Attached files
file | filename |
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8-K - FORM 8-K - Williams Partners L.P. | c54213e8vk.htm |
EX-99.2 - EX-99.2 - Williams Partners L.P. | c54213exv99w2.htm |
EX-23.1 - EX-23.1 - Williams Partners L.P. | c54213exv23w1.htm |
Exhibit 99.1
Item 6. Selected Financial Data
The following financial data for each of the three years in the period ended December 31,
2008, should be read in conjunction with the other financial information included in this Exhibit
99.1 of this Form 8-K and the other information included in our Item 6. Selected Financial Data in our Annual Report on Form
10-K for the year ended December 31, 2008. All other financial data has been prepared from our accounting records.
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(Dollars in thousands, except per-unit amounts) | ||||||||||||||||||||
Income before cumulative effect of
change in accounting principle per
limited partner unit(a): |
||||||||||||||||||||
Common unit |
$ | 3.08 | $ | 1.99 | $ | 1.73 | $ | 0.49 | (b) | N/A | ||||||||||
Subordinated unit |
$ | N/A | $ | 1.99 | $ | 1.73 | $ | 0.49 | (b) | N/A | ||||||||||
Net income per limited partner unit(a): |
||||||||||||||||||||
Common unit |
$ | 3.08 | $ | 1.99 | $ | 1.73 | $ | 0.44 | (b) | N/A | ||||||||||
Subordinated unit |
$ | N/A | $ | 1.99 | $ | 1.73 | $ | 0.44 | (b) | N/A |
(a) | As described in Item 8.01 of this Form 8-K, certain of our historical periods earnings per unit have been revised as a result of our January 2009 adoption of new guidance regarding the application of the two-class method to calculate earnings per unit for Master Limited Partnerships. There were no changes to the other information included in our Item 6. Selected Financial Data in our Annual Report on Form 10-K for the year ended December 31, 2008. | |
(b) | The period of August 23, 2005 through December 31, 2005. |
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Williams Partners GP LLC,
General Partner of Williams Partners L.P.,
and the Limited Partners of Williams Partners L.P.
General Partner of Williams Partners L.P.,
and the Limited Partners of Williams Partners L.P.
We have audited the accompanying consolidated balance sheets of Williams Partners L.P. as of
December 31, 2008 and 2007, and the related consolidated statements of income, partners capital,
and cash flows for each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Williams Partners L.P. at December 31, 2008 and
2007, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Williams Partners L.P.s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 23, 2009 expressed an unqualified opinion thereon.
As discussed in Note 3 to the consolidated financial statements, the financial statements have
been retrospectively revised for the adoption of Emerging Issues Task Force Issue No. 07-4,
Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
February 23, 2009,
except as it pertains to the retrospective adjustment
of earnings per unit discussed in Note 3, as to
which the date is October 28, 2009
February 23, 2009,
except as it pertains to the retrospective adjustment
of earnings per unit discussed in Note 3, as to
which the date is October 28, 2009
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 116,165 | $ | 36,197 | ||||
Accounts receivable: |
||||||||
Trade |
16,279 | 12,860 | ||||||
Affiliate |
11,652 | 20,402 | ||||||
Other |
2,919 | 2,543 | ||||||
Product imbalance |
6,344 | 20,660 | ||||||
Prepaid expenses |
4,102 | 4,056 | ||||||
Reimbursable projects |
| 8,989 | ||||||
Other current assets |
3,642 | 3,805 | ||||||
Total current assets |
161,103 | 109,512 | ||||||
Investment in Wamsutter |
277,707 | 284,650 | ||||||
Investment in Discovery Producer Services |
184,466 | 214,526 | ||||||
Gross property, plant and equipment |
1,265,153 | 1,239,792 | ||||||
Less accumulated depreciation |
(624,633 | ) | (597,503 | ) | ||||
Property, plant and equipment, net |
640,520 | 642,289 | ||||||
Other noncurrent assets |
28,023 | 32,500 | ||||||
Total assets |
$ | 1,291,819 | $ | 1,283,477 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current liabilities: |
||||||||
Accounts payable: |
||||||||
Trade |
$ | 22,348 | $ | 35,947 | ||||
Affiliate |
11,122 | 17,676 | ||||||
Product imbalance |
8,926 | 21,473 | ||||||
Deferred revenue |
4,916 | 4,569 | ||||||
Derivative liabilities affiliate |
| 2,718 | ||||||
Accrued interest |
18,705 | 19,500 | ||||||
Other accrued liabilities |
6,172 | 8,243 | ||||||
Total current liabilities |
72,189 | 110,126 | ||||||
Long-term debt |
1,000,000 | 1,000,000 | ||||||
Environmental remediation liabilities |
2,321 | 2,599 | ||||||
Other noncurrent liabilities |
13,699 | 9,265 | ||||||
Commitments and contingent liabilities (Note 14) |
||||||||
Partners capital: |
||||||||
Common unitholders (52,777,452 and 45,774,728 units outstanding at December 31,
2008 and 2007) |
1,619,954 | 1,473,814 | ||||||
Subordinated unitholders (7,000,000 units outstanding at December 31, 2007) |
| 109,542 | ||||||
Accumulated other comprehensive loss |
| (2,487 | ) | |||||
General partner |
(1,416,344 | ) | (1,419,382 | ) | ||||
Total partners capital |
203,610 | 161,487 | ||||||
Total liabilities and partners capital |
$ | 1,291,819 | $ | 1,283,477 | ||||
See accompanying notes to consolidated financial statements.
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(Dollars in thousands, except per-unit amounts) | ||||||||||||
Revenues: |
||||||||||||
Product sales: |
||||||||||||
Affiliate |
$ | 314,299 | $ | 267,970 | $ | 255,075 | ||||||
Third-party |
24,981 | 22,962 | 16,919 | |||||||||
Gathering and processing: |
||||||||||||
Affiliate |
37,893 | 35,819 | 42,228 | |||||||||
Third-party |
195,056 | 202,775 | 206,432 | |||||||||
Storage |
31,429 | 28,016 | 25,237 | |||||||||
Fractionation |
17,441 | 9,622 | 11,698 | |||||||||
Other |
15,961 | 5,653 | 5,821 | |||||||||
Total revenues |
637,060 | 572,817 | 563,410 | |||||||||
Costs and expenses: |
||||||||||||
Product cost and shrink replacement: |
||||||||||||
Affiliate |
85,372 | 73,475 | 78,201 | |||||||||
Third-party |
120,706 | 108,223 | 97,307 | |||||||||
Operating and maintenance expense: |
||||||||||||
Affiliate |
76,735 | 61,633 | 53,627 | |||||||||
Third-party |
109,166 | 100,710 | 101,587 | |||||||||
Depreciation, amortization and accretion |
45,029 | 46,492 | 43,692 | |||||||||
General and administrative expense: |
||||||||||||
Affiliate |
44,065 | 42,038 | 34,295 | |||||||||
Third-party |
2,994 | 3,590 | 5,145 | |||||||||
Taxes other than income |
9,508 | 9,624 | 8,961 | |||||||||
Other (income) expense net |
(3,523 | ) | 12,095 | (2,473 | ) | |||||||
Total costs and expenses |
490,052 | 457,880 | 420,342 | |||||||||
Operating income |
147,008 | 114,937 | 143,068 | |||||||||
Equity earnings Wamsutter |
88,538 | 76,212 | 61,690 | |||||||||
Discovery investment income |
22,357 | 28,842 | 18,050 | |||||||||
Interest expense |
(67,220 | ) | (58,348 | ) | (9,833 | ) | ||||||
Interest income |
706 | 2,988 | 1,600 | |||||||||
Net income |
$ | 191,389 | $ | 164,631 | $ | 214,575 | ||||||
Allocation of net income for calculation of earnings per unit: |
||||||||||||
Net income |
$ | 191,389 | $ | 164,631 | $ | 214,575 | ||||||
Allocation of net income to general partner (a) |
28,957 | 79,507 | 181,737 | |||||||||
Allocation of net income to limited partners (a) |
$ | 162,432 | $ | 85,124 | $ | 32,838 | ||||||
Basic and diluted earnings per limited partner unit: |
||||||||||||
Net income: |
||||||||||||
Common units (a) |
$ | 3.08 | $ | 1.99 | $ | 1.73 | ||||||
Weighted average number of units outstanding: |
||||||||||||
Common units(b) |
52,775,710 | 40,131,195 | (c) | 18,986,368 | (c) |
(a) | Retrospectively adjusted as discussed in Note 3. | |
(b) | Includes subordinated units converted to common on February 19, 2008. | |
(c) | Includes Class B units converted to common on May 21, 2007. |
See accompanying notes to consolidated financial statements.
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
Limited Partners | Accumulated Other | Total | ||||||||||||||||||||||
General | Comprehensive | Partners | ||||||||||||||||||||||
Common | Class B | Subordinated | Partner | Loss | Capital | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Balance December 31, 2005 |
$ | 108,526 | $ | | $ | 108,491 | $ | 925,461 | $ | | $ | 1,142,478 | ||||||||||||
Net income 2006 |
21,181 | 655 | 11,606 | 181,133 | | 214,575 | ||||||||||||||||||
Cash distributions |
(17,887 | ) | | (11,235 | ) | (872 | ) | | (29,994 | ) | ||||||||||||||
Issuance of units to public
(18,545,030 common units) |
625,995 | | | | | 625,995 | ||||||||||||||||||
Issuance of units through private
placement (6,805,492
Class B units) |
| 241,268 | | | | 241,268 | ||||||||||||||||||
Offering costs |
(4,168 | ) | | | | | (4,168 | ) | ||||||||||||||||
Distributions to The Williams
Companies, Inc. net |
| | | (114,497 | ) | | (114,497 | ) | ||||||||||||||||
Adjustment in basis of investment
in Discovery Producer Services |
| | | (7,400 | ) | | (7,400 | ) | ||||||||||||||||
Adjustment in basis of investment
in Wamsutter |
| | | (39,601 | ) | | (39,601 | ) | ||||||||||||||||
Distributions to general partner
for purchase of Four Corners |
| | | (1,583,000 | ) | | (1,583,000 | ) | ||||||||||||||||
Contributions pursuant to the
omnibus agreement |
| | | 6,840 | | 6,840 | ||||||||||||||||||
Contributions from general partner |
| | | 18,614 | | 18,614 | ||||||||||||||||||
Other |
231 | | | | | 231 | ||||||||||||||||||
Balance December 31, 2006 |
733,878 | 241,923 | 108,862 | (613,322 | ) | | 471,341 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income 2007 |
64,546 | 9,212 | 14,995 | 75,878 | | 164,631 | ||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Net unrealized losses on cash
flow hedges |
| | | | (3,763 | ) | (3,763 | ) | ||||||||||||||||
Reclassification into earnings
of derivative instrument losses |
| | | | 1,276 | 1,276 | ||||||||||||||||||
Total other comprehensive loss |
(2,487 | ) | ||||||||||||||||||||||
Total comprehensive income |
162,144 | |||||||||||||||||||||||
Cash distributions |
(59,573 | ) | (6,601 | ) | (14,315 | ) | (6,792 | ) | | (87,281 | ) | |||||||||||||
Conversion of Class B units into
common (6,805,492 units) |
244,534 | (244,534 | ) | | | | | |||||||||||||||||
Distributions to general partner
in exchange for additional
investment in Discovery Producer
Services |
| | | (78,000 | ) | | (78,000 | ) | ||||||||||||||||
Adjustment in basis of investment
in Discovery Producer Services |
| | | (9,035 | ) | | (9,035 | ) | ||||||||||||||||
Issuance of units to public
(9,250,000 common units) |
335,220 | | | | | 335,220 | ||||||||||||||||||
Issuance of units to general
partner (4,163,257 common units) |
157,173 | | | | | 157,173 | ||||||||||||||||||
Distributions to general partner
in exchange for investment in
Wamsutter |
| | | (750,000 | ) | | (750,000 | ) | ||||||||||||||||
Offering costs |
(1,927 | ) | | | | | (1,927 | ) | ||||||||||||||||
Adjustment in basis of investment
in Wamsutter |
| | | (53,807 | ) | | (53,807 | ) | ||||||||||||||||
Contributions from general partner |
| | | 10,334 | | 10,334 | ||||||||||||||||||
Contributions pursuant to the
omnibus agreement |
| | | 5,362 | | 5,362 | ||||||||||||||||||
Other |
(37 | ) | | | | | (37 | ) | ||||||||||||||||
Limited Partners | Accumulated Other | Total | ||||||||||||||||||||||
General | Comprehensive | Partners | ||||||||||||||||||||||
Common | Class B | Subordinated | Partner | Loss | Capital | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Balance December 31, 2007 |
1,473,814 | | 109,542 | (1,419,382 | ) | (2,487 | ) | 161,487 | ||||||||||||||||
Net income 2008 |
163,917 | | 1,556 | 25,916 | | 191,389 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Net unrealized gains on cash flow
hedges |
| | | | 2,903 | 2,903 | ||||||||||||||||||
Reclassification into earnings of
derivative instrument gains |
| | | | (416 | ) | (416 | ) | ||||||||||||||||
Total other comprehensive income |
2,487 | |||||||||||||||||||||||
Total comprehensive income |
193,876 | |||||||||||||||||||||||
Cash distributions |
(124,483 | ) | | (4,025 | ) | (26,874 | ) | | (155,382 | ) | ||||||||||||||
Conversion of subordinated units
into common (7,000,000 units) |
107,073 | | (107,073 | ) | | | | |||||||||||||||||
Contributions pursuant to the
omnibus agreement |
| | | 2,981 | | 2,981 | ||||||||||||||||||
Issuance of units to public
(800,000 common units) |
28,992 | | | | | 28,992 | ||||||||||||||||||
Repurchase of units from Williams
(800,000 common units) |
(28,992 | ) | | | | | (28,992 | ) | ||||||||||||||||
Other |
(367 | ) | | | 1,015 | | 648 | |||||||||||||||||
Balance December 31, 2008 |
$ | 1,619,954 | $ | | $ | | $ | (1,416,344 | ) | $ | | $ | 203,610 | |||||||||||
See accompanying notes to consolidated financial statements.
