General

We are primarily an energy infrastructure company focused on connecting North America's significant hydrocarbon resource plays to growing markets for natural gas and natural gas liquids (NGLs). We manage our business and analyze our results of operations on a segment basis. Our operations are divided into two business segments: Gas Pipeline and Midstream Gas & Liquids (Midstream).

• Gas Pipeline includes Transcontinental Gas Pipe Line Company, LLC (Transco) and Northwest Pipeline GP (Northwest Pipeline), which own and operate interstate natural gas pipelines. Gas Pipeline also holds interests in interstate and intrastate natural gas pipeline systems including a 50 percent interest in Gulfstream Natural Gas System L.L.C. (Gulfstream) and a 51 percent interest in Constitution Pipeline Company, LLC (Constitution).

• Midstream is comprised primarily of significant, large-scale operations in the Rocky Mountain and Gulf Coast regions, operations in the Marcellus Shale region, and various equity investments in domestic natural gas gathering and processing assets and NGL fractionation and transportation assets. Midstream's assets also include substantial operations and investments in the Four Corners region, the Piceance basin, an NGL fractionator and storage facilities near Conway, Kansas as well as an interest and operatorship of an olefins production facility in Geismar, Louisiana along with a refinery grade propylene splitter and pipelines in the Gulf Coast region. Midstream's interest and operatorship of the olefins production facility in Geismar, Louisiana and associated assets is a result of a fourth-quarter 2012 acquisition from a subsidiary of The Williams Companies, Inc. (Williams).

Williams currently holds an approximate 70 percent interest in us, comprised of an approximate 68 percent limited partner interest and all of our 2 percent general partner interest.

Acquisitions

In February 2012, we completed the acquisition of 100 percent of the ownership interests in certain entities from Delphi Midstream Partners, LLC (Laser Acquisition). These entities primarily own the Laser Gathering System, which is comprised of 33 miles of 16-inch natural gas pipeline and associated gathering facilities in the Marcellus Shale in Susquehanna County, Pennsylvania, as well as 10 miles of gathering lines in southern New York. This acquisition represents a strategic platform to enhance our expansion in the Marcellus Shale by providing our customers with both operational flow assurance and marketing flexibility. (See Results of Operations - Segments, Midstream Gas & Liquids.)

In April 2012, we completed the acquisition of 100 percent of the ownership interest in Caiman Eastern Midstream, LLC (Caiman Acquisition). The acquired entity operates a gathering and processing business in northern West Virginia, southwestern Pennsylvania and eastern Ohio. We believe the acquisition will provide us with a significant footprint and growth potential in the NGL-rich portion of the Marcellus Shale. (See Results of Operations - Segments, Midstream Gas & Liquids.)

In November 2012, we completed the acquisition of Williams' 83.3 percent undivided interest and operatorship of the olefins production facility located in Geismar, Louisiana, along with a refinery-grade propylene splitter and pipelines in the Gulf region (Geismar Acquisition), for total consideration valued at $2.364 billion, including 42,778,812 of our limited partner units, $25 million in cash and an increase in the general partner capital account to maintain Williams' 2 percent general partner interest. The acquisition is expected to bring more certainty to cash flows that are currently exposed to volatile ethane prices by shifting the commodity price exposure to ethylene. Prior period segment disclosures have been recast for this transaction. (See Results of Operations - Segments, Midstream Gas & Liquids.)

Distributions

In January 2013, our general partner's Board of Directors approved a quarterly distribution to unitholders of $0.8275 per unit, an increase of approximately 2.5 percent over the prior quarter and 8.5 percent over the same period in the prior year. (See Management's Discussion and Analysis of Financial Condition and Liquidity.)

