DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant x                                              Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material under §240.14a-12

The Williams Companies, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

 

 

  (2) Aggregate number of securities to which transaction applies:

 

 

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

  (4) Proposed maximum aggregate value of transaction:

 

 

 

  (5) Total fee paid:

 

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

 

 

  (2) Form, Schedule or Registration Statement No.:

 

 

 

  (3) Filing Party:

 

 

 

  (4) Date Filed:

 

 

 

 

 


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LOGO

May 25, 2016

MERGER PROPOSAL—YOUR VOTE IS VERY IMPORTANT

EXPLANATORY NOTE

 

 

On September 28, 2015, The Williams Companies, Inc. (“WMB”) entered into an Agreement and Plan of Merger, as amended by Amendment No. 1 thereto (the “merger agreement”), with Energy Transfer Equity, L.P. (“ETE”), Energy Transfer Corp LP (“ETC”), Energy Transfer Corp GP, LLC (“ETC GP”), LE GP, LLC (“LE GP”) and Energy Transfer Equity GP, LLC (“ETE GP”). The merger agreement provides that WMB will be merged with and into ETC (the “merger”), with ETC surviving the merger. ETE formed ETC as a limited partnership that will be treated as a corporation for U.S. federal income tax purposes. Immediately following the effective time of the merger (the “effective time”), LE GP will merge with and into ETE GP (the “GP merger” and, together with the merger, the “mergers”), with ETE GP surviving the GP merger and becoming the general partner of ETE. ETC will serve as the managing member of ETE GP.

At the effective time, each issued and outstanding share of WMB common stock (other than shares of WMB common stock held by WMB, subsidiaries of WMB, ETC and its affiliates and shares of WMB common stock for which the holder thereof has properly demanded appraisal under Delaware law (and who does not fail to perfect or otherwise effectively withdraw their demand or waive or lose the right to appraisal)) will be cancelled and automatically converted into the right to receive, at the election of each WMB stockholder (subject to the election and proration procedures described below):

 

   

$8.00 in cash and 1.5274 common shares representing limited partner interests in ETC (“ETC common shares”) (the “mixed consideration”); or

 

   

1.8716 ETC common shares (the “share consideration”); or

 

   

$43.50 in cash (the “cash consideration”).

WMB stockholders that elect to receive the share consideration or the cash consideration will be subject to proration to ensure that the aggregate number of ETC common shares and the aggregate amount of cash paid in the merger will be the same as if all electing WMB shares received the mixed consideration. The receipt of the merger consideration is expected to be tax-free to the WMB stockholders, except with respect to any cash received. In addition, WMB is entitled to declare a special, one-time dividend of $0.10 per share of WMB common stock, to be paid to holders of record immediately prior to the closing of the merger and contingent upon consummation of the merger.

In connection with the merger, ETE will acquire a number of ETC common shares at the exchange ratio associated with the share consideration, in exchange for the amount of cash needed by ETC to fund the cash portion of the merger consideration (the “Parent Cash Deposit”), and, as a result, based on the number of shares of WMB common stock outstanding as of the date of this proxy statement/prospectus, ETE will own approximately 19% of the outstanding ETC common shares immediately after the effective time (which percentage becomes 17% after giving effect to the anticipated grant of awards under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan following the merger).

Immediately following the completion of the mergers, ETC will contribute substantially all of the assets and liabilities it assumed from WMB through the merger to ETE in exchange for the issuance by ETE to ETC of a number of Class E units, a new class of units representing limited partner interests in ETE (the “ETE Class E units”), equal to (i) the number of ETC common shares issued to the WMB stockholders in the merger plus (ii) the number of ETC common shares issued to ETE in consideration for the Parent Cash Deposit (the “WMB Contribution” and, together with the merger and the other transactions contemplated by the merger agreement, the “merger transactions”).

Each ETC common share issued in connection with the merger transactions will have attached to it one contingent consideration right (a “CCR”). The CCR will provide each CCR holder with the right to receive ETC common shares or a cash payment, at ETE’s election, should the average of the daily volume-weighted average price for common units representing limited partner interests in ETE (the “ETE common units”) on the New York Stock Exchange (“NYSE”) (“ETE common units VWAP”) be greater than the average of the daily volume-weighted average price for ETC common shares on the NYSE (“ETC common shares VWAP”) for a period of 23 months following the 20th trading


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day after the closing date of the merger (the “measurement period”). If the ETC common shares VWAP is less than the ETE common units VWAP for the measurement period (such difference, a “shortfall amount”), then each outstanding CCR will be automatically cancelled and converted into the right to receive a shortfall payment, which will be settled in ETC common shares or cash, at ETE’s election, and ETE will issue a number of ETE Class E units to ETC equal to the number of ETC common shares so issued, if any. If, however, the ETC common shares VWAP is equal to or greater than the ETE common units VWAP for the measurement period, then each outstanding CCR will be immediately and automatically cancelled and no consideration of any kind will be delivered to CCR holders, and ETE will cancel a portion of the ETE Class E units held by ETC based on the amount of such difference, thereby reducing ETC’s ownership interest in ETE. The CCRs will be automatically cancelled and extinguished prior to the end of the measurement period, without any consideration of any kind being delivered to the CCR holders, if (1) the ETC common shares VWAP is greater than the ETE common units VWAP for 20 consecutive trading days and (2) the ETC common shares VWAP is equal to or greater than the ETE common units VWAP for a period beginning on the twenty-first trading day after the effective date of the merger and ending on the twentieth such trading day as mentioned above. The CCRs will trade with the ETC common shares and will not be separable or separately traded and will have no separate voting rights.

On September 28, 2015, the board of directors of WMB (the “WMB Board”) (a) approved and declared advisable and resolved to recommend to its stockholders the adoption of the merger agreement, the merger and the other merger transactions and (b) declared that it is in the best interests of the WMB stockholders for WMB to enter into the merger agreement and consummate the merger and the other merger transactions.

Prior to the merger, WMB will hold a special meeting of its stockholders (the “special meeting”) for the WMB stockholders to approve (a) the adoption of the merger agreement and the transactions contemplated thereby, including the merger (the “Merger Proposal”) and (b) the adjournment of the special meeting from time to time, if necessary or appropriate to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement (the “Adjournment Proposal”). At the special meeting, the WMB stockholders will also cast a non-binding, advisory vote to approve the compensation that may be paid or become payable to WMB’s named executive officers as a result of the merger (the “Compensatory Proposal”).

The WMB Board set May 19, 2016 as the record date (the “Record Date”) for determining holders of WMB common stock entitled to vote at the special meeting. If you are a record holder of outstanding WMB common stock as of the close of business on the Record Date, you may vote at the special meeting. See the section titled “The Special Meeting” beginning on page 99 of this proxy statement/prospectus. The affirmative vote of holders of at least a majority of the outstanding shares of WMB common stock is required to approve the Merger Proposal. The affirmative vote of a majority of the votes cast affirmatively or negatively on the Compensatory Proposal is required to approve, on an advisory basis, the Compensatory Proposal, but this vote will not be binding on WMB, the WMB Board or any of the WMB Board’s committees. The approval of the Adjournment Proposal requires the affirmative vote of a majority of the votes cast on the Adjournment Proposal at the special meeting, regardless of whether a quorum is present.

 

 

This proxy statement/prospectus provides you with detailed information about the merger agreement, the merger transactions and related matters. ETC and WMB encourage you to read the entire document carefully. In particular, please read the “Risk Factors” section beginning on page 45 of this proxy statement/prospectus for a discussion of risks relevant to the merger, ETC, ETE and the combined company.

 

LOGO

Frank T. MacInnis

Chairman of the Board of Directors of WMB

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE ETC COMMON SHARES OR THE ATTACHED CCR TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this proxy statement/prospectus is May 25, 2016 and it was first mailed to WMB stockholders on or about May 25, 2016.


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LOGO

One Williams Center

Tulsa, Oklahoma 74172

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 27, 2016

To the Stockholders of The Williams Companies, Inc.:

Notice is hereby given that a special meeting of stockholders (the “special meeting”) of The Williams Companies, Inc. (“WMB”) will be held on June 27, 2016 at 9:00 a.m., local time, at The Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma 74172 to consider and vote upon the following proposals:

Proposal 1: to approve the adoption of the Agreement and Plan of Merger, as amended by Amendment No. 1 thereto (the “merger agreement”), among Energy Transfer Equity, L.P., Energy Transfer Corp LP (“ETC”), Energy Transfer Corp GP, LLC, LE GP, LLC, Energy Transfer Equity GP, LLC and WMB, and the transactions contemplated thereby, including the merger of WMB with and into ETC (the “merger”) (the “Merger Proposal”);

Proposal 2: to approve, on an advisory (non-binding) basis, specified compensatory arrangements between WMB and its named executive officers relating to the transactions contemplated by the merger agreement (the “Compensatory Proposal”); and

Proposal 3: to approve the adjournment of the special meeting from time to time, if necessary or appropriate to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Proposal (the “Adjournment Proposal” and, together with the Merger Proposal and the Compensatory Proposal, the “Proposals”).

The above Proposals and related transactions are described in detail in the accompanying proxy statement/prospectus, which you should read before you vote. If the Merger Proposal is not approved by the WMB stockholders, the merger cannot be completed.

Only holders of record of WMB common stock at the close of business on May 19, 2016 will be entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof.

Your vote is very important. To ensure your representation at the special meeting, complete and return the enclosed proxy card or submit your proxy by telephone or the Internet. Please submit a proxy promptly whether or not you expect to attend the special meeting. Submitting a proxy now will not prevent you from revoking the proxy and voting in person at the special meeting. If your shares are held in the name of a bank, broker or other nominee, follow the instructions on the voting instruction card furnished to you by such bank, broker or other nominee.

On September 28, 2015, the Board of Directors of WMB approved and declared advisable the merger agreement and the other transactions contemplated thereby, including the merger and the Compensatory Proposal, and determined that they are in the best interests of WMB and its stockholders. Since such time, the WMB Board has, among other things, carefully reviewed the developments described in “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus. As of the date of this proxy statement/prospectus, a majority of the WMB Board recommend that you vote “FOR” the Merger Proposal and the Compensatory Proposal, and the WMB Board unanimously recommends that you vote “FOR” the Adjournment Proposal.

BY ORDER OF THE BOARD OF DIRECTORS

 

LOGO

Sarah C. Miller

Senior Vice President, General Counsel and Corporate Secretary

May 25, 2016


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ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates by reference important business and financial information about WMB from other documents filed with the Securities and Exchange Commission (the “SEC”), that are not included in or delivered with this proxy statement/prospectus. See “Where You Can Find More Information.”

Documents incorporated by reference are available to you without charge upon written or oral request. You can obtain any of these documents by requesting them in writing or by telephone from WMB or from MacKenzie Partners, Inc., WMB’s proxy solicitor, at the following addresses and telephone numbers.

 

The Williams Companies, Inc.
Investor Relations
One Williams Center
Tulsa, Oklahoma 74172
(800) 600-3782
   MacKenzie Partners, Inc.
105 Madison Avenue
New York, New York 10016
Toll-free: (800) 322-2885
Collect: (212) 929-5500

To receive timely delivery of the requested documents in advance of the special meeting, you should make your request no later than June 20, 2016.

ABOUT THIS DOCUMENT

This document, which forms part of a registration statement on Form S-4 filed with the SEC by ETC (File No. 333- 208187), constitutes a prospectus of ETC under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), with respect to the ETC common shares with CCRs attached thereto to be issued pursuant to the merger agreement. This document also constitutes a notice of meeting and a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to the special meeting, at which WMB stockholders will be asked to consider and vote on a proposal to adopt the merger agreement and the transactions contemplated thereby, including the merger, the Compensatory Proposal and the Adjournment Proposal.

Neither ETC nor WMB has authorized anyone to give any information or make any representation about the merger, ETC or WMB that is different from, or in addition to, that contained in this proxy statement/prospectus or in any of the materials that have been incorporated by reference. Therefore, neither ETC nor WMB take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information contained in or incorporated by reference into this proxy statement/prospectus. This proxy statement/prospectus is dated May 25, 2016. The information contained in this proxy statement/prospectus is accurate only as of that date or, in the case of information in a document incorporated by reference, as of the date of such document, unless the information specifically indicates that another date applies. Neither the mailing of this proxy statement/prospectus to WMB stockholders nor the issuance by ETC of its common shares and CCRs pursuant to the merger agreement will create any implication to the contrary.

This proxy statement/prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

The information concerning ETC contained in this proxy statement/prospectus has been provided by ETC, and the information concerning WMB contained in or incorporated by reference into this proxy statement/prospectus has been provided by WMB.


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS

     vi   

SUMMARY

     1   

The Parties

     1   

The Merger

     3   

Merger Consideration

     4   

Appraisal Rights

     4   

Accounting Treatment of the Merger

     5   

Treatment of WMB Equity Awards

     5   

The Special Meeting; Required Vote

     6   

Recommendation of the WMB Board and Its Reasons for the Merger

     6   

Opinions of the Financial Advisors to the WMB Board

     7   

Reasons of ETE General Partner’s Board for the Merger

     8   

No ETE Unitholder Approval

     9   

Financing Commitment

     9   

Board of Directors of the General Partner of ETC After the Merger

     9   

Interests of Directors and Executive Officers of WMB in the Merger

     10   

Risk Factors Relating to the Merger and Ownership of ETC Common Shares

     10   

Material U.S. Federal Income Tax Consequences of the Merger

     12   

Certain U.S. Federal Income Tax Considerations of the WMB Contribution

     12   

Listing of the ETC Common Shares; Delisting and Deregistration of Shares of WMB Common Stock

     13   

Conditions to Completion of the Merger

     13   

Regulatory Approvals

     15   

No Solicitation by WMB of Alternate Proposals

     15   

Change in WMB Board Recommendation

     15   

Termination of the Merger Agreement

     16   

Expenses

     16   

Termination Fee

     16   

Comparison of Rights of ETC Shareholders and WMB Stockholders

     17   

Amendment of ETE Partnership Agreement

     17   

Litigation Relating to the Merger

     17   

The CCR Agreement

     19   

The Contribution Agreement

     20   

Recent Developments

     20   

Organizational Structure of ETC Prior to the Merger Transactions

     34   

Organizational Structure of ETC Following the Merger Transactions

     35   

ETC SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

     36   

WMB SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

     38   

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     40   

COMPARATIVE HISTORICAL AND PRO FORMA PER UNIT AND PER SHARE INFORMATION

     42   

COMPARATIVE PER UNIT AND PER SHARE MARKET PRICE AND DISTRIBUTION AND DIVIDEND INFORMATION

     44   

RISK FACTORS

     45   

Risks Related to the Merger

     45   

Risks Related to the CCRs

     54   

Risks Related to ETC and the Ownership of the ETC Common Shares

     55   

Risks Related to Conflicts of Interest

     64   

Risks Related to the Businesses of ETE and the ETE Entities

     65   

Tax Risks

     91   

FORWARD-LOOKING STATEMENTS

     94   

THE PARTIES

     97   

Energy Transfer Corp LP

     97   

Energy Transfer Equity, L.P.

     97   

 

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The Williams Companies, Inc.

     98   

THE SPECIAL MEETING

     99   

Date, Time and Place

     99   

Purpose; Proposals

     99   

Board Recommendation

     99   

Record Date; Outstanding Shares; Shares Entitled to Vote

     99   

Quorum

     100   

Required Vote

     100   

Stock Ownership of and Voting of Directors and Executive Officers of WMB

     101   

Voting and Submitting a Proxy for WMB Common Stock Held by Holders of Record

     101   

Voting and Submitting a Proxy for WMB Common Stock Held in Street Name

     101   

Revocability of Proxies; Changing Your Vote

     102   

Solicitation of Proxies

     102   

No Other Business

     102   

Adjournments

     102   

Attending the Special Meeting

     103   

Assistance

     103   

THE MERGER

     104   

Background of the Merger

     104   

Recommendation of the WMB Board and Its Reasons for the Merger

     132   

Opinions of the Financial Advisors to the WMB Board

     143   

Financial Forecasts

     169   

Reasons of ETE General Partner’s Board for the Merger

     174   

Interests of Directors and Executive Officers of WMB in the Merger

     176   

Certain Beneficial Owners of WMB Common Stock

     187   

Appraisal Rights

     190   

No ETE Unitholder Approval

     190   

Accounting Treatment of the Merger

     190   

Regulatory Approvals and Clearances Required for the Merger

     190   

Financing Commitment

     193   

Listing of the ETC Common Shares

     193   

Delisting and Deregistration of WMB Common Stock

     193   

Amendment of ETE Partnership Agreement

     193   

Litigation Relating to the Merger

     193   

THE MERGER AGREEMENT

     196   

The Merger

     196   

Closing

     197   

Effective Time

     197   

Merger Consideration

     197   

Election Procedures

     197   

Proration

     198   

Treatment of WMB Equity Awards

     201   

Treatment of WMB Employee Stock Purchase Plan (“WMB ESPP”)

     201   

Pre-Merger Special Dividend

     202   

Subscription of ETC Common Shares by ETE

     202   

Fractional Shares

     202   

Exchange and Payment Procedures

     202   

Representations and Warranties

     203   

Conduct of Business Prior to the Effective Time

     204   

No Solicitation

     206   

Special Meeting

     208   

Regulatory Efforts

     209   

Other Covenants and Agreements

     209   

 

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Employee Matters

     210   

Conditions to Completion of the Merger

     210   

Definition of Material Adverse Effect

     212   

Termination of the Merger Agreement

     213   

Effect of Termination

     214   

Termination Fees and Expenses

     214   

Amendment and Modification

     215   

Governing Law; Jurisdiction

     215   

Specific Performance

     215   

Appraisal Rights

     215   

Contribution Agreement

     216   

CCR AGREEMENT

     217   

Terms

     217   

Early Cancellation of CCRs

     218   

Illustrative Examples of the CCR Terms

     219   

Transfer

     220   

Payment Date

     220   

Payment Procedures

     221   

Amendments

     221   

Governing Law

     222   

Termination of the CCR Agreement

     222   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     223   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     230   

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE WMB CONTRIBUTION

     237   

DESCRIPTION OF ETC COMMON SHARES

     238   

Transfer of Common Shares

     238   

Transfer Agent and Registrar

     238   

COMPARISON OF RIGHTS OF ETC SHAREHOLDERS AND WMB STOCKHOLDERS

     240   

APPRAISAL RIGHTS

     254   

ADDITIONAL INFORMATION ABOUT ETC

     258   

Business

     258   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     270   

Cash Distribution Policy and Restrictions on Distributions

     322   

How We Make Cash Distributions

     329   

Description of Our Partnership Agreement

     331   

Management

     344   

Compensation Discussion and Analysis

     350   

Certain Relationships and Related Party Transactions

     377   

Conflicts of Interest and Fiduciary Duties

     378   

ADDITIONAL INFORMATION ABOUT ETE

     384   

Business

     384   

Cash Distribution Policy of ETE and the ETE Entities

     425   

Material Provisions of the Partnership Agreement of ETE

     443   

LEGAL MATTERS

     449   

EXPERTS

     449   

FUTURE STOCKHOLDER PROPOSALS

     450   

WHERE YOU CAN FIND MORE INFORMATION

     451   

INDEX TO FINANCIAL STATEMENTS

     FIN-1   

ANNEX A: COMPOSITE AGREEMENT AND PLAN OF MERGER

     A-1   

ANNEX B: FORM OF CONTINGENT CONSIDERATION RIGHTS AGREEMENT

     B-1   

ANNEX C: FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ENERGY TRANSFER CORP LP

     C-1   

 

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ANNEX D: GLOSSARY OF TERMS

     D-1   

ANNEX E: SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

     E-1   

ANNEX F: OPINION OF BARCLAYS CAPITAL INC.

     F-1   

ANNEX G: OPINION OF LAZARD FRÈRES & CO.

     G-1   

 

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CERTAIN DEFINED TERMS AND OTHER INFORMATION

Unless the context otherwise requires, references in this proxy statement/prospectus to:

 

   

“ETC” refers to Energy Transfer Corp LP and its subsidiaries;

 

   

“ETC GP” refers to Energy Transfer Corp GP, LLC, ETC’s general partner;

 

   

“ETE” refers to Energy Transfer Equity, L.P. (NYSE: ETE) and its subsidiaries;

 

   

“ETE Entities” means (i) for periods prior to the completion of the mergers, ETP, SXL and Sunoco, collectively, and (ii) for periods from and after the completion of the mergers, ETP, SXL, Sunoco and WPZ, collectively;

 

   

“ETE general partner” means (i) for periods prior to the completion of the mergers, LE GP and (ii) for periods from and after the completion of the mergers, ETE GP;

 

   

“ETE GP” refers to Energy Transfer Equity GP, LLC, ETC’s wholly owned subsidiary, which will become the general partner of ETE following the GP merger;

 

   

“ETP” refers to Energy Transfer Partners, L.P. (NYSE: ETP) and its subsidiaries;

 

   

“Existing GP Owner” refers to KLW LLC, which is wholly owned by Kelcy L. Warren;

 

   

“LE GP” refers to LE GP, LLC, the general partner of ETE, which will be merged with and into ETE GP in connection with the GP merger and thereafter cease to be the general partner of ETE;

 

   

ETC’s “partnership agreement” refers to the First Amended and Restated Agreement of Limited Partnership of Energy Transfer Corp LP to be adopted at the effective time, a form of which is attached to this proxy statement/prospectus as Annex C;

 

   

“Regency” refers to Regency Energy Partners LP, an entity acquired by ETP in April 2015, and its subsidiaries;

 

   

“Sunoco” refers to Sunoco LP (NYSE: SUN) and its subsidiaries;

 

   

“SXL” refers to Sunoco Logistics Partners L.P. (NYSE: SXL) and its subsidiaries;

 

   

“WMB” refers to The Williams Companies, Inc. (NYSE: WMB) and its subsidiaries; and

 

   

“WPZ” refers to Williams Partners L.P. (NYSE: WPZ) and its subsidiaries.

For additional defined terms, please see “Annex D—Glossary of Terms.”

ETC expects to grant awards to officers, directors and eligible service providers of ETC and its affiliates under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan shortly following the closing of the merger covering approximately 10% of the outstanding ETC common shares at the consummation of the merger. Unless otherwise stated, the information in this proxy statement/prospectus regarding the ownership of ETC immediately following the merger and other pro forma financial information for ETC does not give effect to the expected award grants. Please see “Additional Information About ETC—Compensation Discussion and Analysis—Our 2016 Long-Term Incentive Plan.”

 

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QUESTIONS AND ANSWERS

The following section provides brief answers to certain questions that you may have regarding the merger agreement and the proposed mergers. Please note that this section does not address all issues that may be important to you as a WMB stockholder. Accordingly, you should carefully read this entire proxy statement/prospectus, including each of the annexes and the documents that have been incorporated by reference into this proxy statement/prospectus.

Q. Why am I receiving these materials?

A. WMB and ETE have agreed to merge WMB with and into ETC (the “merger”), with ETC surviving the merger.

WMB is holding a special meeting of stockholders (the “special meeting”) to obtain the stockholder approval necessary to adopt the Agreement and Plan of Merger, as amended by Amendment No. 1 thereto (the “merger agreement”), among ETE, ETC, ETC GP, LE GP, ETE GP and WMB. We will be unable to complete the merger unless, among other things, the WMB stockholders approve the adoption of the merger agreement.

WMB stockholders will also be asked to approve the Adjournment Proposal (as described below) and the Compensatory Proposal (as described below) at the special meeting.

WMB is sending these materials to the WMB stockholders to help them decide how to vote their shares of WMB common stock regarding the matters described herein at the special meeting.

This document constitutes both a proxy statement of WMB and a prospectus of ETC. This document is a proxy statement because the Board of Directors of WMB (the “WMB Board”) is soliciting proxies from the WMB stockholders for the adoption of the merger agreement. This document is a prospectus because ETC, in connection with the merger, is offering common shares representing limited partner interests in ETC (“ETC common shares”) with contingent consideration rights (“CCRs”) attached thereto in exchange for outstanding shares of WMB common stock.

Q. What will happen to WMB as a result of the merger?

A. If the merger is successfully completed, WMB will be merged with and into ETC, with ETC surviving the merger. Following the merger, WMB will no longer be a publicly held company, and WMB common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Immediately following the completion of the merger (the “effective time”), ETC will contribute substantially all of the assets and liabilities it assumed from WMB through the merger to ETE in exchange for the issuance by ETE to ETC of a number of Class E units, a new class of units representing limited partner interests in ETE (the “ETE Class E units”), equal to (i) the number of ETC common shares issued to the WMB stockholders in the merger plus (ii) the number of ETC common shares issued to ETE in consideration for the Parent Cash Deposit (as defined below) (the “WMB Contribution” and, together with the merger and the other transactions contemplated by the merger agreement, the “merger transactions”).

Q. When will the merger be completed?

A. ETE and WMB are working to complete the merger as soon as possible. Subject to the satisfaction or waiver of the conditions to the merger, we expect to complete the merger in the first half of 2016, but we cannot be certain when or if the conditions to the merger will be satisfied or, to the extent permitted, waived. The merger cannot be completed until a number of conditions are satisfied, including the approval of the adoption of the merger agreement by WMB stockholders at the special meeting, approval by the Federal Energy Regulatory Commission (“FERC”) pursuant to the Federal Power Act (“FPA”), clearance under the Canada Competition Act

 

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and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”). See the section titled “The Merger—Regulatory Approvals and Clearances Required for the Merger.” In addition, completion of the merger is subject to satisfaction or waiver of a condition that ETC and WMB receive a tax opinion from Latham & Watkins LLP (“Latham”) to the effect that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies (the “721 Opinion”). Latham has advised ETE that, considering the potential claims that the IRS may successfully assert and the level of uncertainty regarding the ultimate outcome of these claims, Latham would not be able to deliver the 721 Opinion were the opinion requested as of the date of this proxy statement/prospectus. On advice of Cravath, Swaine & Moore LLP, special counsel to WMB in connection with the transaction, WMB has advised ETE that it disagrees with Latham’s position and that it believes the WMB Contribution should be a transaction to which Section 721(a) of the Code applies. Receipt by ETC and WMB of the 721 Opinion from Latham is a closing condition that must be met or waived by both ETC and WMB. Because ETE believes that ETE and ETC will be materially adversely affected if the WMB Contribution is not an exchange to which Section 721(a) of the Code applies, it is unlikely that ETC would waive the condition to closing that ETC receive the 721 Opinion from Latham. Based on the information available to WMB as of the date of this proxy statement/prospectus, WMB believes that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies. WMB is, therefore, willing to waive the condition to closing that WMB receive the 721 Opinion from Latham. In addition, on May 13, 2016, WMB filed a lawsuit against ETE in the Delaware Court of Chancery seeking, among other remedies, a declaratory judgment and injunction preventing ETE from terminating or otherwise avoiding its obligations under the merger agreement due to any failure of Latham to deliver the 721 Opinion to ETC and WMB. ETE believes that the allegations underlying the lawsuit are without merit and intends to vigorously defend against them. Please see “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

Q. Who do I call if I have further questions about the merger agreement or the merger?

A. If WMB stockholders have further questions or would like additional copies, without charge, of this proxy statement/prospectus, they may call the WMB Investor Relations Departments at 800-600-3782, or MacKenzie Partners, Inc., who is acting as WMB’s proxy solicitation agent for the special meeting, at (800) 322-2885.

Q. What happens if the merger is not consummated?

A. If for any reason the merger is not consummated, WMB stockholders will retain their shares of WMB common stock, WMB will remain an independent public company and shares of WMB common stock will continue to be listed and traded on the NYSE. WMB stockholders will not receive the merger consideration or the pre-merger special dividend (as defined below).

Additionally, if the merger agreement is terminated, under specified circumstances, WMB may be required to pay ETE a termination fee of $1.48 billion or reimburse ETE for up to $100 million of its expenses. See the section titled “The Merger Agreement—Termination Fees and Expenses” beginning on page 214 of this proxy statement/prospectus.

Q. What are the conditions to the completion of the merger?

A. In addition to the approval of the Merger Proposal by the WMB stockholders, completion of the merger is subject to the satisfaction of a number of other conditions, including certain regulatory clearances and the receipt by ETC and WMB of the 721 Opinion. For additional information on the conditions to completing the merger, see the section titled “The Merger Agreement—Conditions to Completion of the Merger” beginning on page 210 of this proxy statement/prospectus.

 

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Q. How will ETC be governed following the merger?

A. ETC will be managed by its general partner, ETC GP, which will be managed by a board of directors appointed by the Existing GP Owner. The ETC GP board of directors (the “ETC GP Board”) will consist of between five and 11 directors, at least three of which must be independent according to the standards of the NYSE and the Exchange Act. For additional information regarding the management of ETC following the merger, see the section titled “Additional Information About ETC—Management” beginning on page 344 of this proxy statement/prospectus.

After the merger, as a holder of ETC common shares, you will not be entitled to remove ETC GP as the general partner of ETC or to elect or remove directors on the ETC GP Board.

Q. Where does ETC sit in the corporate structure of ETE?

A. ETC will be managed by its general partner, ETC GP, and will also be the managing member of ETE GP, which will be the general partner of ETE following the completion of the GP merger. It is expected that the directors of LE GP immediately prior to the GP merger will continue as directors of ETE GP after the GP merger.

Q. Is the consummation of the merger contingent upon any future approval by the holders of common units representing limited partner interests in ETE (the “ETE common units”)?

A. No. No approvals by the holders of ETE common units are required to consummate the merger.

Q. Do any of the directors or executive officers of WMB have interests in the merger that may differ from or be in addition to interests of WMB stockholders?

A. In considering the recommendation of a majority of the WMB Board to approve the merger, WMB stockholders should be aware that certain WMB directors and executive officers may be deemed to have interests in the merger that are in addition to, or different from, the interests of other WMB stockholders. The WMB Board was aware of these interests and considered them, among other matters, in approving the merger and the merger agreement and in making the recommendations that the WMB stockholders approve the merger agreement, the merger and the other merger transactions. These interests include:

 

   

Certain WMB directors and executive officers have previously been granted WMB stock options, restricted stock units and/or deferred stock units. Under the merger agreement, each WMB stock option, including stock options held by WMB directors and executive officers, will be equitably adjusted immediately prior to the effective time by reducing the exercise price thereof by an amount equal to the pre-merger special dividend, contingent on the consummation of the merger. In addition, WMB equity-based awards, including those held by WMB directors and executive officers, outstanding immediately prior to the effective time will, as of the effective time, be assumed by ETC and converted into cash-settled, time-based equity awards of ETC, adjusted as described below in the section of this proxy statement/prospectus titled “The Merger Agreement—Treatment of WMB Equity Awards.” Performance conditions applicable to WMB restricted stock units will generally be deemed to be satisfied at target (in the case of WMB performance stock units) or the greater of target and actual performance (in the case of WMB leveraged performance stock units). The converted stock options and restricted stock units will only be subject to time-based vesting conditions following the merger. All the converted ETC equity awards will otherwise remain subject to their existing terms and conditions, including the accelerated vesting of the stock options and restricted stock units held by WMB executive officers upon a termination of employment without cause or due to good reason (each as defined in the applicable plans and agreements and referred to as a “qualifying termination”) during the two-year period following completion of the merger, and accelerated vesting of restricted stock units held by WMB non-employee directors upon any separation from service. Upon settlement, holders of

 

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converted WMB restricted stock units and WMB deferred stock units will also be entitled to receive (1) the pre-merger special dividend and payment of any other accrued dividend equivalents, (2) a cash payment in respect of any fractional ETC common shares that would have resulted from such conversion and (3) if such unit settles after the end of the CCR measurement period (as defined below), an amount in cash equal to the shortfall amount (if any).

 

   

The right to certain contractual severance payments and benefits in the event a WMB executive officer experiences a qualifying termination of employment during the two-year period following the completion of the merger.

