafter, at the Eurodollar rate plus 4.0% or the prime rate plus
3.0%.

In addition, the credit agreement contains various covenants limiting our
and Williams Pipe Line's ability to:

o incur additional unsecured indebtedness other than under our operating
partnership's credit facility described above;

o grant liens other than tax liens, mechanic's and materialman's liens and
other liens and encumbrances incurred in the ordinary course of
business;

o make investments, other than investments in the Williams Pipe Line
system, cash and short-term securities and acquisitions;

o merge or consolidate;

21

o dispose of assets;

o make distributions other than from available cash or, in the case of
Williams Pipe Line, in excess of $7.5 million in each quarter;

o engage in any business other than the transportation, storage and
distribution of hydrocarbons and ammonia;

o create obligations for some lease payments; or

o engage in transactions with affiliates other than arm's-length
transactions.

The credit agreement also contains a covenant requiring Williams Pipe Line
to maintain EBITDA (as defined in the credit agreement) of at least $20.0
million for each fiscal quarter. Management believes that we are in compliance
with all of these covenants.

Management intends to refinance the Williams Pipe Line short-term loan with
long-term debt financing prior to the October 8, 2002 maturity of this
outstanding loan. The Partnership's cost of future debt could be influenced by
Williams credit ratings. Currently, Williams credit rating is not investment
grade.

Debt to Total Capitalization - The ratio of debt / total capitalization is a
measure frequently used by the financial community to assess the reasonableness
of a company's debt levels compared to total capitalization, calculated by
summing total debt and total equity. Based on the figures shown in our balance
sheet, debt / total capitalization appears to be 56.8%. Since accounting rules
require that the acquisition of Williams Pipe Line be recorded at historical
book values due to the affiliate nature of the transaction, the $415 million
difference between the purchase price paid and book value was recorded as a
decrease to the general partner's capital account, thus lowering the equity
component. If the pipeline had been purchased from a third party, the asset
would have been recorded at market value, resulting in a debt / total
capitalization of 39.9%. Management has indicated that it is targeting a debt /
total capitalization of approximately 40%.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical
Corrections". The provisions of SFAS No. 145 regarding the rescission of
Statement 4 are effective for financial statements issued for fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item should
be reclassified. Certain provisions of this Statement related to Statement 13
are effective for transactions occurring after May 15, 2002. All other
provisions of this Statement will be effective for financial statements issued
on or after May 15, 2002. We plan to adopt this standard in January 2003, and it
is not expected to have a material impact on our results of operations or
financial position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and amends Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The Statement retains the basic framework of SFAS No.
121, resolves certain implementation issues of SFAS No. 121, extends
applicability to discontinued operations and broadens the presentation of
discontinued operations to include a component of an entity. The Statement is to
be applied prospectively and is effective for financial statements issued for
fiscal years beginning after December 15, 2001. We adopted this standard in
January 2002. The Statement had no initial impact on our results of operations
or financial position.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
accounting and reporting standards for business combinations and requires all
business combinations to be accounted for by the purchase method. The Statement
is effective for all business combinations for which the date of acquisition is
July 1, 2001 or later. SFAS No. 142 addresses accounting and reporting standards
for goodwill and other intangible assets. Under this Statement, goodwill and
intangible assets with indefinite useful lives will no longer be

22

amortized but will be tested annually for impairment. The Statement becomes
effective for all fiscal years beginning after December 15, 2001. We have
applied the new rules on accounting for goodwill and other intangible assets
beginning January 1, 2002. Based on the amount of goodwill recorded as of
December 31, 2001, application of the non-amortization provision of the
Statement resulted in a decrease to amortization expense in the first six months
of 2002 of approximately $0.4 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Williams Energy Partners currently does not engage in interest rate or
foreign currency exchange rate hedging transactions.