Overview

During the second quarter 2012, NGL margins declined sharply largely attributable to a record-warm winter, a slowing global economy, and growing NGL supplies. The downward trend of per-unit NGL margins leveled-off during the second-half of 2012. We have been impacted by this environment as our net income for 2012 decreased by $279 million compared to 2011, primarily due to lower NGL production and marketing margins, higher operating costs and selling, general, and administrative expenses (SG&A), partially offset by an increase in fee revenues and olefin production margins. See additional discussion in Results of Operations.

Our net cash provided by operating activities for 2012 decreased $272 million compared to 2011 primarily due to lower operating income.

Abundant and low-cost natural gas reserves in the United States continue to drive strong demand for midstream and pipeline infrastructure. We believe that we have successfully positioned our energy infrastructure businesses for significant future growth, as highlighted by the following accomplishments during 2012 through the present:

Recent Events

In addition to the previously discussed acquisitions, we note the following:

• In February 2012, we announced a new interstate gas pipeline project. The new 120-mile Constitution Pipeline will connect our gathering system in Susquehanna County, Pennsylvania, to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems. We currently own 51 percent of Constitution Pipeline with two other parties holding 25 percent and 24 percent, respectively. This project, along with the newly acquired Laser Gathering System and our Springville pipeline, are key steps in our strategy to create the Susquehanna Supply Hub, a major natural gas supply hub in northeastern Pennsylvania. In April 2012, we began the Federal Energy Regulatory Commission (FERC) pre-filing process for the Constitution Pipeline and expect to file a FERC application during the second quarter of 2013.

• In April 2012, we completed an equity issuance of 10 million common units representing limited partner interests in us at a price of $54.56 per unit. Subsequently, we sold an additional 973,368 common units for $54.56 per unit to the underwriters upon the underwriters' exercise of their option to purchase additional common units. Also in April 2012, we sold 16,360,133 common units to Williams for $1 billion. The net proceeds of these transactions were used for general partnership purposes, including funding a portion of the cash purchase price of the Caiman Acquisition.

• In July 2012, Transco issued $400 million of 4.45 percent senior unsecured notes due 2042 to investors in a private debt placement. A portion of these proceeds was used to repay Transco's $325 million 8.875 percent senior unsecured notes that matured on July 15, 2012. An offer to exchange these unregistered notes for substantially identical new notes that are registered under the Securities Act of 1933, as amended, was commenced in November 2012 and completed in December 2012.

• In July 2012, we formed Caiman Energy II, LLC with Caiman Energy, LLC and others to develop large-scale natural gas gathering and processing and the associated liquids infrastructure serving oil and gas producers in the Utica shale, primarily in Ohio and northwest Pennsylvania. As a result, we plan to contribute $380 million through 2014 to fund a portion of Blue Racer Midstream, a joint project formed in December 2012 between Caiman Energy II, LLC and another party.

• In August 2012, we completed an equity issuance of 8,500,000 common units representing limited partner interests in us at a price of $51.43 per unit. Subsequently, we sold an additional 1,275,000 common units for $51.43 per unit to the underwriters upon the underwriters' exercise of their option to purchase additional common units. The net proceeds of these transactions were primarily used to repay outstanding borrowings on our senior unsecured revolving credit facility (revolver).

• In August 2012, we completed a public offering of $750 million of 3.35 percent senior unsecured notes due 2022. We used the net proceeds to repay outstanding borrowings on our revolver and for general partnership purposes.

• In January 2013, we agreed to sell a 49 percent ownership interest in our Gulfstar FPS™ project to a third party. The transaction is expected to close in second-quarter 2013, at which time we expect the third party will contribute $225 million to fund its proportionate share of the project costs, following with monthly capital contributions to fund its share of ongoing construction.

Outlook for 2013

Our strategy is to provide large-scale energy infrastructure designed to maximize the opportunities created by the vast supply of natural gas, natural gas products, and crude oil that exists in North America. We seek to accomplish this through further developing our scale positions in current key markets and basins and entering new growth markets and basins where we can become the large-scale service provider. We will maintain a strong commitment to operational excellence and customer satisfaction. We believe that accomplishing these goals will position us to deliver an attractive return to our unitholders.