 

   

The right to an accelerated payout of a WMB director’s or executive officer’s earned and accrued account balance under the Williams Companies Amended and Restated Retirement Restoration Plan.

 

   

The right to indemnification and exculpation benefits following the closing of the merger.

Q. Are there any risks I should consider in deciding whether to vote for the Merger Proposal?

A. Yes. You should read and carefully consider the risks described in the section titled “Risk Factors” beginning on page 45 of this proxy statement/prospectus.

Q: What impact has the recent decline in crude oil and natural gas prices had on ETE, WMB and the merger?

A: Please see “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

Q. What effect will the merger have on the previously announced merger with WPZ?

A. The merger agreement between WMB and WPZ was terminated before WMB and ETE entered into the merger agreement. There is no longer a planned merger between WMB and WPZ, and WPZ will remain as an independent publicly traded master limited partnership.

Q. When and where will the special meeting be held?

A. The special meeting will be held on June 27, 2016 at 9:00 a.m., local time, at The Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma 74172.

Q. Who is entitled to vote at the special meeting?

A. If you are a record holder of WMB common stock as of the close of business on May 19, 2016 (the “Record Date”), you are entitled to vote at the special meeting. See the section titled “The Special Meeting” beginning on page 99 of this proxy statement/prospectus.

Q. What am I being asked to vote on at the special meeting?

A. WMB stockholders are being asked to consider and vote on the following proposals:

 

  (1) The “Merger Proposal”: to approve the adoption of the merger agreement and the transactions contemplated thereby, including the merger;

 

  (2) The “Compensatory Proposal”: to approve, on an advisory (non-binding) basis, specified compensatory arrangements between WMB and its named executive officers relating to the transactions contemplated by the merger agreement; and

 

  (3) The “Adjournment Proposal”: to approve the adjournment of the special meeting from time to time, if necessary or appropriate to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Proposal.

 

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Q. What vote is required to approve each of the Proposals?

A. The approval of the Merger Proposal requires the affirmative vote of holders of at least a majority of the outstanding shares of WMB common stock. The affirmative vote of a majority of the votes cast affirmatively or negatively on the Compensatory Proposal is required to approve, on an advisory basis, the Compensatory Proposal, but this vote will not be binding on WMB, the WMB Board or any of its committees. The approval of the Adjournment Proposal requires the affirmative vote of a majority of the votes cast on the proposal at the special meeting, regardless of whether a quorum is present.

Q. What constitutes a quorum for the special meeting?

A. The presence, in person or by proxy, of WMB stockholders representing a majority of the shares of WMB common stock outstanding on the Record Date will constitute a quorum for the special meeting.

Q. What if I do not vote my WMB common stock or if I abstain from voting?

A. The approval of the Merger Proposal requires the affirmative vote of holders of a majority of the outstanding shares of WMB common stock. Therefore, an abstention or failure to vote has the same effect as a vote against the Merger Proposal.

The affirmative vote of a majority of the votes cast affirmatively or negatively on the Compensatory Proposal is required to approve, on an advisory basis, the Compensatory Proposal. Therefore, voting against the Compensatory Proposal increases the number of votes required to approve the Compensatory Proposal, but abstentions or failures to vote do not.

The Adjournment Proposal requires the affirmative vote of a majority of the votes cast on such proposal at the special meeting. Abstentions will not be treated as votes cast for purposes of the Adjournment Proposal. If you abstain from voting on the Adjournment Proposal, your shares of WMB common stock will be disregarded for purposes of determining the votes cast for the Adjournment Proposal, and the abstention will therefore have no effect on the adoption of that proposal. Neither the Compensatory Proposal nor the Adjournment Proposal affects the approval of the Merger Proposal.

Q. Which proposals must be approved for the merger to be completed?

A. The merger will not be completed unless the Merger Proposal is approved.

Q. How do I submit my proxy for the special meeting?

A. If you are a stockholder of record, you may submit a proxy by the Internet, by phone or by mail. If you hold your WMB common stock in “street name” (with a bank, broker or other nominee) you should follow the instructions provided by your bank, broker or other nominee. See the section titled “The Special Meeting” beginning on page 99 of this proxy statement/prospectus.

Q. How many votes do I have?

A. WMB stockholders have one vote per share of WMB common stock on each proposal to be voted upon.

Q. If my shares of WMB common stock are held in street name by my bank, broker or other nominee, will my bank, broker or other nominee automatically vote my shares for me?

A. No. If your shares of WMB common stock are held in street name, you must instruct your bank, broker or other nominee on how to vote your shares. See the section titled “The Special Meeting” beginning on page 99 of this proxy statement/prospectus.

 

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Q. What happens if I sell my WMB common stock after the Record Date but before the special meeting?

A. If you transfer your shares of WMB common stock after the Record Date but before the date of the special meeting, you will retain your right to vote at the special meeting.

Q. May I change my vote after I have delivered my proxy card?

A. If you are a stockholder of record, you can change your vote within the regular voting deadlines by voting again by telephone or the Internet, executing and returning a later-dated proxy card or attending the special meeting and voting in person. If you are a stockholder of record, you can revoke your proxy by delivering a written notice of your revocation to WMB’s Corporate Secretary at One Williams Center, MD 47, Tulsa, Oklahoma 74172. If you hold your WMB common stock in street name, you should follow the instructions provided by your bank, broker or other nominee. See the section titled “The Special Meeting” beginning on page 99 of this proxy statement/prospectus.

Q. How does the WMB Board recommend that WMB stockholders vote at the special meeting?

A. A majority of the WMB Board recommend that WMB stockholders vote “FOR” the Merger Proposal. See the sections titled “The Merger—Recommendation of the WMB Board and Its Reasons for the Merger” beginning on page 132 of this proxy statement/prospectus and “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

A majority of the WMB Board recommend that WMB stockholders vote “FOR” the Compensatory Proposal.

The WMB Board unanimously recommends that WMB stockholders vote “FOR” the Adjournment Proposal.

Q. Should WMB stockholders deliver their shares now?

A. No. After the merger is completed, WMB stockholders who held their shares of WMB common stock in certificated or book entry form immediately prior to the effective time will receive written instructions for exchanging their shares of WMB common stock. If you hold shares of WMB common stock in street name, the consideration to be received including ETC common shares, if any, will be credited to your account in accordance with the policies and procedures of your bank, broker or other nominee within a few days following the completion of the merger. Please do not send in any stock certificates with your proxy card.

Q. What will WMB stockholders be entitled to receive in the merger?

A. If the merger is successfully completed, each WMB stockholder will be entitled to receive ETC common shares, cash or a combination of ETC common shares and cash in exchange for such holder’s shares of WMB common stock (other than shares of WMB common stock held by WMB, subsidiaries of WMB, ETC and its affiliates and shares of WMB common stock for which the holder thereof has properly demanded appraisal of such holder’s shares under Delaware law (and who does not fail to perfect or otherwise effectively withdraw their demand or waive or lose their right to appraisal)). Specifically, subject to the proration described below, each WMB stockholder may choose to receive one of the following options for each share of WMB common stock:

 

   

$8.00 in cash and 1.5274 ETC common shares (the “mixed consideration” and an election to receive mixed consideration, a “mixed election”); or

 

   

1.8716 ETC common shares (the “share consideration” and an election to receive share consideration, a “share election”); or

 

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$43.50 in cash (the “cash consideration” and an election to receive cash consideration, a “cash election”).

WMB stockholders that elect to receive the share consideration or the cash consideration will be subject to proration to ensure that the aggregate number of ETC common shares and the aggregate amount of cash paid in the merger will be the same as if all electing shares received the mixed consideration. See the section titled “The Merger Agreement—Proration” beginning on page 198 of this proxy statement/prospectus.

If the merger would result in a WMB stockholder being entitled to receive a fractional ETC common share, such holder will receive cash (payable in U.S. dollars, without interest) in lieu of such fractional share. See the section titled “The Merger Agreement—Fractional Shares” beginning on page 202 of this proxy statement/prospectus.

Each ETC common share issued in the merger, including the ETC common shares issued to ETE in respect of the Parent Cash Deposit, will have attached to it one CCR.

Q. What percentage of outstanding ETC common shares will WMB stockholders own after the successful consummation of the merger?

A. If the merger is successfully completed, based on the number of shares of WMB common stock outstanding as of the date of this proxy statement/prospectus, and the fact that ETE will subscribe for a number of ETC common shares at the 1.8716x exchange ratio associated with the share consideration in exchange for the amount of cash needed by ETC to fund the cash portion of the merger consideration (the “Parent Cash Deposit”), WMB stockholders will collectively own approximately 81% of the outstanding ETC common shares immediately following completion of the merger (which percentage becomes approximately 74% after giving effect to the anticipated grant of awards under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan following the merger).

Q. What are the CCRs?

A. A CCR is a contingent consideration right attached to each ETC common share issued in connection with the merger that represents the right to receive an additional payment, in cash or ETC common shares at ETE’s election, from ETC under certain circumstances. The CCRs will not be separately listed on any securities exchange and will not have separate voting rights. The right to receive a payment under a CCR will only be transferable in connection with the transfer of the ETC common share to which it is attached. In addition, there is no assurance that any payment will be made under the CCRs. Any amounts to be received in connection with the CCRs are contingent upon the occurrence of certain events that may or may not occur.

The CCR will provide each CCR holder with the right to receive ETC common shares or a cash payment, at ETE’s election, should the average of the daily volume-weighted average price for ETE common units on the NYSE (“ETE common units VWAP”) be greater than the average of the daily volume-weighted average price for ETC common shares on the NYSE (“ETC common shares VWAP”) for a period of 23 months following the 20th trading day after the closing of the merger (the “measurement period”). If the ETC common shares VWAP is less than the ETE common units VWAP for the measurement period (such difference, a “shortfall amount”), then each outstanding CCR will be automatically cancelled and converted into the right to receive a shortfall payment, which will be settled in ETC common shares or cash, at ETE’s election, and ETE will issue a number of ETE Class E units to ETC equal to the product of (a) the ratio of ETE Class E units held by ETC and its wholly owned subsidiaries over the number of ETC common shares outstanding (the “CCR exchange ratio”), multiplied by (b) (i) the aggregate number of ETC common shares to be issued to CCR holders pursuant to the shortfall amount, if ETE elects the share payment, or (ii) the aggregate number of ETC common shares to be issued to ETE pursuant to the shortfall amount, if ETE elects the cash payment.

 

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If, however, the ETC common shares VWAP is equal to or greater than the ETE common units VWAP for the measurement period, then each outstanding CCR will be immediately and automatically cancelled and no consideration of any kind will be delivered to CCR holders in respect of the CCRs, and ETE will cancel a portion of the ETE Class E units held by ETC based on the amount of such difference, thereby reducing ETC’s ownership interest in ETE.

The CCRs will be automatically cancelled and extinguished prior to the end of the measurement period, without any consideration of any kind being delivered to CCR holders, if (1) the ETC common shares VWAP is greater than the ETE common units VWAP for 20 consecutive trading days and (2) the ETC common shares VWAP is equal to or greater than the ETE common units VWAP for a period beginning on the twenty-first trading day after the effective date of the merger and ending on the twentieth such trading day as mentioned above.

For a complete description of the CCRs, see the section titled “CCR Agreement” beginning on page 217 of this proxy statement/prospectus.

Q. Are WMB stockholders guaranteed to receive the consideration option they choose?

A. No. Regardless of merger consideration elections made by WMB stockholders, the total amount of cash to be paid to WMB stockholders will be approximately $6.05 billion.

 

   

If the sum of the cash to be delivered in cash elections and mixed elections is over $6.05 billion, then:

 

   

WMB stockholders that made a mixed election would receive $8.00 plus 1.5274 ETC common shares.

 

   

WMB stockholders that made a cash election would receive a pro rata amount of the cash remaining after the mixed election shares are paid (but less than $43.50), with the balance of their consideration consisting of an equivalent number of ETC common shares.

 

   

WMB stockholders that made a share election would receive 1.8716 ETC common shares.

 

   

WMB stockholders that did not make an election would receive 1.8716 ETC common shares.

 

   

If the sum of the cash to be delivered in cash elections and mixed elections is less than $6.05 billion, then:

 

   

WMB stockholders that made a mixed election would receive $8.00 plus 1.5274 ETC common shares.

 

   

WMB stockholders that made a cash election would receive $43.50.

 

   

The balance of the cash to be distributed would depend on the total cash remaining and the number of WMB stockholders that did not make an election:

 

   

If the total cash remaining is less than the amount needed to pay $43.50 to all the WMB stockholders that did not make an election, then:

 

   

All WMB stockholders that did not make an election would receive a pro rata amount of the cash remaining (instead of $43.50), with the balance of their consideration consisting of an equivalent number of ETC common shares; and

 

   

All WMB stockholders that made a share election would receive 1.8716 ETC common shares.

 

   

If the total cash remaining is more than enough to pay $43.50 to all the WMB stockholders that did not make an election, then:

 

   

All WMB stockholders that did not make an election would receive $43.50; and

 

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All WMB stockholders that made a share election would receive a pro rata amount of the cash remaining, with the balance of their consideration consisting of an equivalent number of ETC common shares (but less than 1.8716 ETC common shares).

The actual amount of cash to be paid out in the merger will be determined by multiplying the number of shares of WMB common stock issued and outstanding on the closing date (excluding certain cancelled shares, shares for which appraisal has properly been sought and shares owned by WMB subsidiaries) by $8.00. Based on the number of shares of WMB common stock issued and outstanding on the date the parties entered into the merger agreement, the amount of cash available to be paid out as consideration in the merger is expected to be approximately $6.05 billion but is subject to change if shares of WMB common stock are issued or retired during the pendency of the transaction. See the section titled “The Merger Agreement—Proration” beginning on page 198 of this proxy statement/prospectus.

Q. How do I calculate the value of the stock portion of the merger consideration I receive, if any?

A. Because WMB stockholders may receive ETC common shares as part of the merger consideration, the value of the merger consideration that WMB stockholders receive will depend on the per share value of ETC common shares at the effective time. Unless a “when issued” trading market for the ETC common shares develops, prior to the effective time, there has not been and will not be an established public trading market for ETC common shares. It is expected that the trading prices of ETC common shares and ETE common units will be closely correlated since, following the completion of the merger transactions:

 

   

ETC’s primary asset and source of cash flow will initially be ETE Class E units;

 

   

ETC will initially own a number of ETE Class E units equal to the number of ETC common shares outstanding immediately following the merger;

 

   

Each ETE Class E unit will be entitled to receive the same cash distribution per unit as the cash distribution on the ETE common units;

 

   

ETE has agreed to a dividend equalization mechanism to ensure that, through December 31, 2018, ETC will be able to make a cash distribution per ETC common share equal to the cash distribution per ETE common unit; and

 

   

The CCRs issued by ETC in connection with the merger provide for adjustments to the number of ETE Class E units held by ETC based on the relative trading prices of ETC common shares and ETE common units for the 24-month period following the closing date of the merger (subject to early termination under certain circumstances) which are intended to promote trading price parity between ETC common shares and ETE common units during this period.

Due to a variety of factors (many of which are out of the control of ETE and ETC), however, ETC common shares could trade at a discount to ETE common units and, unless a “when issued” trading market for the ETC common shares develops, prior to the effective time, the actual trading price of the ETC common shares will be unknown until the commencement of trading following the effective time. We intend to apply for listing of the ETC common shares and the attached CCRs on the NYSE under the symbol “ETC.”

Q. How do WMB stockholders make their election to receive cash, ETC common shares or a combination of both?

A. Under the merger agreement, WMB stockholders are required to make an election to receive the mixed consideration, the stock consideration or the cash consideration by 5:00 p.m., local time (in the city in which the principal office of the exchange agent is located), on the earlier of (i) the 20th business day after the date on which the election form and this proxy statement/prospectus are mailed to WMB stockholders (the “Mailing Date”) and (ii) 3 business days prior to the anticipated closing date of the merger (the “Election Deadline”). An election form will be mailed to each WMB stockholder of record for the special meeting together with this proxy

 

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statement/prospectus. Each WMB stockholder should complete and return the election form according to the instructions included with the form. WMB will also make one or more election forms available, if requested, to each person that subsequently becomes a holder or beneficial owner of shares of WMB common stock.

If you own shares of WMB common stock in street name through a bank, broker or other nominee and you wish to make an election, you should seek instructions from the bank, broker or other nominee holding your shares concerning how to make an election.

If you do not properly submit an election by the Election Deadline, you will receive the share consideration, the cash consideration or the mixed consideration, subject to the proration and adjustment procedures provided for in the merger agreement, in exchange for your shares of WMB common stock. See the section titled “The Merger Agreement—Proration” beginning on page 198 of this proxy statement/prospectus.

If you properly complete and submit an election form, you may not revoke or change your election after the Election Deadline. A revocation of an election prior to the Election Deadline is required in connection with any transfer of shares of WMB common stock. As a result, in the period following the Election Deadline and until the consummation of the proposed merger, you will not be able to transfer (including by sale) your shares of WMB common stock for which a properly completed election form has been submitted. The merger agreement provides that the Election Deadline will occur on the earlier of (i) the 20th business day after the Mailing Date and (ii) 3 business days prior to the anticipated closing date of the merger. As a result, you may be unable to transfer your shares of WMB common stock for which a properly completed election form has been submitted for the period between the earlier of (i) the 20th business day after the Mailing Date and (ii) 3 business days prior to the anticipated closing date of the merger, and the completion of the merger. If you wish to retain the ability to transfer your shares of WMB common stock between the Election Deadline and the completion of the merger, then you should not return the election form, but you should note that you may still be unable to transfer all or a portion of your shares (including by sale) because, as a result of all shares of WMB common stock for which an election having been validly made no longer being transferable, there may not be a trading market that will provide you with adequate liquidity for such transfer.

Q. Can I make one election for some of my shares and another election for the rest?

A. Yes. Each election form permits the holder to specify the number of such holder’s shares of WMB common stock with respect to which such holder makes an election. Such election will be honored, subject to the proration procedures described in this proxy statement/prospectus. See the section titled “The Merger Agreement—Proration” beginning on page 198 of this proxy statement/prospectus.

Q. Will WMB stockholders receive dividends on shares of WMB common stock in the future?

A. Before completion of the merger, WMB expects to pay regular quarterly dividends on shares of its common stock at times and intervals consistent with its prior practice and as permitted by the merger agreement. Once the merger is completed, when distributions are declared and paid by the ETC GP Board, former WMB stockholders will receive distributions on any ETC common shares that they receive in the merger in accordance with ETC’s partnership agreement. Other than the pre-merger special dividend (defined below), WMB stockholders will not receive dividends from WMB and distributions from ETC for the same quarter. A WMB stockholder’s receipt of regular quarterly dividends and the pre-merger special dividend will not reduce their per-share merger consideration.

In addition, if the merger is completed, WMB stockholders will receive a special, one-time dividend of $0.10 per share of WMB common stock (the “pre-merger special dividend”) that such holders held of record immediately prior to the completion of the merger. The pre-merger special dividend will be distributed shortly after the merger is completed. The pre-merger special dividend (if declared and paid) will be payable to all such holders regardless of whether such holders demand appraisal of their shares of WMB common stock under Delaware law.

 

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Once the merger is completed and shares of WMB common stock are exchanged for ETC common shares, all shares of WMB common stock will be canceled and WMB stockholders will no longer receive dividends on such shares. WMB stockholders will instead receive dividends on any ETC common shares they received as part of the merger consideration.

Q. Will the ETC common shares received by WMB stockholders as part of the merger consideration, if any, receive distributions in the future?

A. Yes, to the extent the board of directors of ETC GP declares distributions with respect to ETC common shares in the future. After the merger is completed, the ETC common shares will receive distributions according to ETC’s partnership agreement. WMB stockholders will not be entitled to be paid distributions otherwise payable on the ETC common shares into which their shares of WMB common stock are exchangeable until they surrender their shares of WMB common stock according to the instructions provided to them.

Following the merger, any distributions or changes to ETC’s distribution policy will be made at the discretion of the board of directors of ETC GP and will depend upon many factors, including the financial condition of ETC, ETE, earnings, legal requirements, including limitations imposed by Delaware law and restrictions in ETE or ETC’s debt agreements that limit its ability to pay distributions to its unitholders or shareholders, respectively, and other factors the board of directors of ETC GP deems relevant. Certain of these factors are discussed elsewhere in this proxy statement/prospectus, including in the sections titled “Risk Factors,” “Forward-Looking Statements” and “Summary—Recent Developments” beginning on pages 45, 94 and 20, respectively. Until December 31, 2018, ETE will ensure that ETC has sufficient cash to pay distributions on each ETC common share in an amount equal to 100% of the distributions paid by ETE on each ETE common unit. See the section titled “The Merger—Amendment of ETE Partnership Agreement” beginning on page 193 of this proxy statement/prospectus. As discussed in “Summary—Recent Developments—Updated Financial Forecasts of ETC,” following the closing of the merger, ETE does not expect to make any cash distributions with respect to its common units or ETE Class E Units prior to the distribution payable with respect to the quarter ending March 31, 2018. If ETE does not make a cash distribution on its ETE Class E Units until such time, then ETC will not have any cash available for distribution on its common shares.

Q. What are the expected U.S. federal income tax consequences to WMB stockholders as a result of the merger?

A. The parties intend to treat the merger as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the “Code”). Based on this treatment, U.S. holders (as defined below under the heading “Material U.S. Federal Income Tax Consequences of the Merger”) of WMB common stock generally will not recognize gain or loss for U.S. federal income tax purposes upon their receipt of ETC common shares in exchange for WMB common stock pursuant to the merger. However, U.S. holders of WMB common stock that receive cash in addition to ETC common shares generally will recognize gain or loss with respect to such cash received, and U.S. holders of WMB common stock that receive cash in connection with the settlement of a CCR will be treated as receiving a distribution with respect to their ETC common shares taxable as a dividend to the extent of such holder’s ratable share of ETC’s current and accumulated earnings and profits. See “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 230 of this proxy statement/prospectus. It is possible, however, that the Internal Revenue Service (“IRS”) may treat the merger as a “reorganization” within the meaning of Section 368(a)(1)(A) of the Code (instead of Section 368(a)(1)(F) of the Code). In such a case, U.S. holders would still not recognize gain or loss upon their receipt of ETC common shares in exchange for WMB common stock, but would be subject to different tax treatment with respect to any cash received pursuant to the merger and in connection with the cash settlement of a CCR, as described under the heading “Material U.S. Federal Income Tax Consequences of the Merger—Possible Treatment of Merger as a Reorganization Pursuant to Section 368(a)(1)(A) of the Code.”

 

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Q. What will happen to WMB equity awards in the merger?

A. At the effective time, ETC will assume all obligations of WMB under the WMB stock plans with respect to outstanding awards issued thereunder. The number and kind of shares available for issuance under the WMB stock plans assumed by ETC will be converted and adjusted to reflect the fact that converted awards will correspond to ETC common shares, although all converted awards will be settled in cash.

WMB Stock Options. Each WMB stock option will be equitably adjusted immediately prior to the effective time by reducing the exercise price thereof by an amount equal to the pre-merger special dividend, contingent on the consummation of the merger.

At the effective time, each unexercised WMB stock option will be assumed by ETC and converted into a cash-settled stock appreciation right, on otherwise the same terms and conditions as were applicable under the corresponding WMB stock option, adjusted in a manner intended to preserve the aggregate intrinsic value of the original WMB stock option. In order to preserve the intrinsic value, the ETC cash-settled stock appreciation right will correspond to a number of ETC common shares (determined by multiplying the number of shares of WMB common stock subject to the WMB stock option by an exchange ratio (as defined below) and rounding down to the nearest whole share), at a base price per share (rounded up to the nearest whole cent) determined by dividing the per-share exercise price of the WMB stock option by that same exchange ratio. For purposes of adjusting the WMB stock options, the exchange ratio is equal to the ratio of the average of the volume-weighted average prices of WMB common stock over the 10 trading days preceding the closing date to the average of the volume-weighted average prices of ETC common shares over the 10 trading days following the closing date.

WMB Restricted Stock Units and WMB Deferred Stock Units. At the effective time, each WMB restricted stock unit (including WMB performance stock units) and each WMB deferred stock unit will be assumed by ETC and converted into a cash-settled restricted stock unit or deferred stock unit, as applicable, on otherwise the same terms and conditions as were applicable under the corresponding WMB restricted stock unit or WMB deferred stock unit, as applicable, with the number of ETC common shares covered by the award adjusted based on the share consideration ratio, rounded down to the nearest whole share. In addition, with respect to each WMB performance stock unit, performance conditions will generally be deemed to be satisfied at target (in the case of WMB performance stock units) or the greater of target and actual performance (in the case of WMB leveraged performance stock units) and, following the effective time, the vesting of the award will be time-based and subject to continued employment through the end of the applicable performance period or any other date required by the terms of the applicable award. Holders of converted WMB restricted stock units and WMB deferred stock units will also be entitled to receive upon settlement of the unit (1) the pre-merger special dividend and payment of any other accrued dividend equivalents, (2) a cash payment in respect of any fractional ETC common shares that would have resulted from such conversion without regard to rounding and (3) if such unit settles after the end of the CCR measurement period, an amount in cash equal to the shortfall amount (if any). The value of any payments in respect of fractional ETC common shares will be based on the same value of ETC common shares used for purposes of converting WMB stock options.

Q. Are holders of shares of WMB common stock entitled to appraisal rights in connection with the merger?

A. Yes. Holders of WMB common stock who do not vote in favor of adoption of the merger agreement will have the right to seek appraisal and receive the fair value of their shares of WMB common stock in lieu of receiving the merger consideration if the merger closes, but only if they perfect their appraisal rights by complying with the required procedures under Delaware law. Holders of WMB common stock who demand and perfect their appraisal rights will still be entitled to receive the pre-merger special dividend (if declared and paid). See the section titled “Appraisal Rights” beginning on page 254 of this proxy statement/prospectus.

 

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Q. Where can I find the voting results of the special meeting?

A. The preliminary voting results will be announced at the special meeting. In addition, within four business days following certification of the final voting results, WMB intends to file the final voting results with the SEC on a Current Report on Form 8-K.

 

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SUMMARY

This summary highlights material information in this proxy statement/prospectus. You are urged to carefully read the entire proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus because the information in this section does not provide all of the information that might be important to you with respect to the merger agreement, the merger and other matters being considered at the special meeting. For information on how to obtain the documents that are on file with the Securities and Exchange Commission (the “SEC”), see the section of this proxy statement/prospectus titled “Where You Can Find More Information.” Please see “Certain Defined Terms” and the glossary included as Annex D to this proxy statement/prospectus for the meaning of some of the defined terms used herein.

References in this proxy statement/prospectus to (i) the number of outstanding ETC common shares and the ownership interest of each of the former WMB stockholders and ETE in ETC following the completion of the merger transactions is based on the number of shares of WMB common stock outstanding as of the date of this proxy statement/prospectus and (ii) the ownership interest of ETC in ETE following the completion of the merger transactions is based on the number of shares of WMB common stock and common units representing limited partner interests in ETE (the “ETE common units”) outstanding as of the date of this proxy statement/prospectus.

You are urged to review the information included in the summary section titled “Recent Developments” since the historical information included herein does not fully reflect the impact on ETE or WMB of the significant decline in crude oil and natural gas prices.

The Parties (see page 97)

Energy Transfer Corp LP

Energy Transfer Corp LP is a Delaware limited partnership that will be treated as a corporation for U.S. federal income tax purposes. Upon the completion of the merger transactions (as defined below), ETC’s primary cash generating asset will consist of Class E units, a new class of units representing limited partner interests in ETE (the “ETE Class E units”), which will represent an approximate 57% limited partner interest in ETE following the completion of the merger transactions, excluding any interest attributable to the Series A Convertible Preferred Units in ETE (the “Convertible Units”) issued by ETE in March 2016, as further described in the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

ETE has agreed to provide all administrative services to ETC and to indemnify ETC for all non-tax liabilities incurred by ETC. Therefore, ETC expects to distribute 100% of the quarterly cash distributions it receives from ETE in respect of the ETE Class E units, after deducting federal and state income taxes, if any, to the holders of common shares representing limited partner interests in ETC (the “ETC common shares”).

The ETE Class E units will be entitled to receive the same quarterly cash distribution per unit as the quarterly cash distribution paid per ETE common unit. In addition, for any period ending on or before December 31, 2018 (the “dividend equalization period”), ETE is obligated to make distributions and/or special allocations of depreciation or other forms of cost recovery to the ETE Class E units to ensure that ETC has sufficient cash to pay distributions on each ETC common share in an amount equal to 100% of the distributions paid by ETE on each ETE common unit. As discussed in “—Recent Developments—Updated Financial Forecasts of ETC,” following the closing of the merger, ETE does not expect to make any cash distributions with respect to its common units or ETE Class E Units prior to the distribution payable with respect to the quarter ending March 31, 2018. If ETE does not make a cash distribution on its ETE Class E Units until such time, then ETC will not have any cash available for distribution on its common shares.

 



 

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In general, distributions on ETC common shares will be treated as distributions on corporate stock for federal income tax purposes. No Schedule K-1s will be issued with respect to the ETC common shares, but instead holders of ETC common shares will receive an IRS Form 1099 from ETC or their brokers with respect to the distributions they receive on the ETC common shares.

ETC’s principal executive offices are located at 8111 Westchester Drive, Dallas, Texas 75225, and ETC’s phone number is (214) 981-0700.

Energy Transfer Equity, L.P.

ETE (NYSE: ETE) is a publicly traded master limited partnership whose principal sources of cash flow are derived from its direct and indirect equity interests in Energy Transfer Partners, L.P. (NYSE: ETP), Sunoco Logistics Partners L.P. (NYSE: SXL) and Sunoco LP (NYSE: SUN), all of which are publicly traded master limited partnerships engaged in diversified energy-related businesses. As of March 31, 2016, after giving effect to the Sunoco Retail Acquisition and the Sunoco Equity Offering, ETE’s direct and indirect equity interests in ETP, SXL and Sunoco consisted of the following:

 

     IDRs     General Partner
Interest
   

Limited Partner Interests

ETE’s Interests in ETP

     100     100  

2,571,695 Common Units(1)

81,001,069 Class H Units(2)

100 Class I Units(3)

ETE’s Interests in SXL

     0.1 %(2)      0.1   —  

ETE’s Interests in Sunoco

     100     100   2,263,158 Common Units(4)

ETP’s Interests in SXL

     99.9 %(2)      99.9  

67,061,274 Common Units(5)

9,416,196 Class B Units(5)

ETP’s Interests in Sunoco

     —          —       

43,487,668 Common Units(6)

 

(1) Represents an approximate 0.5% limited partner interest in ETP.
(2) The ETP Class H Units entitle ETE to receive 90.05% of the cash distributions related to the incentive distribution rights (“IDRs”) and general partner interest of SXL received by ETP. As a result of ETE’s ownership of the ETP Class H Units and its interests in SXL, ETE is entitled to receive 90.15% of the cash distributions related to the IDRs and general partner interest of SXL.
(3) The ETP Class I Units provide for additional cash distributions from ETP to ETE for the purpose of offsetting a portion of the IDR subsidies that ETE previously agreed to provide to ETP, with such distributions occurring in 2015 and 2016.
(4) Represents an approximate 2% limited partner interest in Sunoco.
(5) ETP’s ownership of the SXL common units and SXL Class B units represents an approximate 27% limited partner interest in SXL. The SXL Class B units are not entitled to receive quarterly distributions and are automatically convertible into common units on a one-to-one basis on July 11, 2017, subject to SXL’s call right and ETP’s put right described herein. Pursuant to a unitholder agreement entered into by SXL and ETP, SXL has a right to call the Class B units for redemption during the period beginning on the earlier of (i) the first full service date under a transportation service agreement with a shipper on the Bakken pipeline project and (ii) January 1, 2017, and ending ten days thereafter, and ETP has a right to sell the Class B units to SXL during the period beginning on July 1, 2017 and ending on July 10, 2017, in each case for cash consideration at the respective prices set forth in the unitholder agreement.
(6) Represents an approximate 39% limited partner interest in Sunoco.