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 interest rate
risk. Debt we incur under our credit facility and the Williams Pipe Line
short-term loan bear variable interest based on the Eurodollar rate. If the
Eurodollar rate changed by 0.125%, our annual debt coverage obligations
associated with the $148.0 million of outstanding borrowings under the credit
facility at June 30, 2002 and the $411.0 million of outstanding borrowings under
the Williams Pipe Line short-term loan would change by approximately $0.7
million.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report on Form 10-Q include
forward-looking statements - statements that discuss our expected future results
based on current and pending business operations. We make these forward-looking
statements in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by words such as "anticipates",
"believes", "expects", "estimates", "forecasts", "projects" and other similar
expressions. Although we believe our forward-looking statements are based on
reasonable assumptions, statements made regarding future results are subject to
numerous assumptions, uncertainties and risks that may cause future results to
be materially different from the results stated or implied in this document.

The following are among the important factors that could cause actual
results to differ materially from any results projected, forecasted, estimated
or budgeted:

o Price trends and overall demand for natural gas liquids, refined
petroleum products, natural gas, crude oil and ammonia in the United
States and globally; economic activity, weather, alternative energy
sources, conservation and technological advances may affect price trends
and demand;

o Our failure to make principal or interest payments on our short-term
loan incurred to finance the acquisition of Williams Pipe Line;

o Mergers among our customers and competitors, could result in lower
volumes being shipped on our pipelines and/or demand for product storage
and terminal services at our terminal facilities;

o The closure of mid-continent refineries that supply the Williams
Pipe Line could result in disruptions or reductions in the volumes
transported on the system;

o Changes in demand for refined petroleum products that we store and
distribute;

o Changes in demand for storage in our petroleum products terminals;

o Changes in our tariff rate implemented by the Federal Energy Regulatory
Commission and the United States Surface Transportation Board;

o Shut-downs or cutbacks at major refineries, petrochemical plants,
ammonia production facilities or other businesses that use our services
or supply services to us;

o Changes in the throughput on petroleum products pipelines owned and
operated by third parties and connected to our petroleum products
terminals;

o Loss of Williams Energy Marketing & Trading Company or Williams Refining
& Marketing, L.L.C. as customers;

o Loss of one or all of our three customers on our ammonia pipeline
system: in particular, the loss of volumes from Farmland Industries,
which filed for Chapter 11 bankruptcy protection on May 31, 2002;

o An increase in the price of natural gas, which increases ammonia
production costs and could reduce the amount of ammonia transported
through our ammonia pipeline system;

23

o Changes in the federal government's policy regarding farm subsidies,
which could negatively impact the demand for ammonia and reduce the
amount of ammonia transported through our ammonia pipeline system;

o An increase in the competition our petroleum products terminals and
ammonia pipeline system encounter;

o The occurrence of an operational hazard or unforeseen interruption for
which we are not adequately insured;

o Our ability to integrate any acquired operations into our existing
operations;

o Changes in the general economic conditions in the United States;

o Changes in laws and regulations to which we are subject, including tax,
safety, environmental and employment laws and regulations;

o The condition of the capital markets and equity markets in the United
States;

o The cost and effects of legal and administrative claims and proceedings
against us or our subsidiaries;

o The ability to raise capital in a cost-effective way;

o The effect of changes in accounting policies;

o The ability to control costs;

o The political and economic stability of the oil producing nations of the
world; and

o Our relationship with Williams, which subjects us to risks that are
beyond our control.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As a result of an Environmental Protection Agency investigation and
associated report of benzene contamination in Corpus Christi, Texas, Elementis
Chromium Inc. brought suit against El Paso CGP Company which, in turn, sent a
demand letter to the Partnership which presented a claim for $5.3 million,
representing El Paso's costs to date. The Partnership has denied all
responsibility for any of the contamination issues in the litigation. The
Partnership has received a complete indemnification from Hess associated with
this claim.

During 2001, the Environmental Protection Agency ("EPA"), pursuant to
Section 308 of the Clean Water Act, preliminarily determined that Williams may
have systemic problems with petroleum discharges from pipeline operations. The
inquiry primarily focused on Williams Pipe Line, which was subsequently acquired
by the Partnership. The response to the EPA's information request was submitted
during November 2001.