Fee-based businesses are a significant component of our portfolio. As we continue to transition to an overall business mix that is increasingly fee-based, the influence of commodity price fluctuations on our operating results and cash flows is expected to become somewhat less significant.

In light of the above, our business plan for 2013 continues to reflect both significant capital investment and growth in distributions. Our planned capital investments for 2013 total approximately $3.75 billion, of which we expect to fund a significant portion through debt and equity issuances. We expect to maintain an attractive cost of capital and reliable access to capital markets, both of which will allow us to pursue development projects and acquisitions.

Potential risks and obstacles that could impact the execution of our plan include:

• General economic, financial markets, or industry downturn;

• Availability of capital;

• Lower than expected levels of cash flow from operations;

• Counterparty credit and performance risk;

• Decreased volumes from third parties served by our midstream business;

• Unexpected significant increases in capital expenditures or delays in capital project execution;

• Changes in the political and regulatory environments;

• Physical damages to facilities, especially damage to offshore facilities by named windstorms.

We continue to address these risks through maintaining a strong financial position and ample liquidity, as well as managing a diversified portfolio of energy infrastructure assets.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. We have reviewed the selection, application, and disclosure of these critical accounting estimates with our general partner's Audit Committee. We believe that the nature of these estimates and assumptions is material due to the subjectivity and judgment necessary, or the susceptibility of such matters to change, and the impact of these on our financial condition or results of operations.

Goodwill and Intangible Assets

At December 31, 2012, our Consolidated Balance Sheet includes $649 million of goodwill and $1.7 billion in intangible assets related to the Laser and Caiman Acquisitions, which were completed earlier in the year.

Goodwill

We performed our annual assessment of goodwill for impairment as of October 1. All of our goodwill is allocated to our Northeast gathering and processing businesses (the reporting unit). In our evaluation, our estimate of the fair value of the reporting unit exceeded its carrying value, including goodwill, and thus no impairment was recognized. If the carrying value of the reporting unit had exceeded its fair value, a computation of the implied fair value of the goodwill would have been compared with its related carrying value. If the carrying value of the reporting unit goodwill had exceeded the implied fair value of that goodwill, an impairment loss would have been recognized in the amount of the excess.

The fair value of the reporting unit was estimated using an income approach (discounted cash flows). Significant estimates and assumptions in this determination included our estimate of the expected future cash flows associated with the underlying operations. These assumptions include projections of future production volumes and timing, certain energy commodity prices, capital expenditures and recovery provisions, gathering fees, and operating expenses.

Judgments and assumptions are inherent in our estimate of future cash flows used to evaluate these assets. The use of alternate judgments and assumptions could result in a different calculation of fair value, which could ultimately result in the recognition of an impairment charge in the consolidated financial statements. Our calculation of fair value used a discount rate of 11.25 percent. We estimate that an increase of approximately 250 basis points in the discount rate could result in a fair value of the reporting unit below its carrying value, all other variables held constant.

Other intangible assets

We evaluate other intangible assets for both changes in the expected remaining useful lives and impairment when events or changes in circumstances indicate, in our management's judgment, that the estimated useful lives have changed or the carrying value of such assets may not be recoverable. Changes in an estimated remaining useful life would be reflected prospectively through amortization over the revised remaining useful life. When an indicator of impairment has occurred, we compare our management's estimate of undiscounted future cash flows attributable to the intangible assets to the carrying value of the assets to determine whether an impairment has occurred and we apply a probability-weighted approach to consider the likelihood of different cash flow assumptions and possible outcomes. If an impairment of the carrying value has occurred, we determine the amount of the impairment

recognized in the financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value. Indicators of potential impairment may include:

• Laws prohibiting the production of reserves in the areas where our assets from the Laser and Caiman Acquisitions operate;

• The development of alternative energy sources that would halt the production of reserves in these areas; or

• The loss of or failure to renew customer contracts. A significant portion of the value allocated to these contracts in our purchase price allocation was based on our assumptions regarding our ability and intent to renew or renegotiate existing customer contracts. (See Note 2 of Notes to Consolidated Financial Statements.)