In addition to the equity interests described above, ETE owns all of the equity interests in Lake Charles LNG Company, LLC (“Lake Charles LNG”), an entity that owns a fully constructed liquefied natural gas (“LNG”) import terminal and regasification facility near Lake Charles, Louisiana, and a 60% equity interest in Lake Charles LNG Export, LLC (“LCL”), an entity whose subsidiary is developing an LNG liquefaction and

 



 

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export terminal facility that will be integrated with Lake Charles LNG’s import/regasification facility. ETP owns the remaining 40% equity interest in LCL.

As of March 31, 2016, the market capitalization of ETE common units totaled approximately $7.45 billion. ETE’s principal executive offices are located at 8111 Westchester Drive, Dallas, Texas 75225, and ETE’s phone number is (214) 981-0700. ETE’s website is located at www.energytransfer.com. Information on ETE’s website or any other website is not incorporated by reference into this proxy statement/prospectus and does not constitute part of this proxy statement/prospectus.

The Williams Companies, Inc.

WMB (NYSE: WMB) is a publicly traded Delaware corporation founded in 1908, originally incorporated under the laws of the state of Nevada in 1949 and reincorporated under the laws of the State of Delaware in 1987. WMB is primarily an energy infrastructure company focused on connecting North America’s hydrocarbon resource plays to growing markets for natural gas, NGLs, and olefins. WMB’s operations span from the deepwater Gulf of Mexico to the Canadian oil sands.

WMB’s interstate gas pipeline and midstream interests are largely held through its significant investment in WPZ, which is a publicly traded energy infrastructure master limited partnership focused on connecting North America’s significant hydrocarbon resource plays to growing markets for natural gas, NGLs and olefins through its gas pipeline and midstream businesses.

The principal executive offices of WMB are located at One Williams Center, Tulsa, Oklahoma 74172-0172, its telephone number is (918) 573-2000, and its website is located at http://co.williams.com. WMB makes available its periodic reports and other information filed with or furnished to the SEC, free of charge, through its website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on the website or any other website is not incorporated by reference into this proxy statement/prospectus and does not constitute a part of this proxy statement/prospectus.

The Merger (see page 104)

Pursuant to the merger agreement, WMB will merge with and into ETC (the “merger”), with ETC surviving the merger. Immediately thereafter, LE GP will merge with and into ETE GP (the “GP merger” and, together with the merger, the “mergers”), with ETE GP surviving the GP merger and becoming the general partner of ETE.

Immediately following the completion of the mergers, ETC will contribute substantially all of the assets and liabilities it assumed from WMB through the merger to ETE in exchange for the issuance by ETE to ETC of a number of ETE Class E units equal to (i) the number of ETC common shares issued to the WMB stockholders in the merger plus (ii) the number of ETC common shares issued to ETE in consideration for the Parent Cash Deposit (as defined below) (the “WMB Contribution” and, together with the merger and the other transactions contemplated by the merger agreement, the “merger transactions”).

Immediately following the effective time of the mergers, ETC will contribute an amount of cash to ETE GP (the “GP Contribution”), which ETE GP will contribute to ETE in exchange for newly issued ETE common units and general partner units in ETE. As a result of the GP Contribution, the percentage interest in ETE that will be owned by ETE GP after completion of the merger transactions will equal the percentage interest in ETE owned by LE GP immediately prior to the merger transactions.

In connection with the merger, ETE will acquire a number of ETC common shares equal to (i) (a) the share consideration (as defined below) multiplied by (b) the aggregate number of shares of WMB common stock issued and outstanding as of the closing date of the merger (the “closing date”), multiplied by (c) $8.00 (we refer to the product of (b) and (c) as the “cash component”) divided by (ii) the cash consideration (as defined below), in

 



 

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exchange for the amount of cash needed by ETC to fund the cash portion of the merger consideration (the “Parent Cash Deposit”). As a result, based on the number of shares of WMB common stock outstanding as of the date of this proxy statement/prospectus, ETE will own approximately 19% of the outstanding ETC common shares immediately after the effective time of the merger (the “effective time”) (which percentage becomes approximately 17% after giving effect to the anticipated grant of awards under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan following the merger). For additional information regarding the financing that ETE plans to obtain to fund the Parent Cash Deposit, see the section titled “The Merger—Financing Commitment” on page 193 of this proxy statement/prospectus.

The terms and conditions of the merger are contained in the merger agreement, a composite copy of which, incorporating the amendment into the text of the initial agreement, is attached as Annex A to this proxy statement/prospectus. We encourage you to read the merger agreement carefully and in its entirety, as it is the legal document that governs the merger.

Merger Consideration (see page 197)

Upon completion of the merger, each issued and outstanding share of WMB common stock (other than shares of WMB common stock held by WMB, subsidiaries of WMB, ETC and its affiliates and shares for which the holder thereof has properly demanded appraisal under Delaware law (and who does not fail to perfect or otherwise effectively withdraw their demand or waive or lose the right to appraisal, which shares we refer to as “appraisal shares”)) will be converted into the right to receive, at the election of each WMB stockholder, but subject to the election and proration procedures described below:

 

   

$8.00 in cash and 1.5274 ETC common shares (the “mixed consideration”); or

 

   

1.8716 ETC common shares (the “share consideration”); or

 

   

$43.50 in cash (the “cash consideration”).

In addition, each ETC common share issued in the merger will have attached to it one contingent consideration right (a “CCR”).

WMB stockholders that elect to receive the share consideration or the cash consideration will be subject to proration to ensure that the aggregate number of ETC common shares and the aggregate amount of cash paid in the merger will be the same as if all electing shares received the mixed consideration.

WMB stockholders receiving consideration in ETC common shares will not receive any fractional ETC common shares in the merger. Instead, WMB stockholders will receive cash (payable in U.S. dollars, without interest) in lieu of any fractional ETC common shares that they would otherwise have been entitled to receive.

For more information, please see the sections titled “The Merger Agreement—Merger Consideration” and “CCR Agreement” beginning on pages 197 and 217, respectively, of this proxy statement/prospectus.

Appraisal Rights (see page 254)

Under Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”), WMB stockholders will be entitled to appraisal rights in connection with the merger. To perfect appraisal rights, a WMB stockholder, among other things, must not vote for the adoption of the merger agreement, must continue to hold his, her or its shares of WMB common stock through the effective time and must comply with all the procedures required under Delaware law, including delivering a written demand for appraisal to WMB before the taking of the vote on the adoption of the merger agreement. Failure to follow any of the statutory procedures set forth in Section 262 will result in the loss of appraisal rights under Delaware law. Because of the complexity of Delaware law relating to appraisal rights, if any WMB stockholder is considering exercising his, her or its appraisal rights, ETC and WMB encourage such WMB stockholder to seek the advice of his, her or its own legal counsel.

 



 

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A summary of the requirements under Delaware law to exercise appraisal rights is included in this proxy statement/prospectus in the section titled “Appraisal Rights” beginning on page 254, and the text of Section 262 of the DGCL as in effect with respect to the merger is attached as Annex E to this proxy statement/prospectus.

Accounting Treatment of the Merger (see page 190)

In accordance with accounting principles generally accepted in the United States and in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 805—Business Combinations, ETC will account for the merger as an acquisition of a business.

Treatment of WMB Equity Awards (see page 201)

At the effective time, ETC will assume all obligations of WMB under the WMB stock plans with respect to outstanding awards issued thereunder. The number and kind of shares available for issuance under the WMB stock plans assumed by ETC will be converted and adjusted to reflect the fact that converted awards will correspond to ETC common shares, although all converted awards will be settled in cash.

WMB Stock Options. Each WMB stock option will be equitably adjusted immediately prior to the effective time by reducing the exercise price thereof by an amount equal to the pre-merger special dividend, contingent on the consummation of the merger.

At the effective time, each unexercised WMB stock option will be assumed by ETC and converted into a cash-settled stock appreciation right, on otherwise the same terms and conditions as were applicable under the corresponding WMB stock option, adjusted in a manner intended to preserve the aggregate intrinsic value of the original WMB stock option. In order to preserve the intrinsic value, the ETC cash-settled stock appreciation right will correspond to a number of ETC common shares (determined by multiplying the number of shares of WMB common stock subject to the WMB stock option by an exchange ratio (as defined below) and rounding down to the nearest whole share), at a base price per share (rounded up to the nearest whole cent) determined by dividing the per-share exercise price of the WMB stock option by that same exchange ratio. For purposes of adjusting the WMB stock options, the exchange ratio is equal to the ratio of the average of the volume-weighted average prices of WMB common stock over the 10 trading days preceding the closing date to the average of the volume-weighted average prices of ETC common shares over the 10 trading days following the closing date.

WMB Restricted Stock Units and WMB Deferred Stock Units. At the effective time, each WMB restricted stock unit (including WMB performance stock units) and each WMB deferred stock unit will be assumed by ETC and converted into a cash-settled restricted stock unit or deferred stock unit, as applicable, on otherwise the same terms and conditions as were applicable under the corresponding WMB restricted stock unit or WMB deferred stock unit, as applicable, with the number of ETC common shares covered by the award adjusted based on the share consideration ratio, rounded down to the nearest whole share. In addition, with respect to each WMB performance stock unit, performance conditions will generally be deemed to be satisfied at target (in the case of WMB performance stock units) or the greater of target and actual performance (in the case of WMB leveraged performance stock units) and, following the effective time, the vesting of the award will be time-based and subject to continued employment through the end of the applicable performance period or any other date required by the terms of the applicable award. Holders of converted WMB restricted stock units and WMB deferred stock units will also be entitled to receive upon settlement of the unit (1) the pre-merger special dividend and payment of any other accrued dividend equivalents, (2) a cash payment in respect of any fractional ETC common shares that would have resulted from such conversion without regard to rounding and (3) if such unit settles after the end of the CCR measurement period, an amount in cash equal to the shortfall amount (if any). The value of any payments in respect of fractional ETC common shares will be based on the same value of ETC common shares used for purposes of converting WMB stock options.

 



 

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The Special Meeting; Required Vote (see page 100)

The special meeting of WMB stockholders (the “special meeting”) will be held on June 27, 2016 at 9:00 a.m., local time, at The Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma 74172. At the special meeting, you will be asked to consider and vote on the following proposals:

 

   

Proposal 1: to approve the adoption of the merger agreement and the transactions contemplated thereby, including the merger, which we refer to as the Merger Proposal;

 

   

Proposal 2: to approve, on an advisory (non-binding) basis, specified compensatory arrangements between WMB and its named executive officers relating to the merger transactions, which we refer to as the Compensatory Proposal; and

 

   

Proposal 3: to approve the adjournment of the special meeting from time to time, if necessary or appropriate to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Proposal, which we refer to as the Adjournment Proposal.

Approval of the Merger Proposal requires the affirmative vote of holders of a majority of the outstanding shares of WMB common stock.

The affirmative vote of a majority of the votes cast affirmatively or negatively on the Compensatory Proposal is required to approve, on an advisory basis, the Compensatory Proposal, but this vote will not be binding on WMB, the Board of Directors of WMB (the “WMB Board”) or any of its committees.

The approval of the Adjournment Proposal requires the affirmative vote of a majority of the votes cast on such proposal at the special meeting, regardless of whether a quorum is present.

Corvex Management LP (“Corvex”) and Soroban Master Fund LP (“Soroban”), as of the close of business on February 26, 2016, held, directly or indirectly, and therefore controlled the power to vote or direct the voting of, 8.38% of the combined voting power of WMB common stock. Under the terms of the Settlement Agreement, dated as of February 25, 2014, by and among Corvex, Keith Meister, Soroban, Soroban Capital Partners LLC, Eric W. Mandelblatt and WMB, because Keith Meister and Eric W. Mandelblatt, in their capacity as WMB directors voted in favor of the Merger Proposal at a meeting of the WMB Board, Corvex and Soroban are required to cause their shares of WMB common stock to be voted in accordance with the WMB Board’s recommendation with respect to such matter. As a result, due to the WMB Board’s recommendation “for” the Merger Proposal, 8.38% of the combined voting power of WMB common stock will be voted in favor of the Merger Proposal.

Recommendation of the WMB Board and Its Reasons for the Merger (see page 132)

After careful consideration, on September 28, 2015, a majority of the WMB Board (a) approved and declared advisable and resolved to recommend to its stockholders the adoption of the merger agreement, the merger and the other merger transactions and (b) declared that it is in the best interests of the WMB stockholders for WMB to enter into the merger agreement and consummate the merger and the other merger transactions. Since such time, the WMB Board has, among other things, carefully reviewed the developments described in “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus. As of the date of this proxy statement/prospectus, a majority of the WMB Board continue to recommend a vote “FOR” the Merger Proposal. Certain members of the WMB Board voted on September 28, 2015 against entering into the merger agreement and continue as of the date of this proxy statement/prospectus to disagree with the recommendation of a majority of the WMB Board that WMB stockholders adopt the merger agreement. See section titled “The Merger—Background of the Merger” beginning on page 104 of this proxy statement/prospectus. A majority of the WMB Board also recommend a vote “FOR” the non-binding Compensatory Proposal, and the WMB Board unanimously recommend a vote “FOR” the approval of the Adjournment Proposal, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Proposal.

 



 

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For a discussion of the material factors that the WMB Board considered in determining to approve the Merger Proposal, see the section titled “The Merger—Recommendation of the WMB Board and Its Reasons for the Merger” beginning on page 132 of this proxy statement/prospectus.

WMB’s reasons for the transaction are forward-looking in nature and, therefore, should be read in light of the risk factors discussed in the sections of this proxy statement/prospectus titled “Risk Factors” and “Forward-Looking Statements, as well as the forward-looking information, including the prospective financial information, in the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

Opinions of the Financial Advisors to the WMB Board (see page 143)

At a meeting of the WMB Board held on September 28, 2015, each of Barclays Capital Inc. (“Barclays”) and Lazard Freres & Co. (“Lazard”) delivered the fairness opinions further described below. The WMB Board acknowledges that the fairness opinions of Barclays and Lazard only address fairness of the consideration to be received by WMB stockholders as of September 28, 2015 and the WMB Board no longer believes that the projections underlying the fairness opinions are valid. Accordingly, the WMB Board is not relying on the fairness opinions of Barclays and Lazard in evaluating its recommendation to WMB stockholders to adopt the merger agreement in light of the developments described in “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

Opinion of Barclays Capital Inc. (see page 143)

At a meeting of the WMB Board held on September 28, 2015, Barclays delivered an oral opinion to the WMB Board, which was subsequently confirmed in writing, to the effect that, as of such date and based upon and subject to the qualifications, limitations and assumptions stated therein, the merger consideration to be paid in the aggregate to the WMB stockholders is fair, from a financial point of view, to such stockholders.

The terms of the merger were determined through arm’s-length negotiations between WMB, on the one hand, and ETE, on the other hand, and were approved on September 28, 2015 by a majority vote of the WMB Board. Barclays did not recommend any specific form or amount of consideration to WMB or that any specific form or amount of consideration constituted the only appropriate consideration for the merger. Barclays was not requested to address, and its opinion does not in any manner address, WMB’s underlying business decision to proceed with or effect the merger or the likelihood of consummation of the merger or the relative merits of the merger as compared to any strategic alternatives that may be available to WMB. In addition, Barclays expressed no opinion on, and its opinion does not in any manner address, the fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the merger, or any class of such persons, relative to the merger consideration to be paid in the aggregate by ETC in the merger or otherwise. No limitations were imposed by the WMB Board upon Barclays with respect to the investigations made or procedures followed by it in rendering its opinion. The full text of Barclays’ written opinion, dated as of September 28, 2015, is attached hereto as Annex F. Barclays’ written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays in rendering its opinion. You are encouraged to read the opinion carefully in its entirety. This summary is qualified in its entirety by reference to the full text of the opinion. See “The Merger—Opinions of the Financial Advisors to the WMB Board—Opinion of Barclays.”

Opinion of Lazard Frères & Co. (see page 155)

At a meeting of the WMB Board held on September 28, 2015, Lazard delivered an oral opinion to the WMB Board, which was subsequently confirmed in writing, to the effect that, as of such date and based upon and subject to the assumptions, procedures, factors, qualifications and limitations stated therein, the merger

 



 

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consideration to be paid to WMB stockholders (other than certain WMB stockholders excluded from the scope of Lazard’s opinion as set forth in Lazard’s written opinion) in the merger was fair, from a financial point of view, to such WMB stockholders.

The terms of the merger were determined through arm’s-length negotiations between WMB, on the one hand, and ETE, on the other hand, and were approved on September 28, 2015 by a majority vote of the WMB Board. Lazard’s opinion was directed to the WMB Board (in its capacity as such) in connection with the WMB Board’s evaluation of the merger and only addressed the fairness, from a financial point of view, to WMB stockholders (other than certain WMB stockholders excluded from the scope of Lazard’s opinion as set forth in Lazard’s written opinion) of the merger consideration to be paid to such WMB stockholders in the merger. Lazard’s opinion was not intended to and does not constitute a recommendation to any WMB stockholder as to how such stockholder or other person should vote or act with respect to the merger or any matter relating thereto. Lazard did not express any opinion as to the prices at which shares of WMB common stock, the ETC common shares (including the attached CCRs), the ETE common units or the ETE Class E units may trade at any time subsequent to the announcement of the merger. Lazard did not express any opinion as to any tax or other consequences that might result from the merger or related transactions contemplated by the merger agreement, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which Lazard understood that WMB obtained such advice as it deemed necessary from qualified professionals. In addition, Lazard’s opinion did not address the relative merits of the merger as compared to any other transaction or business strategy in which WMB might engage or the merits of the underlying decision by WMB to engage in the merger and related transactions contemplated by the merger agreement. In addition, Lazard expressed no view or opinion as to any terms or other aspects (other than the merger consideration to the extent expressly specified in Lazard’s written opinion) of the merger and related transactions contemplated by the merger agreement, including, without limitation, the form or structure of the merger or any agreements or arrangements entered into in connection with, or contemplated by, the merger or the related transactions contemplated by the merger agreement. The summary of Lazard’s opinion set forth herein is qualified in its entirety by reference to the full text of Lazard’s opinion, which is attached hereto as Annex G, and which you are encouraged to carefully read in its entirety.

Reasons of ETE General Partner’s Board for the Merger (see page 174)

At a meeting held on September 27, 2015, after due consideration and consultation with ETE’s management and its legal and financial advisors, the board of directors of ETE’s general partner, LE GP, unanimously approved the merger agreement and the transactions contemplated thereby, including the merger, the GP merger and the WMB Contribution. In reaching its determination to approve the merger agreement, the board of directors of LE GP considered a number of factors based on facts and circumstances that existed as of September 27, 2015, including:

 

   

the transaction will create the world’s largest energy infrastructure group by combining two of the largest diversified master limited partnerships (each, an “MLP”), the second largest crude and logistics MLP, a fast-growing retail fuel MLP and an attractive LNG export opportunity;

 

   

the transaction enhances the credit profile of the combined company through greater scale, cash flow diversity and synergy potential;

 

   

the view that the combination creates a complementary geographic footprint for the assets of the combined company that is expected to provide benefits for producers and end use customers;

 

   

the view that the combination will generate significant commercial and revenue synergies from ETE’s integrated business model by providing end-to-end solutions for its customers;

 

   

the merger is expected to be immediately accretive to distributable cash flow and distributions for ETE; and

 



 

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the creation of the entity treated as a corporation for federal income tax purposes is expected to broaden the spectrum of institutional investors that can invest in the Energy Transfer family, and the expected liquidity of the ETC common shares will allow investors to build meaningful positions in ETC.

ETE’s reasons for the transaction are forward-looking in nature and, therefore, should be read in light of the factors discussed in the sections of this proxy statement/prospectus titled “Risk Factors” and “Forward-Looking Statements” and in this Summary section titled “Recent Developments” beginning on page 20 of this proxy statement/prospectus, which section includes a description of certain facts and circumstances arising after September 27, 2015 and the effect that those facts and circumstances have had on certain factors considered by the board of directors of LE GP at the time of approving the merger, as well as certain prospective financial information for ETC that takes into account the facts and circumstances set forth in such section. The reasons of the board of directors of LE GP as of September 27, 2015 for approving the merger do not take into account the facts and circumstances described in the section titled “Summary—Recent Developments,” including the prospective financial information set forth therein, should not be relied upon as reflective of the current views of the board of directors of LE GP and do not constitute a recommendation by the board of directors of LE GP as to how WMB stockholders should vote with respect to the Merger Proposal. The adverse impact of the decline in crude oil and natural gas prices together with the refinancing risks related to the $6.05 billion in new indebtedness expected to be incurred by ETE in connection with the merger, significantly reduces the value of ETC as compared to the value envisioned by the board of directors of LE GP at the time the merger agreement was entered into.

No ETE Unitholder Approval (see page 190)

Approval of ETE unitholders is not required to adopt the merger agreement or approve the merger or the issuance of the ETC common shares or ETE Class E units in connection with the merger transactions.

Financing Commitment (see page 193)

On October 21, 2015, ETE entered into an Amended and Restated Commitment Letter (the “Commitment Letter”) with a syndicate of 20 banks (collectively, the “Commitment Parties”). Pursuant to the Commitment Letter, the Commitment Parties have committed to provide a 364-day secured term loan credit facility in an aggregate principal amount of $6.05 billion (or such lesser amount that ETE may elect to borrow). The total interest rate on such facility is capped at 5.50%, and the facility can be extended for an additional one year at the election of ETE. The commitment is subject to customary conditions for commitments of this type, including the execution of satisfactory definitive documentation.

Board of Directors of the General Partner of ETC After the Merger (see page 344)

Upon completion of the merger, the board of directors of the general partner of ETC (the “ETC GP Board”) will consist of between five and 11 directors, including at least three independent directors meeting the independence standards established by the NYSE and the Exchange Act. The directors will all be designated and elected by the Existing GP Owner, but the independent directors who will serve on the conflicts committee of the ETC GP Board must also be approved by the WMB Board, with such approval not to be unreasonably withheld. The Existing GP Owner has selected John W. McReynolds, Thomas E. Long, Marshall S. McCrea, III, Thomas P. Mason, James W. Bryant, Imad K. Anbouba and M. Max Yzaguirre as, and such individuals have agreed to serve as, directors of the ETC GP Board, effective in connection with the closing of the merger. The Existing GP Owner has proposed James W. Bryant, Imad K. Anbouba and M. Max Yzaguirre as its nominees for the conflicts committee of the ETC GP Board. On May 18, 2016, the WMB Board approved these nominees.

 



 

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Interests of Directors and Executive Officers of WMB in the Merger (see page 176)

In considering the recommendation of a majority of the WMB Board to approve the merger, WMB stockholders should be aware that certain WMB directors and executive officers may be deemed to have interests in the merger that are in addition to, or different from, the interests of other WMB stockholders. The WMB Board was aware of these interests and considered them, among other matters, in approving the merger and the merger agreement and in making the recommendations that the WMB stockholders approve the merger agreement, the merger and the other merger transactions. These interests include:

 

   

Certain WMB directors and executive officers have previously been granted WMB stock options, restricted stock units and/or deferred stock units. Under the merger agreement, each WMB stock option, including stock options held by WMB directors and executive officers, will be equitably adjusted immediately prior to the effective time by reducing the exercise price thereof by an amount equal to the pre-merger special dividend, contingent on the consummation of the merger. In addition, WMB equity-based awards, including those held by WMB directors and executive officers, outstanding immediately prior to the effective time will, as of the effective time, be assumed by ETC and converted into cash-settled, time-based equity awards of ETC, adjusted as described below in the section of this proxy statement/prospectus titled “The Merger Agreement—Treatment of WMB Equity Awards.” Performance conditions applicable to WMB restricted stock units will generally be deemed to be satisfied at target (in the case of WMB performance stock units) or the greater of target and actual performance (in the case of WMB leveraged performance stock units). The converted stock options and restricted stock units will only be subject to time-based vesting conditions following the merger. All the converted ETC equity awards will otherwise remain subject to their existing terms and conditions, including the accelerated vesting of the stock options and restricted stock units held by WMB executive officers upon a qualifying termination during the two-year period following completion of the merger, and accelerated vesting of restricted stock units held by WMB non-employee directors upon any separation from service. Upon settlement, holders of converted WMB restricted stock units and WMB deferred stock units will also be entitled to receive (1) the pre-merger special dividend and payment of any other accrued dividend equivalents, (2) a cash payment in respect of any fractional ETC common shares that would have resulted from such conversion without regard to rounding and (3) if such unit settles after the end of the CCR measurement period, an amount in cash equal to the shortfall amount (if any).

 

   

The right to certain contractual severance payments and benefits in the event a WMB executive officer experiences a qualifying termination of employment during the two-year period following the completion of the merger.

 

   

The right to an accelerated payout of a WMB director’s or executive officer’s earned and accrued account balance under the Williams Companies Amended and Restated Retirement Restoration Plan.

 

   

The right to indemnification and exculpation benefits following the closing of the merger.

Risk Factors Relating to the Merger and Ownership of ETC Common Shares (see pages 45 and 55)

You should consider all the information contained in or incorporated by reference into this proxy statement/prospectus in deciding how to vote for the proposals presented in this proxy statement/prospectus. In particular, you should consider the risks relating to the merger described in the section titled “Risks Related to the Merger” beginning on page 45 of this proxy statement/prospectus, some of which are summarized below:

 

   

there is no assurance when or if the merger will be completed, and ETE believes there is substantial risk that the merger will not be consummated due to the likelihood that Latham & Watkins LLP (“Latham”), special counsel to ETC, will not be able to deliver a tax opinion to the effect that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies (the “721 Opinion”) at closing of the merger and that the related condition to closing will not be satisfied or waived;

 



 

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the number of ETC common shares to be received by holders receiving share consideration or mixed consideration is fixed and will not be adjusted for changes in the market prices of ETE common units or WMB’s common stock;

 

   

you may not receive the form of merger consideration that you elect;

 

   

the merger is subject to the receipt of consents and approvals from governmental entities that may impose conditions that could have an adverse effect on ETE and ETC;

 

   

ETC common shares received by WMB stockholders as consideration in the merger will have different rights from the shares of WMB common stock;

 

   

ETC may fail to realize many of the anticipated benefits of the merger; and

 

   

as a result of the adverse impact of the decline in crude oil and natural gas prices on the operations of ETE and WMB, ETE’s expected incurrence of $6.05 billion of new indebtedness in connection with the merger increases the refinancing risks facing ETE compared to the risks anticipated at the time the merger agreement was entered into.

There are also several risks related to the CCRs and the Contingent Consideration Rights Agreement (the “CCR agreement”), which you should consider:

 

   

as an ETC shareholder, you may not receive any payment in respect of the CCRs;

 

   

as an ETC shareholder, you will not be able to determine the payments to be received under the CCRs until at least two years following the closing date;

 

   

the CCRs are stapled to the ETC common shares and are not separately tradeable; and

 

   

ETC’s ownership in ETE may be diminished if ETC common shares trade at a premium to ETE common units over the measurement period.

You should also consider the risks relating to the ownership of ETC common shares described in the section titled “Risks Related to ETC and the Ownership of ETC Common Shares” beginning on page 55 of this proxy statement/prospectus, some of which are summarized below:

 

   

ETC’s cash flow, and therefore its ability to make distributions to ETC shareholders, depends primarily upon ETE’s ability to make cash distributions to ETC, which in turn depends on the cash distributions ETE receives from the ETE Entities, cash flows ETE receives from its LNG business, the consolidated debt level and debt agreements of ETE, ETC, the ETE Entities and their respective subsidiaries and the expenses ETE otherwise incurs;

 

   

no trading market currently exists for ETC common shares, the price of ETC common shares may be volatile, and a trading market that will provide ETC shareholders with adequate liquidity may not develop;

 

   

ETC common shares and ETE common units may not trade in relation or proportion to one another;

 

   

starting in 2019, the distributions ETC shareholders receive on their ETC common shares may be lower than the distribution ETE common unitholders receive on their ETE common units;

 

   

the incentive distributions (including distributions with respect to the ETP Class H units) that ETE is entitled to receive may be limited or modified without the consent of ETC’s shareholders, which may reduce cash distributions to you, as an ETC shareholder;

 

   

a reduction in the ETE Entities’ distributions will disproportionately affect the amount of cash distributions to which ETE is entitled and, consequently, the amount of cash distributions to which ETC is entitled; and

 



 

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ETC shareholders have limited voting rights on matters affecting ETC’s business and are not entitled to elect or remove ETC GP or its directors. Further, ETC shareholders will not be entitled to direct the manner in which ETC votes the ETE Class E units and, therefore, will not have any voting rights with respect to ETE’s business through their ownership of ETC.

Material U.S. Federal Income Tax Consequences of the Merger (see page 230)

It is a condition to WMB’s obligation to complete the merger that WMB receive a written opinion from Cravath, Swaine & Moore LLP (“Cravath”), special counsel to WMB, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to ETC’s obligation to complete the merger that ETC receive a written opinion from Latham to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. In addition, in connection with the filing of the registration statement of which this document is a part, each of Cravath and Latham has delivered an opinion to WMB and ETC, respectively, to the same effect.

The parties intend to treat the merger as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Code. Accordingly, U.S. holders of WMB common stock generally will not recognize gain or loss for U.S. federal income tax purposes upon their receipt of ETC common shares in exchange for WMB common stock pursuant to the merger. However, (a) U.S. holders of WMB common stock that receive cash pursuant to the merger generally will recognize gain or loss equal to the difference between the amount of any cash received and the holder’s adjusted tax basis in the shares of WMB common stock surrendered for such cash consideration (as designated by the holder); (b) U.S. holders of WMB common stock that receive cash in connection with the settlement of a CCR will be treated as receiving a distribution with respect to their ETC common shares taxable as a dividend to the extent of such holder’s ratable share of ETC’s current and accumulated earnings and profits; and (c) U.S. holders of WMB common stock generally will recognize gain or loss with respect to cash received in lieu of fractional ETC common shares that such holders would otherwise be entitled to receive.

It is possible, however, that the IRS will treat the merger as a “reorganization” within the meaning of Section 368(a)(1)(A) of the Code (instead of Section 368(a)(1)(F) of the Code). In such a case, U.S. holders would still not recognize gain or loss upon their receipt of ETC common shares in exchange for WMB common stock but would be subject to different tax treatment with respect to any cash received pursuant to the merger and in connection with the cash settlement of a CCR, as described under the headings “Material U.S. Federal Income Tax Consequences of the Merger—Possible Treatment of Merger as a Reorganization Pursuant to Section 368(a)(1)(A) of the Code—Exchange for ETC Common Shares and Cash” and “Material U.S. Federal Income Tax Consequences of the Merger—Possible Treatment of Merger as a Reorganization Pursuant to Section 368(a)(1)(A) of the Code—Contingent Consideration Rights.”

For further information, please refer to the discussion under the heading “Material U.S. Federal Income Tax Consequences of the Merger.” Holders of WMB common stock should consult their own tax advisors to determine the particular tax consequences to them of the merger (including the application and effect of any state, local or non-U.S. income and other tax laws).

Certain U.S. Federal Income Tax Considerations of the WMB Contribution (see page 237)

Immediately following the completion of the merger, pursuant to the contribution agreement, ETC will contribute substantially all of the assets and liabilities it assumed from WMB through the merger to ETE in exchange for the issuance by ETE to ETC of a number of ETE Class E units equal to (i) the number of ETC common shares issued to the WMB stockholders in the merger plus (ii) the number of ETC common shares issued to ETE in exchange for the amount of cash needed by ETC to fund the cash portion of the merger consideration. Completion of the merger is subject to satisfaction or waiver of a number of conditions, including

 



 

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the receipt by ETC and WMB of the 721 Opinion from Latham. Latham has advised ETE that, considering the potential claims that the IRS may successfully assert and the level of uncertainty regarding the ultimate outcome of these claims, Latham would not be able to deliver the 721 Opinion were the opinion requested as of the date of this proxy statement/prospectus.

