Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

Management’s Discussion and Analysis should be read in conjunction with Item 8. Financial Statements and Supplementary Data.

EXECUTIVE OVERVIEW

We reported net income from controlling interests of $1,161 million in 2016 compared with $1,225 million in 2015 mainly due to expansion projects, more than offset by pipeline inspection and repair costs related to the Texas Eastern incident near Delmont, Pennsylvania, lower processing revenues and crude oil transportation revenues due to lower volumes, and a one-time property tax accrual adjustment in 2015. Distributable cash flow was $1,187 million in 2016 compared with $1,205 million in 2015.

We increased our quarterly cash distribution each quarter in 2016, from $0.63875 per limited partner unit for the fourth quarter of 2015 which was paid in February 2016, to $0.68875 per unit for the fourth quarter of 2016 which is payable on February 28, 2017 . Our expectation is that we will increase our quarterly distribution by one and a quarter cents per unit each quarter through 2017. The declaration and payment of distributions is subject to the sole discretion of our Board of Directors and depends upon many factors, including the financial condition, earnings and capital requirements of our operating subsidiaries, covenants associated with certain debt obligations, legal requirements, regulatory constraints, our partnership agreement and other factors deemed relevant by our Board of Directors.

We invested $2.6 billion of capital and investment expenditures in 2016, including $2.3 billion of expansion and investment capital expenditures. We continue to foresee significant capital spending over the next several years, with approximately $2.8 billion planned for 2017, excluding contributions from noncontrolling interests. We will rely upon cash flows from operations, including cash distributions received from our equity investments, and various financing transactions, which may include issuances of short-term and long-term debt, to fund our liquidity and capital requirements for 2017. Given that we expect to continue to pursue expansion opportunities over the next several years, capital resources will continue to include long-term borrowings and possibly unit issuances. We expect to maintain an investment-grade capital structure and liquidity profile that supports our strategic objectives. Therefore, we will continue to monitor market requirements and our liquidity, and make adjustments to these plans, as needed.

We are committed to an investment-grade balance sheet and continued prudent financial management of our capital structure. Therefore, financing these growth activities will continue to be based on our strong and growing fee-based earnings and cash flows as well as the issuances of debt and/or equity securities. As of December 31, 2016 , we have access to a $2.5 billion revolving credit facility which is used principally as a back-stop for our commercial paper program.

Our Strategy. Our strategy is to create superior and sustainable value for our investors, customers, employees and communities by delivering natural gas and crude oil to premium markets.  We will grow our business by way of organic growth, greenfield expansions and strategic acquisitions, with a steadfast focus on safety, reliability, customer responsiveness and profitability.  We intend to accomplish this by:

• Building off the strength of our asset base.

• Maximizing that base through sector leading operations and service.

• Effectively executing the projects we have secured.

• Securing new growth opportunities that add value for our investors within each of our business segments.

• Expanding our value chain participation into complementary infrastructure assets.

Natural gas supply dynamics continue to evolve, and there is general recognition that natural gas can be an effective solution for meeting the energy needs of North America and beyond. This causes us to be optimistic about future growth opportunities.  Identified opportunities include growth in gas-fired power generation and industrial markets, LNG exports from North America, growth related to moving new sources of gas supplies to markets (including exports) and significant new liquids pipeline infrastructure. With our advantage of providing continuous access from leading supply regions through to the last mile of pipe in growing markets, we expect to continue expanding our assets and operations to meet the evolving needs of our customers.

Crude oil supply dynamics continue to evolve as North American oil production has shifted from growth to decline. In recent years, growing North American crude oil production has displaced imports from overseas and led to increased demand for crude oil transportation and logistics. Although depressed global crude oil prices resulted in declining North American oil production, we expect a return to attractive pricing and a growing North American production outlook. Thus, we remain confident about long-term growth in North American oil production and our ability to capture crude oil pipeline business.

Successful execution of our strategy will depend on maintaining our reputation and leadership as a safe and reliable operator and the effective execution of our capital projects. Continued growth and new opportunities will be determined by key factors, such as the continued growth and production of natural gas and crude oil within North America and our ability to provide creative solutions to meet the markets' evolving energy needs in both North America and beyond.

We continue to be actively engaged in the national discussions in both the United States and Canada regarding energy policy and have taken a lead role in shaping policy as it relates to pipeline safety and operations.

Significant Economic Factors For Our Business. O ur regulated businesses are generally economically stable and are not significantly affected in the short-term by changing commodity prices. However, all of our businesses can be negatively affected in the long term by sustained downturns in the economy or prolonged decreases in the demand for crude oil and/or natural gas, all of which are beyond our control and could impair our ability to meet long-term goals.

Most of our revenues are based on regulated tariff rates, which include the recovery of certain fuel costs. Lower overall economic output would reduce the volume of natural gas transmitted and gathered and processed at our plants, and the volume of crude oil transported, resulting in lower earnings and cash flows. This decline would primarily affect gathering revenues, potentially in the short term. Transmission revenues could be affected by long-term economic declines resulting in the non-renewal of long-term contracts at the time of expiration. Pipeline transmission and storage customers continue to renew most contracts as they expire.