We have not evaluated our intangible assets for impairment as of December 31, 2012, as there were no indicators of potential impairment.

Equity-method Investments

At December 31, 2012, our Consolidated Balance Sheet includes approximately $1.8 billion of investments that are accounted for under the equity method of accounting. We evaluate these investments for impairment when events or changes in circumstances indicate, in our management's judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. We generally estimate the fair value of our investments using an income approach where significant judgments and assumptions include expected future cash flows and the appropriate discount rate. In some cases, we may utilize a form of market approach to estimate the fair value of our investments.

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 fair value is recognized in the consolidated financial statements as an impairment charge. Events or changes in circumstances that may be indicative of an other-than-temporary decline in value will vary by investment, but may include:

• Lower than expected cash distributions from investees;

• Significant asset impairments or operating losses recognized by investees;

• Significant delays in or lack of producer development or significant declines in producer volumes in markets served by investees; and,

• Significant delays in or failure to complete significant growth projects of investees.

No impairments of investments accounted for under the equity method have been recorded for the year ended December 31, 2012.

Results of Operations

Consolidated Overview

The following table and discussion is a summary of our consolidated results of
operations for the three years ended December 31, 2012. The results of
operations by segment are discussed in further detail following this
consolidated overview discussion.



                                                                              Years Ended December 31,
                                                          $ Change       % Change                    $ Change       % Change
                                                            from           from                        from           from
                                             2012          2011*          2011*          2011          2010*         2010*          2010
                                                                                     (Millions)
Revenues:
Service revenues                           $ 2,709             +192            +8%     $ 2,517            +171            +7%     $ 2,346
Product sales                                4,611             -586           -11%       5,197          +1,084           +26%       4,113

Total revenues                               7,320                                       7,714                                      6,459

Costs and expenses:
Product costs                                3,526             +425           +11%       3,951            -728           -23%       3,223
Operating and maintenance expenses             987              -39            -4%         948            -111           -13%         837
Depreciation and amortization expenses         714              -93           -15%         621             -43            -7%         578
Selling, general, and administrative
expenses                                       553             -147           -36%         406              +2              -         408
Other (income) expense - net                    23              -10           -77%          13             -27             NM          (14 )

Total costs and expenses                     5,803                                       5,939                                      5,032

Operating income                             1,517                                       1,775                                      1,427
Equity earnings (losses)                       111              -31           -22%         142             +33           +30%         109
Interest expense                               (405 )           +10            +2%         (415 )          -51           -14%         (364 )
Interest income                                  3               +1           +50%           2              -2           -50%           4
Other income (expense) - net                     6               -1           -14%           7              -5           -42%          12

Net income                                   1,232                                       1,511                                      1,188
Less: Net income attributable to
noncontrolling interests                         -                -              -           -             +16          +100%          16

Net income attributable to
controlling interests                      $ 1,232                                     $ 1,511                                    $ 1,172

* + = Favorable change; - = Unfavorable change; NM = A percentage calculation is not meaningful due to a change in signs, a zero-value denominator, or a percentage change greater than 200.

2012 vs. 2011

The increase in service revenues is primarily due to Midstream's higher fee revenues resulting from increased gathering and processing fee revenues from higher volumes in the Marcellus Shale, including new volumes on our recently acquired gathering and processing assets in our Ohio Valley Midstream and Susquehanna Supply Hub businesses and higher volumes in the western deepwater Gulf of Mexico and in the Piceance basin. Additionally, Gas Pipeline's transportation revenues increased from expansion projects placed into service in 2011 and 2012.