ETE believes that if the WMB Contribution is not an exchange to which Section 721(a) of the Code applies, ETC would likely be required to pay a material amount of tax as a result of the transaction. Under the terms of the contribution agreement, ETE will indemnify ETC pursuant to the contribution agreement for any taxes incurred by ETC as a result of the merger transactions, including the WMB Contribution. However, since ETC’s primary cash generating asset following the merger will consist of ETE Class E units, any material adverse impact on ETE from such indemnification will have a material adverse impact on ETC. As a consequence, it is unlikely that ETC would waive the condition to closing that ETC receive the 721 Opinion from Latham.

Cravath disagrees with Latham’s position and has advised WMB that it is willing to deliver an opinion that the WMB Contribution should qualify as an exchange to which 721(a) of the Code applies. Based on the information available to WMB as of the date of this proxy statement/prospectus, WMB believes that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies. WMB is, therefore, willing to waive the condition to closing that WMB receive the 721 Opinion from Latham. In addition, on May 13, 2016, WMB filed a lawsuit against ETE in the Delaware Court of Chancery seeking, among other remedies, a declaratory judgment and injunction preventing ETE from terminating or otherwise avoiding its obligations under the merger agreement due to any failure of Latham to deliver the 721 Opinion to ETC and WMB. ETE believes that the allegations underlying the lawsuit are without merit and intends to vigorously defend against them. Please see “Recent Developments—Litigation Related to the 721 Opinion and the Outside Date.”

Listing of the ETC Common Shares; Delisting and Deregistration of Shares of WMB Common Stock (see page 193)

It is a condition to the completion of the merger that the ETC common shares and attached CCRs to be issued to WMB stockholders and ETE in connection with the merger transactions be approved for listing on the NYSE, subject to official notice of issuance. We intend to apply for listing on the NYSE under the symbol “ETC”. When the merger is completed, the WMB common stock currently listed on the NYSE will be delisted from the NYSE and deregistered under the Exchange Act.

Conditions to Completion of the Merger (see page 210)

The obligations of each of ETE and WMB to effect the merger are subject to the satisfaction or waiver of the following conditions:

 

   

WMB having obtained the requisite WMB stockholder approval;

 

   

the expiration or termination of the waiting period (and any extensions thereof) applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the “HSR Act”);

 

   

clearance under the Canada Competition Act (the “Competition Act”) must have been received;

 

   

the merger having been approved by the Federal Energy Regulatory Commission (“FERC”) under the Federal Power Act (“FPA”);

 

   

no injunction, order or other judgment being in effect that restrains consummation of the merger;

 

   

this registration statement having become effective under the Securities Act and not being the subject of any stop order or proceedings seeking a stop order;

 



 

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the ETC common shares to be issued pursuant to the merger agreement having been approved for listing on the NYSE, subject to official notice of issuance; and

 

   

the receipt by ETC and WMB of the 721 Opinion from Latham. Latham has advised ETE that considering the potential claims that the IRS may successfully assert and the level of uncertainty regarding the ultimate outcome of these claims, Latham would not be able to deliver the 721 Opinion were the opinion requested as of the date of this proxy statement/prospectus. On advice of Cravath, WMB has advised ETE that it disagrees with Latham’s position and that it believes the WMB Contribution should be a transaction to which Section 721(a) of the Code applies. Because ETE believes that ETE and ETC will be materially adversely affected if the WMB Contribution is not an exchange to which Section 721(a) of the Code applies, it is unlikely that ETC would waive the condition to closing that ETC receive the 721 Opinion from Latham. Based on the information available to WMB as of the date of this proxy statement/prospectus, WMB believes that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies. WMB is, therefore, willing to waive the condition to closing that WMB receive the 721 Opinion from Latham. Please see “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus.

We cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

The obligations of ETC and ETE to effect the merger are also subject to the satisfaction or waiver of the following conditions:

 

   

the accuracy of certain representations and warranties of WMB contained in the merger agreement as of the date of the merger agreement and as of the effective time (other than representations that by their terms speak specifically as of another date), subject to the materiality standards provided in the merger agreement;

 

   

the performance by WMB in all material respects of its obligations required to be performed under the merger agreement;

 

   

the absence of any change, event or effect that, individually or in the aggregate, has, had or would be reasonably expected to have a material adverse effect (as defined in the merger agreement) on WMB since the date of the merger agreement; and

 

   

the receipt by ETC of a tax opinion from Latham and Watkins LLP, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.

The obligation of WMB to effect the merger is also subject to the satisfaction or waiver of the following conditions:

 

   

the accuracy of certain representations and warranties of ETE and ETC contained in the merger agreement as of the date of the merger agreement and as of the effective time (other than representations that by their terms speak specifically as of another date), subject to the materiality standards provided in the merger agreement;

 

   

the respective performance by each of ETE and ETC in all material respects of its obligations required to be performed under the merger agreement;

 

   

the absence of any change, event or effect that, individually or in the aggregate, has, had or reasonably expected to have a material adverse effect (as defined in the merger agreement) on ETE since the date of the merger agreement;

 



 

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the receipt by WMB of a tax opinion from Cravath, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code; and

 

   

the due execution and delivery of the CCR agreement by ETC, ETE and the exchange agent, and such CCR agreement being in full force and effect.

Regulatory Approvals (see page 190)

To complete the merger, ETE and WMB must obtain approvals or consents from, or make filings with, certain U.S. federal and international authorities. The material regulatory approvals, consents and filings include the following:

 

   

the expiration or termination of the waiting period (or any extension thereof) under the HSR Act;

 

   

approval from the FERC pursuant to Section 203 of the FPA; and

 

   

clearance under the Competition Act.

The merger agreement provides that ETE and WMB will make the necessary filings and submissions for the above-mentioned authorizations and approvals and will use their reasonable best efforts to obtain these authorizations and approvals. In addition, WMB and ETE are required to obtain certain state or local approvals in connection with the merger. Although ETE and WMB believe that they will receive the required authorizations and approvals described above to complete the merger, we cannot give any assurance as to the timing of these consents and approvals or as to ETE’s or WMB’s ultimate ability to obtain such consents or approvals (or any additional consents or approvals that may otherwise become necessary). We also cannot ensure that we will obtain such authorizations or approvals on terms and subject to conditions satisfactory to ETE and WMB.

No Solicitation by WMB of Alternate Proposals (see page 206)

As more fully described in this proxy statement/prospectus and in the merger agreement, and subject to certain exceptions summarized below, WMB has agreed not to solicit, initiate, knowingly encourage, or knowingly facilitate inquiries or proposals with respect to, or engage or participate in any negotiations concerning, or provide any confidential or nonpublic information to any person relating to, an alternative takeover proposal. Notwithstanding these restrictions, the merger agreement provides that WMB may participate in discussions or negotiations or furnish nonpublic information regarding WMB in response to an unsolicited bona fide written takeover proposal, and under specific circumstances, including the WMB Board’s determination (in accordance with the merger agreement and after consultation with WMB’s outside legal counsel and financial advisors) that the failure to take such actions would be more likely than not to result in a violation of its fiduciary duties under applicable law, and that the terms of such transaction would be more favorable to WMB stockholders than the merger.

Change in WMB Board Recommendation (see page 207)

The WMB Board may effect an adverse recommendation change in response to an intervening event, or enter into an alternative acquisition agreement in response to an unsolicited superior proposal, without breaching its no-solicitation obligations under the merger agreement. The WMB Board’s ability to do so is subject to certain other requirements, including the provision of written notice to ETE, the good faith negotiation with ETE to revise the terms of the merger agreement, and, where the adverse recommendation change is in response to an intervening event, the good faith determination that the WMB Board would breach its fiduciary duties under applicable law if it failed to make such recommendation.

 



 

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Termination of the Merger Agreement (see page 213)

WMB and ETE may mutually agree to terminate the merger agreement and abandon the merger at any time before the consummation of the merger. Subject to conditions and circumstances described in the merger agreement, the merger agreement may be terminated as follows:

 

   

by mutual written consent of the parties;

 

   

by either party if the merger is not completed by June 28, 2016 (the “outside date”);

 

   

by either party if a governmental entity issues a final and nonappealable law, injunction, order or other judgment restraining or enjoining the consummation of the merger;

 

   

by either party if stockholder approval of the merger agreement has not been obtained at the special meeting;

 

   

by ETE if: (i) WMB breaches any of its representations or warranties or fails to perform any of the covenants or agreements under the merger agreement, and such breach or failure to perform (a) would give rise to the failure of a closing condition and (b) is incapable of being cured prior to the outside date, or (ii) WMB makes an adverse recommendation change or willfully and materially breaches its obligations under the merger agreement regarding the solicitation of acquisition proposals; or

 

   

by WMB if: (i) either ETC or ETE breaches any of its representations or warranties or fails to perform any of the covenants or agreements under the merger agreement, and such breach or failure to perform (a) would give rise to the failure of a closing condition and (b) is incapable of being cured prior to the outside date, or (ii) prior to obtaining WMB stockholder approval of the merger agreement, WMB intends to accept a superior takeover proposal.

Expenses (see page 214)

If the merger agreement is terminated by ETE or ETC following the failure of WMB stockholders to approve the merger proposal at the special meeting, then WMB will reimburse ETE for all out-of-pocket fees and expenses incurred in connection with the merger, up to $50.0 million. If the merger agreement is terminated by ETE or WMB due to the breach by the other party of its representations, warranties, covenants or agreements set forth in the merger agreement, then the breaching party will reimburse all out-of-pocket fees and expenses incurred by the other party in connection with the merger, up to $100.0 million.

Termination Fee (see page 214)

WMB will be required to pay ETE a termination fee of $1.48 billion if:

 

   

WMB terminates the merger agreement to accept a superior proposal from a third party;

 

   

ETE terminates the merger agreement due to a change in the WMB Board’s recommendation of the merger to WMB stockholders;

 

   

ETE terminates the merger agreement due to a breach by WMB of its non-solicitation obligations; or

 

   

(a) after the date of the merger agreement and prior to the special meeting, a takeover proposal is publicly announced, publicly disclosed or otherwise communicated to WMB, which takeover proposal shall not be withdrawn for at least seven business days prior to the special meeting, (b) thereafter, the merger agreement is terminated (i) by either ETE or WMB following the failure of WMB stockholders to approve the merger proposal at the special meeting, (ii) by either ETE or WMB for a failure to consummate the merger on or before the outside date, or (iii) by ETE following a breach by WMB of its covenants or agreements not to solicit a takeover proposal, to hold the special meeting, to aid in the preparation of the prospectus/proxy statement or to negotiate with ETE for three business days after

 



 

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informing ETE of a superior proposal and (c) WMB enters into a definitive agreement with respect to a transaction contemplated by a takeover proposal or consummates a takeover proposal within 12 months of the date the merger agreement is terminated.

ETE will also be required to reimburse WMB $410.0 million for a portion of the termination fee paid by WMB to terminate its previous merger agreement with WPZ if certain conditions to WMB’s obligation to consummate the merger have not been satisfied and the merger agreement is terminated by ETE or WMB due to: (i) a permanent injunction or final, non-appealable governmental order or action being in effect; (ii) ETE or ETC’s breach of any of its representations, warranties, covenants, or agreements set forth in the merger agreement; or (iii) the failure to consummate the merger within the outside date. Any expenses of ETE reimbursed by WMB are creditable against the termination fee.

Comparison of Rights of ETC Shareholders and WMB Stockholders (see page 240)

The rights of WMB stockholders are currently governed by WMB’s amended and restated certificate of incorporation and by-laws and by the DGCL. WMB stockholders who receive the merger consideration in ETC common shares will become shareholders of ETC upon completion of the merger. Thereafter, their rights will be governed by ETC’s certificate of limited partnership, ETC’s partnership agreement and the Delaware Revised Uniform Limited Partnership Act. As a result, these WMB stockholders will have different rights once they become shareholders of ETC due to the differences in the governing documents of and laws applicable to ETC and WMB. The key differences are described in the section titled “Comparison of Rights of ETC Shareholders and WMB Stockholders.”

Amendment of ETE Partnership Agreement (see page 193)

In conjunction with the GP merger, ETE GP will enter into the ETE partnership agreement amendment providing for the creation and issuance of the ETE Class E units with the rights, privileges and obligations set forth in the partnership agreement amendment.

Litigation Relating to the Merger (see page 193)

Between October 5, 2015, and December 24, 2015, purported WMB stockholders filed six putative class action lawsuits in the Delaware Court of Chancery challenging the merger. The suits are captioned Greenwald et al. v. The Williams Companies, Inc., et al., C.A. No. 11573-VCG; Ozaki v. Armstrong et al., C.A. No. 11574-VCG; Blystone v. The Williams Companies, Inc., et al., C.A. No. 11601-VCG; Glener et al. v. The Williams Companies, Inc., et al., C.A. No. 11606-VCG; Amaitis et al. v. Armstrong et al., C.A. No. 11809-VCG; and State-Boston Retirement System et al. v. Armstrong et al., C.A. No. 11844-VCG. The complaints assert various claims against the individual members of the WMB Board; ETE, ETC, ETC GP, LE GP and ETE GP (the “ETE Defendants”); WMB; Barclays; and Lazard. The Ozaki and Blystone complaints allege that the individual members of the WMB Board have breached their fiduciary duties to WMB stockholders by agreeing to sell WMB through an allegedly unfair process and for an allegedly unfair price, and that the ETE Defendants have aided and abetted this purported breach of fiduciary duties. The Greenwald and Glener complaints make similar allegations, but also claim that WMB has aided and abetted the individual members of the WMB Board’s purported breach of fiduciary duties. The Amaitis and State-Boston Retirement System complaints allege that the individual members of the WMB Board who voted for the merger have breached their fiduciary duties to WMB stockholders by agreeing to sell WMB through an allegedly unfair process and for an allegedly unfair price, and that all the individual members of the WMB Board have violated their fiduciary duties by allegedly failing to disclose material information about the merger. The Amaitis complaint additionally alleges that the ETE Defendants, Barclays and Lazard have aided and abetted the individual members of the WMB Board’s supposed breach of fiduciary duties. All the complaints seek, among other things, an injunction against the merger and an

 



 

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award of costs and attorneys’ fees. On January 13, 2016, the Court consolidated, pursuant to a stipulation among the plaintiffs, these six actions into a new consolidated action captioned In re The Williams Companies, Inc. Merger Litigation, Consolidated C.A. No. 11844-VCG (the “Merger Litigation”). In its stipulated order, the Court designated the complaint from the State-Boston action as operative, and it dismissed without prejudice the ETE Defendants, Barclays and Lazard from the consolidated action. On January 19, 2016, the defendants in the Merger Litigation moved to dismiss the operative complaint. On March 22, 2016, the Court stayed briefing and discovery in the Merger Litigation until the merger between ETE and WMB is consummated and plaintiffs in the Merger Litigation have filed an amended complaint.

On December 4, 2015, a purported WMB stockholder filed an amended complaint in a putative class action lawsuit pending in the Delaware Court of Chancery captioned In re The Williams Companies, Inc. Stockholder Litigation, Consol. C.A. No. 11236-VCG (the “Stockholder Litigation”). The complaint asserts claims against all of the individual members of the WMB Board other than Mr. Meister and Mr. Mandelblatt. The complaint alleges that WMB’s preliminary proxy statement is false and misleading. As relief, the complaint requests, among other things, an injunction requiring WMB to make supplemental disclosures and an award of costs and attorneys’ fees. On December 9, 2015, the defendants in the Stockholder Litigation moved to dismiss the amended complaint. On March 7, 2016, the Court dismissed the amended complaint in a ruling from the bench.

On January 14, 2016, a purported WMB stockholder filed a putative class action lawsuit against WMB and ETE, captioned Bumgarner v. The Williams Companies, Inc., et al., Case No. 16-cv-26-GKF-FHM, in the United States District Court for the Northern District of Oklahoma. The plaintiff alleges that ETE and WMB have violated Section 14 of the Exchange Act by making allegedly false statements concerning the merger. As relief, the complaint seeks an injunction against the proposed merger. On February 1, 2016, the plaintiff filed an amended complaint, making substantially the same allegations. On February 19, 2016, the defendants in the Bumgarner action moved to dismiss the amended complaint. On April 21, 2016, the plaintiff moved for expedited proceedings and expedited discovery. On April 25, 2016, the defendants filed a response in opposition to the plaintiff’s motion for expedition, and also filed a second motion to dismiss. On April 28, 2016, the court denied the defendants’ second motion to dismiss, but granted the original motion to dismiss the amended complaint. The court denied expedited discovery, but granted expedited proceedings and also granted the plaintiff permission to amend his complaint. On May 12, 2016, the plaintiff filed his second amended complaint in the Bumgarner action. The plaintiff alleges that ETE and WMB have violated the Exchange Act by making allegedly false statements concerning the merger and failing to disclose material information concerning, among other topics, (a) the reasons for the changes in the estimated commercial synergies, (b) WMB Board members’ potential conflicts of interest and (c) how the WMB Board ascertained that the directors who voted against the transaction subsequently determined to support the WMB Board’s commitment to consummate the transaction as required by the terms of the merger agreement, including such directors’ current beliefs.

On January 15, 2016, a purported WMB stockholder filed a putative class action lawsuit in the Delaware Court of Chancery against the individual members of the WMB Board, captioned Ryan v. Armstrong et al., C.A. No. 11903-VCG. The complaint asserts that all of the individual members of the WMB Board breached their fiduciary duties in agreeing to the WPZ merger and that a majority of the individual members of the WMB Board breached their fiduciary duties by failing to negotiate for a “collar” provision in connection with the merger with ETE. As relief, the complaint seeks, among other things, damages and an award of costs and attorneys’ fees. On February 22, 2016, the defendants moved to dismiss the complaint, and on March 24, 2016, the defendants filed a brief in support of their motion to dismiss. On April 22, 2016, the plaintiff filed an amended complaint.

On January 19, 2016, a purported WMB stockholder filed a putative class action lawsuit against WMB, the individual members of the WMB Board and the ETE Defendants, captioned City of Birmingham Retirement and Relief System v. Armstrong et al., Case No. 1:16-cv-00017-RGA, in the United States District Court for the District of Delaware. The lawsuit alleges that the individual members of the WMB Board have violated their duty of

 



 

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disclosure by issuing a supposedly misleading proxy statement in support of the transaction, that a majority of the individual members of the WMB Board violated their fiduciary duties by voting in favor of the merger and that the ETE Defendants aided and abetted this supposed breach of fiduciary duties. The complaint also alleges that the individual members of the WMB Board and WMB have violated Section 14 of the Exchange Act by issuing a supposedly misleading proxy statement and that all defendants have violated Section 20 of the Exchange Act by supposedly causing a misleading proxy statement to be issued. As relief, the complaint seeks, among other things, injunctive relief, damages and an award of costs and attorneys’ fees. On February 10, 2016, WMB and the individual members of the WMB Board moved to dismiss the complaint. On February 18, 2016, the ETE Defendants moved to dismiss the complaint. On March 7, 2016, the plaintiff voluntarily dismissed its complaint.

The defendants believe the allegations in the various complaints noted above are without merit.

The CCR Agreement (see page 217)

The rights of ETC shareholders with respect to the CCRs attached to the ETC common shares will be governed by and subject to the terms and conditions of the CCR agreement, which is attached as Annex B to this proxy statement/prospectus and is incorporated by reference into this proxy statement/prospectus.

The CCR agreement entitles each CCR holder to receive ETC common shares or a cash payment, at ETE’s election, should the average of the daily volume-weighted average price for ETE common units on the NYSE (“ETE common units VWAP”) be greater than the average of the daily volume-weighted average price for ETC common shares on the NYSE (“ETC common shares VWAP”) for a period of 23 months following the 20th trading day after the closing date (the “measurement period”). If the ETC common shares VWAP is less than the ETE common units VWAP for the measurement period (such difference, a “shortfall amount”), then each outstanding CCR will be automatically cancelled and converted into the right to receive a shortfall payment. The shortfall payment will be, at ETE’s election, either:

 

   

a number of ETC common shares equal to the shortfall amount divided by the settlement calculation VWAP. The settlement calculation VWAP means (a) the sum of the daily dollar volume-weighted average price for the ETC common shares on the NYSE for the five trading days starting with the first trading day after the second anniversary of the closing date, divided by (b) 5; or

 

   

an amount in cash equal to the shortfall amount.

Notwithstanding the above, the aggregate cash payment cannot exceed an amount of cash equal to (a) 55% of the value of the merger consideration minus (b) the sum of (i) the pre-merger special dividend, (ii) the cash component of the merger consideration, (iii) the aggregate amount of cash paid to former holders of WMB common stock in lieu of issuing fractional ETC common shares and (iv) the aggregate amount of cash paid in respect of appraisal shares. If the aggregate cash payment exceeds this sum, then any difference will be paid in ETC common shares valued at the settlement calculation VWAP.

If, however, the ETC common shares VWAP is equal to or greater than the ETE common units VWAP for the measurement period, then each outstanding CCR will be immediately and automatically cancelled and no consideration of any kind will be delivered to CCR holders in respect of the CCRs. Furthermore, ETE will cancel as an adjustment to the number of ETE Class E units issued to ETC in the WMB Contribution, a number of ETE Class E units equal to (a) (i) the number of outstanding CCRs multiplied by (ii) a fraction, the numerator of which is the excess amount and the denominator of which is the settlement calculation VWAP, multiplied by (b) the ratio of ETE Class E units held by ETC and its subsidiaries over the number of ETC common shares outstanding. See the section titled “The Merger” beginning on page 104 of this proxy statement/prospectus.

 



 

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The CCRs will be automatically cancelled and extinguished, without consideration of any kind being delivered to CCR holders in respect of the CCRs, and ETE, ETC and the rights agent will have no further obligations with respect to the CCRs, in the event that both of the following exist at any time during the period between the start date and the end date:

 

   

the ETC common shares VWAP is greater than the ETE common units VWAP for twenty consecutive trading days; and

 

   

the ETC common shares VWAP is equal to or greater than the ETE common units VWAP for a period beginning on the twenty-first trading day after the closing date and ending on the twentieth such trading day as mentioned above.

There are numerous risks associated with the CCRs, including the possibility that CCR holders will not receive any payment in respect thereof. For more information, please see the sections titled “Risks Related to the CCRs” and “CCR Agreement” beginning on pages 54 and 217, respectively, of this proxy statement/prospectus.

The Contribution Agreement (see page 216)

Concurrently with the effective time of the GP merger, ETC, ETE and ETE GP will execute a Contribution, Conveyance and Assumption Agreement (the “contribution agreement”) to effect the WMB Contribution and GP Contribution. In exchange for the contribution by ETC of substantially all of the assets and liabilities it assumed from WMB through the merger to ETE in the WMB Contribution, ETE will issue to ETC a number of ETE Class E units equal to (i) the number of ETC common shares issued to the WMB stockholders in the merger plus (ii) the number of ETC common shares issued to ETE in consideration for the Parent Cash Deposit.

The contribution agreement will also provide that ETE will indemnify ETC against all losses suffered or incurred by ETC after the effective date resulting from the consummation of the merger or the other transactions contemplated by the contribution agreement, as well as all losses (other than income taxes) suffered or incurred by ETC before or after the date of the contribution agreement. In addition, pursuant to the contribution agreement, ETE will indemnify ETC for any taxes incurred by ETC for each taxable year ending on or before December 31, 2018.

Recent Developments

Crude oil prices in the United States (based on NYMEX trading prices) have experienced a significant decline recently, dropping from an average of $60.00 per barrel in June 2015 to an average closing price of $37.96 in March 2016. Natural gas prices in the United States (based on NYMEX trading prices) also have experienced a significant decline, dropping from an average of near $3.00 per MMcf in June 2015 to an average closing price of $1.81 per MMcf in March 2016. Other energy commodity prices have also continued to decline or hover at relatively low levels. As a result, energy company equity values have declined sharply and credit has tightened. Equity and debt capital markets are less receptive and the cost of capital for energy companies, in general, is significantly more expensive than the cost of capital in June 2015. Most producers of oil and natural gas have recently reduced their levels of drilling and related projects to preserve existing liquidity and reduce financing needs in light of continued low prices and infrastructure constraints, as well as higher costs of capital. In some areas, producers are shutting-in production until realized prices improve as a result of higher energy prices and/or new infrastructure that improves netbacks. As a result of the current weak energy price environment and increased cost of capital, the industry in which WMB and ETE participate is likely to experience lower growth in terms of volumes, earnings, cash flows, cash distributions and dividends. Energy prices are highly variable and the industry in which WMB and ETE participate may experience lower or higher prices and those prices will effect volumes, earnings, cash flows, cash distributions and dividends.

 



 

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As disclosed in “The Merger—Reasons of ETE’s General Partner’s Board for the Merger,” during its due diligence process relating to the merger, ETE identified significant commercial synergies ranging from new revenue opportunities, improved operational efficiencies and performance, new capital opportunities and prioritization of existing capital projects. At the time of execution of the merger agreement with WMB, ETE expected that the anticipated EBITDA from those commercial synergies would exceed $2 billion per year by 2020 and would require overall incremental capital investment of more than $5 billion to achieve. As part of ETE’s and WMB’s joint integration planning efforts, the management teams of both companies have devoted a significant amount of time in analyzing commercial synergy opportunities that may be achieved by the combined company following the closing of the merger. Taking into account facts and circumstances occurring since September 28, 2015, including those described in the preceding paragraph, ETE and WMB believe, as of March 23, 2016, that the base case for EBITDA from commercial synergies that is reasonably probable to be achieved by the combined company is approximately $126 million per year by 2020, which is materially less than the $2 billion of anticipated EBITDA from commercial synergies per year by 2020 identified by ETE as of September 28, 2015 and considered by the board of directors of ETE’s general partner when determining to approve entry into the merger agreement. The annual EBITDA that is reasonably probable of being achieved from commercial synergies by 2020 of $126 million is an amount determined by commercial development and finance personnel from ETE and WMB based on their analysis of commercial development projects that are reasonably probable to be successfully completed and based on, among other items, assumptions of WTI crude oil prices ranging from $32.92 per barrel in 2016 to $44.31 per barrel in 2020 and Henry Hub natural gas prices ranging from $2.34 per MMcf in 2016 to $3.11 per MMcf in 2020, which price assumptions were based on the forward price curve for futures contracts as of January 20, 2016. ETE and WMB also anticipate that the net capital savings to be incurred in connection with these commercial synergies would be approximately $220 million.

ETE and WMB also developed a case which assumed a recovery of crude oil and natural gas prices based on the forward price curve for futures contracts for these commodities as of July 22, 2015, which forward price curve indicated WTI crude oil futures prices ranging from $53.97 per barrel in 2016 to $64.26 per barrel in 2020 and Henry Hub natural gas futures prices ranging from $3.21 per MMcf in 2016 to $3.62 per MMcf in 2020. Based on these price assumptions, the commercial development and finance personnel from ETE and WMB determined that the annual EBITDA that may be potentially achieved by 2020 from commercial synergies would be approximately $590 million. ETE and WMB also anticipate that the net capital expenditures anticipated to be incurred to achieve these commercial synergies would be approximately $260 million. The commodity price assumptions related to the commercial synergies in this price recovery case are significantly higher than the average trading prices of these commodities as of the date of this proxy statement/prospectus and, as a result, ETE and WMB believe that the commercial synergies in this price recovery case may not be achieved.

The current range of anticipated EBITDA from commercial synergies jointly identified by ETE and WMB as described above in the base case and the price recovery case, however, is consistent with the range of potential synergies considered by WMB’s financial advisors when performing the analyses and arriving at the opinions described in “The Merger—Opinions of the Financial Advisors to the WMB Board.”

The section “The Merger—Financial Forecasts” contains certain prospective financial information for WMB and ETC as prepared by WMB and as made available to the legal and financial advisors of WMB and the WMB Board prior to the execution of the merger agreement. ETE did not review the projections for ETC prepared by WMB, and ETE makes no representations or warranties in respect thereof and such projections did not, at the time they were prepared, and do not currently, reflect the views of ETE. See “—Updated Financial Forecasts of ETC” below for updated financial forecasts of ETC provided by the management of ETE. As further noted in “The Merger—Financial Forecasts,” WMB does not intend to update or otherwise revise the prospective financial information contained therein to reflect the occurrence of subsequent events. WMB believes that the prospective financial information prepared by WMB, including forecasts for cash distributions per unit of ETC as described in “The Merger—Financial Forecasts—Pro Forma ETC Unaudited Financial Projections,” is no longer

 



 

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valid, will likely be materially lower than reflected in the tables containing such prospective financial information and should not be relied upon in light of, among other things, the factors discussed in this “Recent Developments” section.

In addition to the factors described in this “Recent Developments” section, and as noted elsewhere in this proxy statement/prospectus, ETE has a significant amount of debt outstanding. As of March 31, 2016, ETE had approximately $6.4 billion of debt on a stand-alone basis and approximately $37.4 billion of consolidated debt, excluding the debt of its joint ventures. In addition, in connection with the merger, ETE expects to incur an additional $6.05 billion of debt to finance the cash portion of the merger consideration and to assume approximately $4.2 billion of outstanding debt under WMB’s senior notes. In light of the sustained low commodity price environment and ETE’s current leverage and credit profile, there is a risk that the incurrence and assumption of such additional debt could adversely affect ETE’s credit ratings. Any downgrade in ETE’s credit ratings following the transaction could adversely affect the investment grade credit ratings of ETP, SXL and WPZ, and the credit ratings of Sunoco. ETP, SXL and WPZ currently maintain investment grade ratings by Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Rating Services (“S&P”) and Fitch Ratings, Inc. (“Fitch”). However, those current ratings may not remain in effect for any given period of time and a rating may be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. If Moody’s, S&P or Fitch were to downgrade the long-term rating of any of the ETE Entities, particularly below investment grade, ETE’s consolidated borrowing costs could significantly increase, which would adversely affect ETE’s consolidated financial results, and the terms of ETE’s credit agreements could become significantly more restrictive. The potential pool of investors and funding sources could also decrease. Further, due to the relationship between ETE and the ETE Entities, any downgrade of ETE’s credit ratings could also result in a downgrade in one or more of the ETE Entities’ credit ratings. Ratings from credit agencies are not recommendations to buy, sell or hold ETE’s securities, and each rating should be evaluated independently of other ratings. In order for ETE to maintain its credit ratings at current rating levels, it may need to sell assets, issue additional equity securities, reduce cash distributions to unitholders or a combination thereof.

ETE states that in connection with ETE’s efforts to maintain its current credit ratings with Moody’s, S&P and Fitch, on March 8, 2016, ETE completed the private offering of Convertible Units to certain ETE common unitholders who are “accredited investors” (as defined in Regulation D promulgated under the Securities Act) (the “offerees”). The Convertible Units were issued to offerees who elected to participate in a plan (the “Plan”) to forgo a portion of their future potential cash distributions on ETE common units participating in the Plan for a period of up to nine fiscal quarters, commencing with distributions for the fiscal quarter ending March 31, 2016 (the “plan period”), and reinvest those distributions in the Convertible Units. Each offeree who elected to participate in the Plan (an “Electing Unitholder”) received one Convertible Unit for each ETE common unit that such Electing Unitholder validly elected to participate in the Plan (each such ETE common unit, a “Participating Common Unit”). With respect to each quarter for which the declaration date and record date occurs prior to the closing of the merger, or earlier termination of the merger agreement (the “WMB End Date”), each Participating Common Unit will receive the same cash distribution as all other ETE common units up to $0.11 per unit, which represents approximately 40% of the per unit distribution paid with respect to ETE common units for the quarter ended December 31, 2015 (the “Preferred Distribution Amount”), and the holder of such Participating Common Unit will forgo all cash distributions in excess of that amount (other than (i) any non-cash distribution or (ii) any cash distribution that is materially and substantially greater, on a per unit basis, than ETE’s most recent regular quarterly distribution, as determined by the ETE general partner (such distributions in clauses (i) and (ii), “Extraordinary Distributions”)). With respect to each quarter for which the declaration date and record date occurs after the WMB End Date, each Participating Common Unit will forgo all distributions for each such quarter (other than Extraordinary Distributions), and each Convertible Unit will receive the Preferred Distribution Amount payable in cash prior to any distribution on ETE common units (other than Extraordinary Distributions).