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 191,389 | $ | 164,631 | $ | 214,575 | ||||||
Adjustments to reconcile to cash provided by operations: |
||||||||||||
Depreciation, amortization and accretion |
45,029 | 46,492 | 43,692 | |||||||||
Provision for loss on property, plant and equipment |
6,827 | 11,306 | | |||||||||
Gain on sale of property, plant and equipment |
| | (3,055 | ) | ||||||||
Amortization of gas purchase contract affiliate |
| 4,754 | 5,320 | |||||||||
Gain on involuntary conversion |
(11,604 | ) | | | ||||||||
Equity earnings of Wamsutter |
(88,538 | ) | (76,212 | ) | (61,690 | ) | ||||||
Equity earnings of Discovery Producer Services |
(20,641 | ) | (28,842 | ) | (18,050 | ) | ||||||
Distributions related to equity earnings of Wamsutter |
95,926 | | | |||||||||
Distributions related to equity earnings of Discovery Producer Services |
20,641 | 26,240 | 12,033 | |||||||||
Cash provided (used) by changes in assets and liabilities: |
||||||||||||
Accounts receivable |
4,955 | 11,830 | (13,564 | ) | ||||||||
Prepaid expenses |
(46 | ) | (369 | ) | (1,023 | ) | ||||||
Reimbursable projects |
8,989 | (8,989 | ) | | ||||||||
Other current assets |
(1,373 | ) | (1,041 | ) | (920 | ) | ||||||
Accounts payable |
(8,280 | ) | 7,206 | (10,600 | ) | |||||||
Product imbalance |
1,769 | 162 | (1,114 | ) | ||||||||
Accrued liabilities |
(2,344 | ) | 15,914 | 6,395 | ||||||||
Deferred revenue |
59 | 1,709 | (170 | ) | ||||||||
Other, including changes in noncurrent assets and liabilities |
4,632 | 4,313 | (2,379 | ) | ||||||||
Net cash provided by operating activities |
247,390 | 179,104 | 169,450 | |||||||||
INVESTING ACTIVITIES: |
||||||||||||
Purchase of Four Corners |
| | (607,545 | ) | ||||||||
Purchase of additional investment in Discovery Producer Services |
| (69,061 | ) | | ||||||||
Purchase of investment in Wamsutter |
| (277,262 | ) | | ||||||||
Cumulative distributions in excess of equity earnings of Wamsutter |
3,213 | | | |||||||||
Cumulative distributions in excess of equity earnings of Discovery Producer Services |
35,759 | 229 | 4,367 | |||||||||
Capital expenditures |
(57,851 | ) | (39,777 | ) | (27,192 | ) | ||||||
Receipt of insurance proceeds |
13,140 | | | |||||||||
Contribution to Wamsutter |
(3,658 | ) | | | ||||||||
Contribution to Discovery Producer Services |
(5,700 | ) | | (1,600 | ) | |||||||
Proceeds from sales of property, plant and equipment |
| | 7,757 | |||||||||
Net cash used by investing activities |
(15,097 | ) | (385,871 | ) | (624,213 | ) | ||||||
FINANCING ACTIVITIES: |
||||||||||||
Proceeds from sales of common units |
28,992 | 492,393 | 867,263 | |||||||||
Proceeds from debt issuances |
| 250,000 | 750,000 | |||||||||
Redemption of common units from general partner |
(28,992 | ) | | | ||||||||
Excess purchase price over the contributed basis of Four Corners |
| | (975,455 | ) | ||||||||
Excess purchase price over the contributed basis of the investment in Discovery
Producer Services |
| (8,939 | ) | | ||||||||
Excess purchase price over the contributed basis of the investment in Wamsutter |
| (472,738 | ) | | ||||||||
Payment of debt issuance costs |
| (1,781 | ) | (13,138 | ) | |||||||
Payment of offering costs |
| (1,927 | ) | (4,168 | ) | |||||||
Distributions to The Williams Companies, Inc. |
| | (114,497 | ) | ||||||||
Distributions to unitholders and general partner |
(155,382 | ) | (87,281 | ) | (29,994 | ) | ||||||
General partner contributions |
| 10,334 | 18,614 | |||||||||
Contributions per omnibus agreement |
2,981 | 5,362 | 6,840 | |||||||||
Other |
76 | | | |||||||||
Net cash provided (used) by financing activities |
(152,325 | ) | 185,423 | 505,465 | ||||||||
Increase (decrease) in cash and cash equivalents |
79,968 | (21,344 | ) | 50,702 | ||||||||
Cash and cash equivalents at beginning of year |
36,197 | 57,541 | 6,839 | |||||||||
Cash and cash equivalents at end of year |
$ | 116,165 | $ | 36,197 | $ | 57,541 | ||||||
See accompanying notes to consolidated financial statements.
WILLIAMS PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Unless the context clearly indicates otherwise, references in this report to we, our, us
or similar language refer to Williams Partners L.P. and its subsidiaries. Unless the context
clearly indicates otherwise, references to we, our, and us include the operations of
Wamsutter LLC (Wamsutter) and Discovery Producer Services LLC (Discovery) in which we own interests
accounted for as equity investments that are not consolidated in our financial statements. When we
refer to Wamsutter or Discovery by name, we are referring exclusively to their businesses and
operations.
We are a publicly-traded Delaware limited partnership. Williams Partners GP LLC, a Delaware
limited liability company and wholly owned by The Williams Companies, Inc. (Williams), serves as
our general partner and owns a 2% general partner interest, a 6% limited partner interest and
incentive distribution rights in the partnership. All of our activities are conducted through
Williams Partners Operating LLC, an operating limited liability company (wholly owned by us).
Note 2. Description of Business
We are principally engaged in the business of gathering, transporting, processing and treating
natural gas and fractionating and storing natural gas liquids (NGL). Operations of our businesses
are located in the United States and are organized into three reporting segments: (1) Gathering and
Processing-West, (2) Gathering and Processing-Gulf and (3) NGL Services. Our Gathering and
Processing-West segment includes the Four Corners gathering and processing operations and our
equity investment in Wamsutter. Our Gathering and Processing-Gulf segment includes the Carbonate
Trend gathering pipeline and our equity investment in Discovery. Our NGL Services segment includes
the Conway fractionation and storage operations.
Gathering and Processing-West. Our Four Corners natural gas gathering, processing and
treating assets consist of, among other things, (1) an approximately 3,800-mile natural gas
gathering system in the San Juan Basin in New Mexico and Colorado with a capacity of two billion
cubic feet per day, (2) the Ignacio natural gas processing plant in Colorado and the Kutz and
Lybrook natural gas processing plants in New Mexico, which have a combined processing capacity of
765 million cubic feet per day (MMcf/d) and (3) the Milagro and Esperanza natural gas treating
plants in New Mexico, which have a combined carbon dioxide removal capacity of 67 MMcf/d.
Wamsutter owns (1) an approximate 1,800-mile natural gas gathering system in the Washakie
Basin in south-central Wyoming that currently connects approximately 2,000 wells, with a typical
operating capacity of approximately 500 MMcf/d at current operating pressures, and (2) the Echo
Springs cryogenic processing plant near Wamsutter, Wyoming which has 390 MMcf/d of inlet cryogenic
processing capacity and NGL production capacity of 30,000 bpd.
Gathering and Processing-Gulf. We own a 60% interest in Discovery, which includes a
wholly-owned subsidiary, Discovery Gas Transmission LLC. Discovery owns (1) an approximate 300-mile
natural gas gathering and transportation pipeline system, located primarily off the coast of
Louisiana in the Gulf of Mexico, (2) a 600 MMcf/d cryogenic natural gas processing plant in Larose,
Louisiana, (3) a 32,000 barrels per day (bpd) natural gas liquids fractionator in Paradis,
Louisiana and (4) a 22-mile mixed NGL pipeline connecting the gas processing plant to the
fractionator. Although Discovery includes fractionation operations, which would normally fall
within the NGL Services segment, it is primarily engaged in gathering and processing and is managed
as such. Hence, this equity investment is considered part of the Gathering and Processing-Gulf
segment.
Our Carbonate Trend gathering pipeline is an unregulated sour gas gathering pipeline
consisting of approximately 34 miles of pipeline off the coast of Alabama.
NGL Services. Our Conway storage facilities include three underground NGL storage facilities
in the Conway, Kansas area with a storage capacity of approximately 20 million barrels. The
facilities are connected via a series of pipelines. The storage facilities receive daily shipments
of a variety of products, including mixed NGLs and fractionated products. In addition to pipeline
connections, one facility offers truck and rail service.
Our Conway fractionation facility is located near Conway, Kansas and has a capacity of
approximately 107,000 bpd. We own a 50% undivided interest in these facilities representing
capacity of approximately 53,500 bpd. ConocoPhillips and ONEOK Partners, L.P. are the other owners.
We operate the facility pursuant to an operating agreement that extends until May 2011. The
fractionator
separates mixed NGLs into five products: ethane, propane, normal butane, isobutane and natural
gasoline. Portions of these products are then transported and stored at our Conway storage
facilities.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation. We have prepared the consolidated financial statements based upon
accounting principles generally accepted in the United States and have included the accounts of the
parent and our wholly owned subsidiaries. We eliminated all intercompany accounts and transactions
and reclassified certain amounts to conform to the current classifications.
In January 2009, we adopted the EITF Issue No. 07-4, Application of the Two-Class Method
under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships. EITF Issue No.
07-4 states, among other things, that the calculation of earnings per unit should not reflect an
allocation of undistributed earnings to the incentive distribution right (IDR) holders beyond
amounts distributable to IDR holders under the terms of the partnership agreement. Previously,
under generally accepted accounting principles, we calculated earnings per unit as if all the
earnings for the period had been distributed, which resulted in an additional allocation of income
to the general partner (the IDR holder) in quarterly periods where an assumed incentive
distribution exceeded the actual incentive distribution. Following the adoption of the guidance in
EITF Issue No. 07-4, we no longer calculate assumed incentive distributions. We have
retrospectively applied EITF Issue No. 07-4 to all periods presented. The retrospective application
of this guidance decreased the income allocated to the general partner and increased the income
allocated to limited partners for the amount that any assumed incentive distribution exceeded the
actual incentive distribution calculated during that period. Certain of our historical periods
earnings per unit have been revised as a result of this change. Earnings per unit for the years
ended December 31, 2008, 2007 and 2006 increased from $2.55 per
unit to $3.08 per unit; $1.97 per
unit to $1.99 per unit; and $1.62 per unit to $1.73 per unit, respectively. Adoption of this new
standard only impacts the allocation of earnings for purposes of calculating our earnings per
limited partner unit and has no impact on our results of operations, allocation of earnings to
capital accounts, or distributions of available cash to unitholders and our general partner.
Use of Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Estimates and assumptions which, in the opinion of management, are significant to the
underlying amounts included in the financial statements and for which it would be reasonably
possible that future events or information could change those estimates include:
| loss contingencies; | ||
| impairment assessments of long-lived assets; | ||
| environmental remediation obligations; and | ||
| asset retirement obligations. |
These estimates are discussed further throughout the accompanying notes.