No other material litigation or claims were filed against the Partnership
during the three months ended June 30, 2002, and there have been no material
changes in legal proceedings previously disclosed.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the quarter ended June 30, 2002, the Partnership issued the following
securities that were not registered under the Securities Act:

On April 11, 2002, the Partnership issued 7,830,924 Class B units
representing limited partner interests to its general partner, Williams GP
LLC. The securities, valued at $304.4 million, were issued as partial
payment for the acquisition of Williams Pipe Line. The Partnership has the
right to redeem the Class B units for cash based on the 15-day average
closing price of the common units prior to the redemption date. If the Class
B units are not redeemed by April 11, 2003, upon the request of the General
Partner and approval of the holders of a majority of the common units voting
at a meeting of the unitholders, the Class B units will convert into common
units. If the approval of the conversion by the common unitholders is not
obtained within 120 days of our General Partner's request, our General
Partner will be entitled to receive distributions with respect to its Class
B units, on a per unit basis,

24

equal to 115% of the amount of distributions paid on a common unit. These
securities are exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit 99.1 - Williams GP LLC's balance sheets as of June 30, 2002 and
December 31, 2001 and notes thereto.

(b) Reports on Form 8-K:

On July 31, 2002, the Partnership reported on Form 8-K its earnings
for the three and six months ended June 30, 2002 and 2001.

On July 25, 2002, the Partnership reported on Form 8-K that it had
held a conference call with analysts on July 23, 2002 to discuss the
news announced on July 22, 2002, by The Williams Companies, Inc., owner
of its general partner.

On May 23, 2002, the Partnership reported on Form 8-K that it had
entered into an underwriting agreement with Lehman Brothers and Salomon
Smith Barney as the lead underwriters with respect to the issuance and
sale by the Partnership of 8,000,000 units representing limited partner
interests in the Partnership in an underwritten public offering.

On May 15, 2002, the Partnership reported on Form 8-K that the board
of directors for the general partner of the Partnership had elected Phil
Wright as chairman of the board and Don Wellendorf as president and
chief executive officer. The board also elected Mike Mears as vice
president, transportation, and Rick Olson as vice president, pipeline
operations.

On May 3, 2002, the Partnership filed on Form 8-K, restated
Management's Discussion and Analysis of Financial Condition and Results
of Operations and consolidated financial statements and notes to reflect
the results of operations, financial position and cash flows as if the
Partnership and Williams Pipe Line Company had been combined throughout
the periods presented. This filing was amended on Form 8-K/A on May 9,
2002, to correct certain typographical errors.

On April 29, 2002, the Partnership's earnings for the three months
ended March 31, 2002 and 2001 were issued on Form 8-K on April 25, 2002.

25

On April 19, 2002, the Partnership filed on Form 8-K the following
financial statements associated with its purchase of all the membership
interests of Williams Pipe Line Company for $1 billion effective April
11, 2002:

o Unaudited pro forma balance sheet as of December 31, 2001,
and unaudited pro forma statement of income for the year
ended December 31, 2001;

o The consolidated balance sheets of Williams Pipe Line
Company, LLC as of December 31, 2001 and 2000, and the
related consolidated statements of income and member's
equity and cash flows for each of the three years in the
period ended December 31, 2001, with report of independent
auditors.

On April 11, 2002, on Form 8-K, the Partnership reported that The
Williams Companies, Inc. had announced that it closed the sale of
Williams Pipe Line Company to the Partnership for $1 billion.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Tulsa, Oklahoma, on August 14, 2002.

WILLIAMS ENERGY PARTNERS L.P.

By: Williams GP LLC
its General Partner

/s/ John D. Chandler
---------------------------------------
John D. Chandler
Chief Financial Officer
and Treasurer (Principal Accounting and
Financial Officer)

26

INDEX TO EXHIBITS