 



 

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At the end of the plan period, each Convertible Unit will automatically convert into ETE common units, the number of which will be determined by dividing (a) the Conversion Value (as defined and described below) at the end of the plan period by (b) $6.56, which is 95% of the five-day volume-weighted average closing price of ETE common units on the NYSE on the date immediately prior to the commencement of the private offering (the “Conversion Price”).

The conversion value of each Convertible Unit (the “Conversion Value”) on the closing date of the offering is zero. The Conversion Value will increase each quarter in an amount equal to $0.285, which is the per unit amount of the cash distribution paid with respect to ETE common units for the quarter ended December 31, 2015 (the “Conversion Value Cap”), less the cash distribution actually paid with respect to each Convertible Unit for such quarter (or, if prior to the WMB End Date, each Participating Common Unit). Any cash distributions in excess of $0.285 per ETE common unit, and any Extraordinary Distributions, made with respect to any quarter during the plan period will be disregarded for purposes of calculating the Conversion Value.

ETE issued 329,299,267 Convertible Units to the Electing Unitholders at the closing of the offering, which represents the participation by common unitholders with respect to approximately 31.5% of ETE’s total outstanding common units. ETE’s Chairman, Kelcy L. Warren, participated in the Plan with respect to substantially all of his common units, which represent approximately 18% of ETE’s total outstanding common units, and was issued 187,313,942 Convertible Units. In addition, John McReynolds, a director of LE GP and President of LE GP; and Matthew S. Ramsey, a director of LE GP, ETP LLC and Sunoco GP LLC and President of ETP LLC, participated in the Plan with respect to substantially all of their common units, and Marshall S. McCrea, III, a director of LE GP, ETP LLC and SXL GP and the Group Chief Operating Officer and Chief Commercial Officer of LE GP, participated in the Plan with respect to a substantial portion of his common units. The common units for which Messrs. McReynolds, Ramsey and McCrea elected to participate in the Plan collectively represent approximately 2.2% of ETE’s total outstanding common units. ETE issued 21,382,155 Convertible Units to Mr. McReynolds, 51,317 Convertible Units to Mr. Ramsey and 1,112,728 Convertible Units to Mr. McCrea. In accordance with the ETE partnership agreement, the board of directors of LE GP determines the amount of cash available for distribution by ETE each quarter and the amount of the quarterly cash distribution to unitholders. Therefore, as directors of LE GP, each of Messrs. Warren, McReynolds, Ramsey and McCrea, together with the other directors of LE GP, exercise control over ETE’s distributions. Mr. Warren, as the owner of 81.2% of the membership interest in LE GP, has the ability to appoint and remove the directors of LE GP. Mr. Ray Davis, who owns the remaining 18.8% membership interests in LE GP, participated in the Plan with respect to substantially all of his ETE common units, which represents approximately 6.9% of ETE’s total outstanding common units, and was issued 72,042,486 Convertible Units. Other than Mr. Davis, no other Electing Unitholder owns a material amount of equity securities of ETE or its affiliates and neither Mr. Davis nor such other Electing Unitholders has the ability to exercise control over ETE’s distributions.

ETE expected cash distribution savings from the offering of Convertible Units that would allow ETE to reduce its outstanding debt. However, ETE no longer expects to pay cash distributions with respect to its common units following the closing of the merger until the quarter ending March 31, 2018, and therefore, does not expect to receive any cash distribution savings until such time from forgone distributions on Participating Common Units, or to repay any debt from such cash distribution savings. See the section titled “Additional Information about ETC—Business—Recent Developments of Energy Transfer Equity, L.P.” for additional information regarding the private offering and the terms of the Plan and the Convertible Units.

Initially, ETE intended to provide the opportunity to participate in the Plan to all of its common unitholders on substantially the same terms as the private offering. The merger agreement requires ETE and WMB to obtain the other party’s consent to take certain actions prior to the closing of the merger. ETE believes that the terms of

 



 

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the merger agreement permitted ETE to provide the opportunity to participate in the Plan to all of its common unitholders. In order to offer participation in the Plan to all of its common unitholders, ETE would have been required to file a registration statement with the SEC relating to the public offering of the Convertible Units. Such a filing would require the consent of WMB’s independent registered accounting firm to the incorporation by reference in the registration statement of its report on WMB’s audited financial statements. However, after ETE advised WMB of ETE’s intention to pursue a public offering of the Convertible Units pursuant to the Plan, WMB declined to allow its independent registered accounting firm to provide the auditor consent required to be included in a registration statement for a public offering. As a result, in light of what ETE viewed as an important step to address potential cash needs (including to finance part of the consideration payable to WMB stockholders in the merger), ETE determined to conduct a private offering to certain accredited investors that was not subject to the SEC rules requiring the consent of WMB’s independent registered accounting firm. In connection with the proposed public offering, WMB advised ETE that WMB believed its consent was required under the merger agreement for the public offering and declined to consent. ETE believes that both the proposed public offering and the completed private offering are permitted by the terms of the merger agreement and as a result did not request WMB’s consent to pursue the private offering.

WMB has reviewed the terms of the Plan and the Convertible Units, and ETE’s description of the Plan and the Convertible Units, and believes that the Convertible Units offering required WMB’s consent under the merger agreement and that by proceeding without WMB’s consent, ETE violated the merger agreement. WMB filed lawsuits against ETE, LE GP and Mr. Warren in relation to the Convertible Units offering on April 6, 2016. The lawsuit against ETE and LE GP, which was filed in the Court of Chancery of the State of Delaware (C.A. No. 12168-VCG), alleges breach of the merger agreement and seeks, among other things, to unwind the private offering of Convertible Units. The lawsuit against Mr. Warren, which was filed in the District Court of Dallas County, Texas (Cause No. DC-16-03941), alleges tortious interference with the merger agreement in connection with the Convertible Units offering and seeks damages, among other things. See the section titled “Risk Factors—Risks Related to the Merger—ETE and WMB do not agree on whether ETE’s offering of the Convertible Units without WMB’s consent was a violation of the merger agreement, and WMB has filed lawsuits against ETE, LE GP and Mr. Warren in relation thereto” beginning on page 51 of this proxy statement/prospectus. ETE believes that the lawsuits are without merit and intends to vigorously defend its actions.

In addition to the issuance of the Convertible Units that ETE believes is a means to address the rating agency issues described in this proxy statement/prospectus, ETE and WMB have been analyzing the potential cost savings that may be realized with respect to general and administrative expenses as a result of the merger. In light of the decline in energy commodity prices, both ETE and WMB are also analyzing cost reductions that may be achieved on a standalone basis and, in this regard, WMB recently reduced its workforce by 10%.

ETE and WMB have also been analyzing other steps to reduce general and administrative expenses. ETE has determined that it will be necessary to consolidate corporate offices and headquarters of ETE and WMB in Dallas, Texas in order to achieve the appropriate overall reduction in general and administrative costs for the combined company and headquarters and, as a result, the current presence of WMB in Tulsa, Oklahoma and Oklahoma City, Oklahoma will need to be significantly reduced, particularly with respect to the finance, accounting, engineering and construction, legal, human resources and information technology functions, or potentially eliminated.

The WMB Board has carefully reviewed the developments in this section in connection with the continuing recommendation of a majority of the WMB Board to WMB stockholders to adopt the merger agreement. See the section titled “The Merger—Recommendation of the WMB Board and Its Reasons for the Merger” beginning on page 132 of this proxy statement/prospectus. In particular:

 

   

The WMB Board notes that (i) ETE has announced that, in connection with its integration planning efforts and in light of the current business environment for WMB and ETE as described above, ETE currently intends to consolidate the corporate offices and headquarters of ETE and WMB in Dallas,

 



 

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Texas and to significantly reduce or potentially eliminate the current presence of WMB in Tulsa, Oklahoma and in Oklahoma City, Oklahoma as described above and (ii) this current intention differs from ETE’s statement in the WMB-ETE joint press release issued on September 28, 2015 that WPZ would maintain a meaningful presence in Tulsa, Oklahoma.

 

   

In reviewing the Convertible Units offering, the WMB Board noted the preferential treatment on cash distributions that Electing Unitholders will receive over non-participating holders of ETE common units, as well as the impact that this preferential treatment will have with respect to the payment of cash distributions on the ETC common shares. The WMB Board also considered its view of the preferential treatment as well as the potential dilution to holders of ETC common shares as a result of the pay-in-kind feature of the Convertible Units. See this “Recent Developments” section beginning on page 20. As noted above, the WMB Board views the Convertible Units offering as a breach of the merger agreement and intends to enforce its rights under the merger agreement in relation thereto; as a result, WMB has filed lawsuits against ETE, LE GP and Kelcy L. Warren. The WMB Board has reviewed the concerns raised by ETE regarding the potential material adverse impact on the operations and financial condition of ETC that may arise if WMB’s lawsuits against ETE, LE GP and Mr. Warren are resolved adversely to ETE, LE GP and Mr. Warren, respectively. See the section titled “Summary—Recent Developments—Litigation Relating to the Convertible Unit Offering” beginning on page 31 of this proxy statement/prospectus. The WMB Board notes that WMB remains committed to working with ETE to ensure the strength of the combined company, provided that all ETE and WMB investors are treated fairly and equitably. The WMB Board notes that immediately after the closing of the merger, the lawsuits against ETE, LE GP and Mr. Warren would be contributed from ETC to ETE as part of the WMB Contribution. Accordingly, after closing, ETE will have the right to determine whether to proceed with such lawsuits based on the best interests of the ETE unitholders and the ETC shareholders at such time.

 

   

The WMB Board has reviewed ETE’s current projections for ETC set forth below under “—Updated Financial Forecasts of ETC.” The WMB Board notes that ETE prepared these ETC projections, in part, by using the WMB projections provided by WMB to ETE on April 7, 2016, and, in part, by using the ETE projections prepared by ETE management as of April 12, 2016. The WMB Board further notes that these projections for ETC are subject to a number of assumptions as described below, including (i) ETE’s assumptions regarding the amount and timing of debt repayment, including of the acquisition financing and any assumed refinancings and (ii) ETE’s assumptions regarding the amount of incentive distribution waivers at ETP and WPZ which affect the cash available at ETE and ETC.

 

   

The WMB Board has reviewed ETE’s statement that it does not expect to make any cash distributions with respect to its common units following the closing of the merger and prior to the distribution payable with respect to the quarter ending March 31, 2018. See the section titled “—Updated Financial Forecasts of ETC” beginning on page 29 of this proxy statement/prospectus. The WMB Board further notes that a lack of distributions on ETE common units will lead to a lack of distributions on ETE Class E units, and therefore, on ETC common shares, until that time. This is inconsistent with the WMB Board’s expectation, as of September 28, 2015, that the pro forma dividend per ETC common share would exceed the expected 2016 dividend per share of WMB on a standalone basis. See the section titled “The Merger—Recommendation of the WMB Board and Its Reasons for the Merger” beginning on page 132 of this proxy statement/prospectus.

 

   

In reviewing the commercial synergies described above, the WMB Board notes that the base case of anticipated EBITDA from commercial synergies jointly identified by ETE and WMB as described above is consistent with the range of potential synergies considered by the WMB Board in approving the merger and by WMB’s financial advisors when performing the analyses and arriving at the opinions described in the section titled “The Merger—Opinions of the Financial Advisors to the WMB Board” beginning on page 143 of this proxy statement/prospectus.

 



 

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The WMB Board recognizes that the impact of the loss of expected commercial synergies under current market conditions is different than the sensitivity analysis regarding synergies considered by the WMB Board at the time of the approval of the merger agreement on September 28, 2015 because the base model against which the sensitivities were applied has been substantially outdated by economic changes since September 28, 2015.

 

   

The WMB Board has considered the impact of the closing of the merger, in particular the likely negative effects of the incurrence of approximately $6.05 billion of additional indebtedness, on the financial condition and operations of ETE and ETC and the likely trading price of the ETE common units and ETC common shares following the merger. In that regard, WMB has considered the likely adverse impact that the additional indebtedness on the ability of ETE and ETC to pay cash distributions and grow ETE’s operations.

 

   

The WMB Board has considered ETE’s position that the closing condition that Latham deliver the 721 Opinion is unlikely to be satisfied. See this “Recent Developments” section beginning on page 27 and “Risk Factors—Risks Related to the Merger—There is no assurance when or if the merger will be completed, and ETE believes there is a substantial risk that the merger will not be consummated” beginning on page 45 of this proxy statement/prospectus.

The WMB Board believes it is appropriate to continue to rely on the fairness opinions dated September 28, 2015 for purposes of its original decision to enter into the merger agreement. However, the WMB Board acknowledges that those fairness opinions only address fairness of the consideration to be received by WMB stockholders as of September 28, 2015 and the WMB Board no longer believes that the projections underlying those fairness opinions are valid. Accordingly, the WMB Board is not relying on those fairness opinions in evaluating its recommendation to Williams’ stockholders to adopt the merger agreement in light of the developments described in this section. After conferring with its legal advisors, the WMB Board does not believe that it is necessary to request updated fairness opinions from its financial advisors and does not believe that updated fairness opinions would materially assist the WMB Board in evaluating its recommendation to WMB stockholders to adopt the merger agreement. The WMB Board believes it has, with the assistance of WMB management and the WMB Board’s financial advisors, the necessary expertise to evaluate the impact of changed economic conditions on the merits of the merger transaction.

After carefully reviewing the developments described in this section, including those noted above, the WMB Board has not changed its recommendation from its vote on September 28, 2015 that WMB stockholders adopt the merger agreement. Except as described below, the reasons for the WMB Board’s recommendation continue to be those described in the section titled “The Merger—Recommendation of the WMB Board and Its Reasons for the Merger” beginning on page 132 of this proxy statement/prospectus. These reasons include the value certainty provided by the substantial portion of the merger consideration that is payable in cash, the industrial logic of a combination of WMB’s and ETE’s businesses, that the WMB stockholders will have an opportunity to participate in the value created by the combination, the WMB Board’s assessment of WMB’s challenges as a standalone company, the strategic review process conducted by the WMB Board and the protective measures that were negotiated by the WMB Board regarding the economic equivalence of ETC common shares and ETE common units. As discussed above, the WMB Board continues to rely on the fairness opinions of WMB’s financial advisors dated September 28, 2015 for purposes of its original decision to enter into the merger agreement, but is not relying on such fairness opinions as a basis for the continuing recommendation of a majority of the WMB Board to WMB stockholders to adopt the merger agreement. The following reasons for the WMB Board’s recommendation described in the section titled “The Merger—Recommendation of the WMB Board and Its Reasons for the Merger” beginning on page 132 of this proxy statement/prospectus no longer serve as a basis for the continuing recommendation of a majority of the WMB Board that WMB stockholders adopt the merger agreement:

 

   

The WMB Board’s expectation that the pro forma dividend per ETC common share would exceed the expected 2016 dividend per share of WMB on a standalone basis given ETE’s statement that it does not

 



 

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expect to make any cash distributions with respect to its common units and Class E Units following the closing of the merger and prior to the distribution payable with respect to the quarter ending March 31, 2018, which will result in ETC being unable to make cash distributions on the ETC common shares.

 

   

The WMB Board’s expectation that WPZ will retain its current name and remain a publicly traded partnership headquartered with a meaningful ongoing presence in Tulsa, Oklahoma.

The WMB Board also notes that changes in the industries in which WMB and ETE operate and market conditions could adversely impact the likelihood of (i) ETC common shares being included in the S&P 500 Index and (ii) the merger resulting in the establishment of the third largest energy franchise in North America and one of the five largest global energy companies.

Certain members of the WMB Board voted on September 28, 2015 against entering into the merger agreement and continue to disagree with the recommendation of a majority of the WMB Board that WMB stockholders adopt the merger agreement. See section titled “The Merger—Background of the Merger” beginning on page 104 of this proxy statement/prospectus. Notwithstanding their continuing disagreement with the recommendation of the majority of the WMB Board, these directors fully support the WMB Board’s commitment to consummate the transaction as required by the terms of the merger agreement. The WMB Board is unanimously committed to enforcing WMB’s rights under the merger agreement and delivering the benefits of the merger agreement to WMB stockholders.

In connection with the merger, there are two other separate transactions that are occurring: (i) the transfer of newly issued ETC common shares from ETC to ETE in exchange for cash (to be used by ETC to fund the cash portion of the merger consideration) and (ii) the transfer by ETC of substantially all of the assets and liabilities it assumes from WMB in the merger to ETE in exchange for newly issued ETE Class E units (i.e., the WMB Contribution). Completion of the merger is subject to satisfaction or waiver of a number of conditions, including the receipt by ETC and WMB of the 721 Opinion from Latham.

Latham has recently advised ETE that it has concluded that there is a substantial risk that the IRS could successfully assert that the WMB Contribution would not be a transaction to which Section 721(a) of the Code applies based, in part, on the belief that the decline in value of ETE’s common units since the merger agreement was executed has increased such risk. In arriving at this conclusion, Latham considered and discussed with ETE claims that the IRS could possibly assert regarding whether the WMB Contribution would not be a transaction to which Section 721(a) of the Code applies, including the possibility that the IRS would successfully disregard the form of the transaction by applying various principles under statutory and case law (including Section 707 of the Code) and, therefore, assert that a portion of the cash consideration being paid by ETE for ETC common shares may be deemed paid by ETE to ETC for the Williams assets in the WMB Contribution. Accordingly, considering the potential claims that the IRS may successfully assert and the level of uncertainty regarding the ultimate outcome of these claims, Latham has advised ETE that it would not be able to deliver the 721 Opinion were the opinion requested as of the date of this proxy statement/prospectus.

The ability of Latham to deliver the 721 Opinion is also dependent on ETE not being treated as an investment company for federal income tax purposes if ETE were incorporated. ETE has received favorable private letter rulings from the IRS that address material legal issues with respect to ETE not being treated as an investment company for federal income tax purposes if ETE were incorporated. Accordingly, Latham does not believe that this issue will affect its ability to deliver the 721 Opinion.

 



 

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After Latham advised ETE that it would not be able to deliver the 721 Opinion as described above, ETE consulted not only with Latham, but also with other legal advisors, regarding the risks that the WMB Contribution would not be a transaction to which Section 721(a) of the Code applies. Following those consultations and based on the information available to it, ETE believes that there is a substantial risk that the WMB Contribution will not be a transaction to which Section 721(a) of the Code applies given the risk that the IRS will successfully disregard the form of the transaction by applying various principles under statutory and case law (including Section 707 of the Code) and, therefore, assert that a portion of the cash consideration being paid by ETE for ETC common shares will be deemed paid by ETE to ETC for the WMB assets in the WMB Contribution.

ETE has also considered WMB’s views. On advice of Cravath, special counsel to WMB in connection with the transaction, WMB has advised ETE that it disagrees with Latham’s position and that it believes the WMB Contribution should be a transaction to which Section 721(a) of the Code applies. Further, in an effort to address ETE’s concerns, WMB has proposed two alternative transaction structures, each of which WMB and Cravath believe fully address ETE’s concerns. On advice of Cravath, WMB believes that the covenants in the merger agreement that require the parties to use commercially reasonable efforts to cause the WMB Contribution to qualify as an exchange to which Section 721(a) of the Code applies and to obtain the 721 Opinion require ETE and WMB to restructure the existing transaction in a manner such as WMB has suggested. ETE has advised WMB that it does not believe, after consultation with its legal advisors, that the merger agreement requires ETE to restructure the existing transaction as WMB has proposed. ETE has further advised WMB that, reserving its rights to assert that restructuring of the existing transaction is not required under the merger agreement, it has discussed the alternative transaction structures proposed by WMB and that, after consulting with Latham and the other legal advisors and based on their advice, ETE has concluded that there is a substantial risk that the form of either of the proposed alternative transaction structures, if undertaken would not be respected for tax purposes and, therefore, that there would remain the substantial risk of material taxation described above.

ETE is continuing to evaluate the tax risks referred to above and has expressed its willingness to continue to discuss the matter with WMB. Further, although ETE is fully committed to meeting its obligations under the merger agreement and using its reasonable best efforts to have the registration statement on Form S-4 declared effective so that WMB may proceed to a stockholder meeting to vote on the merger, ETE believes that there is a substantial risk that the closing condition relating to the 721 Opinion will not be met. Because ETE believes that ETE and ETC will be materially adversely affected if the WMB Contribution is not an exchange to which Section 721(a) of the Code applies, it is unlikely that ETC would waive the condition to closing that ETC receive the 721 Opinion from Latham. Based on the information available to WMB as of the date of this proxy statement/prospectus, WMB believes that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies. WMB is, therefore, willing to waive the condition to closing that WMB receive the 721 Opinion from Latham. In addition, on May 13, 2016, WMB filed a lawsuit against ETE in the Delaware Court of Chancery seeking, among other remedies, a declaratory judgment and injunction preventing ETE from terminating or otherwise avoiding its obligations under the merger agreement due to any failure of Latham to deliver the 721 Opinion to ETC and WMB. ETE believes that the allegations underlying the lawsuit are without merit and intends to vigorously defend against them. Please see “Recent Developments—Litigation Related to the 721 Opinion and the Outside Date.”

Currently, neither ETE nor WMB has an estimate as to when the WMB stockholders are likely to learn the outcome of this issue, nor can either party provide any assurance that the outcome of this issue will be determined prior to the special meeting. If the closing condition relating to the 721 Opinion is not met or waived, and as a result the merger is not consummated, ETE expects to announce this outcome in a press release and file a Current Report on Form 8-K with the SEC regarding the same. See the section entitled “Risk Factors—Risks Related to the Merger—There is no assurance when or if the merger will be completed, and ETE believes there is substantial risk that the merger will not be consummated.”

 



 

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Updated Financial Forecasts of ETC

In an effort to understand the effects of more challenging business conditions and the merger, management of ETE has prepared projections for ETC, on a pro forma basis after giving effect to the merger, and shared those projections with the board of directors of LE GP and with WMB. The projections were based upon facts and circumstances known to management of ETE as of April 12, 2016, were delivered to WMB on April 12, 2016, and have not been subsequently updated. The ETC projections were based in part on projected financial information prepared by WMB management with respect to WMB that was provided by WMB to ETE on April 7, 2016. In preparing the ETC projections, ETE made a variety of assumptions, as described below. WMB expressly takes no responsibility for the ETC projections and states no view on the reasonableness of such projections.

You should be aware that this forecasted financial information is based on numerous assumptions about future events, as further discussed below. Many of these assumptions are speculative in nature and actual results for ETC will likely vary materially in one manner or another from the forecast. Nevertheless, management of ETE believes the forecast was prepared on a reasonable basis.

Neither ETE’s nor WMB’s independent registered public accounting firm nor any other independent registered public accounting firm has compiled, examined or performed any procedures with respect to the forecasted financial information, nor do they take any responsibility whatsoever for the forecasted financial information. You should consider that ETC and ETE are the only parties responsible for the inclusion herein of the following forecasted financial information.

Pro Forma Forecasted Financial Information

 

     Year ended December 31,  
     2016      2017      2018  

Pro Forma ETC (1)

        

Consolidated EBITDA ($mm) (2)

   $ 10,179       $ 11,603       $ 13,162   

Total cash available for distribution ($mm)(2)

   $ 2,243       $ 1,710       $ 2,870   

Distributions per common share ($/common share)

   $ 0.57       $ 0.00       $ 0.46   

ETE Leverage

        

Unconsolidated leverage (3)

     6.8x         5.9x         3.7x   

Consolidated leverage(4)

     6.8x         6.1x         5.4x   

Commodity Price Assumptions

        

WTI ($/bbl)

   $ 40.00       $ 45.00       $ 50.00   

Henry Hub ($/mcf)

   $ 2.50       $ 2.75       $ 3.00   

 

(1) ETC expects to grant awards to officers, directors and eligible service providers of ETC and its affiliates under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan shortly following the closing of the merger covering approximately 10% of the outstanding ETC common shares at the consummation of the merger. The pro forma forecasted financial information gives effect to these expected grants, which grants will not have a material impact on the forecasted financial information presented herein. Assuming these grants take place, former holders of WMB common stock and ETE would hold approximately 74% and 17% of the outstanding equity interests in ETC, respectively, and directors and officers of ETC would own approximately 9% of the outstanding equity interests in ETC. Please see “Additional Information About ETC—Compensation Discussion and Analysis—Our 2016 Long-Term Incentive Plan.”
(2) At closing, we expect ETC will own an approximate 57% limited partner interest in ETE, excluding any interest attributable to the Convertible Units issued by ETE in March 2016. We expect ETC will consolidate the results of ETE because ETC will control ETE GP, the general partner of ETE.
(3)

Unconsolidated leverage is calculated as ETE’s unconsolidated indebtedness, which consists of borrowings outstanding under ETE’s revolving credit facility and term loans (including the $6.05 billion term loan that

 



 

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  will be incurred in connection with the closing of the merger), ETE’s senior notes and the WMB senior notes to be assumed by ETE in connection with the merger, divided by ETE’s unconsolidated EBITDA. ETE’s unconsolidated EBITDA is calculated as (a) the distributions received by ETE from its ownership interests in ETP, Sunoco, Lake Charles LNG and WPZ, less (b) a management fee to ETP and (c) ETE’s selling, general and administrative expenses.
(4) Consolidated leverage is calculated as ETE’s consolidated indebtedness, which consists of all of the outstanding indebtedness of ETE, ETP, Sunoco Logistics, Sunoco and WPZ, divided by ETE’s consolidated EBITDA. ETE’s consolidated EBITDA is calculated as (a) the EBITDA of ETP (excluding distributions received from Sunoco Logistics and an ETE management fee), Sunoco Logistics, Sunoco, Lake Charles LNG and WPZ less (b) selling, general and administrative expenses.

In developing the forecasted financial information set forth above, management of ETE made numerous material assumptions with respect to WMB, ETE and ETC for the periods covered by the projections, and management of WMB made numerous material assumptions with respect to the information related to WMB that ETE management utilized in preparing the forecasted financial information set forth above, including:

 

   

the EBITDA and maintenance capital expenditures from existing assets and business activities;

 

   

organic growth opportunities, and the amounts and timing of related capital expenditures and future EBITDA to be generated from such organic growth opportunities;

 

   

the credit risk of customers and the potential impact from future deteriorations of credit quality, including the potential for bankruptcy, of certain customers and the financial impact to ETC related thereto;

 

   

outstanding debt and debt and equity issuance during applicable periods, and the availability and cost of debt and equity capital;

 

   

the amount and timing of debt repayments, including that the acquisition financing is only partially repaid with excess cash from the elimination of ETE and ETC distributions or dividends (due to assumed incentive distribution waivers at the underlying partnerships and fixed debt refinancing assumptions at closing);

 

   

the amount of incentive distribution waivers at ETP and WPZ which affects the cash available at ETE and ETC;

 

   

the terms under which the acquisition financing will be refinanced and the timing thereof;

 

   

the prices and production of, and demand for crude oil, natural gas, NGLs, other hydrocarbons and petrochemical products, which could impact volumes and margins;

 

   

the tax profiles of WMB and ETC;

 

   

the timing and nature of certain asset sales, including the sale of Gulfstream Natural Gas Systems, L.L.C., and the anticipated net proceeds therefrom;

 

   

the amounts and timing of synergies expected to be realized by the combined company, and of costs incurred to realize such synergies; and

 

   

other general business, market, and financial assumptions.

ETE management has assumed in preparing the forecasted financial information set forth above that, commencing with the distributions related to the second quarter of 2016 for each of ETP and WPZ payable on or before August 15, 2016, ETE will agree to waive incentive distributions to which it would otherwise be entitled from each of ETP and WPZ in amounts intended to permit each of ETP and WPZ to maintain their respective investment grade credit ratings without reducing distributions payable with respect to ETP’s or WPZ’s common units. Accordingly, the assumptions underlying the projections with respect to the availability and cost of debt and equity capital to ETP and WPZ during the projection period assume that ETP and WPZ maintain distributions at their respective current levels through 2016 and 2017 and ETP increases distributions in 2018

 



 

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while WPZ maintains the same, and that ETP and WPZ maintain their respective investment grade credit ratings. While ETE believes these assumptions are reasonable, there can be no assurances that the board of directors of LE GP will ultimately approve incentive distribution waivers in such amounts or at all or that any incentive distribution waivers will permit ETP or WPZ to maintain their respective investment grade credit ratings (with or without reducing distributions payable with respect to their respective common units).

In preparing the forecasted financial information set forth above, ETE management has also assumed that all of the cash distributions that it receives from ETP, WPZ, SXL and SUN following the closing of the merger through mid-2018, after taking into account the waivers of incentive distributions assumed to be agreed to by ETE as described above, will be used to make cash distributions on the Convertible Units and to repay a portion of the indebtedness incurred by ETE in connection with the merger. As a result, ETE does not expect to make any cash distributions with respect to its common units or Class E Units prior to the distribution payable with respect to the quarter ending March 31, 2018. Assuming ETE does not pay any distributions on its common units and pays a distribution of $0.11 per unit with respect to its Convertible Units for each quarter during the forecast period, the Conversion Value at the end of the plan period for each Convertible Unit and for all of the Convertible Units issued in the offering would be $1.575 and approximately $518.6 million, respectively. Upon conversion of the Convertible Units at the end of the plan period, each Convertible Unit would convert into approximately 0.24 ETE common units, resulting in an aggregate issuance of approximately 79.1 million ETE common units. Assuming that ETE does not issue any additional equity securities prior to the end of the plan period, upon the conversion of the Convertible Units, ETC would own an approximate 55% limited partner interest in ETE, which is less than the approximate 57% limited partner interest in ETE that ETC will hold immediately following the completion of the merger transactions. The Convertible Units have a priority distribution over the ETE common units and, following the merger, will have a priority distribution over the ETE Class E Units. Thus, ETE’s unitholders that did not participate in the offering (including ETC, as the future holder of ETE Class E Units) may not receive any cash distributions with respect to their units, including in any quarter in which holders of the Convertible Units receive a cash distribution and/or an increase in the Conversion Value of their Convertible Units. If ETE does not make a cash distribution on its common units, then ETC will not receive a cash distribution on the ETE Class E Units that it will own following the merger and will not have any cash available for distribution on its common shares.

ETE expected cash distribution savings from the offering of Convertible Units that would allow ETE to reduce its outstanding debt. However, ETE no longer expects to pay cash distributions with respect to its common units following the closing of the merger until the quarter ending March 31, 2018, and therefore, does not expect to receive any cash distribution savings until such time from forgone distributions on Participating Common Units, or to repay any debt from such cash distribution savings. As described above, ETE expects to reduce its outstanding debt following the merger with cash distributions it receives from ETP, WPZ, SXL and SUN through mid-2018. As a result, ETE expects that it will be able to reduce its unconsolidated leverage ratio to approximately 3.7x for the year ending December 31, 2018 and ETE believes that its overall plan to reduce its unconsolidated leverage ratio to this level will position ETE to maintain its current debt rating throughout the forecast period.

All of the above assumptions involve variables making them difficult to predict, and most are beyond the control of either WMB, ETE or ETC. Although management of WMB and ETE, as applicable, believe that there was a reasonable basis for their respective internal projections and the underlying assumptions related thereto, any assumptions for near-term and long-term projected cases remain uncertain, and the risk of inaccuracy increases with the length of the forecasted period.