Proportional Accounting for the Conway Fractionator. No separate legal entity exists for the
fractionator. We hold a 50% undivided interest in the fractionator property, plant and equipment,
and we are responsible for our proportional share of the costs and expenses of the fractionator. As
operator of the facility, we incur the liabilities of the fractionator (except for certain fuel
costs purchased directly by one of the co-owners) and are reimbursed by the co-owners for their
proportional share of the total costs and expenses. Each co-owner is responsible for the marketing
of their proportional share of the fractionators capacity. Accordingly, we reflect our
proportionate share of the revenues and costs and expenses of the fractionator in the Consolidated
Statements of Income, and we reflect our proportionate share of the fractionator property, plant
and equipment in the Consolidated Balance Sheets. Liabilities in the Consolidated Balance Sheets
include those incurred on behalf of the co-owners with corresponding receivables from the
co-owners. Accounts receivable also includes receivables from our customers for fractionation
services.
Cash and Cash Equivalents. Cash and cash equivalents include amounts primarily invested in
funds with high-quality, short-term securities and instruments that are issued or guaranteed by the
U.S. government. These have maturities of three months or less when acquired.
Accounts Receivable. Accounts receivable are carried on a gross basis, with no discounting, less
an allowance for doubtful accounts. We do not recognize an allowance for doubtful accounts at the
time the revenue which generates the accounts receivable is recognized. We estimate the allowance
for doubtful accounts based on existing economic conditions, the financial condition of our
customers, and the amount and age of past due accounts. We consider receivables past due if full
payment is not received by the contractual due date. Past due accounts are generally written off
against the allowance for doubtful accounts only after all collection attempts have been
unsuccessful.
Product Imbalances. In the course of providing gathering, processing and treating services to
our customers, we realize over and under deliveries of our customers products and over and under
purchases of shrink replacement gas when our purchases vary from operational requirements. In
addition, in the course of providing gathering, processing, treating, fractionation and storage
services to our customers, we realize gains and losses due to (1) the product blending process at
the Conway fractionator, (2) the periodic emptying of storage caverns at Conway and (3)
inaccuracies inherent in the gas measurement process. These gains and losses impact our results of
operations and are included in operating and maintenance expense in the Consolidated Statements of
Income. These imbalance positions are reflected as product imbalance receivables and payables on
the Consolidated Balance Sheets. We value product imbalance receivables based on the lower of
current market prices or current cost of natural gas in the system or, in the case of our Conway
facilities, lower of the current market prices or weighted average value of NGLs. We value product
imbalance payables at
current market prices. The majority of Four Corners product imbalance settlements are through
in-kind arrangements whereby incremental volumes are delivered to a customer (in the case of an
imbalance payable) or received from a customer (in the case of an imbalance receivable). Such
in-kind deliveries are on-going and take place over several periods. In some cases, settlements of
imbalances build up over a period of time and are ultimately settled in cash and are generally
negotiated at values which approximate average market prices over a period of time. These gains and
losses impact our results of operations and are included in operating and maintenance expense in
the Consolidated Statements of Income.
Prepaid Expenses and Leasing Activities. Prepaid expenses include the unamortized balance of
minimum lease payments made to date under a right-of-way renewal agreement. We capitalize land and
right-of-way lease payments made at the time of initial construction or placement of plant and
equipment on leased land as part of the cost of the assets. Lease payments made in connection with
subsequent renewals or amendments of these leases are classified as prepaid expenses. The minimum
lease payments for the lease term, including any renewal, are expensed on a straight-line basis
over the lease term.
Reimbursable Projects. We recorded expenditures incurred for the repair of the Ignacio
natural gas processing plant damaged by a fire in November 2007, which were probable of recovery
when incurred, as reimbursable projects. Expenditures up to the insurance deductible and amounts
subsequently determined not to be recoverable were expensed.
Derivative Instruments and Hedging Activities. We may utilize derivatives to manage a portion
of our commodity price risk. These instruments consist primarily of swap agreements and forward
contracts involving short- and long-term purchases and sales of a physical energy commodity. The
counterparty to these instruments is a Williams affiliate. We execute these transactions in
over-the-counter markets in which quoted prices exist for active periods. We report the fair value
of derivatives, except those for which the normal purchases and normal sales exception has been
elected, on the Consolidated Balance Sheets in other current assets, derivative liabilities
affiliate, other assets or other noncurrent liabilities. We determine the current and noncurrent
classification based on the timing of expected future cash flows of individual contracts.
The accounting for changes in the fair value of derivatives is governed by Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, and depends on whether the derivative has been designated in a hedging relationship
and what type of hedging relationship it is. The accounting for the change in fair value can be
summarized as follows:
Derivative Treatment | Accounting Method | |
Normal purchases and normal sales exception
|
Accrual accounting | |
Designated in qualifying hedging relationship
|
Hedge accounting | |
All other derivatives
|
Mark-to-market accounting |
We have elected the normal purchases and normal sales exception for certain short- and
long-term purchases and sales of physical energy commodities. Under accrual accounting, any change
in the fair value of these derivatives is not reflected on the balance sheet since we made the
election of this exception at the inception of these contracts.
For a derivative to qualify for designation in a hedging relationship it must meet specific
criteria and we must maintain appropriate documentation. We establish hedging relationships
pursuant to our risk management policies. We evaluate the hedging relationships at the inception of
the hedge and on an ongoing basis to determine whether the hedging relationship is, and is expected
to remain, highly effective in achieving offsetting changes in fair value or cash flows
attributable to the underlying risk being hedged. We also regularly assess whether the hedged
forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer
expected to be highly effective, or if we believe the likelihood of occurrence of the hedged
forecasted transaction is no longer probable, hedge accounting is discontinued prospectively, and
future changes in the fair value of the derivative are recognized currently in other revenues.
For derivatives designated as a cash flow hedge, the effective portion of the change in fair
value of the derivative is reported in other comprehensive loss and reclassified into product sales
revenues in the period in which the hedged item affects earnings. Any ineffective portion of the
derivatives change in fair value is recognized currently in product sales revenues. Gains or
losses deferred in accumulated other comprehensive loss associated with terminated derivatives,
derivatives that cease to be highly effective hedges, derivatives for which the forecasted
transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that
have been otherwise discontinued remain in accumulated other comprehensive loss until the hedged
item affects earnings. If it becomes probable that the forecasted transaction designated as the
hedged item in a cash flow hedge will not occur, any gain or loss
deferred in accumulated other comprehensive loss is recognized in other revenues at that time.
The change in likelihood of a forecasted transaction is a judgmental decision that includes
qualitative assessments made by management.
Investments. At December 31, 2008, our ownership interests in Wamsutter consist of 100% of
the Class A limited liability company interests and 20 Class C units representing 50% of the
initial Class C ownership interests (collectively the Wamsutter Ownership Interests). We account
for our Wamsutter Ownership Interests and our 60% investment in Discovery under the equity method
due to the voting provisions of their limited liability company agreements which provide the other
members of these entities significant participatory rights such that we do not control these
investments. Discoverys underlying equity exceeds the carrying value of our investment at December
31, 2008 and 2007 due to an other-than-temporary impairment of that investment that we recognized
in 2004.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost. We base the
carrying value of these assets on estimates, assumptions and judgments relative to capitalized
costs, useful lives and salvage values. Depreciation of property, plant and equipment is provided
on the straight-line basis over estimated useful lives. Expenditures for maintenance and repairs
are expensed as incurred. Expenditures that enhance the functionality or extend the useful lives of
the assets are capitalized. We remove the cost of property, plant and equipment sold or retired and
the related accumulated depreciation from the accounts in the period of sale or disposition. Gains
and losses on the disposal of property, plant and equipment are recorded in the Consolidated
Statements of Income.
We record an asset and a liability equal to the present value of each expected future asset
retirement obligation (ARO). The ARO asset is depreciated in a manner consistent with the
depreciation of the underlying physical asset. We measure changes in the liability due to passage
of time by applying an interest method of allocation. This amount is recognized as an increase in
the carrying amount of the liability and as corresponding accretion expense.
Revenue Recognition. The nature of our businesses results in various forms of revenue
recognition. Our Gathering and Processing segments recognize (1) revenue from fee-based gathering
and processing of gas in the period the service is provided based on contractual terms and the
related natural gas and liquid volumes and (2) product sales revenue when the product has been
delivered. Our NGL Services segment recognizes (1) fractionation revenues when services have been
performed and product has been delivered, (2) storage revenues under prepaid contracted storage
capacity evenly over the life of the contract as services are provided and (3) product sales
revenue when the product has been delivered.
Impairment of Long-Lived Assets and Investments. We evaluate our long-lived assets of
identifiable business activities for impairment when events or changes in circumstances indicate
the carrying value of such assets may not be recoverable. The impairment evaluation of tangible
long-lived assets is measured pursuant to the guidelines of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. When an indicator of impairment has occurred, we
compare our managements estimate of undiscounted future cash flows attributable to the assets to
the carrying value of the assets to determine whether the carrying value of the assets is
recoverable. We apply a probability-weighted approach to consider the likelihood of different cash
flow assumptions and possible outcomes. If the carrying value is not recoverable, we determine the
amount of the impairment recognized in the financial statements by estimating the fair value of the
assets and recording a loss for the amount that the carrying value exceeds the estimated fair
value.
We evaluate our investments for impairment when events or changes in circumstances indicate,
in our managements judgment, that the carrying value of such investments may have experienced an
other-than-temporary decline in value. When evidence of loss in value has occurred, we compare our
estimate of fair value of the investment to the carrying value of the investment to determine
whether an impairment has occurred. If the estimated fair value is less than the carrying value and
we consider the decline in value to be other than temporary, the excess of the carrying value over
the estimated fair value is recognized in the financial statements as an impairment.
Judgments and assumptions are inherent in our managements estimate of undiscounted future
cash flows used to determine recoverability of an asset and the estimate of an assets or
investments fair value used to calculate the amount of impairment to recognize. The use of
alternate judgments and/or assumptions could result in the recognition of different levels of
impairment charges in the financial statements.
Environmental. Environmental expenditures that relate to current or future revenues are
expensed or capitalized based upon the nature of the expenditures. Expenditures that relate to an
existing contamination caused by past operations that do not contribute to current or future
revenue generation are expensed. Accruals related to environmental matters are generally determined
based on site-
specific plans for remediation, taking into account our prior remediation experience, and are
not discounted. Environmental contingencies are recorded independently of any potential claim for
recovery.
Capitalized Interest. We capitalize interest during construction on major projects with
construction periods of at least three months and a total project cost in excess of $1.0 million.
Interest is capitalized based on our average interest rate on debt to the extent we incur interest
expense. Capitalized interest for the periods presented is immaterial.
Income Taxes. We are not a taxable entity for federal and state income tax purposes. The tax
on our net income is borne by the individual partners through the allocation of taxable income. Net
income for financial statement purposes may differ significantly from taxable income of unitholders
as a result of differences between the tax basis and financial reporting basis of assets and
liabilities and the taxable income allocation requirements under our partnership agreement. The
aggregated difference in the basis of our net assets for financial and tax reporting purposes
cannot be readily determined because information regarding each partners tax attributes in us is
not available to us.
Earnings Per Unit. In accordance with SFAS No. 128, Earnings Per Share, as clarified by the
Emerging Issues Task Force (EITF) Issues No. 03-6 and 07-4, we use the two-class method to
calculate basic and diluted earnings per unit whereby net income, adjusted for items specifically
allocated to our general partner, is allocated on a pro-rata basis between unitholders and our
general partner. Basic and diluted earnings per unit are based on the average number of common,
Class B and subordinated units outstanding. Basic and diluted earnings per unit are equivalent as
there are no dilutive securities outstanding.
Recent Accounting Standards. In March 2008, the Financial Accounting Standards Board (FASB)
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an
amendment of FASB Statement No. 133. SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, currently establishes the disclosure requirements for derivative instruments
and hedging activities. SFAS 161 amends and expands the disclosure requirements of Statement 133
with enhanced quantitative, qualitative and credit risk disclosures. The Statement requires
quantitative disclosure in a tabular format about the fair values of derivative instruments, gains
and losses on derivative instruments and information about where these items are reported in the
financial statements. Also required in the tabular presentation is a separation of hedging and
nonhedging activities. Qualitative disclosures include outlining objectives and strategies for
using derivative instruments in terms of underlying risk exposures, use of derivatives for risk
management and other purposes and accounting designation, and an understanding of the volume and
purpose of derivative activity. Credit risk disclosures provide information about credit risk
related contingent features included in derivative agreements. SFAS No. 161 also amends SFAS No.
107, Disclosures about Fair Value of Financial Instruments, to clarify that disclosures about
concentrations of credit risk should include derivative instruments. This Statement is effective
for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. We plan to apply this Statement beginning in 2009. This
Statement encourages, but does not require, comparative disclosures for earlier periods at initial
adoption. The application of this Statement will increase the disclosures in our Consolidated
Financial Statements.