The decrease in product sales is primarily due to Midstream's lower NGL and olefin production revenues reflecting an overall decrease in average per-unit sales prices. Marketing revenues also decreased primarily due to significant decreases in NGL and olefin prices, partially offset by higher NGL and crude volumes, as well as new volumes from natural gas marketing activities.

The decrease in product costs is primarily due to lower olefins feedstock costs reflecting a decrease in average per-unit prices and lower costs associated with the production of NGLs primarily due to a decrease in average natural gas prices at Midstream. Midstream's marketing purchases also decreased primarily resulting from significantly lower average NGL prices, partially offset by higher NGL and crude volumes, as well as new volumes from natural gas marketing activities.

The increase in operating and maintenance expenses is primarily due to Gas Pipeline's increased employee-related benefit costs and increased pipeline maintenance as well as Midstream's increased maintenance expenses primarily associated with its new assets acquired in 2012, partially offset by lower costs in our Four Corners area related to the consolidation of certain operations.

The increase in depreciation and amortization expenses is primarily associated with Midstream's new assets acquired in 2012 (see Note 2 of Notes to Consolidated Financial Statements).

The increase in SG&A is primarily due to an increase of $71 million at Midstream reflecting $23 million of acquisition and transition-related costs as well as higher employee-related and information technology expenses driven by general growth within Midstream's business operations. Also, general corporate expenses increased $66 million in 2012 related to our higher proportionate share of these costs as a result of Williams' spin-off of WPX, which was completed on December 31, 2011. This increase in general corporate expenses includes $25 million of reorganization-related costs in 2012 primarily relating to Williams' engagement of a consulting firm to assist in better aligning resources to support our business strategy following Williams' spin-off of WPX.

The decrease in operating income generally reflects lower NGL production and marketing margins, as well as previously described increases in operating and maintenance expenses, depreciation and amortization expenses, and SG&A. Higher fee revenues and olefin production margins partially offset these decreases.

Equity earnings (losses) decreased primarily due to lower Laurel Mountain Midstream, LLC (Laurel Mountain), Aux Sable Liquid Products L.P. (Aux Sable) and Discovery Producer Services LLC (Discovery) equity earnings at Midstream primarily reflecting lower operating results of these investees and the impairment of two minor NGL processing plants at Laurel Mountain, partially offset by an increase in equity earnings at Gas Pipeline primarily resulting from the acquisition of an additional 24.5 percent interest in Gulfstream in May 2011.

Interest expense decreased due to an increase in interest capitalized related to construction projects primarily at Midstream, partially offset by an increase in interest incurred related to increased borrowings (see Note 11 of Notes to Consolidated Financial Statements).

2011 vs. 2010

The increase in service revenues is primarily due to higher Midstream gathering and processing fee revenue in the Marcellus Shale related to gathering assets acquired at the end of 2010, in the western deepwater Gulf of Mexico related to assets placed into service in late 2010, and in the Piceance basin as a result of an agreement executed in November 2010. These increases are partially offset by a decline in fee revenue in the eastern deepwater Gulf of Mexico primarily due to natural field declines. Gas Pipeline's transportation revenues increased primarily due to expansion projects placed in service in 2010 and 2011.

The increase in product sales is primarily due to higher marketing and NGL and olefin production revenues at Midstream as a result of higher average energy commodity prices, partially offset by a decrease in NGL production volumes.

The increase in product costs is primarily due to increased marketing purchases and olefin feedstock costs at Midstream primarily resulting from higher average energy commodity prices. These increases are partially offset by decreased costs associated with production of NGLs reflecting lower average natural gas prices and lower NGL production volumes at Midstream.

The increase in operating and maintenance expenses is primarily due to increased maintenance expenses and higher property insurance expenses at Midstream.

The increase in depreciation and amortization expenses is primarily due to assets placed in service late in 2010, along with increased depreciation of a facility, which was idled in 2012, at Midstream.

The unfavorable change in other (income) expense - net within operating income primarily reflects:

. . .