Litigation Relating to the Convertible Unit Offering

On April 6, 2016, WMB filed a complaint, accompanied by a motion for expedited proceedings, against ETE and LE GP in the Delaware Court of Chancery. The complaint is captioned The Williams Companies, Inc. v. Energy

 



 

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Transfer Equity, L.P., et al., C.A. No. 12168-VCG. WMB alleges that ETE has breached the merger agreement by making the private offering of Convertible Units, as announced in a Current Report on Form 8-K filed by ETE on March 9, 2016. As relief, WMB seeks, among other things, to unwind the private offering and invalidate Amendment No. 5 to the ETE partnership agreement, adopted on March 8, 2016 (the “Amendment”), pursuant to which ETE established the Convertible Units. On April 14, 2016, the Court granted WMB’s motion for expedited proceedings in a ruling from the bench. The Court has ordered that the injunction hearing for this lawsuit be held during the week of June 13, 2016. Therefore, while this lawsuit may not be resolved prior to the special meeting, WMB has advised ETE that it expects that the lawsuit will be resolved prior to the consummation of the merger. Also on April 6, 2016, WMB filed a petition against Mr. Warren, the chairman of ETE, in the District Court of Dallas County, Texas, captioned The Williams Companies, Inc. v. Warren, No. DC-16-03941. In the Warren action, WMB alleges that Mr. Warren has tortiously interfered with the merger agreement by inducing ETE to undertake the private offering, and seeks compensatory damages, exemplary damages and other relief. The exact amount of damages is a factual issue to be determined at trial if the case should reach trial. The Warren action is a suit against Mr. Warren individually. Therefore, WMB believes any judgment would be satisfied out of Mr. Warren’s personal funds and would not require payment by ETE or ETC unless Mr. Warren is entitled to indemnification from ETE pursuant to the provisions of the ETE partnership agreement or the separate directors and officers indemnification agreement between ETE and Mr. Warren. WMB has advised ETE that it believes the Warren action will likely not be resolved prior to the special meeting or the consummation of the merger.

On May 3, 2016, ETE and LE GP filed an answer and counterclaim. The counterclaim asserts that WMB materially breached its obligations under the merger agreement by (i) blocking ETE’s attempts to complete a public offering of the Convertible Units pursuant to the Plan, including, among other things, by declining to allow WMB’s independent registered public accounting firm to provide the auditor consent required to be included in the registration statement for a public offering and (ii) bringing the Warren action against Mr. Warren in the District Court of Dallas County, Texas. WMB believes that ETE and LE GP’s counterclaim is without merit and intends to defend against it vigorously.

ETE has advised WMB that it believes the action against ETE is without merit and that the action is harmful to the merger process. Mr. Warren and ETE have both advised WMB that they believe the action against Mr. Warren is without merit, that it is harmful to the merger process, particularly since WMB is claiming that Mr. Warren, who will control ETC following the closing of the merger, acted in a materially wrongful manner, and that ETE will likely be required to indemnify Mr. Warren against all costs and other payments resulting from the Warren action. ETE believes that the lawsuit against Mr. Warren violates the terms of the merger agreement, including the parties’ agreement to file any lawsuits relating to the merger agreement in the Court of Chancery in the State of Delaware, and that WMB brought the suit against Mr. Warren at least in part to pressure ETE to resolve the action WMB has brought against ETE. WMB believes that the merger agreement’s requirement to bring suit in the Court of Chancery in the State of Delaware is inapplicable to the lawsuit against Mr. Warren because, among other things, the lawsuit is against Mr. Warren individually and Mr. Warren is not a party to the merger agreement.

ETE is unable at this time to determine when these actions will be resolved. While ETE and Mr. Warren believe they are meritless, ETE believes that if the actions are resolved adversely to ETE or Mr. Warren such resolution could have a material adverse impact on the operations and financial condition of ETC following the merger and, with regard to Mr. Warren, if ETE is not required to indemnify Mr. Warren (which is contrary to ETE’s and Mr. Warren’s belief), Mr. Warren could be required to sell some or all of his ETE common units or his ownership interests in LE GP or ETC GP, to fund any damage award. Any sale of a significant amount of ETE common units by Mr. Warren could have a substantial negative impact on the trading price of ETE common units following the merger, and any sale of Mr. Warren’s interests in LE GP or ETC GP could result in a change of control of ETC and ETE (which, in the case of ETE, could trigger change of control repurchase obligations under its senior notes and an immediate event of default under its credit facilities entitling the lenders thereunder to accelerate repayment or pursue other remedies) and significant disruption in their respective businesses and

 



 

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operations, any of which could have a negative impact on ETE, ETC and their respective equityholders. Mr. Warren is permitted to sell his interests in LE GP and ETC GP without any approval by ETE or ETC or their respective equityholders. Immediately after the closing of the merger, the actions against ETE, LE GP and Mr. Warren would be contributed from ETC to ETE as part of the WMB Contribution. Accordingly, after closing, ETE will have the right to determine whether to proceed with such actions based on the best interests of the ETE unitholders and the ETC shareholders at such time.

On April 12 and 22, 2016, two purported ETE unitholders filed putative class action lawsuits against ETE, LE GP, LE GP directors and certain recipients of the Convertible Units, captioned Levine v. Energy Transfer Equity, L.P., et al. and Bowood MLP Return Fund, L.P. v. Energy Transfer Equity, L.P., both in the Delaware Court of Chancery. The Bowood plaintiff had previously filed a books and records action on April 11, 2016 in the Delaware Court of Chancery but dismissed this action when it filed the Bowood lawsuit. The complaints allege that the defendants breached various provisions of ETE’s limited partnership agreement due to ETE’s issuance of the Convertible Units. The Bowood complaint also alleges causes of action for unjust enrichment and tortious interference with ETE’s limited partnership agreement in connection with ETE’s issuance of the Convertible Units. The complaints seek, among other things, to enjoin ETE from making distributions on the Convertible Units and to invalidate the Amendment. On April 22, 2016, the Court granted the Levine plaintiff’s motion for expedited proceedings and ordered the parties to negotiate a schedule so that a preliminary injunction hearing can be held by early August 2016. The parties are currently negotiating a scheduling order per the Court’s instructions, and the Bowood plaintiff has moved to consolidate its lawsuit with the Levine lawsuit. The defendants believe the allegations in the complaints are without merit and intend to vigorously defend their actions.

Amendment of the Merger Agreement

On and effective as of May 1, 2016, the parties to the merger agreement approved an amendment to the merger agreement (the “amendment”) to remove the requirement that the Election Deadline be at least 30 days prior to the anticipated closing date of the merger, and provide instead that the Election Deadline will be the earlier of (i) the 20th business day after the Mailing Date and (ii) three business days prior to the anticipated closing date of the merger. The amendment also removes the requirement in the merger agreement that the election form be mailed to WMB stockholders of record at least 20 business days before the Election Deadline, and provides instead that the election form be mailed on the same date as this proxy statement/prospectus.

Litigation Relating to the 721 Opinion and Outside Date

On May 13, 2016, WMB filed a new lawsuit against ETE in the Delaware Court of Chancery. The lawsuit is captioned The Williams Companies, Inc. v. Energy Transfer Equity L.P., Energy Transfer Corp LP, ETE Corp GP, LLC, LE GP, LLC and Energy Transfer Equity GP, LLC. WMB alleges that ETE has breached the merger agreement by failing to cooperate to obtain the 721 Opinion from Latham and failing otherwise to use its reasonable best efforts to take all actions necessary to close the merger. As relief, WMB seeks, among other things, a declaratory judgment and injunction preventing ETE from terminating or otherwise avoiding its obligations under the merger agreement based on either (i) any failure to obtain the 721 Opinion from Latham or (ii) any failure to close the transaction by the Outside Date of June 28, 2016.

ETE believes that the allegations are without merit and intends to vigorously defend against them. Specifically, ETE believes that it has complied with its covenants in the merger agreement, including those requiring ETE to use commercially reasonable efforts to obtain the 721 Opinion and to otherwise use reasonable best efforts to consummate the merger and related transactions. Please see “Summary—Recent Developments” for additional discussion regarding ETE’s efforts to obtain the 721 Opinion and ETE’s beliefs regarding the substantive tax risks associated with the transaction. At the time this suit was filed, the parties were in the midst of resolving the remaining comments from the staff of the SEC related to this proxy statement/prospectus which would facilitate the mailing of the proxy statement/prospectus for the purpose of soliciting WMB stockholder approval or a

 



 

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meeting to vote on the merger in advance of the June 28, 2016 Outside Date. ETE believes and has informed WMB that, even assuming the WMB stockholders approve the merger, the merger will still not be able to close due to a failure of a closing condition, given the substantial risk that Latham will not be able to deliver the 721 Opinion prior to the Outside Date and ETC’s current expectation that it would not waive such condition. Accordingly, ETE believes this lawsuit is an attempt to gain undue leverage in, and undermine future discussions regarding, the pending merger and that this lawsuit therefore will likely result in further delay in mailing the proxy statement/prospectus.

On May 20, 2016, ETE filed its affirmative defenses and counterclaim. The parties have agreed to expedited proceedings, with a trial scheduled to be held June 20 and June 21, 2016.

Organizational Structure of ETC Prior to the Merger Transactions

The diagram below depicts the simplified structure of the mergers and reflects the ownership structure of ETC, ETE and WMB prior to the consummation of the mergers.

 

LOGO

 

(1) Kelcy L. Warren, the Existing GP Owner, is the sole member of KLW LLC.

 



 

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(2) ETE is entitled to receive 90.15% of the cash distributions related to the SXL IDRs and general partner interest on account of its ownership of 0.1% of the IDRs and general partner interest of SXL and ETP Class H Units, which entitle ETE to receive 90.05% of the cash distributions related to the IDRs and general partner interest of SXL received by ETP.
(3) In connection with the Sunoco Equity Offering, ETE acquired an approximate 2% limited partner interest in Sunoco.
(4) ETP owns an approximate 39% limited partner interest in Sunoco after giving effect to the Sunoco Retail Acquisition and the Sunoco Equity Offering.
(5) ETP owns an approximate 27% limited partner interest in SXL and receives 9.85% of the cash distributions related to the IDRs and general partner interest after accounting for the distributions ETP makes to ETE with respect to the ETP Class H Units described above.

Organizational Structure of ETC Following the Merger Transactions

The diagram below depicts the simplified organizational structure of ETC as of the date of this proxy statement/prospectus, after giving effect to the completion of the merger transactions:

 

LOGO

 

 

(1) Immediately following the completion of the merger transactions, it is expected that former holders of WMB common stock will hold approximately 81% of the outstanding equity interests of ETC, and that ETE will hold approximately 19% of the outstanding equity interests of ETC. ETC expects to grant awards to officers, directors and eligible service providers of ETC and its affiliates under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan shortly following the consummation of the merger covering approximately 10% of the outstanding ETC common shares at the consummation of the merger. Assuming these grants take place, former holders of WMB common stock and ETE would hold approximately 74% and 17% of the outstanding equity interests in ETC, respectively, and directors and officers of ETC would own approximately 9% of the outstanding equity interests in ETC. Please see “Additional Information About ETC—Compensation Discussion and Analysis—Our 2016 Long-Term Incentive Plan.”
(2) Kelcy L. Warren, the Existing GP Owner, is the sole member of KLW LLC.
(3) After the completion of the merger transactions, ETC will be the managing member of the general partner of ETE and will own approximately 1.4 billion ETE Class E Units, which will represent an approximate 57% limited partner interest in ETE, excluding any interest attributable to Convertible Units issued by ETE in March 2016, as further described in the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus. ETE will own approximately 260 million ETC common shares, which will represent an approximate 19% interest in ETC (which percentage becomes approximately 17% after giving effect to the anticipated grant of awards under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan).
(4) ETE is entitled to receive 90.15% of the cash distributions related to the SXL IDRs and general partner interest on account of its ownership of 0.1% of the IDRs and general partner interest of SXL and ETP Class H Units, which entitle ETE to receive 90.05% of the cash distributions related to the IDRs and general partner interest of SXL received by ETP.
(5) In connection with the Sunoco Equity Offering, ETE acquired an approximate 2% limited partner interest in Sunoco.
(6) ETP owns an approximate 39% limited partner interest in Sunoco after giving effect to the Sunoco Retail Acquisition and Sunoco Equity Offering.
(7) ETP owns an approximate 27% limited partner interest in SXL and receives 9.85% of the cash distributions related to the IDRs and general partner interest after accounting for the distributions ETP makes to ETE with respect to the ETP Class H Units described above.

 



 

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ETC SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

ETC was formed as a corporation in April 2014 and converted into a limited partnership in July 2015. It has not had any operations since its formation and, therefore, does not have historical financial statements. Upon the completion of the merger transactions, ETC will own ETE Class E units and will control ETE GP, the general partner of ETE. Because ETC will have a controlling interest in ETE GP, it will reflect its ownership interest in ETE GP on a consolidated basis, which means that ETC’s financial results will be consolidated with those of ETE GP and ETE.

The following table shows the selected historical financial data of ETE for the periods and as of the dates indicated. The selected historical balance sheet data as of December 31, 2014 and 2015 and March 31, 2016, and the selected historical statements of operations and cash flow data for the years ended December 31, 2013, 2014 and 2015 and the three months ended March 31, 2015 and 2016 are derived from the audited and unaudited financial statements of ETE included elsewhere in this proxy statement/prospectus. The selected historical balance sheet data as of December 31, 2011, 2012 and 2013 and March 31, 2015, and the selected historical statements of operations and cash flow data for the years ended December 31, 2011 and 2012 are derived from ETE’s audited and unaudited financial statements for such years, which have not been incorporated by reference into this proxy statement/prospectus.

ETC derived the data in the following table from, and it should be read together with and is qualified in its entirety by reference to, the historical financial statements of ETE referenced above and all of the financial information and notes contained therein. The table should also be read together with “Additional Information About ETC—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    ETE Historical  
    Year Ended December 31,     Three Months Ended
March  31,
 
    2011     2012     2013     2014     2015     2015     2016  
    (in millions)              

Statement of Operations Data:

     

Revenues:

             

Investment in ETP(1)

  $ 8,233      $ 17,702      $ 48,335      $ 55,475      $ 34,292      $ 10,326      $ 4,481   

Investment in Sunoco LP(2)

    —          —          —          6,825        16,935        4,342        3,202   

Investment in Lake Charles LNG

    —          166        216        216        216        54       
49
  

Other

    (43     (904     (216     (6,825     (9,317     (4,342     (50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    8,190        16,964        48,335        55,691        42,126        10,380        7,682   

Gross margin

    3,021        3,876        5,755        7,277        8,117        1,893        2,060   

Depreciation and amortization

    586        871        1,313        1,724        2,079        493        562   

Operating income

    1,237        1,360        1,551        2,470        2,399        617        701   

Interest expense, net of interest capitalized

    (740     (1,018     (1,221     (1,369     (1,643     (371     (427

Income from continuing operations before income tax expense

    548        1,437        375        1,417        993        233        281   

Income tax expense (benefit) from continuing operations

    17        54        93        357        (100     12       
(55

Net income (loss) attributable to noncontrolling interest

    218        970        119        491        (96     (63    
24
  

Net income attributable to partners

    310        304        196        633        1,189        284       
312
  

 

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    ETE Historical  
    Year Ended December 31,     Three Months Ended
March 31,
 
    2011     2012     2013     2014     2015     2015     2016  
    (in millions)              

Balance Sheet Data (at period end):

             

Current assets

  $ 1,455      $ 5,597      $ 6,536      $ 6,139      $ 5,410      $ 6,789      $ 5,584   

Total assets

    20,897        48,904        50,330        64,279        71,189        67,004        72,765   

Current liabilities

    1,841        5,845        6,500        6,683        4,910        5,327        5,691   

Long-term debt, less current maturities

    10,947        21,440        22,562        29,477        36,837        33,158        37,401   

Total equity

    7,389        16,350        16,279        22,314        23,598        22,791        23,039   

Other Financial Data:

             

Cash flow provided by operating activities

  $ 1,378      $ 1,078      $ 2,419      $ 3,175      $ 3,068      $ 575      $ 985   

Cash flow used in investing activities

    (3,874     (4,196     (2,347     (6,795     (10,094     (2,585     (1,942

Cash flow provided by financing activities

    2,536        3,364        146        3,877        6,785        3,026        1,158   

Cash paid for acquisitions

    (1,972     (2,982     (405     (2,367     (835     (370     (2

 

(1) ETP completed its acquisition of Regency in April 2015; therefore, the Investment in ETP segment amounts for prior periods have been retroactively adjusted to include Regency.
(2) The Investment in Sunoco LP segment amounts reflect the results of Sunoco beginning August 29, 2014 (the date that ETP originally obtained control of Sunoco) based on the revenues as reported by Sunoco in its consolidated financial statements included in Sunoco’s 2015 Annual Report on Form 10-K.

 

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WMB SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The selected historical financial information presented for WMB as of December 31, 2014 and 2015, and for the years ended December 31, 2013, 2014 and 2015, was derived from the audited consolidated financial statements of WMB included in its Annual Report on Form 10-K filed February 26, 2016 (the “WMB 10-K”), which is incorporated by reference in this proxy statement/prospectus. The selected unaudited financial information presented for WMB as of March 31, 2016, and for the three months ended March 31, 2015 and 2016, was derived from the unaudited consolidated financial statements of WMB included in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (the “WMB First Quarter 2016 10-Q”), which is incorporated by reference in this proxy statement/prospectus. All other selected historical financial information presented for WMB has been prepared from financial statements not incorporated by reference in this proxy statement/prospectus.

The unaudited consolidated financial statements of WMB have been prepared on the same basis as the audited consolidated financial statements except as stated in the related notes thereto, included in the WMB First Quarter 2016 10-Q and, in the opinion of WMB management, include all normal recurring and other adjustments considered necessary for a fair presentation of the financial condition and results of operations of WMB for such periods. Operating results for the three months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

You should read the financial information with respect to WMB presented below in conjunction with the historical consolidated financial statements, the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the WMB 10-K and the WMB First Quarter 2016 10-Q.

 

    WMB Historical  
    Years Ended December 31,     Three Months
Ended March 31,
 
  2011      2012      2013      2014      2015     2015      2016  
    (in millions, except per common share data)               

Statement of Income Data:

                  

Revenues(1)

  $ 7,930       $ 7,486       $ 6,860       $ 7,637       $ 7,360      $ 1,716       $ 1,660   

Income (loss) from continuing operations(2)

    1,078         929         679         2,335         (1,314     13      

 

(13

Amounts attributable to The Williams Companies, Inc.:

                  

Income (loss) from continuing operations(2)

    803         723         441         2,110         (571  

 

70

  

     (65

Diluted earnings (loss) per common share:

                  

Income (loss) from continuing operations(2)

    1.34         1.15         .64         2.91         (0.76  

 

.09

  

  

 

(.09

Cash dividends declared per common share

    .775         1.196         1.438         1.958         2.450     

 

.58

  

  

 

.64

  

    WMB Historical         
    As of December 31,     As of
March 31,
        
    2011      2012      2013      2014      2015     2016         
    (in millions)               

Balance Sheet Data:

                  

Total assets at end of period(3)(4)(6)

  $ 16,432       $ 24,248       $ 27,065       $ 50,455       $ 49,020      $ 48,807      

Commercial paper and long-term debt due within one year at end of period(5)

    352         1         226         802         675     

 

1,111

  

  

Long-term debt at end of period(3)(4)(6)

    8,300         10,656         11,276         20,780         23,812     

 

23,701

  

  

Stockholders’ equity at end of period(3)(4)

    1,296         4,752         4,864         8,777         6,148     

 

5,691

  

  

 

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(1) Revenues for 2014 increased reflecting the consolidation of Access Midstream Partners, L.P. (“ACMP”) beginning in the third quarter and new Canadian construction management services.
(2) Income (loss) from continuing operations:
   

For the three months ended March 31, 2016, includes a $112 million impairment of certain equity-method investments;

   

For 2015 includes a $1.4 billion impairment of certain equity-method investments and a $1.1 billion impairment of goodwill;

   

For 2014 includes $2.5 billion pretax gain recognized in the third quarter as a result of remeasuring to fair value the equity-method investment held before acquiring a controlling interest in ACMP, $246 million of insurance recoveries related to the 2013 explosion and fire at WPZ’s Geismar olefins plant, and $154 million of cash received related to a contingency settlement. 2014 also includes $78 million of pretax equity losses from Bluegrass Pipeline and Moss Lake related primarily to the underlying write-off of previously capitalized project development costs and $76 million of pretax acquisition, merger, and transition expenses related to the acquisition of ACMP;

   

For 2013 includes $99 million of deferred income tax expense incurred on undistributed earnings of foreign operations that are no longer considered permanently reinvested; and

   

For 2011 includes $271 million of pretax early debt retirement costs.

(3) The increases in 2014 reflect assets acquired and debt assumed primarily related to the acquisition of ACMP in the third quarter as well as $1.9 billion of related debt issuances and $2.8 billion of debt issuances at WPZ. Additionally, WMB issued $3.4 billion of equity.
(4) The increases in 2012 reflect assets and investments acquired, primarily related to the April 2012 purchase of Caiman Eastern Midstream, LLC and the February 2012 purchase from Delphi Midstream Partners, LLC of certain entities that operate in Susquehanna County, Pennsylvania, and Southern New York and WMB’s investment in ACMP, as well as debt and equity issuances.
(5) The increases in 2015, 2014, and 2013 reflects borrowings under WPZ’s commercial paper program, which was initiated in 2013.
(6) Amounts for 2014 and preceding periods presented have been adjusted to reflect the early adoption of ASU 2015-03 and ASU 2015-15, which address the presentation of debt issuance costs.

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The selected unaudited pro forma condensed combined statements of operations for the year ended December 31, 2015 and for the three months ended March 31, 2016 have been prepared to give effect to the merger transactions as if the merger transactions were completed on January 1, 2015. The selected unaudited pro forma condensed combined balance sheet as of March 31, 2016 has been prepared to give effect to the merger transactions as if the merger transactions were completed on March 31, 2016.

The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. The pro forma information is not necessarily indicative of what ETC’s financial position or results of operations actually would have been had the proposed combination between ETC and WMB been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of ETC. Among other things, the unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the completion of the merger transactions, the costs to integrate the operations of ETE, the ETE Entities and WMB or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements, or any facts and circumstances subsequent to the dates of such financial statements, including the facts and circumstances described in the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus. The following selected unaudited pro forma condensed combined financial information should be read in conjunction with the section titled “Unaudited Pro Forma Condensed Combined Financial Statements” and related notes beginning on page 223 of this proxy statement/prospectus, as well as the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus, which includes a description of facts and circumstances occurring subsequent to the date the parties executed the merger agreement.

Unaudited Pro Forma Condensed Consolidated Balance Sheet Data as of March 31, 2016

 

     ETE
Historical
     WMB
Historical
     Pro Forma
Adjustments
     ETC Pro
Forma for
Merger
 
     (in millions)  

Total assets

   $ 72,765       $ 48,807       $ 4,141       $ 125,713   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     5,691         2,789         (5      8,475   

Total long-term debt, less current maturities

     37,401         23,701         2,734         63,836   

Total other non-current liabilities

     6,634         6,693         2,002         15,329   

Total equity

     23,039         15,624         (590      38,073   

Total liabilities and equity

   $ 72,765       $ 48,807       $ 4,141       $ 125,713   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations for the Three Months Ended March 31, 2016

 

     ETE
Historical
     WMB
Historical
    Pro Forma
Adjustments
    ETC Pro
Forma for
Merger
 
     (in millions except per unit data)  

Revenues

   $ 7,682       $ 1,660      $ —        $ 9,342   

Income (Loss) from Continuing Operations

   $ 336       $ (13   $ (150   $ 173   
  

 

 

    

 

 

   

 

 

   

 

 

 

Shareholders’ Allocation of (Loss) from Continuing Operations

          $ 51   

(Loss) from Continuing Operations per Common Share:

         

Basic

          $ 0.04   
         

 

 

 

Diluted

          $ 0.04   
         

 

 

 

 

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Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations for the Year Ended December 31, 2015

 

     ETE
Historical
     WMB
Historical
    Pro Forma
Adjustments
    ETC Pro
Forma for
Merger
 
     (in millions except per unit data)  

Revenues

   $ 42,126       $ 7,360      $ (28   $ 49,458   

Income (Loss) from Continuing Operations

   $ 1,093       $ (1,314   $ (876   $ (1,097
  

 

 

    

 

 

   

 

 

   

 

 

 

Shareholders’ Allocation of (Loss) from Continuing Operations

          $ (233

(Loss) from Continuing Operations per Common Share:

         

Basic

          $ (0.20
         

 

 

 

Diluted

          $ (0.20
         

 

 

 

 

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COMPARATIVE HISTORICAL AND PRO FORMA PER UNIT AND PER SHARE INFORMATION

The following table summarizes (i) the historical per unit and per share information for ETE and WMB, respectively; (ii) the unaudited per share information for ETC on a pro forma basis after giving effect to the merger transactions and (iii) the unaudited per share information for WMB on an equivalent pro forma basis based on the exchange ratio of 1.8716 ETC common shares per share of WMB common stock, the exchange ratio associated with the share consideration. The following information should be read in conjunction with the historical financial statements and accompanying notes of ETE and WMB that are included elsewhere in or incorporated by reference into this proxy statement/prospectus and the unaudited pro forma condensed combined financial statements beginning on page 223 of this proxy statement/prospectus. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of what the operating results or financial position would have been if the merger transactions had been completed as of the beginning of the period presented, nor is it necessarily indicative of the future operating results or financial position of the ETC and should be read in conjunction with the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus, which includes a description of facts and circumstances occurring subsequent to the date the parties executed the merger agreement.

The historical income per unit/share, distributions or dividends per unit/share and book value per unit/share of ETE and WMB shown in the table below are derived from their respective audited consolidated financial statements as of and for the year ended December 31, 2015 and unaudited consolidated financial statements as of and for the three months ended March 31, 2016. The historical book value per unit/share is computed by dividing total partners’ equity or stockholders’ equity, as applicable, by the number of common units or shares outstanding, as applicable, at the end of the period on a diluted basis, excluding any treasury shares, in the case of WMB.

The pro forma combined income from continuing operations per share of ETC is computed by dividing the pro forma income from continuing operations available to holders of common shares by the pro forma weighted-average number of shares outstanding. The pro forma combined book value per share of ETC is computed by dividing total pro forma shareholders’ equity by the pro forma number of common shares outstanding at the end of the period on a diluted basis. WMB equivalent pro forma combined per share amounts are calculated by multiplying ETC pro forma combined per share amounts by the exchange ratio of 1.8716 ETC common shares per share of WMB common stock, the exchange ratio associated with the share consideration.

 

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There is currently no public market for ETC common shares; however, in connection with the closing of the merger, ETC intends to list the common shares for trading on the NYSE under the symbol “ETC” and a “when issued” trading market may develop prior to the effective time. Following the completion of the merger transactions, ETC’s primary asset and source of cash flow will initially be the ETE Class E units that it owns.

 

     As of or for the
Year Ended
December 31,
2015
     As of or for the
Three Months Ended
March  31,
2016
 

ETE—Historical

     

Historical per ETE common unit:

     

Income from continuing operations per common unit:

     

Basic

   $ 1.11       $ 0.30   

Diluted

     1.11         0.30   

Cash distributions declared per common unit(1)

     1.08         0.285   

Book value per common unit

     (0.89      (1.61

WMB—Historical

     

Historical per share of WMB common stock:

     

Income (loss) from continuing operations per share:

     

Basic

   $ (0.76    $ (0.09

Diluted

     (0.76      (0.09

Cash dividends declared per share

     2.45         0.64   

Book value per share

     8.21         7.59   

ETC—Pro Forma Combined

     

Pro forma per ETC common share:

     

Income from continuing operations per share:

     

Basic

   $ (0.20    $ 0.04   

Diluted

     (0.20      0.04   

Book value per share

     13.74         7.13   

Pro Forma WMB Equivalents(2)

     

Pro forma per share of WMB common share:

     

Income from continuing operations per share:

     

Basic

   $ (0.37    $ 0.07   

Diluted

     (0.37      0.07   

Book value per share

     25.71         13.34   

 

(1) Represents cash distributions per common unit declared and paid with respect to the period to which they relate.
(2) Calculated by multiplying ETC’s pro forma per unit amounts by the exchange ratio of 1.8716 ETC common share.

 

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COMPARATIVE PER UNIT AND PER SHARE MARKET PRICE AND DISTRIBUTION AND DIVIDEND INFORMATION

There is currently no public market for ETC common shares; however, in connection with the closing of the merger transactions, ETC intends to list the common shares for trading on the NYSE under the symbol “ETC.” The common units of ETE are listed on the NYSE under the symbol “ETE.” WMB common stock is listed on the NYSE under the symbol “WMB.”

The table below sets forth, for the calendar quarters indicated, the high and low sale prices per unit and share reported on the NYSE and the distributions and dividends declared on ETE common units and on WMB common stock, respectively.

 

    ETE Common
Units(1)
    Cash
Distribution(1)
    WMB Common Stock        
    High     Low           High             Low         Dividend  

2016

           

Second Quarter (through May 20, 2016)

  $ 13.97      $ 6.40        N/A(2)      $ 22.26      $ 14.60        N/A(2)   

First Quarter

  $ 14.39      $ 4.00      $ 0.2850      $ 26.68      $ 10.22      $ 0.6400   

2015

           

Fourth Quarter

  $ 25.36      $ 10.84      $ 0.2850      $ 44.51      $ 20.95      $ 0.64000   

Third Quarter

  $ 33.06      $ 18.62      $ 0.2850      $ 58.77      $ 34.64      $ 0.64000   

Second Quarter

  $ 35.44      $ 31.41      $ 0.2650      $ 61.38      $ 46.28      $ 0.59000   

First Quarter

  $ 33.08      $ 24.84      $ 0.2450      $ 51.15      $ 40.07      $ 0.58000   

2014

           

Fourth Quarter

  $ 33.11      $ 22.94      $ 0.2250      $ 57.00      $ 41.21      $ 0.57000   

Third Quarter

  $ 31.77      $ 26.59      $ 0.2075      $ 59.77      $ 54.28      $ 0.56000   

Second Quarter

  $ 30.29      $ 23.02      $ 0.1900      $ 59.68      $ 39.31      $ 0.42500   

First Quarter

  $ 23.81      $ 19.50      $ 0.1794      $ 42.94      $ 37.77      $ 0.40250   

 

(1) In July 2015, ETE completed a two-for-one split of its outstanding common units. Therefore, the per-unit amounts shown in the table above have been adjusted to give effect to the unit split.
(2) Cash distributions in respect of the second quarter of 2016 have not been declared or paid.

The following table presents trading information for ETE common units and WMB common stock on (i) September 25, 2015, the last trading day before the public announcement of the merger between ETC and WMB and (ii) May 23, 2016 the most recent practicable trading day prior to the date of this proxy statement/prospectus. The table also presents the equivalent market value per share of WMB common stock on September 25, 2015 and May 23, 2016 as determined by adding (i) $8.00, the cash portion of the prorated mixed consideration, and (ii) the product of (a) the closing prices of ETE common units on those dates and (b) 1.5274, the exchange ratio associated with the share portion of the prorated mixed consideration.

 

     ETE
Closing
Price
     WMB
Closing
Price
     Implied Per
Share
Value
 

September 25, 2015

   $ 23.24       $ 41.60       $ 43.50   

May 23, 2016

   $ 12.66       $ 21.95       $ 27.34   

The implied value of the share consideration that WMB stockholders may receive in this offer will change as the market price of ETE common units fluctuates during the pendency of the merger. Additionally, although ETC expects the price of its common shares and the price of ETE common units to trade in relation to one another following the completion of the merger transactions, ETC can provide no assurance as to the value at which its common shares will publicly trade. WMB stockholders are encouraged to obtain current market quotations for ETE common units and shares of WMB common stock prior to making any decision with respect to the merger. See the section “Risk Factors beginning on page 45 of this proxy statement/prospectus.