In November 2008, the FASB ratified EITF Issue No. 08-6, Accounting for Equity Method
Investments Considerations. This Issue clarifies that an equity method investor is required to
continue to recognize an other-than-temporary impairment of their investment in accordance with APB
Opinion No. 18. Also, an equity method investor should not separately test an investees underlying
assets for impairment. However, an equity method investor should recognize their share of an
impairment charge recorded
by an investee. This Issue will be effective on a prospective basis in fiscal years beginning
on or after December 15, 2008 and interim periods within those fiscal years. Earlier application by
an entity that has previously adopted an alternative accounting policy would not be permitted.
Beginning January 1, 2009, we will apply the guidance provided in this Consensus as required.
Note 4. Allocation of Net Income and Distributions
The allocation of net income between our general partner and limited partners, as reflected in
the Consolidated Statement of Partners Capital, for the years ended December 31, 2008, 2007 and
2006 is as follows (in thousands):
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Allocation of net income to general partner: |
||||||||||||
Net income |
$ | 191,389 | $ | 164,631 | $ | 214,575 | ||||||
Net income applicable to pre-partnership operations allocated to general partner |
| (71,426 | ) | (184,157 | ) | |||||||
Beneficial conversion of Class B units* |
| (5,308 | ) | | ||||||||
Charges allocated directly to general partner: |
||||||||||||
Reimbursable general and administrative costs |
1,600 | 2,400 | 3,200 | |||||||||
Carbonate Trend overburden indemnified costs |
112 | | | |||||||||
Core drilling indemnified costs |
| | 784 | |||||||||
Total charges allocated directly to general partner |
1,712 | 2,400 | 3,984 | |||||||||
Income subject to 2% allocation of general partner interest |
193,101 | 90,297 | 34,402 | |||||||||
General partners share of net income |
2.0 | % | 2.0 | % | 2.0 | % | ||||||
General partners allocated share of net income before items directly allocable
to general partner interest |
3,861 | 1,806 | 688 | |||||||||
Incentive distributions paid to general partner** |
23,767 | 5,046 | 272 | |||||||||
Charges allocated directly to general partner |
(1,712 | ) | (2,400 | ) | (3,984 | ) | ||||||
Pre-partnership net income allocated to general partner interest |
| 71,426 | 184,157 | |||||||||
Net income allocated to general partner |
$ | 25,916 | $ | 75,878 | $ | 181,133 | ||||||
Net income |
$ | 191,389 | $ | 164,631 | $ | 214,575 | ||||||
Net income allocated to general partner |
25,916 | 75,878 | 181,133 | |||||||||
Net income allocated to limited partners |
$ | 165,473 | $ | 88,753 | $ | 33,442 | ||||||
* | The $5.3 million allocation of income to the Class B units reflects the Class B unit beneficial conversion feature resulting from the May 2007 conversion of these units into common units on a one-for-one basis. We computed the $5.3 million beneficial conversion feature as the product of the 6,805,492 Class B units and the difference between the fair value of a privately placed common unit on the date of issuance ($36.59) and the issue price of a privately placed Class B unit ($35.81). The $5.3 million allocation of income to the Class B units is included in the $9.2 million of net income for 2007 allocated to the Class B units on the Consolidated Statement of Partners Capital. | |
** | In the calculation of basic and diluted net income per limited partner unit, the net income allocated to the general partner includes IDRs pertaining to the current reporting period, but paid in the subsequent period. The net income allocated to the general partners capital account reflects IDRs paid during the current reporting period. . |
Common and subordinated unitholders shared equally, on a per-unit basis, in the net income
allocated to limited partners before the conversion of the subordinated units into common units in
2008.
The reimbursable general and administrative, core drilling and Carbonate Trend overburden
costs represent the costs charged against our income that our general partner is required to
reimburse us under the terms of the omnibus agreement.
We paid or have authorized payment of the following cash distributions during 2006, 2007 and
2008 (in thousands, except for per unit amounts):
General Partner | ||||||||||||||||||||||||||||
Incentive | ||||||||||||||||||||||||||||
Per Unit | Common | Subordinated | Class B | Distribution | Total Cash | |||||||||||||||||||||||
Payment Date | Distribution | Units | Units | Units | 2% | Rights | Distribution | |||||||||||||||||||||
2/14/2006 |
$ | 0.3500 | $ | 2,452 | $ | 2,450 | $ | | $ | 100 | $ | | $ | 5,002 | ||||||||||||||
5/15/2006 |
$ | 0.3800 | $ | 2,662 | $ | 2,660 | $ | | $ | 109 | $ | | $ | 5,431 | ||||||||||||||
8/14/2006 |
$ | 0.4250 | $ | 6,204 | $ | 2,975 | $ | | $ | 189 | $ | 74 | $ | 9,442 | ||||||||||||||
11/14/2006 |
$ | 0.4500 | $ | 6,569 | $ | 3,150 | $ | | $ | 202 | $ | 199 | $ | 10,120 | ||||||||||||||
2/14/2007 |
$ | 0.4700 | $ | 12,010 | $ | 3,290 | $ | 3,198 | $ | 390 | $ | 603 | $ | 19,491 | ||||||||||||||
5/15/2007 |
$ | 0.5000 | $ | 12,777 | $ | 3,500 | $ | 3,403 | $ | 421 | $ | 965 | $ | 21,066 | ||||||||||||||
8/14/2007 |
$ | 0.5250 | $ | 16,989 | $ | 3,675 | $ | | $ | 447 | $ | 1,267 | $ | 22,378 | ||||||||||||||
11/14/2007 |
$ | 0.5500 | $ | 17,799 | $ | 3,850 | $ | | $ | 487 | $ | 2,211 | $ | 24,347 | ||||||||||||||
2/14/2008 |
$ | 0.5750 | $ | 26,321 | $ | 4,025 | $ | | $ | 706 | $ | 4,231 | $ | 35,283 | ||||||||||||||
5/15/2008 |
$ | 0.6000 | $ | 31,665 | $ | | $ | | $ | 758 | $ | 5,499 | $ | 37,922 | ||||||||||||||
8/14/2008 |
$ | 0.6250 | $ | 32,984 | $ | | $ | | $ | 811 | $ | 6,765 | $ | 40,560 | ||||||||||||||
11/14/2008 |
$ | 0.6350 | $ | 33,513 | $ | | $ | | $ | 832 | $ | 7,272 | $ | 41,617 | ||||||||||||||
2/13/2009(a) |
$ | 0.6350 | $ | 33,513 | $ | | $ | | $ | 832 | $ | 7,272 | $ | 41,617 |
(a) | On February 13, 2009, we paid a cash distribution of $0.635 per unit on our outstanding common units to unitholders of record on February 6, 2009. |
Note 5. Related Party Transactions
The employees of our operated assets and all of our general and administrative employees are
employees of Williams. Williams directly charges us for the payroll costs associated with the
operations employees. Williams carries the obligations for most employee-related benefits in its
financial statements, including the liabilities related to the employee retirement and medical
plans and paid time off. We charge back certain of the payroll costs associated with the operations
employees to the other Conway fractionator co-owners. Our share of those costs is charged to us
through affiliate billings and reflected in Operating and maintenance expense Affiliate in the
accompanying Consolidated Statements of Income.
We are charged for certain administrative expenses by Williams and its Midstream segment of
which we are a part. These charges are either directly identifiable or allocated to our assets.
Direct charges are for goods and services provided by Williams and Midstream at our request.
Allocated charges are either (1) charges allocated to the Midstream segment by Williams and then
reallocated from the Midstream segment to us or (2) Midstream-level administrative costs that are
allocated to us. These allocated corporate administrative expenses are based on a three-factor
formula, which considers revenues; property, plant and equipment; and payroll. We charge certain of
these costs back to the other Conway fractionator co-owners. Our share of direct and allocated
administrative expenses is reflected in General and administrative expense Affiliate in the
accompanying Consolidated Statements of Income. In managements estimation, the allocation
methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing
business incurred by Williams. Under the omnibus agreement, Williams gives us a quarterly credit
for general and administrative expenses. These amounts are reflected as capital contributions from
our general partner. The annual amounts of the credits are as follows: $3.2 million in 2006, $2.4
million in 2007, $1.6 million in 2008 and $0.8 million in 2009.
At December 31, 2008 and 2007 we have a contribution receivable from our general partner of
$0.2 million and $0.5 million, respectively, for amounts reimbursable to us under the omnibus
agreement. We net this receivable against Partners capital on the Consolidated Balance Sheets.
Williams has agreed to reimburse us for certain capital expenditures, subject to limits,
including for certain excess capital expenditures in connection with Discoverys Tahiti pipeline
lateral expansion project.
We purchase natural gas for shrink replacement and fuel for Four Corners and the Conway
fractionator, including fuel on behalf of the Conway co-owners, from Williams Gas Marketing, Inc.
(WGM), a wholly owned subsidiary of Williams. Natural gas purchased for fuel is reflected in
Operating and maintenance expense Affiliate, and natural gas purchased for shrink replacement is
reflected in Product cost and shrink replacement Affiliate in the accompanying Consolidated
Statements of Income. These purchases are generally made at market rates at the time of purchase.
In connection with the IPO, Williams transferred to us a gas purchase contract
for the purchase of a portion of our fuel requirements at the Conway fractionator at a market
price not to exceed a specified level. We reflect the amortization of this contract in Operating
and maintenance expense Affiliate in the accompanying Consolidated Statements of Income. This
contract terminated on December 31, 2007. In December 2007, we entered into fixed price natural gas
purchase contracts with WGM to hedge the price of a portion of our natural gas shrink replacement
costs for February through December of 2008.
Four Corners uses waste heat from a co-generation plant located adjacent to the Milagro
treating plant. Williams Flexible Generation, LLC, an affiliate of Williams, owns the co-generation
plant. Waste heat is required for the natural gas treating process, which occurs at Milagro. The
charge to us for the waste heat is based on the natural gas needed to generate the waste heat. We
purchase this natural gas from WGM. Prior to 2007, the natural gas cost charged to us by WGM had
been favorably impacted by WGMs fixed price natural gas fuel contracts which expired in the fourth
quarter of 2006. This impact was approximately $9.0 million during 2006 as compared to estimated
market prices. We reflect this cost in Operations and maintenance expense Affiliate.
The operation of the Four Corners gathering system includes the routine movement of gas across
gathering systems. We refer to this activity as crosshauling. Crosshauling typically involves the
movement of some natural gas between gathering systems at established interconnect points to
optimize flow, reduce expenses or increase profitability. As a result, we must purchase gas for
delivery to customers at certain plant outlets and we have excess volumes to sell at other plant
outlets. WGM conducts these purchase and sales transactions at current market prices at each
location. These transactions are included in Product sales Affiliate and Product cost and shrink
replacement Affiliate on the Consolidated Statements of Income. Historically, WGM has not
charged us a fee for providing this service, but has occasionally benefited from price
differentials that historically existed from time to time between the plant outlets.
We sell the NGLs to which we take title on the Four Corners system to Williams NGL Marketing
LLC (WNGLM), a wholly owned subsidiary of Williams. We reflect revenues associated with these
activities as Product sales Affiliate on the Consolidated Statements of Income. We conduct these
transactions at current market prices for the products.
We periodically enter into financial swap contracts with WGM and WNGLM to hedge forecasted NGL
sales. These contracts are priced based on market rates at the time of execution and are reflected
in Other current assets and Derivative liabilities affiliate on the Consolidated Balance Sheet.
One of our major customers is Williams Production Company (WPC), a wholly owned subsidiary of
Williams. WPC is one of the largest natural gas producers in the San Juan Basin and we provide
natural gas gathering, treating and processing services to WPC under several contracts. One of the
contracts with WPC is adjusted annually based on changes in the average price of natural gas. We
reflect revenues associated with these activities in the Gathering and processing Affiliate on
the Consolidated Statements of Income.
We sell Conways surplus propane and other NGLs to WNGLM, which takes title to the product and
resells it, for its own account, to end users. Revenues associated with these activities are
reflected as Product sales Affiliate on the Consolidated Statements of Income. Correspondingly,
we purchase ethane and other NGLs for Conway from WNGLM to replenish deficit product inventory
positions. We conduct transactions between us and WNGLM at current market prices for the products.
Prior to its acquisition by us, Four Corners participated in Williams cash management program
under an unsecured promissory note agreement with Williams for both advances to and from Williams.
Upon Four Corners acquisition by us, the outstanding advances were distributed to Williams.
Changes in these advances to Williams are presented as distributions to Williams in the
Consolidated Statement of Partners Capital and Consolidated Statements of Cash Flows.
Under our stand-alone cash management program, we reflect amounts owed by us or to us by
Williams or its subsidiaries as Accounts receivable Affiliate or Accounts payable Affiliate
in the accompanying Consolidated Balance Sheets.
