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Despite years chasing Williams, ETE may be better off without it, analysts say

EnergyTransfer Equity LP may have spent more than two years trying to buyWilliams Cos. Inc.,but the Dallas-based Energy Transfer family will be more stable if its bid forthe natural gas midstream giant does not come to fruition, analysts said.

ETE would be less levered as a standalone entity even as itrelies on its partnership EnergyTransfer Partners LP as a principal source of cash flow, accordingto Andy Brooks, a midstream analyst at Moody's.

"If the deal doesn't close, that's $10 billion of debtthat ETE is not taking on its balance sheet," he said, referring to the $6billion cash component of the merger agreement and the more than $4 billion ofunsecured Williams debt that ETE proposed to guarantee.

Brooks said that although ETE would have a less diversifiedcash flow, the cash it saves and the debt it avoids from not buying Williamswill buoy the partnership. Moody's ratings outlook for ETE remains stable.

S&P Capital IQ industry analyst Stewart Glickmansaid the collapse in oil and gas prices means that ETE may be better offwithout taking on Williams' gas pipeline projects, which may not have as attractivereturns on investment as they did when initially proposed. Oil-linked projectsmay have more attractive returns, Glickman noted, allowing Energy Transfer tofocus on its core competency.

Details of the proposed merger, which Energy Transfer's leaderKelcy Warren has been working toward since February 2014, show how low priceshave tempered ETE's enthusiasm for purchasing the Tulsa-based Williams. Duringdue diligence, ETE identified huge potential new revenue opportunities andsavings from the combination. When it struck the merger agreement, ETE forecastanticipated EBITDA from commercial synergies would exceed $2 billion a year bythe end of the decade. But the collapse in crude oil and gas prices led ETE toslash those EBITDAprojections to about $170 million per year.

For its part, Williams could be worse off without itsprospective buyer.

"Without ETE, Williams will have a continued relianceon natural gas prices as a key driver for project backlog … The U.S. gas rigcount is at an all-time low and production is still robust. So, the U.S. rigsupplier response hasn't affected production," Glickman said.

As the deal has taken turns for the worse, ETE and Williams'share prices have soared. News on April 18 that ETE's lawyers were not ready toprovide a necessary tax opinion led more deal-watchers to question if thetransaction ever gets completed. Williams has said its boardremains unanimously committed to completing the deal per the originalagreement, but it has also suedETE and Warren over a private offering completed in March.

Williams and ETE are inside of a 60-day window until eitherparty can walk away from the agreement on June 28. The SEC has yet to approve aregistration statement connected to the merger, and a Williams shareholder voteis still required. The vote cannot be held until the registration statement isdeemed effective.

"There's clearly been one setback after the other. Ithas been a very rocky courtship since the deal was announced," saidMichael Grande, a corporate ratings director at Standard & Poor's RatingsServices. "[But] ETE and Williams are very careful not to disparage theother. So, it's hard to get a read on that. I have the impression that they'restill working together. Whether that's a good working relationship is adifferent question."

TomDroege, a spokesperson for Williams said the company "continues to operateas a separate entity until such time as the pending transaction is completed."A spokesperson for ETE did not respond to inquiries.

Given the uncertainty, "we continue to look at thissituation in both respects — ETE with Williams, and as a standalone," Brookssaid.

S&P Capital IQ,S&P Ratings and S&P Global Market Intelligence are owned by S&PGlobal Inc.