 

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RISK FACTORS

Risks Related to the Merger

There is no assurance when or if the merger will be completed, and ETE believes there is substantial risk that the merger will not be consummated.

In connection with the merger, there are two other separate transactions that are occurring: (i) the transfer of newly issued ETC common shares from ETC to ETE in exchange for cash (to be used by ETC to fund the cash portion of the merger consideration) and (ii) the transfer by ETC of substantially all of the assets and liabilities it assumes from WMB in the merger to ETE in exchange for newly issued ETE Class E units (i.e., the WMB Contribution). Completion of the merger is subject to satisfaction or waiver of a number of conditions, including the receipt by ETC and WMB of the 721 Opinion from Latham.

Latham has recently advised ETE that it has concluded that there is a substantial risk that the IRS could successfully assert that the WMB Contribution would not be a transaction to which Section 721(a) of the Code applies based, in part, on the belief that the decline in value of ETE’s common units since the merger agreement was executed has increased such risk. In arriving at this conclusion, Latham considered and discussed with ETE claims that the IRS could possibly assert regarding whether the WMB Contribution would not be a transaction to which Section 721(a) of the Code applies, including the possibility that the IRS would successfully disregard the form of the transaction by applying various principles under statutory and case law (including Section 707 of the Code) and, therefore, assert that a portion of the cash consideration being paid by ETE for ETC common shares may be deemed paid by ETE to ETC for the Williams assets in the WMB Contribution. Accordingly, considering the potential claims that the IRS may successfully assert and the level of uncertainty regarding the ultimate outcome of these claims, Latham has advised ETE that it would not be able to deliver the 721 Opinion were the opinion requested as of the date of this proxy statement/prospectus.

The ability of Latham to deliver the 721 Opinion is also dependent on ETE not being treated as an investment company for federal income tax purposes if ETE were incorporated. ETE has received favorable private letter rulings from the IRS that address material legal issues with respect to ETE not being treated as an investment company for federal income tax purposes if ETE were incorporated. Accordingly, Latham does not believe that this issue will affect its ability to deliver the 721 Opinion.

After Latham advised ETE that it would not be able to deliver the 721 Opinion as described above, ETE consulted not only with Latham, but also with other legal advisors, regarding the risks that the WMB Contribution would not be a transaction to which Section 721(a) of the Code applies. Following those consultations and based on the information available to it, ETE believes that there is a substantial risk that the WMB Contribution will not be a transaction to which Section 721(a) of the Code applies given the risk that the IRS will successfully disregard the form of the transaction by applying various principles under statutory and case law (including Section 707 of the Code) and, therefore, assert that a portion of the cash consideration being paid by ETE for ETC common shares will be deemed paid by ETE to ETC for the WMB assets in the WMB Contribution.

ETE has also considered WMB’s views. On advice of Cravath, special counsel to WMB in connection with the transaction, WMB has advised ETE that it disagrees with Latham’s position and that it believes the WMB Contribution should be a transaction to which Section 721(a) of the Code applies. Further, in an effort to address ETE’s concerns, WMB has proposed two alternative transaction structures, each of which WMB and Cravath believe fully address ETE’s concerns. On advice of Cravath, WMB believes that the covenants in the merger agreement that require the parties to use commercially reasonable efforts to cause the WMB Contribution to qualify as an exchange to which Section 721(a) of the Code applies and to obtain the 721 Opinion require ETE and WMB to restructure the existing transaction in a manner such as WMB has suggested. ETE has advised WMB that it does not believe, after consultation with its legal advisors, that the merger agreement requires ETE

 

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to restructure the existing transaction as WMB has proposed. ETE has further advised WMB that, reserving its rights to assert that restructuring of the existing transaction is not required under the merger agreement, it has discussed the alternative transaction structures proposed by WMB and that, after consulting with Latham and the other legal advisors and based on their advice, ETE has concluded that there is a substantial risk that the form of either of the proposed alternative transaction structures, if undertaken would not be respected for tax purposes and, therefore, that there would remain the substantial risk of material taxation described above.

ETE is continuing to evaluate the tax risks referred to above and has expressed its willingness to continue to discuss the matter with WMB. Further, although ETE is fully committed to meeting its obligations under the merger agreement and using its reasonable best efforts to have the registration statement on Form S-4 declared effective so that WMB may proceed to a stockholder meeting to vote on the merger, ETE believes that there is a substantial risk that the closing condition relating to the 721 Opinion will not be met. Because ETE believes that ETE and ETC will be materially adversely affected if the WMB Contribution is not an exchange to which Section 721(a) of the Code applies, it is unlikely that ETC would waive the condition to closing that ETC receive the 721 Opinion from Latham. Based on the information available to WMB as of the date of this proxy statement/prospectus, WMB believes that the WMB Contribution should qualify as an exchange to which Section 721(a) of the Code applies. WMB is, therefore, willing to waive the condition to closing that WMB receive the 721 Opinion from Latham. In addition, on May 13, 2016, WMB filed a lawsuit against ETE in the Delaware Court of Chancery seeking, among other remedies, a declaratory judgment and injunction preventing ETE from terminating or otherwise avoiding its obligations under the merger agreement due to any failure of Latham to deliver the 721 Opinion to ETC and WMB. ETE believes that the allegations underlying the lawsuit are without merit and intends to vigorously defend against them. Please see “Summary—Recent Developments—Litigation Related to the 721 Opinion and the Outside Date.”

Currently, neither ETE nor WMB has an estimate as to when the WMB stockholders are likely to learn the outcome of this issue, nor can either party provide any assurance that the outcome of this issue will be determined prior to the special meeting. If the closing condition relating to the 721 Opinion is not met or waived, and as a result the merger is not consummated, ETE expects to announce this outcome in a press release and file a Current Report on Form 8-K with the SEC regarding the same.

Additional conditions that must be satisfied or waived include the WMB stockholder approval of the Merger Proposal, the termination of the waiting period applicable to the merger under antitrust laws, the absence of any law or order prohibiting the closing of the merger, the declaration by the SEC of the effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part and the authorization of the listing on the NYSE of the ETC common shares. See the section titled “The Merger Agreement—Conditions to Completion of the Merger” beginning on page 206. There can be no assurance that ETC, ETE and WMB will be able to satisfy the closing conditions or that closing conditions beyond their control will be satisfied or waived.

Completion of the merger is also conditioned on the accuracy of representations and warranties made by the parties to the merger agreement (subject to customary materiality qualifiers and other customary exceptions) and the performance in all material respects by the parties of obligations imposed under the merger agreement.

ETE and WMB can mutually agree at any time to terminate the merger agreement, even if WMB stockholders have already voted to approve the merger agreement. ETE and WMB can also terminate the merger agreement under other specified circumstances. See the section titled “The Merger Agreement—Termination of the Merger Agreement” beginning on page 209.

 

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The number of ETC common shares to be received by WMB stockholders receiving the share consideration or mixed consideration is fixed and will not be adjusted for changes in the market prices of ETE common units or WMB common stock.

The total number of ETC common shares to be issued in the merger is fixed and will not be adjusted for changes in the market price of either ETE common units or WMB common stock. Because ETC’s primary asset will initially consist of ETE Class E units, changes in the price of ETE common units prior to the merger will affect the implied value of the merger consideration that WMB stockholders who have elected to receive the share consideration or mixed consideration (and, in some cases, the cash consideration, if cash is oversubscribed) will receive on the closing date of the merger. Market price changes may result from a variety of factors (many of which are beyond the control of ETE, ETC and WMB), including the following:

 

   

changes in WMB’s, ETC’s and ETE’s respective businesses, operations, assets, liabilities and prospects;

 

   

changes in market assessments of the business, operations, financial position and prospects of WMB, ETC or ETE;

 

   

market assessments of the likelihood that the merger will be completed and the prospects of the combined company;

 

   

interest rates, general market and economic conditions;

 

   

federal, state and local legislation, governmental regulation and legal developments in the businesses in which WMB, ETC and ETE operate; and

 

   

other factors beyond the control of WMB, ETC and ETE, including those described or referred to elsewhere in this “Risk Factors” section.

The price of ETE common units at the closing of the merger may vary from its price on the date the merger agreement was executed, on the date of this proxy statement/prospectus and on the date of the special meeting. As a result, the implied value of ETC common shares to be received as merger consideration will also vary. For example, based on the range of closing prices of ETE common units during the period from September 25, 2015, the last day of trading before public announcement of the merger agreement, through May 23, 2016, the latest practicable date before the date of this proxy statement/prospectus, the prorated mixed consideration of $8.00 and 1.5274 ETC common shares represented an implied value (based on the trading price of ETE common units) ranging from a low of $4.00 to a high of $24.88. In addition, the trading price of ETE common units substantially increased after the filing of the prior amendment to this proxy statement/prospectus. ETE believes that the increase in the trading price resulted, in part, from the disclosure in the proxy statement/prospectus relating to the increased likelihood that the merger will not be closed due to the advice of Latham to ETE to the effect that it would not be able to render the 721 Opinion were the opinion requested as of the date of this proxy statement/prospectus, which opinion is a condition to the closing of the merger. See “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus. If the closing of the merger becomes more certain, the trading price of ETE’s common units may decline materially and affect the implied value of ETC common shares to be received as merger consideration. A “when issued” trading market for the ETC common shares may also develop prior to the effective time and affect the value of the ETC common shares to be received as merger consideration.

Because the merger will be completed after the date of the special meeting, at the time of the special meeting, you will not know the exact market value of the ETC common shares that the WMB stockholders who receive the ETC common shares will receive upon completion of the merger.

 

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If you properly make an election before the election deadline, you will not be able to transfer your shares of WMB common stock during the period between the Election Deadline and the consummation of the proposed merger and after the Election Deadline there may not be a liquid market for shares of WMB common stock.

WMB stockholders may elect to receive the mixed consideration, the stock consideration or the cash consideration by the Election Deadline. During the time between the Election Deadline and the consummation of the proposed merger, WMB stockholders will not be able to transfer (including by sale) their shares of WMB common stock for which a properly completed election form has been submitted. The merger agreement provides that the Election Deadline will occur on the earlier of (i) the 20th business day after the Mailing Date and (ii) 3 business days prior to the anticipated closing date of the merger. As a result, such stockholders will not be able to transfer (including by sale) their shares of WMB common stock for which a properly completed election form has been submitted for the period between the earlier of (i) the 20th business day after the Mailing Date and (ii) 3 business days prior to the anticipated closing date of the merger, and the completion of the merger. WMB stockholders who wish to retain the ability to transfer their shares of WMB common stock between the Election Deadline and the consummation of the proposed merger should not return the election form. However, by not returning an election form prior to the Election Deadline a WMB stockholder is giving up the choice to elect his preferred form of consideration and will instead receive either the share consideration, the cash consideration or the mixed consideration, subject to the proration and adjustment procedures, as provided for in the merger agreement. Furthermore, even if WMB stockholders do not return the election form, they may be unable to transfer (including by sale) all or some of their shares as all shares of WMB common stock for which an election has been validly made will no longer be transferable and as a result there may not be a trading market that will provide WMB stockholders with adequate liquidity to make the desired transfer.

You may not receive the form of merger consideration that you elect.

The consideration to be received by WMB stockholders in the proposed merger is subject to proration to ensure that the aggregate number of ETC common shares and the aggregate amount of cash paid in the merger will be the same as if all shares of WMB common stock outstanding at the closing of the merger received the mixed consideration. See the section titled “The Merger Agreement—Proration” beginning on page 198. Accordingly, unless you elect to receive the mixed consideration, there is no assurance that you will receive the form of consideration that you elect with respect to all shares of WMB common stock you hold.

The merger is subject to the receipt of consents and approvals from governmental entities that may impose conditions that could have an adverse effect on ETC and ETE.

Before the merger may be completed, various waivers, approvals, clearances or consents must be obtained from the FTC, FERC and the Antitrust Division of the Department of Justice (the “Antitrust Division”) and other authorities in the United States and in Canada. These governmental entities may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of ETC and ETE following the merger, any of which might have an adverse effect on ETC or ETE following the merger.

The merger agreement contains provisions that could discourage a potential competing acquirer of WMB or could result in any competing proposal being at a lower price than it might otherwise be.

The merger agreement contains provisions that, subject to certain exceptions, restrict WMB’s ability to solicit, encourage, facilitate or discuss competing third-party proposals to acquire all or a significant part of WMB. In addition, ETE generally has an opportunity to negotiate with WMB in response to any competing proposal that may be made before the WMB Board is permitted to withdraw or qualify its recommendation to WMB stockholders. In some circumstances, upon termination of the merger agreement, WMB may be required to pay to ETE a termination fee of $1.48 billion. See “The Merger Agreement—No Solicitation” beginning on page 206, “The Merger Agreement—Termination of the Merger Agreement” beginning on page 213 and “The Merger Agreement—Termination Fees and Expenses” beginning on page 214.

 

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These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of WMB from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher value than the consideration proposed to be received or realized in the merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

ETC common shares received by WMB stockholders as consideration in the merger will have different rights from the shares of WMB common stock.

Upon completion of the merger, the rights of WMB stockholders receiving ETC common shares in the merger will be governed by ETC’s partnership agreement and the Delaware Revised Uniform Limited Partnership Act (“DRULPA”). Certain of the rights associated with WMB common stock are different from the rights associated with ETC common shares in part due to the fact that WMB is a corporation and ETC is a partnership. See the section of this proxy statement/prospectus titled “Comparison of Rights of ETC Shareholders and WMB Stockholders” for a discussion of the different rights associated with ETC common shares.

The pendency of the merger could adversely affect the business and operations of WMB, WPZ and ETE.

In connection with the pending merger, some customers or vendors of each of WMB, WPZ and ETE may delay or defer decisions, which could negatively impact the revenues, earnings and cash flows of WMB, WPZ and ETE, regardless of whether the merger is completed. Similarly, current and prospective employees of WMB, WPZ and ETE may experience uncertainty about their future roles following the merger, which may materially adversely affect the ability of WMB, WPZ and ETE to attract and retain key personnel during the pendency of the merger. In addition, due to operating covenants in the merger agreement, each of WMB, WPZ and ETE may be unable, during the pendency of the merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business. Such risks relating to vendors, customers, employees and those risks arising from operating covenants in the merger agreement will also apply to varying degrees to subsidiaries and affiliates of WMB, WPZ and ETE and thereby have a corresponding impact on WMB, WPZ and ETE.

ETC may fail to realize many of the anticipated benefits of the merger.

ETE entered into the merger agreement because it believed that the transaction would be beneficial to WMB and its stockholders, ETC and its shareholders and ETE and its unitholders for a number of reasons, including its identification of commercial synergies it expected would generate EBITDA in excess of $2 billion per year by 2020 and require over $5 billion of incremental capital investment to achieve. Since September 28, 2015, as part of ETE and WMB’s joint integration planning efforts, ETE and WMB have further analyzed commercial synergy opportunities, given industry conditions and the facts and circumstances described in the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus, and currently believe that the base case for EBITDA from commercial synergies that is reasonably probable to be achieved is $126 million per year by 2020. ETE and WMB also anticipate that the net capital savings to be incurred in connection with these commercial synergies would be approximately $220 million. The ongoing integration efforts to date suggest that a significant portion of the originally anticipated commercial synergies of the proposed combination are unlikely to be achieved, and the achievement of the anticipated benefits of the proposed combination with WMB will depend in part upon whether ETE can integrate the businesses of WMB in an effective and efficient manner. ETE may not be able to accomplish this integration process successfully. The integration of any business may be complex and time-consuming. The difficulties that could be encountered include the following:

 

   

integrating personnel, operations and systems;

 

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coordinating the geographically dispersed organizations;

 

   

distraction of management and employees from operations and changes in corporate culture;

 

   

retaining existing customers and attracting new customers;

 

   

maintaining business relationships; and

 

   

inefficiencies associated with the integration of the operations of ETC.

In addition, there will be integration costs and non-recurring transaction costs associated with the proposed combination with WMB (such as fees paid to legal, financial, accounting and other advisors and other fees paid in connection with the merger), and such costs may be significant.

The likelihood that ETE will not realize the full extent of the benefits of the proposed combination with WMB originally anticipated by ETE, as well as any delays encountered in the integration process and the realization of such benefits, could have an adverse effect upon the revenues, level of expenses and operating results of ETE, which may adversely affect the value of ETE common units and, in turn, the value of ETC common shares after the completion of the merger.

The completion of the merger may result in ratings organizations and/or securities analysts taking actions that may adversely affect the business, financial condition, results of operations and cash flows of ETC, ETE and the ETE Entities, as well as the market price of ETC’s, ETE’s and the ETE Entities’ securities.

In connection with the completion of the merger, the sustained low commodity price environment and the other facts and circumstances described in the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus, ratings agencies may reevaluate ETE’s ratings. A downgrade may increase ETE’s and the ETE Entities’ cost of borrowing, may negatively impact ETE’s and the ETE Entities’ ability to raise additional debt capital, may negatively impact ETE’s and the ETE Entities’ ability to successfully compete, and may negatively impact the willingness of counterparties to deal with ETE and the ETE Entities, each of which could have a material adverse effect on the business, financial condition, results of operations and cash flows of ETC, ETE and the ETE Entities, as well as the market price of ETC’s, ETE’s and the ETE Entities’ securities.

In addition, the trading market for ETC securities will depend, as the trading market for ETE’s and the ETE Entities’ securities depends, in part on the research and reports that third-party securities analysts publish about ETC, ETE and the ETE Entities and the industry in which ETC participates. In connection with the completion of the merger, one or more of these analysts could downgrade ETC’s, ETE’s and the ETE Entities’ securities or issue other negative commentary about ETC, ETE and the ETE Entities and the industry in which ETC participates, which could cause the trading price of such securities to decline.

As of December 31, 2015, ETE had approximately $7 billion of debt on a stand-alone basis and approximately $36.97 billion of consolidated debt, excluding the debt of its joint ventures. In addition, in connection with the merger, ETE expects to incur an additional $6.05 billion of debt to fund the cash consideration for the transaction and to assume approximately $4.2 billion of debt outstanding under WMB’s senior notes. In light of the decline in energy commodity prices and ETE’s current leverage and credit profile, there is a risk that the incurrence of such additional debt could adversely affect ETE’s credit ratings. Any downgrade in ETE’s credit ratings following the transaction could adversely affect the investment grade credit ratings of ETP, SXL and WPZ, and the credit rating of Sunoco. ETP and WPZ currently maintain investment grade ratings by Moody’s, S&P and Fitch. However, those current ratings may not remain in effect for any given period of time and a rating may be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. If Moody’s, S&P or Fitch were to downgrade the long-term rating of any of the ETE Entities, particularly below investment grade, ETE’s consolidated borrowing costs could significantly increase, which would adversely affect ETE’s consolidated financial results, and the terms of ETE’s credit

 

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agreements could become significantly more restrictive. The potential pool of investors and funding sources could also decrease. Further, due to the relationship between ETE and the ETE Entities, any downgrade of ETE’s credit ratings could also result in a downgrade in one or more of the ETE Entities’ credit ratings. ETE’s ability to refinance the $6.05 billion of debt expected to be incurred in connection with the merger or its $1.5 billion senior secured revolving credit facility, which matures in December 2018, on commercially reasonable terms or at all may also be materially impacted if ETE’s access to capital markets becomes limited due to a credit ratings downgrade or other disruptions.

In addition, WMB has commenced litigation seeking, among other things, to unwind the private offering of Convertible Units. While ETE believes WMB’s claims are without merit, ETE believes that if WMB is successful in unwinding the Convertible Units offering, it could have a negative impact on ETE’s efforts to maintain its ratings with Moody’s, S&P or Fitch.

Additionally, the merger, if followed by a decrease in the rating of WPZ’s outstanding 6.125% Senior Notes due 2022, 4.875% Senior Notes due 2023 and 4.875% Senior Notes due 2024 (collectively, the “Applicable WPZ Notes”) by either Moody’s or S&P within ninety days of the closing date, will result in a change of control as defined in the indentures governing the Applicable WPZ Notes (the “Applicable WPZ Notes Indentures”). ETC can provide no assurance that a downgrade will not occur. The occurrence of a change of control under the Applicable WPZ Notes Indentures will trigger an obligation for WPZ to offer to purchase all or any part of each series of Applicable WPZ Notes at a purchase price equal to 101% of the principal amount of each series of Applicable WPZ Notes, plus accrued and unpaid interest thereon to the date of repurchase. The aggregate principal amount of the Applicable WPZ Notes is $2.9 billion. If WPZ is required to repurchase some or all of the Applicable WPZ Notes, its ability to do so would be subject to the same risk factors associated with financing its business. Please see “Risks Related to the Businesses of ETE and the ETE Entities—The ETE Entities are exposed to the credit risk of their respective customers, and an increase in the nonpayment and nonperformance by their respective customers could have a material adverse impact on the financial condition and results of operations of the ETE Entities and could reduce their respective ability to make distributions to their unitholders, including to ETE.”

ETE and WMB do not agree on whether ETE’s offering of the Convertible Units without WMB’s consent was a violation of the merger agreement, and WMB has filed lawsuits against ETE, LE GP and Kelcy L. Warren in relation thereto.

The merger agreement requires ETE and WMB to obtain the other party’s consent to take certain actions prior to the closing of the merger. ETE believes that the terms of the merger agreement permitted ETE to provide the opportunity to participate in the Plan to all of its common unitholders. In order to offer participation in the Plan to all of its common unitholders, ETE would have been required to file a registration statement with the SEC relating to the public offering of the Convertible Units. Such a filing would require the consent of WMB’s independent registered accounting firm to the incorporation by reference in the registration statement of its report on WMB’s audited financial statements. However, after ETE advised WMB of ETE’s intention to pursue a public offering of the Convertible Units pursuant to the Plan, WMB declined to allow its independent registered accounting firm to provide the auditor consent required to be included in a registration statement for a public offering. WMB also advised ETE that WMB believed its consent was required under the merger agreement for the public offering and declined to consent. As a result, ETE determined to conduct a private offering to certain accredited investors that was not subject to the SEC rules requiring the consent of WMB’s independent registered accounting firm. ETE believes that both the proposed public offering and the completed private offering are permitted by the terms of the merger agreement and as a result did not request WMB’s consent to pursue the private offering.

WMB has reviewed the terms of the Plan and the Convertible Units and ETE’s description of the Plan and the Convertible Units and believes that the Convertible Units offering required WMB’s consent under the merger agreement and that by proceeding without WMB’s consent, ETE violated the merger agreement. WMB has filed

 

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a lawsuit in the Court of Chancery of the State of Delaware for breach of the merger agreement seeking, among other things, to unwind the private offering of Convertible Units. WMB has also filed a lawsuit against Mr. Warren, in his capacity as the largest ETE unitholder, in the District Court of Dallas County, Texas, for tortious interference with the merger agreement in connection with the Convertible Units offering, seeking damages, among other things. WMB claims that Mr. Warren induced ETE to undertake the Convertible Units offering.

WMB believes that these lawsuits are an enforcement of its rights under the merger agreement and that these lawsuits are necessary to deliver to WMB stockholders the benefits of the merger agreement. ETE believes that the lawsuits are without merit and intends to vigorously defend its actions. At this preliminary stage, there is no way to predict the outcome of these lawsuits. In addition, the lawsuits could, among other things, adversely affect the business and results of operation, as well as the liquidity, of ETE and the ETE Entities and impact the trading price of ETE common units or shares of WMB common stock.

Litigation commenced by WMB against ETE, LE GP and Mr. Warren could cause ETE to incur substantial costs, may present material distractions and, if decided adverse to ETE, could negatively impact ETE’s financial position and credit ratings.

On April 6, 2016, WMB filed a complaint against ETE and LE GP in the Delaware Court of Chancery and a petition against Mr. Warren in the district court of Dallas, Texas, relating to the Convertible Units offering. Among other remedies, WMB seeks to unwind the Convertible Units offering. On May 3, 2016, ETE and LE GP filed an answer and counterclaim to WMB’s complaint. On May 13, 2016, WMB filed a lawsuit against ETE in the Delaware Court of Chancery relating to the 721 Opinion and Outside Date. Among other remedies, WMB seeks to prevent ETE from terminating or otherwise avoiding its obligations under merger agreement due to any failure of Latham to deliver the 721 Opinion or any failure to close the transaction by the Outside Date. These lawsuits could result in substantial costs to ETE, including litigation costs and settlement costs. ETE believes that the time required by the management of ETE and its counsel to defend against the allegations made by WMB in the litigation against ETE and Mr. Warren is likely to be substantial and the time required by Mr. Warren and other officers and employees of LE GP, assuming WMB actively pursues such litigation, is also likely to be substantial. ETE believes that the time spent dealing with this litigation will reduce the time that could be spent dealing with the operational challenges facing ETE as well as the issues presented by the merger. The defense or settlement of any lawsuit or claim that remains unresolved may result in negative media attention, and may adversely affect ETE’s business, reputation, financial condition, results of operations, cash flows and market price. In addition, since ETE states that it undertook the Convertible Units offering in an effort to maintain its current credit ratings with Moody’s, S&P and Fitch, if the Convertible Units offering is unwound, ETE’s financial position and credit ratings could be negatively impacted. Immediately after the closing of the merger, the actions against ETE, LE GP and Mr. Warren would be contributed from ETC to ETE as part of the WMB Contribution. Accordingly, after closing, ETE will have the right to determine whether to proceed with such actions based on the best interests of the ETE unitholders and the ETC shareholders at such time.

Directors and executive officers of WMB have financial interests in the merger that may be different from, or in addition to, the interests of the WMB stockholders.

In considering the recommendation of a majority of the WMB Board to approve the merger, WMB stockholders should be aware that certain WMB directors and executive officers may be deemed to have interests in the merger that are in addition to, or different from, the interests of other WMB stockholders. The WMB Board was aware of these interests and considered them, among other matters, in approving the merger and the merger agreement and in making the recommendations that the WMB stockholders approve the merger agreement, the merger and the other merger transactions. These interests include:

 

   

Certain WMB directors and executive officers have previously been granted WMB stock options, restricted stock units and/or deferred stock units. Under the merger agreement, each WMB stock option, including stock options held by WMB directors and executive officers, will be equitably

 

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adjusted immediately prior to the effective time by reducing the exercise price thereof by an amount equal to the pre-merger special dividend, contingent on the consummation of the merger. In addition, WMB equity-based awards, including those held by WMB directors and executive officers, outstanding immediately prior to the effective time will, as of the effective time, be assumed by ETC and converted into cash-settled, time-based equity awards of ETC, adjusted as described below in the section of this proxy statement/prospectus titled “The Merger Agreement—Treatment of WMB Equity Awards”. Performance conditions applicable to WMB restricted stock units will generally be deemed to be satisfied at target (in the case of WMB performance stock units) or the greater of target and actual performance (in the case of WMB leveraged performance stock units). The converted stock options and restricted stock units will only be subject to time-based vesting conditions following the merger. All the converted ETC equity awards will otherwise remain subject to their existing terms and conditions, including the accelerated vesting of the stock options and restricted stock units held by WMB executive officers upon a qualifying termination during the two-year period following completion of the merger, and accelerated vesting of restricted stock units held by WMB non-employee directors upon any separation from service. Upon settlement, holders of converted WMB restricted stock units and WMB deferred stock units will also be entitled to receive (1) the pre-merger special dividend and payment of any other accrued dividend equivalents, (2) a cash payment in respect of any fractional ETC common shares that would have resulted from such conversion without regard to rounding and (3) if such unit settles after the end of the CCR measurement period, an amount in cash equal to the shortfall amount (if any).

 

   

The right to certain contractual severance payments and benefits in the event a WMB executive officer experiences a qualifying termination of employment during the two-year period following the completion of the merger.

 

   

The right to an accelerated payout of a WMB director’s or executive officer’s earned and accrued account balance under the Williams Companies Amended and Restated Retirement Restoration Plan.

 

   

The right to indemnification and exculpation benefits following the closing of the merger.

For information concerning these interests, see the discussion in the section of this proxy statement/prospectus titled “The Merger—Interests of Directors and Executive Officers of WMB in the Merger.”

The unaudited pro forma financial statements included in this document are presented for illustrative purposes only and may not be an indication of ETC’s or ETE’s actual financial condition or results of operations following the merger.

The unaudited pro forma financial statements contained in this document are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates, and may not be an indication of ETC’s or ETE’s actual financial condition or results of operations following the merger for several reasons. See “Selected Unaudited Pro Forma Condensed Combined Financial Information.” The actual financial condition and results of operations of ETC and ETE following the merger may not be consistent with, or evident from, these pro forma financial statements, and in this regard the pro forma financial statements should be read in conjunction with the section titled “Summary—Recent Developments” beginning on page 20 of this proxy statement/prospectus, which includes a description of facts and circumstances occurring subsequent to the date the parties executed the merger agreement. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect ETE’s or ETC’s actual financial condition or results of operations following the merger. Any potential decline in ETC’s financial condition or results of operations may cause significant variations in the price of ETC common shares after completion of the merger.

 

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Risks Related to the CCRs

You may not receive any payment in respect of the CCRs.

Your right, as an ETC shareholder, to receive any future payment on the CCRs will be dependent upon the volume-weighted average price of ETC common shares and ETE common units for the 23-month period following one month after the closing of the merger, as specified in the CCR agreement. In the event that the daily volume-weighted average trading price of ETC common shares for the 23-month period following one month after the closing of the merger is greater than the daily volume-weighted average trading price of ETE common units for such period, no payment will be made to ETC holders in respect of the CCRs and the CCRs will expire valueless. In addition, the CCRs will be automatically cancelled if: (i) the daily dollar volume-weighted average price for ETC common shares is greater than the daily dollar volume-weighted average price for ETE common units for twenty consecutive trading days and (ii) the average daily dollar volume-weighted average price for ETC common shares for such twenty trading day period is equal to or greater than the average daily dollar volume-weighted average price for ETE common units for such twenty trading day period. Accordingly, the value, if any, of the CCRs is speculative, and the CCRs may ultimately have no value. See “CCR Agreement.”

You will not be able to determine the payments to be received under the CCRs until at least two years following the closing of the merger and you will be unable to elect whether to receive such payment in additional ETC common shares or in cash.

If any payment is made on the CCRs, the amount of such payment will not be calculated until five trading days after the second anniversary of the closing of the merger and will not be paid until at least five business days following such determination. In addition, ETE will be entitled to make, at any time prior to the settlement of the CCRs, the determination to make any payment due under the CCR in either cash or ETC common shares.

The CCRs are stapled to the ETC common shares and cannot be transferred without a transfer of the ETC common shares to which they are attached.

The CCRs are stapled to the ETC common shares and are not separable and therefore a CCR cannot be transferred other than in connection with a transfer of the ETC common shares to which they are attached. As such, there will not be a traded market for the CCRs and the CCRs will not have a value separate and apart from the ETC common shares to which they are attached. Additionally, the potential for a payment of cash or additional ETC common shares upon the expiration of the CCRs at the end of the two-year period following the closing of the merger may artificially inflate the value of the ETC shares prior to the expiration of the CCRs, which may result in a reduced payment, or no payment, under the CCRs upon expiration since the determination of whether a payment will be made on the CCRs is dependent upon the trading price of the ETC common shares in relation to the trading price of the ETE common units during this two year period.

ETC’s ownership in ETE may be diminished if ETC common shares trade at a premium to ETE common units.

In the event that the daily volume-weighted average trading price of ETC common shares for the 23-month period following one month after the closing of the merger is greater than the daily volume-weighted average trading price of ETE common units for such period, ETE will cancel a number of ETE Class E units held by ETC based on the amount of such difference and as set forth in the CCR agreement. See “CCR Agreement.” Such a transfer will have the effect of reducing ETC’s ownership interest in ETE and, consequently, the amount of cash distributions received in respect of ETC’s ownership of ETE Class E units. This will limit the cash ETC will have available to make distributions on the ETC common shares and will reduce the indirect ownership interest of former WMB stockholders in ETE from the amount such holders held immediately following the merger.