Note 6. Equity Investments
Wamsutter
We account for our Wamsutter Ownership Interests using the equity method of accounting due to
the voting provisions of Wamsutters limited liability company agreement (LLC agreement) which
provide the other member, owned by a Williams affiliate, significant participatory rights such that
we do not control the investment.
Williams is the operator of Wamsutter. As such, effective December 1, 2007, Williams is
reimbursed on a monthly basis for all direct and indirect expenses it incurs on behalf of Wamsutter
including Wamsutters allocable share of general and administrative costs.
Wamsutter purchases natural gas for fuel and shrink replacement from WGM and sells NGLs to
WNGLM. We conduct these transactions at current market prices for the products.
Wamsutter participates in Williams cash management program and, therefore, carries no cash
balances. Prior to December 1, 2007, Wamsutter had net advances to Williams, which were classified
as a component of their members capital because although the advances were due on demand, Williams
had not historically required repayment or repaid amounts owed to Wamsutter. Upon our acquisition
of the Wamsutter Ownership Interests, the outstanding advances were distributed to Williams.
Our consolidated financial statements and notes reflect our Wamsutter Ownership Interests,
which we acquired in December, 2007. However, certain cash transactions resulting from Wamsutters
participation in Williams cash management program, which occurred between Wamsutter and Williams
prior to this acquisition are not reflected in our Consolidated Statements of Cash Flows even
though these transactions affect the carrying value of our Wamsutter Ownership Interests. These
transactions were omitted from our Consolidated Statements of Cash Flows because they did not
affect our cash. Our Consolidated Statement of Partners Capital reflects the total of these
transactions as an adjustment in the basis of our investment in Wamsutter.
The Wamsutter LLC Agreement provides for quarterly distributions of available cash beginning
in March 2008. Available cash is defined as cash generated from Wamsutters business less reserves
that are necessary or appropriate to provide for the conduct of its business and to comply with
applicable law and or debt instrument or other agreement to which it is a party.
Wamsutter distributes its available cash as follows:
| First, an amount equal to $17.5 million per quarter to the holder of the Class A membership interests. We currently own 100% of the Class A interests; | ||
| Second, an amount equal to the amount the distribution on the Class A membership interests in prior quarters of the current distribution year was less than $17.5 million per quarter to the holder of the Class A membership interests; and | ||
| Third, 5% of remaining available cash shall be distributed to the holder of the Class A membership interests and 95% shall be distributed to the holders of the Class C units, on a pro rata basis. At December 31, 2008, we owned 50% of the Class C units. |
In addition, to the extent that at the end of the fourth quarter of a distribution year, the
Class A member has received less than $70.0 million under the first and second bullets above, the
Class C members will be required to repay any distributions they received in that distribution year
such that the Class A member receives $70.0 million for that distribution year. If this repayment
is insufficient to result in the Class A member receiving $70.0 million, the shortfall will not
carry forward to the next distribution year. The distribution year for Wamsutter commences each
year on December 1 and ends on November 30.
Wamsutter allocates net income (equity earnings) to us based upon the allocation,
distribution, and liquidation provisions of its limited liability company agreement applied as
though liquidation occurs at book value. In general, the agreement allocates income in a manner
that will maintain capital account balances reflective of the amounts each membership interest
would receive if Wamsutter were dissolved and liquidated at carrying value. The income allocation
for the quarterly periods during a year reflects the preferential rights of the Class A member to
any distributions made to the Class C member until the Class A member has received $70.0 million in
distributions for the year. The Class B member receives no income or loss allocation. As the owner
of 100% of the Class A membership interest, we will receive 100% of Wamsutters annual net income
up to $70.0 million. Income in excess of $70.0 million will be shared between the Class A member
and Class C member, of which we owned 50% throughout 2008. For annual periods in which Wamsutters
net income exceeds $70.0 million, this will result in a higher allocation of equity earnings to us
early in the year and a lower allocation of equity earnings to us later in the year. Wamsutters
net income allocation does not affect the amount of available cash it distributes for any quarter.
The following table presents the allocation of Wamsutters 2008 net income to its unitholders:
Our Share | Other | Wamsutter | ||||||||||||||||||
Wamsutter Net Income Allocation | Class A | Class C | WPZ Total | Class C | Net Income | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Net income, beginning December 1, 2007 up to $70.0 million.* |
$ | 62.6 | $ | | $ | 62.6 | $ | | $ | 62.6 | ||||||||||
Net income allocation related to 5% of amount over $70.0 million |
2.1 | | 2.1 | | 2.1 | |||||||||||||||
Net income for December 2008 |
1.0 | | 1.0 | | 1.0 | |||||||||||||||
Net income allocation related to transition support payments paid to us |
7.6 | | 7.6 | | 7.6 | |||||||||||||||
Remainder net income allocated to Class C members |
| 15.2 | 15.2 | 15.2 | 30.4 | |||||||||||||||
Totals |
$ | 73.3 | $ | 15.2 | $ | 88.5 | $ | 15.2 | $ | 103.7 | ||||||||||
* | $7.4 million of the $70.0 million was recognized in 2007. |
Wamsutters LLC agreement provides that it receive a transition support payment related to a
cap on general and administrative expenses from its Class B membership interest each quarter during
2008 through 2012. Although the full amount of expenses are recorded by Wamsutter, this support
increases the cash distributable and income allocable to the Class A membership interest.
During 2008, we made $3.7 million in capital contributions to Wamsutter for capital projects
and received total cash distributions of $91.5 million from Wamsutter, as well as transition
support payments of $7.6 million.
In January 2009, Wamsutter issued an additional 70.8 and 28.8 Class C units to us and
Williams, respectively, related to the funding of expansion capital expenditures placed in service
during 2008. As a result, we currently own 65% and Williams owns 35% of Wamsutters outstanding
Class C units. As of December 31, 2008, Williams contributed an additional $28.8 million for an
expansion capital project that is expected to be placed in service during 2010. Williams will
receive Class C units related to these expenditures after the assets are placed in service.
The summarized financial position and results of operations for 100% of Wamsutter are
presented below (in thousands).
December 31, | ||||||||
2008 | 2007 | |||||||
Current assets |
$ | 17,147 | $ | 27,114 | ||||
Property, plant and equipment |
318,072 | 275,163 | ||||||
Non-current assets |
468 | 191 | ||||||
Current liabilities |
(16,960 | ) | (13,016 | ) | ||||
Non-current liabilities |
(4,353 | ) | (2,740 | ) | ||||
Members capital |
$ | 314,374 | $ | 286,712 | ||||
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Revenues: |
||||||||||||
Product sales: |
||||||||||||
Affiliate |
$ | 134,776 | $ | 93,744 | $ | 113,484 | ||||||
Third-party |
27,384 | 7,447 | | |||||||||
Gathering and processing services |
68,670 | 67,904 | 57,859 | |||||||||
Other revenues |
8,704 | 6,214 | 5,203 | |||||||||
Costs and expenses excluding depreciation and accretion: |
||||||||||||
Affiliate |
74,388 | 46,834 | 68,041 | |||||||||
Third-party |
40,200 | 32,666 | 30,626 | |||||||||
Depreciation and accretion |
21,182 | 18,424 | 16,189 | |||||||||
Net income |
$ | 103,764 | $ | 77,385 | $ | 61,690 | ||||||
Williams Partners interest equity earnings |
$ | 88,538 | $ | 76,212 | $ | 61,690 | ||||||
Discovery Producer Services
We account for our 60% investment in Discovery using the equity method of accounting due to
the voting provisions of Discoverys limited liability company agreement which provide the other
member of Discovery significant participatory rights such that we do not control the investment.
Williams is the operator of Discovery. Discovery reimburses Williams for actual operations
related payroll and employee benefit costs incurred on its behalf. In addition, Discovery pays
Williams a monthly operations and management fee to cover the cost of accounting services, computer
systems and management services provided to it. Discovery also has an agreement with Williams
pursuant to which (1) Discovery purchases a portion of the natural gas from Williams to meet its
fuel and shrink replacement needs at its processing plant and (2) Williams purchases the NGLs and
excess natural gas to which Discovery takes title.
Our consolidated financial statements and notes reflect the additional 20% interest in
Discovery which we acquired in mid-2007. However, certain cash transactions that occurred between
Discovery and Williams prior to this acquisition that related to the additional 20% interest are
not reflected in our Consolidated Statements of Cash Flows even though these transactions affect
the carrying value of our investment in Discovery. These transactions were omitted from our
Consolidated Statements of Cash Flows because they did not affect our cash. Our Consolidated
Statement of Partners Capital reflects the total of these transactions as an adjustment in the
basis of our investment in Discovery. A summary of these transactions is as follows (in thousands):
Years Ended December 31, | ||||||||
2007 | 2006 | |||||||
Cash distributions from Discovery to Williams |
$ | (9,035 | ) | $ | (8,200 | ) | ||
Williams capital contributions to Discovery |
| 800 | ||||||
$ | (9,035 | ) | $ | (7,400 | ) | |||
During 2008, we made $5.7 million in capital contributions to Discovery for capital projects.
In October 2006, we made a $1.6 million capital contribution to Discovery for a substantial portion
of our then 40% share of the estimated future capital expenditures for the Tahiti pipeline lateral
expansion project.
During 2008, 2007, and 2006 we received total cash distributions of $56.4 million, $35.5
million, and $16.4 million, respectively, from Discovery for the 60% interest we currently own or
the 40% interest we owned at the time of distribution.
The summarized financial position and results of operations for 100% of Discovery are
presented below (in thousands).
December 31, | ||||||||
2008 | 2007 | |||||||
Current assets |
$ | 50,978 | $ | 78,035 | ||||
Non-current restricted cash |
3,470 | 6,222 | ||||||
Property, plant and equipment |
370,482 | 368,228 | ||||||
Current liabilities |
(45,234 | ) | (33,820 | ) | ||||
Non-current liabilities |
(19,771 | ) | (12,216 | ) | ||||
Members capital |
$ | 359,925 | $ | 406,449 | ||||
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Revenues: |
||||||||||||
Affiliate |
$ | 209,994 | $ | 220,960 | $ | 160,825 | ||||||
Third-party |
31,254 | 39,712 | 36,488 | |||||||||
Costs and expenses: |
||||||||||||
Affiliate |
96,912 | 101,581 | 74,316 | |||||||||
Third-party |
110,508 | 113,207 | 97,394 | |||||||||
Interest income |
(650 | ) | (1,799 | ) | (2,404 | ) | ||||||
Foreign exchange (gain) loss |
78 | (388 | ) | (2,076 | ) | |||||||
Net income |
$ | 34,400 | $ | 48,071 | $ | 30,083 | ||||||
Discovery investment income: |
||||||||||||
Williams Partners interest equity earnings |
$ | 20,641 | $ | 28,842 | $ | 18,050 | ||||||
Investing income |
1,716 | | | |||||||||
$ | 22,357 | $ | 28,842 | $ | 18,050 | |||||||
Note 7. Other (Income) Expense
Other (income) expense net reflected on the Consolidated Statements of Income consists of
the following items (in thousands):
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Involuntary conversion gain |
$ | (11,604 | ) | $ | | $ | | |||||
Impairment of Carbonate Trend pipeline |
6,187 | 10,406 | | |||||||||
Gain on sale of LaMaquina carbon dioxide treating facility |
| | (3,619 | ) | ||||||||
Other |
1,894 | 1,689 | 1,146 | |||||||||
Total |
$ | (3,523 | ) | $ | 12,095 | $ | (2,473 | ) | ||||
Involuntary conversion gain. On November 28, 2007, the Ignacio gas processing plant sustained
significant damage from a fire. The involuntary conversion gain results from insurance proceeds
received to replace the capital assets destroyed by the fire in excess of the net book value of
those assets being replaced.
Impairment of Carbonate Trend Pipeline. During 2007 and again in 2008, we determined that the
carrying value of this pipeline, included in our Gathering and Processing Gulf segment, may not
be recoverable because of forecasted declining cash flows. As a result, we recognized impairment
charges of $6.2 million and $10.4 million in 2008 and 2007, respectively, to reduce the carrying
value to managements estimate of fair value. As of December 31, 2008, the carrying value of this
asset has been written down to zero. We estimated fair value using discounted cash flow
projections.
LaMaquina Carbon Dioxide Treating Facility. In 2006, we completed the sale of our LaMaquina
carbon dioxide treating facility in the Four Corners area and recognized a gain on the sale. The
December 31, 2005 carrying value resulted from the recognition of impairments of $7.6 million and
$4.2 million in 2004 and 2003, respectively, following the 2002 shut down of the facility and
reflected the then estimated fair value less cost to sell.