Our combined key natural gas markets—the northeastern and the southeastern United States—are projected to continue to exhibit higher than average annual growth in natural gas demand versus the North American and continental United States average growth rates through 2020. This demand growth is primarily driven by the natural gas-fired electricity generation sector, including regional Gulf Coast exports of LNG. The natural gas industry is currently experiencing a significant shift in the sources of supply, and this dramatic change is affecting our growth strategies. Traditionally, supply to our markets has come from the Gulf Coast region, both onshore and offshore. The national supply profile still includes significant production from traditional sources in the Rockies, Midcontinent, and the U.S. Gulf Coast and is augmented by significant resource growth in Appalachia and West Texas. These supply shifts are shaping the growth strategies that we pursue, and therefore, will affect the nature of the projects anticipated in the capital and investment expenditure increases discussed below in “Liquidity and Capital Resources.” Recent social and environmental activism and political pressures have arisen around the production processes associated with extracting natural gas from the shale basins with the construction of new pipelines. Although we continue to believe that natural gas will remain a viable energy solution for the U.S., these pressures could increase costs and/or cause uncertainty on timing of permitting and execution of new projects.

Our key crude oil markets include the Rocky Mountain and Midwest states. Growth in our business is dependent on incremental crude oil supply from North American sources and the ability of that supply to compete with imported crude oil from overseas. Lower crude oil prices over the past two years have adversely affected the availability and cost-competitiveness of North American crude oil supply. This has not adversely affected our crude oil pipeline business, but sustained low oil prices could have a negative impact on our current business and associated growth opportunities although producers have adapted to and improved their competitiveness despite lower oil prices.

While the dramatic supply increase has been largely positive for midstream companies, lower price dynamics and shifting preferences on producing basins have resulted in other uneconomic impacts, which in the longer-term may impact some of our businesses and pipelines. Furthermore our storage business is adversely impacted by the contraction of price spreads historically seen between the summer and winter months. As a result, the value of storage assets and contracts has declined in recent years, and while this has impacted our business, significant increases in demand on the Gulf Coast, particularly for exports should improve the value of our storage service. However, this may also expose our business to cyclical, economic and demand issues in other parts of the world.

Our businesses in the United States and Canada are subject to laws and regulations on the federal, state and provincial levels. Regulations applicable to the natural gas transmission, crude oil transportation and storage industries have a significant effect on the nature of the businesses and the manner in which they operate. Changes to regulations are ongoing and we cannot predict the future course of changes in the regulatory environment or the ultimate effect that any future changes will have on our businesses.

These laws and regulations can result in increased capital, operating and other costs. Environmental laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Compliance with environmental laws and regulations can require significant expenditures, including expenditures for cleanup costs and damages arising out of contaminated properties. In particular, compliance with major Clean Air Act regulatory programs may cause us to incur significant capital expenditures to obtain permits, evaluate offsite impacts of our operations, install emissions control equipment, and otherwise assure compliance.

Our interstate pipeline operations are subject to pipeline safety laws and regulations administered by PHMSA of the U.S. Department of Transportation. These laws and regulations require us to comply with a significant set of requirements for the design, construction, maintenance and operation of our interstate pipelines.

PHMSA is designing an Integrity Verification Process intended to create standards to verify maximum allowable operating pressure, and to improve and expand integrity management processes. There remains uncertainty as to how these standards will be implemented, but it is expected that the changes will impose additional costs on new pipeline projects as well as on existing operations. In this climate of increasingly stringent regulation, pipeline failures or failures to comply with applicable regulations could result in reduction of allowable operating pressures as authorized by PHMSA, which would reduce available capacity on our pipelines. Should any of these risks materialize, it may have an adverse effect on our operations, earnings, financial condition or cash flows. Additionally, PHMSA issued an interim final rule effective January 2017 that addresses safety issues related to underground natural gas storage facilities. We believe our existing storage facilities conform to the majority of the requirements of the new rule.

In light of the changing environmental and safety laws and regulations described above, we are evaluating efforts required to maintain compliance with such laws and regulations and, in addition, are assessing ways to improve overall system integrity, efficiency and reliability. The capital costs to effectively modernize our pipelines in this way will be substantial and will be incurred over several years.

Additionally, investments and projects located in Canada expose us to risks related to Canadian laws, taxes, economic conditions, fluctuations in currency rates, political conditions and policies of the Canadian government. During the past several years, the Canadian dollar has fluctuated compared to the U.S. dollar, which affected earnings to varying degrees for brief periods. Changes in the exchange rate or any other factors are difficult to predict and may affect our future results.

Our strategic objectives include a critical focus on capital expansion projects that will require access to capital markets. An inability to access capital at competitive rates could affect our ability to implement our strategy. Market disruptions or a downgrade in our credit ratings may increase the cost of borrowings or affect our ability to access one or more sources of liquidity.

During the past few years, capital expansion projects have been exposed to cost pressures associated with the availability of skilled labor, the pricing of materials and challenges associated with ensuring the protection of our environment and continual safety enhancements to our facilities. We maintain a strong focus on project management activities to address these pressures as we move forward with planned expansion opportunities. We have also experienced increased scrutiny placed on the permitting and construction of new projects from social and environmental activism, which can sometimes impact the timing of when constructions activities, and ultimate completion of a project, can occur relative to the expected timeline. Significant cost increases could negatively affect the returns ultimately earned on current and future expansions.

For further information related to management’s assessment of our risk factors, see Part I. Item 1A. Risk Factors.