Note 8. Property, Plant and Equipment
Property, plant and equipment, at cost, is as follows:
December 31, | Estimated | |||||||||||
2008 | 2007 | Depreciable Lives | ||||||||||
(In thousands) | ||||||||||||
Land and right of way |
$ | 43,246 | $ | 42,657 | 0-30 years | |||||||
Gathering pipelines and related equipment |
838,214 | 830,437 | 20-30 years | |||||||||
Processing plants and related equipment |
183,222 | 149,855 | 30 years | |||||||||
Fractionation plant and related equipment |
16,540 | 16,720 | 30 years | |||||||||
Storage plant and related equipment |
87,803 | 80,837 | 30 years | |||||||||
Buildings and other equipment |
77,287 | 90,356 | 3-45 years | |||||||||
Construction work in progress |
18,841 | 28,930 | ||||||||||
Total property, plant and equipment |
1,265,153 | 1,239,792 | ||||||||||
Accumulated depreciation |
624,633 | 597,503 | ||||||||||
Net property, plant and equipment |
$ | 640,520 | $ | 642,289 | ||||||||
Our asset retirement obligations relate to gas processing and compression facilities located
on leased land, wellhead connections on federal land, underground storage caverns and the
associated brine ponds and offshore pipelines. At the end of the useful life of each respective
asset, we are legally or contractually obligated to remove certain surface equipment and cap
certain gathering pipelines at the wellhead connections, properly abandon the storage caverns and
offshore pipelines, empty the brine ponds and restore the surface, and remove any related surface
equipment.
A rollforward of our asset retirement obligation for 2008 and 2007 is presented below.
2008 | 2007 | |||||||
(In thousands) | ||||||||
Balance, January 1 |
$ | 8,743 | $ | 4,476 | ||||
Liabilities incurred during the period |
355 | 2,950 | ||||||
Liabilities settled during the period |
| (64 | ) | |||||
Accretion expense |
752 | 1,474 | ||||||
Estimate revisions |
3,615 | (93 | ) | |||||
Balance, December 31 |
$ | 13,465 | $ | 8,743 | ||||
Note 9. Major Customers and Concentrations of Credit Risk
Major customers
Our largest customer, on a percentage of revenues basis, is WNGLM, which purchases and resells
substantially all of the NGLs to which we take title. WNGLM accounted for 49%, 49%, and 43% of
revenues in 2008, 2007 and 2006, respectively. The remaining largest customer, ConocoPhillips, from
our Gathering and Processing West segment, accounted for 17%, 22%, and 21% of revenues in 2008,
2007 and 2006, respectively.
Concentrations of Credit Risk
Our cash equivalent balance is primarily invested in funds with high-quality, short-term
securities and instruments that are issued or guaranteed by the U.S. government. The counterparties
to our derivative contracts are affiliates of Williams, which minimized our credit risk exposure.
The following table summarizes the concentration of accounts receivable by service and
segment.
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Gathering and Processing West: |
||||||||
Natural gas gathering and processing |
$ | 14,516 | $ | 11,512 | ||||
Other |
801 | 471 | ||||||
Gathering and Processing Gulf: |
||||||||
Natural gas gathering |
203 | 324 | ||||||
Other |
| 881 | ||||||
NGL Services: |
||||||||
Fractionation services |
1,025 | 303 | ||||||
Amounts due from fractionator partners |
1,439 | 1,068 | ||||||
Storage |
681 | 735 | ||||||
Other |
34 | | ||||||
Accrued interest and other |
499 | 109 | ||||||
Affiliate |
11,652 | 20,402 | ||||||
$ | 30,850 | $ | 35,805 | |||||
At December 31, 2008 and 2007, a substantial portion of our accounts receivable results from
product sales and gathering and processing services provided to two of our customers. One customer
is an affiliate of Williams which minimizes our credit risk exposure. The remaining customer may
impact our overall credit risk either positively or negatively, in that this entity may be affected
by industry-wide changes in economic or other conditions. As a general policy, collateral is not
required for receivables, but customers financial conditions and credit worthiness are evaluated
regularly. Our credit policy and the relatively short duration of receivables mitigate the risk of
uncollectible receivables.
Note 10. Long-Term Debt, Credit Facilities and Leasing Activities
Long-Term Debt
Long-term debt at December 31, 2008 and 2007 includes the following:
Interest | December 31, | |||||||||||
Rate | 2008 | 2007 | ||||||||||
(Millions) | ||||||||||||
Credit agreement term loan, adjustable rate, due 2012 |
(a) | $ | 250.0 | $ | 250.0 | |||||||
Senior unsecured notes, fixed rate, due 2017 |
7.25 | % | 600.0 | 600.0 | ||||||||
Senior unsecured notes, fixed rate, due 2011 |
7.50 | % | 150.0 | 150.0 | ||||||||
Total Long-term debt |
$ | 1,000.0 | $ | 1,000.0 | ||||||||
(a) | 1.2213% at December 31, 2008 |
The terms of the senior unsecured notes are governed by indentures that contain covenants
that, among other things, limit (1) our ability and the ability of our subsidiaries to incur
indebtedness or liens securing indebtedness and (2) mergers, consolidations and transfers of all or
substantially all of our properties or assets. The indentures also contain customary events of
default, upon which the trustee or the holders of the senior unsecured notes may declare all
outstanding senior unsecured notes to be due and payable immediately.
We may redeem the senior unsecured notes at our option in whole or in part at any time or from
time to time prior to the respective maturity dates, at a redemption price per note equal to the
sum of (1) the then outstanding principal amount thereof, plus (2) accrued and unpaid interest, if
any, to the redemption date (subject to the right of holders of record on the relevant record date
to receive interest due on an interest payment date that is on or prior to the redemption date),
plus (3) a specified make-whole premium (as defined in the indenture). Additionally, upon a
change of control (as defined in the indenture), each holder of the senior unsecured notes will
have the right to require us to repurchase all or any part of such holders senior unsecured notes
at a price equal to 101% of the principal amount of the senior unsecured notes plus accrued and
unpaid interest, if any, to the date of settlement. Except upon a change of control as described in
the prior sentence, we are not required to make mandatory redemption or sinking fund payments with
respect to the senior unsecured notes or to repurchase the senior unsecured notes at the option of
the holders.
Credit Facilities
We have a $450.0 million senior unsecured credit agreement with Citibank, N.A. as
administrative agent, comprised initially of a $200.0 million revolving credit facility available
for borrowings and letters of credit and a $250.0 million term loan. The parent company and certain
affiliates of Lehman Brothers Commercial Bank, who is committed to fund up to $12.0 million of this
credit facility, have filed for bankruptcy. We expect that our ability to borrow under this
facility is reduced by this committed amount. The committed amounts of the other participating
banks under this agreement remain in effect and are not impacted by this reduction. However, debt
covenants may restrict the full use of the credit facility. We must repay borrowings under this
agreement by December 11, 2012. At December 31, 2008 and 2007, we had a $250.0 million term loan
outstanding under the term loan provisions and no amounts outstanding under the revolving credit
facility.
Interest on borrowings under this agreement are payable at rates per annum equal to, at our
option: (1) a fluctuating base rate equal to Citibank, N.A.s prime rate plus the applicable
margin, or (2) a periodic fixed rate equal to LIBOR plus the applicable margin.
The credit agreement contains various covenants that limit, among other things, our, and
certain of our subsidiaries, ability to incur indebtedness, grant certain liens supporting
indebtedness, merge, consolidate or allow any material change in the character of its business,
sell all or substantially all of our assets or make distributions or other payments other than
distributions of available cash under certain conditions. Significant financial covenants under the
credit agreement include the following:
| We together with our consolidated subsidiaries and Wamsutter are required to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the credit agreement) of no greater than 5.00 to 1.00. This ratio may be increased in the case of an acquisition of $50.0 million or more, in which case the ratio will be 5.50 to 1.00 for the fiscal quarter in which the acquisition occurs and three fiscal quarter-periods following such acquisition. At December 31, 2008, our ratio of consolidated indebtedness to consolidated EBITDA, as calculated under this covenant, of approximately 2.98 is in compliance with this covenant. |
| Our ratio of consolidated EBITDA to consolidated interest expense, as defined in the credit agreement, must be not less than 2.75 to 1.00 as of the last day of any fiscal quarter commencing March 31, 2008 unless we obtain an investment grade rating from Standard and Poors Ratings Services or Moodys Investors Service and the rating from the other agencies is not less than Ba1 or BB+, as applicable. At December 31, 2008, our ratio of consolidated EBITDA to consolidated interest expense, as calculated under this covenant, of approximately 5.13 is in compliance with this covenant. |
Inasmuch as the ratios are calculated on a rolling four-quarter basis, the ratios at December
31, 2008 do not reflect a full-year impact of the lower earnings we experienced in the fourth
quarter of 2008. In the event that despite our efforts we breach our financial covenants causing an
event of default, the lenders could, among other things, accelerate the maturity of any borrowings
under the facility (including our $250.0 million term loan) and terminate their commitments to
lend. There are no cross-default provisions in the indentures governing our senior unsecured
notes; therefore, a default under the Credit Agreement would not cause a cross default under the
indentures governing the senior unsecured notes.
We also have a $20.0 million revolving credit facility with Williams as the lender. The
facility is available exclusively to fund working capital requirements. Borrowings under the credit
facility mature on June 20, 2009 and bear interest at the one-month LIBOR. We pay a commitment fee
to Williams on the unused portion of the credit facility of 0.30% annually. We are required to
reduce all borrowings under the credit facility to zero for a period of at least 15 consecutive
days once each 12-month period prior to the maturity date of the credit facility. As of December
31, 2008, we have no outstanding borrowings under the working capital credit facility.
Cash payments for interest during 2008, 2007 and 2006 were $65.5 million, $38.8 million and
$5.5 million, respectively.
Leasing Activities
We lease the land on which a significant portion of Four Corners pipeline assets are located.
The primary landowners are the Bureau of Land Management (BLM) and several Indian tribes. The BLM
leases are for thirty years with renewal options. A significant Indian tribal lease in Colorado
will expire at the end of 2022.
We concluded our negotiations with the Jicarilla Apache Nation (JAN) during February 2009 with
the execution of a 20-year right-of-way agreement. Under the new agreement, the JAN granted
rights-of-way for Four Corners existing natural gas gathering system on JAN land as well as a
significant geographical area for additional growth of the system. We paid an initial payment of
$7.3 million upon execution of the agreement. Beginning in 2010, we will make annual payments of
approximately $7.5 million and an additional annual payment which varies depending on the prior
years per-unit NGL margins and the volume of gas gathered by our gathering facilities subject to
the agreement. Depending primarily on the per-unit NGL margins for any given year, the additional
annual payments could approximate the fixed amount. Additionally, five years from the effective
date of the agreement, the JAN will have the option to acquire up to a 50% joint venture interest
for 20 years in certain of Four Corners assets existing at the time the option is exercised. The
joint venture option includes Four Corners gathering assets subject to the agreement and portions
of Four Corners gathering and processing assets located in an area adjacent to the JAN lands. If
the JAN selects the joint venture option, the value of the assets contributed by each party to the
joint venture will be based upon a market value determined by a neutral third party at the time the
joint venture is formed. This right-of-way agreement is subject to the consent of the United States
Secretary of the Interior before it may become effective.
We also lease other minor office, warehouse equipment and automobiles under non-cancelable
leases. The future minimum annual rentals under these non-cancelable leases as of December 31, 2008
are payable as follows:
(In thousands) | ||||
2009 |
$ | 1,357 | ||
2010 |
880 | |||
2011 |
396 | |||
2012 |
90 | |||
2013 and thereafter |
| |||
$ | 2,723 | |||
Total rent expense was $24.4 million, $21.2 million and $19.4 million for 2008, 2007 and 2006,
respectively.
Note 11. Partners Capital
On January 9, 2008, we sold an additional 800,000 common units to the underwriters upon the
underwriters partial exercise of their option to purchase additional common units pursuant to our
common unit offering in December 2007 used to finance our acquisition of the Wamsutter Ownership
Interests. We used the net proceeds from the partial exercise of the underwriters option to redeem
800,000 common units from an affiliate of Williams at a price per common unit of $36.24 ($37.75,
net of underwriter discount).
At December 31, 2008, the public held 76% of our total units outstanding, and affiliates of
Williams held the remaining units.
Limited Partners Rights
Significant rights of the limited partners include the following:
| Right to receive distributions of available cash within 45 days after the end of each quarter. | ||
| No limited partner shall have any management control over our business and affairs; the general partner shall conduct, direct and manage our activities. | ||
| The general partner may be removed if such removal is approved by the unitholders holding at least 66 2/3% of the outstanding units voting as a single class, including units held by our general partner and its affiliates. |
Subordinated Units
Our subordination period ended on February 19, 2008 when we met the requirements for early
termination pursuant to our partnership agreement. As a result of the termination, the 7,000,000
outstanding subordinated units owned by four subsidiaries of Williams converted one-for-one to
common units and now participate pro rata with the other common units in distributions of available
cash.
Class B Units
On May 21, 2007, the Class B units were converted into common units on a one-for-one basis and
now participate pro rata with the other common units in distributions of available cash.
Incentive Distribution Rights
Our general partner is entitled to incentive distributions if the amount we distribute to
unitholders with respect to any quarter exceeds specified target levels shown below:
General | ||||||||
Quarterly Distribution Target Amount (per unit) | Unitholders | Partner | ||||||
Minimum quarterly distribution of $0.35 |
98 | % | 2 | % | ||||
Up to $0.4025 |
98 | 2 | ||||||
Above $0.4025 up to $0.4375 |
85 | 15 | ||||||
Above $0.4375 up to $0.5250 |
75 | 25 | ||||||
Above $0.5250 |
50 | 50 |
In the event of liquidation, all property and cash in excess of that required to discharge all
liabilities will be distributed to the unitholders and our general partner in proportion to their
capital account balances, as adjusted to reflect any gain or loss upon the sale or other
disposition of our assets in liquidation.
Issuances of Additional Partnership Securities
Our partnership agreement allows us to issue additional partnership securities for any
partnership purpose at any time and from time to time for consideration and on terms and conditions
as our general partner determines, all without the approval of any limited partners.
Note 12. Financial Instruments and Fair Value Measurements
Financial Instruments
We used the following methods and assumptions to estimate the fair value of financial
instruments.
Cash and cash equivalents. The carrying amounts reported in the balance sheets approximate
fair value due to the short-term maturity of these instruments.
Long-term debt. The fair value of our publicly traded long-term debt is valued using
indicative year-end traded bond market prices. We base the fair value of our private long-term debt
on market rates and the prices of similar securities with similar terms and credit ratings. We
consider our non-performance risk in estimating fair value.
Energy commodity swap agreements. We base the fair value of our swap agreements on prices of
the underlying energy commodities over the contract life and contractual or notional volumes with
the resulting expected future cash flows discounted to a present value using a risk-free market
interest rate.
Carrying amounts and fair values of our financial instruments
2008 | 2007 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Asset (Liability) | Amount | Value | Amount | Value | ||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 116,165 | $ | 116,165 | $ | 36,197 | $ | 36,197 | ||||||||
Long-term debt |
(1,000,000 | ) | (825,289 | ) | (1,000,000 | ) | (1,027,499 | ) | ||||||||
Energy commodity swap agreements |
| | (2,487 | ) | (2,487 | ) |
Fair Value Measurements
Adoption of SFAS No. 157
On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, for our assets and
liabilities which are measured at fair value on a recurring basis (our commodity derivatives). Upon
applying SFAS No. 157, we changed our valuation methodology to consider our nonperformance risk in
estimating the fair value of our liabilities. Applying SFAS No. 157 did not materially impact our
consolidated financial statements. In February 2008, the FASB issued Financial Staff Position (FSP)
FAS 157-2 permitting entities to delay application of SFAS No. 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). On January 1, 2009, we adopted SFAS No. 157 fair value requirements for nonfinancial
assets and nonfinancial liabilities, such as long-lived assets measured at fair value for
impairment purposes and initial measurement of fair value for asset retirement obligations, that
are not recognized or disclosed at fair value on a recurring basis when such fair value
measurements are required. Applying SFAS No. 157 at January 1, 2009 did not impact our consolidated
financial statements. Upon adopting SFAS No. 157, we applied a prospective transition as we did not
have financial instrument transactions that required a cumulative-effect adjustment to beginning
retained earnings.
Fair value is the price that would be received in the sale of an asset or the amount paid to
transfer a liability in an orderly transaction between market participants (an exit price) at the
measurement date. Fair value is a market-based measurement from the perspective of a market
participant. We use market data or assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and the risks inherent in the inputs to the
valuation. These inputs can be readily observable, market corroborated, or unobservable. We
primarily apply a market approach for recurring fair value measurements using the best available
information while utilizing valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs.
SFAS No. 157 establishes a fair-value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement). We classify fair-value balances based on the observability of those
inputs. The three levels of the fair-value hierarchy are as follows:
| Level 1 Quoted prices in active markets for identical assets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. | ||
| Level 2 Inputs are other than quoted prices in active markets included in Level 1, that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured. | ||
| Level 3 Includes inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect managements best estimate of the assumptions market participants would use in determining fair value. Our Level 3 consists of instruments valued with valuation methods that utilize unobservable pricing inputs that are significant to the overall fair value. |
In valuing certain contracts, the inputs used to measure fair value may fall into different
levels of the fair-value hierarchy. For disclosure purposes, assets and liabilities are classified
in their entirety in the fair-value hierarchy level based on the lowest level of input that is
significant to the overall fair value measurement. Our assessment of the significance of a
particular input to the fair-value measurement requires judgment and may affect the placement
within the fair-value hierarchy levels.
At December 31, 2008 we had no assets or liabilities measured at fair value on a recurring
basis. At December 31, 2007, our only assets or liabilities measured at fair value on a recurring
basis were derivative assets and liabilities, and these were contracted entirely with Williams.
These commodity-based financial swap contracts were classified as Level 3 valuations.
The following table sets forth a reconciliation of changes in the fair value of net
derivatives classified as Level 3 in the fair-value hierarchy for the twelve months ended December
31, 2008.
Level 3 Fair-Value Measurements Using Significant Unobservable Inputs
Twelve Months Ended December 31, 2008
(In thousands)
Twelve Months Ended December 31, 2008
(In thousands)
Net Derivative | ||||
Asset (Liability) | ||||
Balance as of January 1, 2008 |
$ | (2,487 | ) | |
Total gains (losses) recognized in earnings: |
||||
Hedge ineffectiveness |
(200 | ) | ||
Reclassification from other comprehensive income |
416 | |||
Unrealized gains (losses) deferred in other comprehensive income, net of amounts reclassified |
2,487 | |||
(Gains) losses realized in settlements |
(216 | ) | ||
Purchases, issuances and transfers in/(out) of Level 3 |
| |||
Balance as of December 31, 2008 |
$ | | ||
Unrealized gains included in net income relating to instruments still held at December 31, 2008 |
$ | | ||
Realized and unrealized gains (losses) included in net income are reported in revenues in our
Consolidated Statement of Income.
Energy Commodity Cash Flow Hedges
We are exposed to market risk from changes in energy commodity prices within our operations.
Our Four Corners operation receives NGL volumes as compensation for certain processing services. To
reduce our exposure to volatility in revenues from the sale of these NGL volumes from fluctuations
in NGL market prices, we entered into financial swap contracts. We designated these derivatives as
cash flow hedges under SFAS No. 133. These derivatives were highly effective in offsetting cash
flows attributable to the hedged risk during the term of the hedge. We recognized a $0.2 million
net loss from hedge ineffectiveness in our Consolidated Statements of Income during 2008. No net
gains or losses from hedge ineffectiveness are included in the Consolidated Statements of Income
during 2007 or 2006, and there were no derivative gains or losses excluded from the assessment of
hedge effectiveness for the periods presented. We have no cash flow hedges outstanding at December
31, 2008.
Note 13. Long-Term Incentive Plan
Our general partner maintains the Williams Partners GP LLC Long-Term Incentive Plan (the Plan)
for employees, consultants and directors of our general partner and its affiliates who perform
services for us. The Plan permits the granting of awards covering an aggregate of 700,000 common
units. These awards may be in the form of options, restricted units, phantom units or unit
appreciation rights.
During 2008, 2007, and 2006 our general partner granted 2,724, 2,403 and 2,130 restricted
units, respectively, pursuant to the Plan to members of our general partners board of directors
who are not officers or employees of our general partner or its affiliates. These restricted units
vested 180 days from the grant date. We recognized compensation expense of $98,000, $77,000 and
$229,000 associated with the Plan in 2008, 2007, and 2006, respectively, based on the market price
of our common units at the date of grant.
Note 14. Commitments and Contingencies
Commitments. Commitments for goods and services used in our operations and for construction
and acquisition of property, plant and equipment are approximately $16.0 million at December 31,
2008.
In January 2009, we entered into a 5-year Master Compression Services Contract with Exterran
Holdings, Inc. Under the agreement, Exterran will provide compressor units including operations and
maintenance services. Payments under this agreement will vary depending upon the extent and amount
of compressors needed to meet producer service requirements and are expected to approximate $24.0
million in 2009.
Environmental Matters-Four Corners. Current federal regulations require that certain unlined
liquid containment pits located near named rivers and catchment areas be taken out of use, and
current state regulations required all unlined, earthen pits to be either permitted or closed by
December 31, 2005. Operating under a New Mexico Oil Conservation Division-approved work plan, we
have physically closed all of our pits that were slated for closure under those regulations. We are
presently awaiting agency approval of the closures for 40 to 50 of those pits. We are also a
participant in certain hydrocarbon removal and groundwater monitoring activities associated with
certain well sites in New Mexico. Of nine remaining active sites, product removal is ongoing at
four and groundwater monitoring is ongoing at each site. As groundwater concentrations reach and
sustain closure criteria levels and state regulator approval is received, the sites will be
properly abandoned. We expect the remaining sites will be closed within four to seven years.
In April 2007, the New Mexico Environment Departments Air Quality Bureau (NMED) issued a
Notice of Violation (NOV) that alleges various emission and reporting violations in connection with
our Lybrook gas processing plants flare and leak detection and repair program. The NMED proposed a
penalty of approximately $3 million. In July 2008, the NMED issued an NOV that alleged air
emissions permit exceedances for three glycol dehydrators at our Pump Mesa central delivery point
compressor facility and proposed a penalty of approximately $103,000. We are discussing the basis
for and scope of the calculation of the proposed penalties with the NMED.
In March 2008, the Environmental Protection Agency (EPA) proposed a penalty of $370,000 for
alleged violations relating to leak detection and repair program delays at our Ignacio gas plant in
Colorado and for alleged permit violations at one of our compressor stations. We met with the EPA
and are exchanging information in order to resolve the issues.
We have accrued liabilities totaling $1.5 million at December 31, 2008 for these environmental
activities. It is reasonably possible that we will incur losses in excess of our accrual for these
matters. However, a reasonable estimate of such amounts cannot be determined at this time because
actual costs incurred will depend on the actual number of contaminated sites identified, the amount
and extent of contamination discovered, the final cleanup standards mandated by governmental
authorities, negotiations with the applicable agencies, and other factors.
We are subject to extensive federal, state and local environmental laws and regulations which
affect our operations related to the construction and operation of our facilities. Appropriate
governmental authorities may enforce these laws and regulations with a variety of civil and
criminal enforcement measures, including monetary penalties, assessment and remediation
requirements and injunctions as to future compliance. We have not been notified and are not
currently aware of any material noncompliance under the various applicable environmental laws and
regulations.
Environmental Matters-Conway. We are a participant in certain environmental remediation
activities associated with soil and groundwater contamination at our Conway storage facilities.
These activities relate to four projects that are in various remediation stages including
assessment studies, cleanups and/or remedial operations and monitoring. We continue to coordinate
with the Kansas Department of Health and Environment (KDHE) to develop screening, sampling, cleanup
and monitoring programs. The costs of such activities will depend upon the program scope ultimately
agreed to by the KDHE and are expected to be paid over the next two to six years. At December 31,
2008, we had accrued liabilities totaling $3.3 million for these costs. It is reasonably possible
that we will incur losses in excess of our accrual for these matters. However, a reasonable
estimate of such amounts cannot be determined at this time because actual costs incurred will
depend on the actual number of contaminated sites identified, the amount and extent of
contamination discovered, the final cleanup standards mandated by KDHE and other governmental
authorities and other factors.
Under an omnibus agreement with Williams entered into at the closing of our IPO, Williams
agreed to indemnify us for certain Conway environmental remediation costs. At December 31, 2008,
approximately $7.3 million remains available for future indemnification. Payments received under
this indemnification are accounted for as a capital contribution to us by Williams as the costs are
reimbursed.
Will Price. In 2001, we were named, along with other subsidiaries of Williams, as defendants
in a nationwide class action lawsuit in Kansas state court that had been pending against other
defendants, generally pipeline and gathering companies, since 2000. The plaintiffs alleged that the
defendants have engaged in mismeasurement techniques that distort the heating content of natural
gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs and
sought an unspecified amount of damages. The defendants have opposed class certification and a
hearing on the plaintiffs second motion to certify the class was held on April 1, 2005. We are
awaiting a decision from the court. The amount of any possible liability cannot be reasonably
estimated at this time.
Grynberg. In 1998, the U.S. Department of Justice informed Williams that Jack Grynberg, an
individual, had filed claims on behalf of himself and the federal government in the United States
District Court for the District of Colorado under the False Claims Act against Williams and certain
of its wholly owned subsidiaries and us. The claims sought an unspecified amount of royalties
allegedly not paid to the federal government, treble damages, a civil penalty, attorneys fees and
costs. Grynberg had also filed claims against approximately 300 other energy companies alleging
that the defendants violated the False Claims Act in connection with the measurement, royalty
valuation and purchase of hydrocarbons. In 1999, the Department of Justice announced that it would
not intervene in any of the Grynberg cases. Also in 1999, the Panel on Multi-District Litigation
transferred all of these cases, including those filed against us, to the federal court in Wyoming
for pre-trial purposes. The District Court dismissed all claims against us. The matter is on appeal
to the Tenth Circuit Court of Appeals. The amount of any possible liability cannot be reasonably
estimated at this time.
GEII Litigation. General Electric International, Inc. (GEII) worked on turbines at our
Ignacio, New Mexico plant. We disagree with GEII on the quality of GEIIs work and the appropriate
compensation. GEII asserts that it is entitled to additional extra work charges under the
agreement, which we deny are due. In 2006 we filed suit in federal court in Tulsa, Oklahoma against
GEII, GE Energy Services, Inc., and Qualified Contractors, Inc. We alleged, among other claims,
breach of contract, breach of the duty of good faith and fair dealing, and negligent
misrepresentation and sought unspecified damages. In 2007, the defendants and GEII filed
counterclaims in the amount of $1.9 million against us that alleged breach of contract and breach
of the duty of good faith and fair dealing. Trial has been set for July 2009.
Other. We are not currently a party to any other legal proceedings but are a party to various
administrative and regulatory proceedings that have arisen in the ordinary course of our business.
Summary. Litigation, arbitration, regulatory matters and environmental matters are subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a
material adverse impact on the results of operations in the period in which the ruling occurs.
Management, including internal counsel, currently believes that the ultimate resolution of the
foregoing matters, taken as a whole and after consideration of amounts accrued, insurance coverage,
recovery from customers or other indemnification arrangements, will not have a material adverse
effect upon our liquidity or financial position.
Note 15. Segment Disclosures
Our reportable segments are strategic business units that offer different products and
services. We manage the segments separately because each segment requires different industry
knowledge, technology and marketing strategies. The accounting policies of the segments are the
same as those described in Note 3, Summary of Significant Accounting Policies. Long-lived assets
are comprised of property, plant and equipment.
Gathering & | Gathering & | |||||||||||||||
Processing - | Processing - | NGL | ||||||||||||||
West | Gulf | Services | Total | |||||||||||||
(In thousands) | ||||||||||||||||
2008 |
||||||||||||||||
Segment revenues: |
||||||||||||||||
Product sales |
$ | 322,583 | $ | | $ | 16,697 | $ | 339,280 | ||||||||
Gathering and processing |
230,853 | 2,096 | | 232,949 | ||||||||||||
Storage |
| | 31,429 | 31,429 | ||||||||||||
Fractionation |
| | 17,441 | 17,441 | ||||||||||||
Other |
6,702 | | 9,259 | 15,961 | ||||||||||||
Total revenues |
560,138 | 2,096 | 74,826 | 637,060 | ||||||||||||
Product cost and shrink replacement |
189,192 | | 16,886 | 206,078 | ||||||||||||
Operating and maintenance expense |
156,713 | 1,668 | 27,520 | 185,901 | ||||||||||||
Depreciation, amortization and accretion |
41,215 | 751 | 3,063 | 45,029 | ||||||||||||
Direct general and administrative expenses |
8,333 | | 2,582 | 10,915 | ||||||||||||
Other, net |
(939 | ) | 6,187 | 737 | 5,985 | |||||||||||
Segment operating income (loss) |
165,624 | (6,510 | ) | 24,038 | 183,152 | |||||||||||
Investment income |
88,538 | 22,357 | | 110,895 | ||||||||||||
Segment profit |
$ | 254,162 | $ | 15,847 | $ | 24,038 | $ | 294,047 | ||||||||
Reconciliation to the Consolidated Statement of Income: |
||||||||||||||||
Segment operating income |
$ | 183,152 | ||||||||||||||
General and administrative expenses: |
||||||||||||||||
Allocated affiliate |
(33,707 | ) | ||||||||||||||
Third-party direct |
(2,437 | ) | ||||||||||||||
Operating income |
$ | 147,008 | ||||||||||||||
Other financial information: |
||||||||||||||||
Segment assets |
$ | 1,248,110 | $ | 379,060 | $ | 127,315 | $ | 1,754,485 | ||||||||
Other assets and eliminations |
(462,666 | ) | ||||||||||||||
Total assets |
$ | 1,291,819 | ||||||||||||||
Equity method investments |
$ | 277,707 | $ | 184,466 | $ | | $ | 462,173 | ||||||||
Additions to long-lived assets |
$ | 36,833 | $ | | $ | 9,020 | $ | 45,853 |
Gathering & | Gathering & | |||||||||||||||
Processing - | Processing - | NGL | ||||||||||||||
West | Gulf | Services | Total | |||||||||||||
(In thousands) | ||||||||||||||||
2007 |
||||||||||||||||
Segment revenues: |
||||||||||||||||
Product sales |
$ | 279,600 | $ | | $ | 11,332 | $ | 290,932 | ||||||||
Gathering and processing |
236,475 | 2,119 | | 238,594 | ||||||||||||
Storage |
| | 28,016 | 28,016 | ||||||||||||
Fractionation |
| | 9,622 | 9,622 | ||||||||||||
Other |
(2,288 | ) | | 7,941 | 5,653 | |||||||||||
Total revenues |
513,787 | 2,119 | 56,911 | 572,817 | ||||||||||||
Product cost and shrink replacement |
170,434 | | 11,264 | 181,698 | ||||||||||||
Operating and maintenance expense |
135,782 | 1,875 | 24,686 | 162,343 | ||||||||||||
Depreciation, amortization and accretion |
41,523 | 1,249 | 3,720 | 46,492 | ||||||||||||
Direct general and administrative expenses |
7,790 | | 2,190 | 9,980 | ||||||||||||
Other, net |
10,567 | 10,406 | 746 | 21,719 | ||||||||||||
Segment operating income (loss) |
147,691 | (11,411 | ) | 14,305 | 150,585 | |||||||||||
Equity earnings |
76,212 | 28,842 | | 105,054 | ||||||||||||
Segment profit |
$ | 223,903 | $ | 17,431 | $ | 14,305 | $ | 255,639 | ||||||||
Reconciliation to the Consolidated Statement of Income: |
||||||||||||||||
Segment operating income |
$ | 150,585 | ||||||||||||||
General and administrative expenses: |
||||||||||||||||
Allocated affiliate |
(32,546 | ) | ||||||||||||||
Third-party direct |
(3,102 | ) | ||||||||||||||
Operating income |
$ | 114,937 | ||||||||||||||
Other financial information: |
||||||||||||||||
Segment assets |
$ | 1,112,652 | $ | 268,471 | $ | 98,730 | $ | 1,479,853 | ||||||||
Other assets and eliminations |
(196,376 | ) | ||||||||||||||
Total assets |
$ | 1,283,477 | ||||||||||||||
Equity method investments |
$ | 284,650 | $ | 214,526 | $ | | $ | 499,176 | ||||||||
Additions to long-lived assets |
$ | 39,391 | $ | | $ | 9,090 | $ | 48,481 |
Gathering & | Gathering & | |||||||||||||||
Processing - | Processing - | NGL | ||||||||||||||
West | Gulf | Services | Total | |||||||||||||
(In thousands) | ||||||||||||||||
2006 |
||||||||||||||||
Segment revenues: |
||||||||||||||||
Product sales |
$ | 255,907 | $ | | $ | 16,087 | $ | 271,994 | ||||||||
Gathering and processing |
246,004 | 2,656 | | 248,660 | ||||||||||||
Storage |
| | 25,237 | 25,237 | ||||||||||||
Fractionation |
| | 11,698 | 11,698 | ||||||||||||
Other |
402 | | 5,419 | 5,821 | ||||||||||||
Total revenues |
502,313 | 2,656 | 58,441 | 563,410 | ||||||||||||
Product cost and shrink replacement |
159,997 | | 15,511 | 175,508 | ||||||||||||
Operating and maintenance expense |
124,763 | 1,660 | 28,791 | 155,214 | ||||||||||||
Depreciation, amortization and accretion |
40,055 | 1,200 | 2,437 | 43,692 | ||||||||||||
Direct general and administrative expenses |
11,920 | 1 | 1,149 | 13,070 | ||||||||||||
Other, net |
5,769 | | 719 | 6,488 | ||||||||||||
Segment operating income |
159,809 | (205 | ) | 9,834 | 169,438 | |||||||||||
Equity earnings |
61,690 | 18,050 | | 79,740 | ||||||||||||
Segment profit |
$ | 221,499 | $ | 17,845 | $ | 9,834 | $ | 249,178 | ||||||||
Reconciliation to the Consolidated Statement of Income: |
||||||||||||||||
Segment operating income |
$ | 169,438 | ||||||||||||||
General and administrative expenses: |
||||||||||||||||
Allocated affiliate |
(23,721 | ) | ||||||||||||||
Third-party direct |
(2,649 | ) | ||||||||||||||
Operating income |
$ | 143,068 | ||||||||||||||
Other financial information: |
||||||||||||||||
Segment assets |
$ | 936,317 | $ | 281,084 | $ | 78,490 | $ | 1,295,891 | ||||||||
Other assets and eliminations |
(3,592 | ) | ||||||||||||||
Total assets |
$ | 1,292,299 | ||||||||||||||
Equity method investments |
$ | 262,245 | $ | 221,187 | $ | | $ | 483,432 | ||||||||
Additions to long-lived assets |
$ | 25,889 | $ | | $ | 6,381 | $ | 32,270 |
QUARTERLY FINANCIAL DATA
(Unaudited)
(Unaudited)
Summarized quarterly financial data are as follows (thousands, except per-unit amounts):
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
2008 |
||||||||||||||||
Revenues |
$ | 150,362 | $ | 178,245 | $ | 175,713 | $ | 132,740 | ||||||||
Costs and operating expenses |
124,050 | 136,033 | 127,737 | 102,232 | ||||||||||||
Net income |
43,629 | 71,822 | 60,833 | 15,105 | (a)(b) | |||||||||||
Basic and diluted net income per limited partner unit: |
||||||||||||||||
Net income: |
||||||||||||||||
Common units (c) |
$ | 0.71 | $ | 1.21 | $ | 1.00 | $ | 0.15 | ||||||||
Subordinated units(c) (d) |
$ | 0.71 | $ | | $ | | $ | |
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
2007 |
||||||||||||||||
Revenues |
$ | 133,815 | $ | 139,269 | $ | 149,576 | $ | 150,157 | ||||||||
Costs and operating expenses |
110,530 | 103,811 | 114,077 | 129,462 | ||||||||||||
Net income |
25,137 | 46,742 | 47,901 | 44,851 | (e) | |||||||||||
Basic and diluted net income per limited partner unit: |
||||||||||||||||
Income before cumulative effect of change in accounting principle: |
||||||||||||||||
Common units (c) |
$ | 0.30 | $ | 0.47 | (f) | $ | 0.69 | $ | 0.52 | |||||||
Subordinated units (c) |
$ | 0.30 | $ | 0.47 | (f) | $ | 0.69 | $ | 0.52 | |||||||
Net income: |
||||||||||||||||
Common units (c) |
$ | 0.30 | $ | 0.47 | (f) | $ | 0.69 | $ | 0.52 | |||||||
Subordinated units (c) |
$ | 0.30 | $ | 0.47 | (f) | $ | 0.69 | $ | 0.52 |
(a) | During September 2008, Discoverys offshore gathering system sustained hurricane damage and was unable to accept gas from producers while repairs were being made through the end of 2008. In addition, throughout the fourth quarter of 2008 we have seen significantly lower per-unit margins as NGL prices, especially ethane, declined along with the price of crude oil. These lower NGL margins have significantly reduced the profitability of our gathering and processing businesses including Four Corners and our ownership interests in Wamsutter and Discovery. | |
(b) | The fourth quarter of 2008 includes a $6.2 million impairment of the Carbonate Trend pipeline (see Note 7 Other (Income) Expense). | |
(c) | Retrospectively adjusted for our adoption of Emerging Issues Task Force No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 Earnings per Share to Master Limited Partnerships (see Note 3 Summary of Significant Accounting Policies). | |
(d) | Subordinated units converted to common on February 19, 2008. | |
(e) | The fourth quarter of 2007 included a $10.4 million impairment of the Carbonate Trend pipeline (see Note 7 Other (Income) Expense) and reduction in operating income from the shutdown of the Ignacio gas processing plant resulting from a fire. | |
(f) | We retrospectively adjusted earnings per unit for the second quarter of 2007 to reflect the conversion of our outstanding Class B units into common units on a one-for-one basis, which occurred on May 21, 2007. |