 

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Risks Related to ETC and the Ownership of the ETC Common Shares

ETC’s cash flow, and therefore its ability to make distributions to ETC shareholders, depends primarily upon ETE’s ability to make cash distributions to ETC, which in turn depends primarily on the cash distributions ETE receives from the ETE Entities, cash flows ETE receives from its LNG business, the consolidated debt level and debt agreements of ETE, ETC, the ETE Entities and their respective subsidiaries and the expenses ETE otherwise incurs. The ETE Entities’ ability to make distributions to ETE is in turn affected by the cash generated by the ETE Entities’ businesses.

At closing, the source of ETC’s earnings and cash flow will consist primarily of cash distributions ETE makes on the ETE Class E units. ETE will only make cash distributions on its units if it has sufficient cash flow.

ETE’s cash flow primarily consists of cash distributions from ETP, SXL and Sunoco and cash flows from its LNG business. The amount of cash that the ETE Entities will be able to distribute each quarter to their respective partners, including ETE, principally depends upon the amount of cash they generate from their respective businesses, which will fluctuate from quarter to quarter and will depend upon, among other things:

 

   

the amount of natural gas, crude oil and products transported through their transportation pipelines and gathering systems;

 

   

the level of throughput in their processing and treating operations;

 

   

the fees charged and the margins realized by the ETE Entities for their services;

 

   

the price of natural gas, NGLs, crude oil and products;

 

   

the relationship between natural gas, NGL and crude oil prices;

 

   

the amount of cash distributions ETP receives with respect to its ownership of SXL common units and Sunoco common units;

 

   

the weather in their respective operating areas;

 

   

the level of competition from other midstream, transportation and storage and retail marketing companies and other energy providers;

 

   

the level of their respective operating costs and maintenance and integrity capital expenditures;

 

   

the tax profile of any blocker entities treated as corporations for federal income tax purposes that are owned by any of the ETE Entities;

 

   

prevailing economic conditions;

 

   

fluctuations in working capital needs and the level of capital expenditures;

 

   

the level of costs related to litigation and regulatory compliance matters;

 

   

the cost of acquisitions, if any;

 

   

debt service requirements and the ETE Entities’ ability to borrow under their respective revolving credit facilities or to access capital markets;

 

   

restrictions on distributions contained in the ETE Entities’ respective debt agreements; and

 

   

the amount, if any, of cash reserves established by the boards of directors of their respective general partners in their discretion for the proper conduct of their respective businesses.

For a further description of certain factors that can cause fluctuations in the amount of cash that the ETE Entities generate from their respective businesses, please read “—Risks Related to the Businesses of ETE and the ETE Entities” and “Additional Information About ETC—Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A material increase in amounts paid or reserved by an ETE Entity with respect to any of the aforementioned factors could restrict its cash flow, causing such ETE Entity to have

 

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insufficient available cash each quarter to continue paying distributions to ETE at their current or any higher levels or at all. If any of ETP, SXL or Sunoco reduces its per unit distribution, either because of reduced operating cash flow, higher expenses, capital requirements or otherwise, this will reduce ETE’s cash flow and its ability to pay distributions on the ETE Class E units. As a result, ETC will have less cash available for distributions to ETC shareholders and would likely reduce its per share distribution to ETC shareholders. Additionally, the amount of cash ETE and the ETE Entities have available for distribution depends primarily upon their respective cash flows and is not solely a function of profitability, which will be affected by non-cash items. As a result, ETE and the ETE Entities may make cash distributions during periods when they record losses and may not make cash distributions during periods when they record profits.

The ETE Entities’ ability to make distributions to ETE, and ETE’s resulting cash flow, will also depend on their respective levels of indebtedness, which affect their respective operations in several ways, including, among other things:

 

   

a significant portion of their cash flows from operations will be dedicated to the payment of principal and interest on outstanding debt and will not be available for other purposes, including payment of distributions;

 

   

covenants contained in their debt agreements require ETE and the ETE Entities to meet financial tests that may adversely affect their flexibility in planning for and reacting to changes in their respective businesses;

 

   

their ability to obtain additional financing for working capital, capital expenditures, acquisitions and general partnership purposes may be limited or more expensive than over prior periods;

 

   

ETE and the ETE Entities may be at a competitive disadvantage relative to similar companies that have less debt;

 

   

ETE and the ETE Entities may be more vulnerable to adverse economic and industry conditions as a result of their significant debt levels; and

 

   

failure by ETE and the ETE Entities to comply with the various restrictive covenants of their respective debt agreements could negatively impact their ability to incur additional debt, including their ability to utilize the available capacity under their respective revolving credit facilities, and to pay distributions.

ETE’s cash flow is further reduced by a number of factors, including:

 

   

ETE’s payment of costs and expenses associated with ETC’s and ETC GP’s operations, including expenses ETC will incur as a result of being a public company, which costs and expenses are not subject to a limit pursuant to the administrative services agreement that ETC expects to enter into with ETE and ETC GP in connection with the completion of the merger (the “Administrative Agreement”);

 

   

ETE’s general and administrative expenses;

 

   

expenses of ETE’s subsidiaries (excluding the ETE Entities and their respective subsidiaries); and

 

   

reserves that the general partner of ETE believes are prudent for ETE to maintain for the proper conduct of ETE’s business or to provide for future distributions.

As set forth in “Summary—Recent Developments—Updated Financial Forecasts of ETC,” ETE management expects that all of the cash distributions that it receives from ETP, WPZ, SXL and SUN following the closing of the merger through mid-2018, after taking into account the waivers of incentive distributions assumed to be agreed to by ETE as described therein, will be used to make cash distributions on the Convertible Units and to repay a portion of the indebtedness incurred by ETE in connection with the merger. As a result, ETE does not expect to make any cash distributions with respect to its common units and Class E Units prior to the distribution payable with respect to the quarter ending March 31, 2018 and, consequently, ETC does not expect that it will be able to make any cash distributions with respect to its common shares until such time.

 

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Starting in 2019, the distributions ETC shareholders receive on their ETC common shares may be lower than the distribution ETE common unitholders receive on their ETE common units.

Upon the completion of the dividend equalization period, ETE’s obligation to make additional cash distributions to ETC or to specifically allocate depreciation or other forms of cost recovery to ETC sufficient to maintain cash distributions on ETC common shares equal to cash distributions on ETE common units will end. Following the completion of the dividend equalization period, the ETE Class E units will receive the same quarterly cash distribution per unit as the quarterly cash distribution per ETE common unit, but the resulting quarterly distribution that ETC makes may be lower than the corresponding quarterly distribution on ETE common units due to federal and state income tax liabilities incurred by ETC resulting from its election to be taxed as a corporation. As discussed in “Summary—Recent Developments—Updated Financial Forecasts of ETC,” following the closing of the merger, ETE does not expect to make any cash distributions with respect to its common units or ETE Class E Units prior to the distribution payable with respect to the quarter ending March 31, 2018. If ETE does not make a cash distribution on its ETE Class E Units until such time, then ETC will not have any cash available for distribution on its common shares.

There is no requirement that the ratio of ETC common shares to ETE Class E units remain one-to-one, allowing for an increase in the number of ETC common shares and a dilution of the distributions received per ETC common share.

There is no requirement for ETC or ETE to preserve the one-to-one ratio of outstanding ETC common shares to ETE Class E units held by ETC that will exist at the effective time. Because the distributions on ETE Class E units will fund the distributions on ETC common shares, an increase in the number of ETC common shares will dilute the distributions received per ETC common share from these ETE Class E unit distributions if the number of ETE Class E units held by ETC is not proportionately increased.

The incentive distributions (including distributions with respect to the ETP Class H units) that ETE is entitled to receive may be limited or modified without the consent of the ETC shareholders.

Upon the completion of the merger transactions, ETC will own ETE Class E units, representing a 57% limited partner interest in ETE based on the number of ETE common units outstanding as of December 31, 2015 (and excluding any interest attributable to the Convertible Units issued by ETE in March 2016) and the number of ETE Class E units expected to be issued in the WMB Contribution. ETE indirectly owns all of the IDRs of ETP and Sunoco. Additionally, through its ownership of ETP Class H units and a 0.1% interest in SXL GP, ETE is entitled to receive 90.15% of the cash distributions related to the IDRs of SXL, while ETP is entitled to receive the remaining 9.85% of such cash distributions. The IDRs entitle the holder to receive increasing percentages (up to a maximum of 48%, with respect to ETP and SXL, and up to 50%, with respect to Sunoco, in each case to the extent not modified) of any cash distributed by (i) ETP in excess of $0.275 per ETP unit in any quarter, (ii) SXL in excess of $0.0833 per SXL unit and (iii) Sunoco in excess of $0.503125 per Sunoco unit. Please read “Additional Information About ETC—Cash Distribution Policy and Restrictions on Distributions.”

ETP, SXL and Sunoco, like other publicly traded partnerships, will generally only undertake an acquisition or expansion capital project if, after giving effect to related costs and expenses, the transaction would be expected to be accretive, meaning it would increase cash distributions per unit in future periods. Because ETE currently participates in the IDRs at the highest cash sharing level of 48% and 50% with respect to ETP and Sunoco, respectively, and ETE and ETP currently participate in the IDRs at the highest cash sharing level of 48% with respect to SXL, to the extent not modified, it may be more difficult for an acquisition or capital project to be accretive to the common unitholders of ETP, SXL and Sunoco, respectively, than if the IDRs received less incremental cash flow. ETC therefore expects that ETE may determine, in certain cases, to propose a reduction to the IDRs of ETP and Sunoco to facilitate a particular acquisition or expansion capital project of ETP or Sunoco, as the case may be, and that ETP may determine, in certain cases, to propose a reduction to the IDRs of SXL to facilitate a particular acquisition or expansion project of SXL. Any such reduction of IDRs will reduce the amount of cash that would have otherwise been distributed by ETE to its unitholders, including ETC, which will

 

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in turn reduce the cash distributions ETC would otherwise be able to pay its shareholders. Similarly, in certain circumstances, ETE may determine, in certain cases, to propose a reduction in the IDRs of ETP or Sunoco, or ETP may propose a reduction in the IDRs of SXL, to permit ETP, Sunoco or SXL, as applicable, to pay a relatively higher proportion of its distributions to holders of ETP or Sunoco common units, as applicable, in order to conserve cash in a manner that minimizes the risk of a decrease in trading prices of those units that would result in an increased cost of capital to ETP or Sunoco, as applicable. Please read “Additional Information About ETC—Cash Distribution Policy and Restrictions on Distributions—General—The IDRs that ETE and ETP Own May Be Limited or Modified Without Your Consent” for a discussion of historical and ongoing IDR reductions. ETC shareholders will not be able to vote on, or otherwise prohibit ETE or ETP from taking, similar actions in the future, and ETE or ETP may elect to modify the ETP, SXL or Sunoco incentive distributions, as the case may be, without considering the interests of the ETC shareholders. In addition, there can be no guarantee that the expected benefits of any IDR modification will be realized.

A reduction in the ETE Entities’ distributions will disproportionately affect the amount of cash distributions to which ETE is entitled and, consequently, the amount of cash distributions to which ETC is entitled.

ETE indirectly owns all of the IDRs of ETP and Sunoco. Additionally, through its ownership of ETP Class H units and a 0.1% interest in SXL GP, ETE is entitled to receive 90.15% of the cash distributions related to the IDRs of SXL, while ETP is entitled to receive the remaining 9.85% of such cash distributions. These IDRs entitle the holder to receive increasing percentages of total cash distributions made by each ETE Entity as such ETE Entity reaches established target cash distribution levels as specified in its partnership agreement. ETE currently receives its pro rata share of cash distributions from ETP and Sunoco based on the highest sharing level of 48% and 50% in respect of the ETP IDRs and Sunoco IDRs, respectively. ETE and ETP currently receive their pro rata share of cash distributions from SXL based on the highest sharing level of 48% in respect of the SXL IDRs.

A decrease in the amount of distributions by ETP to ETE to less than $0.4125 per unit per quarter would reduce ETE’s percentage of the incremental cash distributions from ETP above $0.3175 per unit per quarter from 48% to 23%, and a decrease in the amount of distributions by Sunoco to ETE to less than $0.6563 per unit per quarter would reduce ETE’s percentage of the incremental cash distributions from Sunoco above $0.5469 per unit per quarter from 50% to 25%. Likewise, a decrease in the amount of distributions from SXL to less than $0.2638 per unit per quarter would reduce the percentage of the incremental cash distributions received by ETE and ETP from SXL above $0.0958 per unit per quarter from 48% to 35%. As a result, any such reduction in quarterly cash distributions from the ETE Entities would have the effect of disproportionately reducing the amount of all distributions that ETE and ETP receive, based on their ownership interest in the IDRs as compared to cash distributions they receive from their general partner interest and common units in such ETE Entity, which in turn, would impact the amount of distributions ETC receives from ETE.

If distributions on the ETC common shares are not paid with respect to any fiscal quarter, the ETC common shareholders will not be entitled to receive that quarter’s payments in the future.

Like ETE’s common units, ETC’s distributions to its shareholders will not be cumulative. Consequently, if distributions on the ETC common shares are not paid with respect to any fiscal quarter, ETC shareholders will not be entitled to receive any additional cash distributions in future quarters to compensate for any such cash distribution shortfall in any prior quarter. As discussed in “Summary—Recent Developments—Updated Financial Forecasts of ETC,” following the closing of the merger, ETE does not expect to make any cash distributions with respect to its common units or ETE Class E Units prior to the distribution payable with respect to the quarter ending March 31, 2018. If ETE does not make a cash distribution on its ETE Class E Units until such time, then ETC will not have any cash available for distribution on its common shares.

 

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The amount of cash that ETC, ETE and the ETE Entities distribute each quarter may limit ETC’s ability to grow and is subject to change.

Because ETC’s cash flow will initially be generated primarily from distributions it receives from ETE, which are primarily derived from ETE’s direct and indirect equity interests in the ETE Entities, ETC’s growth will initially be completely dependent upon ETE and the ETE Entities. The amount of distributions received by ETE is based on the per unit distribution paid on each unit of the ETE Entities and the number of common units outstanding of the ETE Entities. Please read “Additional Information About ETE—Cash Distribution Policy of ETE and the ETE Entities” and “—Risks Related to the Businesses of ETE and the ETE Entities.”

If ETC issues additional common shares or if ETC were to incur debt or be required to pay taxes, the payment of distributions on those additional common shares or interest on that debt or payment of such taxes could decrease the per share distribution amount on the ETC common shares.

No trading market currently exists for ETC common shares, the price of ETC common shares may be volatile, and a trading market that will provide ETC shareholders with adequate liquidity may not develop.

Unless a “when issued” trading market develops, prior to completion of the merger, there will have been no market for ETC common shares. After the completion of the merger transactions, the ETC common shares are expected to be listed for trading on the NYSE. However, there can be no assurance that an active market for ETC common shares will develop after the closing of the merger transactions, or that if it develops, the market will be sustained. If an active trading market does not develop, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of ETC common shares and limit the number of investors who are able to buy ETC common shares.

Further, there can be no assurance of the price at which ETC common shares will trade. Although it is expected that trading prices of ETC common shares and ETE common units will be correlated since, following the completion of the merger transactions, ETC’s primary asset and source of cash flow will initially be the ETE Class E units it owns, due to a variety of factors (many of which are out of the control of ETE and ETC), ETC common shares could trade at a discount to ETE common units. You may not be able to resell your ETC common shares at or above the trading price at which your shares of WMB common stock traded immediately prior to the merger. The following factors, among others, could affect the ETC common share price:

 

   

ETE’s and the ETE Entities’ operating and financial performance and prospects and the trading price of their common units;

 

   

the level of ETE’s and the ETE Entities’ quarterly distributions and ETC’s quarterly distributions;

 

   

quarterly variations in the rate of growth of ETC’s financial indicators, such as distributable cash flow per common share, net income and revenues;

 

   

changes in revenue or earnings estimates or publication of research reports by analysts;

 

   

speculation by the press or investment community;

 

   

sales of ETC common shares by ETC shareholders;

 

   

announcements by ETE, the ETE Entities or their competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings, buy backs or capital commitments;

 

   

general market conditions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

adverse changes in tax laws or regulations;

 

   

domestic and international economic, legal and regulatory factors related to ETE’s and the ETE Entities’ performance; and

 

   

other factors described in these “Risk Factors.”

 

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The market price of ETC common shares after the merger may be affected by factors different from those currently affecting the shares of WMB common stock or the ETE common units.

The businesses of WMB and ETE differ and, accordingly, the results of operations of ETE after the acquisition of WMB and the market price of ETC common shares and ETE common units after the merger may be affected by factors that differ from those currently affecting the independent results of operations of WMB and ETE and the share/unit prices of WMB and ETE common stock/units. For a discussion of the businesses of WMB, ETC and ETE and of certain factors to consider in connection with those businesses, see “Additional Information About ETC” and “Additional Information About ETE” and the documents incorporated by reference in this document regarding WMB referred to under “Where You Can Find More Information.”

ETC shareholders will have limited voting rights on matters affecting ETC’s business and will not be entitled to elect or remove ETC’s general partner or the general partner’s directors. Further, ETC shareholders will not be entitled to direct the manner in which ETC votes the ETE Class E units held by ETC and, therefore, will not have any voting rights with respect to ETE’s business through their ownership of ETC.

ETC’s shareholders have only limited voting rights on matters affecting ETC’s business, and therefore limited ability to influence management’s decisions regarding its business. ETC’s shareholders did not elect ETC GP as the general partner and will have no right to elect ETC’s general partner or the general partner’s directors on an annual or other continuing basis. The members of the ETC GP Board, including the independent directors, are chosen by the Existing GP Owner, the indirect owner of ETC GP. Even if ETC shareholders are dissatisfied with the performance of ETC GP, they will not be able to remove ETC GP as the general partner of ETC. ETC GP may only be removed by the Existing GP Owner, and the election of any successor general partner will be made by the Existing GP Owner. ETC’s shareholders’ voting rights are further restricted by ETC’s partnership agreement provision providing that any shares held by a person that owns 10% or more of any class of shares then outstanding, other than ETC GP and its affiliates, cannot be voted on any matter. Please see “Additional Information About ETC—Description of Our Partnership Agreement—Limited Voting Rights” for additional information regarding the limited voting rights held by the ETC common shares.

In addition, the ETC shareholders will not be entitled to direct the manner in which ETC votes the ETE Class E units. When ETE’s partnership agreement provides the ETE Class E units with a vote for the removal of ETE GP as the general partner of ETE, the Existing GP Owner will direct the voting of the ETE Class E units. In all other cases where the ETE Class E units have a voting right under ETE’s partnership agreement, the ETC conflicts committee will direct ETC’s voting of the ETE Class E units. Accordingly, ETC’s shareholders will not have any voting rights with respect to ETE’s business through their ownership of ETC. Please see “Additional Information About ETC—Description of Our Partnership Agreement—Voting the ETE Class E Units” for information on who controls the voting of the ETE Class E units owned by ETC.

The ETC GP Board’s authority to manage and control ETC is restricted by approval rights retained by the Existing GP Owner over certain matters.

The Existing GP Owner retains approval rights with respect to certain ETC matters, including the filing of any bankruptcy, insolvency or reorganization petitions by ETC. The Existing GP Owner also retains approval rights with respect to ETC declaring any material extraordinary distribution on the common shares, selling substantially all of its assets or engaging in mergers or combinations with other entities. These matters cannot therefore be approved solely by a majority vote of the ETC GP Board or the ETC shareholders. As a result, these approval rights may prevent ETC from engaging in certain matters that the ETC GP Board or the shareholders believe to be in the best interest of ETC and its shareholders. Please see “Additional Information About ETC—Description of Our Partnership Agreement—The Existing GP Owner’s Approval Rights” for additional information regarding the Existing GP Owner’s approval rights.

 

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ETC GP may cause ETC to issue additional common shares or other equity securities, including equity securities that are senior to ETC common shares, in each case without ETC shareholder approval, which may adversely affect ETC shareholders.

ETC GP may cause ETC to issue an unlimited number of additional common shares or other equity securities of equal rank with the common shares. ETC GP may also approve the grant of unit awards under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan with respect to up 171.6 million ETC common shares to officers, directors and eligible service providers of ETC and its affiliates. Shortly following the consummation of the merger, ETC expects to grant awards to officers, directors and eligible service providers of ETC and its affiliates under the Energy Transfer Corp LP 2016 Long-Term Incentive Plan covering approximately 10% of the outstanding ETC common shares at the consummation of the merger. ETC may also issue an unlimited number of shares that are senior to ETC common shares in right of distribution, liquidation and voting. Similarly, ETE GP may cause ETE to issue additional equity securities. Any such issuance of equity securities by ETC or ETE can be made without ETC shareholder approval and will have the following effects:

 

   

each ETC shareholder’s proportionate ownership interest in ETC will decrease;

 

   

the amount of distributable cash flow on each ETC common share may decrease;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding ETC common share may be diminished; and

 

   

the market price of the ETC common shares may decline.

Please read “Additional Information About ETC—Description of Our Partnership Agreement—Issuance of Additional Securities.”

ETC’s shareholders may not have limited liability if a court finds that shareholder actions constitute control of ETC’s business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. An ETC shareholder could be liable for any and all of ETC’s obligations as if such shareholder were a general partner if a court or government agency determined that ETC was conducting business in a state but had not complied with that particular state’s partnership statute or such shareholder’s right to act with other shareholders to approve some amendments to the ETC partnership agreement or to take other actions under the ETC partnership agreement constitute “control” of ETC’s business.

For a discussion of the implications of the limitations of liability on an ETC shareholder, please read “Additional Information About ETC—Description of Our Partnership Agreement—Limited Liability.”

ETC shareholders may have liability to repay distributions.

Under certain circumstances, ETC shareholders may have to repay ETC amounts wrongfully distributed to them. Under Delaware law, ETC may not make a distribution to ETC shareholders if the distribution causes ETC’s liabilities to exceed the fair value of its assets. Liabilities to partners on account of their partnership interests and non-recourse liabilities are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that a limited partner who receives such a distribution and knew at the time of the distribution that the distribution violated Delaware law, will be liable to the limited partnership for the distribution amount for three years from the distribution date. Under Delaware law, an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations of the assignor to make contributions to the partnership. However, such an assignee is not obligated for liabilities unknown to him at the time he or she became a limited partner if the liabilities could not be determined from the partnership agreement.

 

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The control of ETC GP may be transferred to a third party without ETC shareholder consent.

ETC GP may transfer its general partner interest to a third party without the consent of the ETC shareholders. Furthermore, the Existing GP Owner may transfer all or part of his ownership interest in ETC GP to a third party without the consent of the ETC shareholders. Subject to certain appointment rights relating to members of the board serving on the conflicts committee of the ETC GP Board, any new owner or owners of ETC GP would be in a position to replace the directors and officers of ETC GP with its own choices and to control the decisions made and actions taken by the ETC GP Board and officers.

ETC common shares and ETE common units may not trade in relation or proportion to one another.

ETC common shares and ETE common units may not trade in relation or proportion to one another. The trading prices may diverge because, among other things:

 

   

ETC expects to pay federal income taxes in the future;

 

   

ETC is not required to maintain a one-for-one relationship between ETC’s outstanding common shares and the number of limited partner interests in ETE that ETC owns; and

 

   

ETC may enter into other businesses separate and apart from ETE or any of its affiliates.

Increases in interest rates could materially adversely affect ETC’s business, results of operations, cash flows and financial condition.

As interest rates rise, the ability of investors to obtain higher risk adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partner interests. Reduced demand for ETC common shares resulting from investors seeking other more favorable investment opportunities may cause the trading price of ETC common shares to decline.

Future sales of ETC common shares in the public market could reduce the price of ETC common shares.

ETC may issue an unlimited number of additional common shares or convertible securities in subsequent public or private offerings. The size of future issuances of ETC common shares or securities convertible into common shares or the effect, if any, that future issuances and sales of ETC common shares will have on the market price of ETC common shares is uncertain. Issuances of substantial amounts of ETC common shares (including shares issued in connection with an acquisition), or the perception that such issuances could occur, may adversely affect prevailing market prices of ETC common shares.

If ETC fails to develop or maintain an effective system of internal controls, ETC’s ability to accurately report its financial results or prevent fraud could be adversely affected. As a result, ETC’s shareholders and other market participants could lose confidence in ETC’s financial reporting, which would harm its business and the trading price of its common shares.

Effective internal controls are necessary for ETC to provide reliable financial reports, prevent fraud and operate successfully as a publicly traded partnership. ETC is not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act of 2002, and is therefore not required to make a formal assessment of the effectiveness of ETC’s internal control over financial reporting for that purpose. Upon becoming a publicly traded company, ETC will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require ETC’s management to certify financial and other information in ETC’s quarterly and annual reports and provide an annual management report on the effectiveness of ETC’s internal control over financial reporting. Though ETC will be required to disclose material changes made to its internal controls and procedures on a quarterly basis, ETC will not be required to make its first annual assessment of its internal control over financial reporting pursuant to Section 404 until the

 

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year following its first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded company, ETC will need to implement additional internal controls, reporting systems and procedures. If ETC cannot provide reliable financial reports or prevent fraud, ETC’s reputation and operating results will be harmed. ETC cannot be certain that its efforts to develop and maintain its internal controls will be successful. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving ETC’s internal controls, could harm its operating results or cause it to fail to meet its reporting obligations. Ineffective internal controls could also cause investors and other market participants who are potential investors to lose confidence in ETC’s reported financial information, which would likely have a negative effect on the trading price of its common shares.

The NYSE does not require a limited partnership like ETC to comply with certain of its corporate governance requirements.

Because ETC is a limited partnership, the NYSE does not require ETC GP to have a majority of independent directors on its board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, ETC’s shareholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. In addition, as a limited partnership, while ETC is required to obtain shareholder approval of equity compensation plans, ETC is not required to seek shareholder approval for issuances of common shares, including issuances in excess of 20% of ETC’s outstanding equity securities, or for issuances of equity to certain affiliates.

ETC may incur liability as a result of its ownership of ETE GP.

Under Delaware law, a general partner of a limited partnership is generally liable for the debts and liabilities of the partnership for which it serves as general partner, subject to the terms of any indemnification agreements contained in the partnership agreement and except to the extent the partnership’s contracts are non-recourse to the general partner. ETC controls ETE GP, which will be the general partner of ETE following the completion of the merger transactions. To the extent the indemnification provisions in ETE’s partnership agreement or non-recourse provisions in ETE’s contracts are not sufficient to protect ETE GP from such liability, ETC may in the future incur liabilities as a result of its ownership interest and control of ETE GP. Please read “Additional Information About ETC—Conflicts of Interest and Fiduciary Duties.”

ETC’s partnership agreement will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by ETC’s shareholders, which would limit its shareholders’ ability to choose the judicial forum for disputes with ETC or its general partner’s directors, officers or other employees.

ETC’s partnership agreement will provide that, with certain limited exceptions, the Court of Chancery of the State of Delaware will be the exclusive forum for any claims, suits, actions or proceedings (1) arising out of or relating in any way to ETC’s partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of ETC’s partnership agreement or the duties, obligations or liabilities among shareholders or of shareholders to us, or the rights or powers of, or restrictions on, the shareholders or ETC), (2) brought in a derivative manner on ETC’s behalf, (3) asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of ETC or ETC’s general partner, or owed by ETC’s general partner to ETC or its shareholders, (4) asserting a claim arising pursuant to any provision of the DRULPA, or (5) asserting a claim governed by the internal affairs doctrine. By receiving a common share as merger consideration, a shareholder is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware (or such other court) in connection with any such claims, suits, actions or proceedings. This provision may have the effect of discouraging lawsuits against ETC and ETC’s general partner’s directors and officers. For additional information about the exclusive forum provision of ETC’s partnership agreement, please read “Additional Information About ETC—Description of Our Partnership Agreement—Applicable Law; Forum, Venue and Jurisdiction.”

 

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Risks Related to Conflicts of Interest

ETC’s existing organizational structure and the relationships among it, ETE, the ETE Entities, the respective general partners and affiliated entities present the potential for conflicts of interest. Moreover, additional conflicts of interest may arise in the future among ETC and the entities affiliated with any general partner or similar interests ETC acquires or among ETE, the ETE Entities and such entities. For a further discussion of conflicts of interest that may arise, please read “Additional Information About ETC—Conflicts of Interest and Fiduciary Duties.”

Conflicts of interest may arise as a result of ETC’s organizational structure and the relationships among ETC, ETE, the ETE Entities, the respective general partners and affiliated entities.

ETC’s partnership agreement defines the duties of ETC GP (and, by extension, its officers and directors). The ETC GP Board or its conflicts committee will have authority on ETC’s behalf to resolve any conflict involving ETC and they have broad latitude to consider the interests of all parties to the conflict.

Conflicts of interest may arise between ETC and its shareholders, on the one hand, and ETC GP and its owners and affiliated entities, on the other hand, or between ETC and its shareholders, on the one hand, and ETE, the ETE Entities and their respective unitholders, on the other hand. The ETC GP Board may approve such conflicted matters without seeking approval of such resolution or course of action from its conflicts committee or from the holders of a majority of the outstanding shares. If the ETC GP Board elects not to submit a conflicted transaction to the ETC conflicts committee for approval, it will be presumed to have acted in good faith in connection with approving such transaction and the ETC shareholders will bear the burden of overcoming such presumption. For a description of circumstances in which conflicts could arise and methods of resolving conflicts of interest under ETC’s partnership agreement, please read “Additional Information About ETC—Conflicts of Interest and Fiduciary Duties.”

ETC’s partnership agreement defines ETC GP’s duties to ETC and contains provisions that reduce the remedies available to ETC’s shareholders for actions that might otherwise be challenged as breaches of fiduciary or other duties under state law.

ETC’s partnership agreement contains provisions that substantially reduce the standards to which ETC GP would otherwise be held by state fiduciary duty law. For example, ETC’s partnership agreement:

 

   

permits ETC GP to make a number of decisions in its individual capacity, as opposed to in its capacity as ETC’s general partner. This entitles ETC GP to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, ETC, ETE, the ETE Entities, ETC’s affiliates or any shareholder. Examples include the exercise of its call right, its rights to transfer or vote any common shares it may own, and its determination whether or not to consent to any merger or consolidation of ETC or amendment to ETC’s partnership agreement;

 

   

generally provides that ETC GP will not have any liability to ETC or its shareholders for decisions made in its capacity as a general partner so long as it acted in good faith which, pursuant to ETC’s partnership agreement, requires a subjective belief that the determination, or other action or anticipated result thereof is in ETC’s best interests;

 

   

generally provides that any resolution or course of action adopted by ETC GP and its affiliates in respect of a conflict of interest will be permitted and deemed approved by all of ETC’s shareholders, and will not constitute a breach of ETC’s partnership agreement or any duty if the resolution or course of action in respect of such conflict of interest is:

 

   

approved by a majority of the members of ETC GP’s conflicts committee, or

 

   

approved by majority vote of ETC common shares (excluding common shares owned by ETC GP and its affiliates);

 

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provides that, to the fullest extent permitted by law, in connection with any action or inaction of, or determination made by, ETC GP or the conflicts committee of the ETC GP Board with respect to any matter relating ETC, it shall be presumed that ETC GP or the conflicts committee of the ETC GP Board acted in good faith, and in any proceeding brought by or on behalf of any of ETC’s shareholders challenging any such action or inaction of, or determination made by, ETC GP or the conflicts committee of the ETC GP Board, the person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption; and

 

   

provides that ETC GP and its officers and directors will not be liable for monetary damages to ETC, its shareholders or assignees for any acts or omissions unless there has been a final and nonappealable judgment entered by a court of competent jurisdiction determining that ETC GP or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.

Please read “Additional Information About ETC—Conflicts of Interest and Fiduciary Duties.”

ETC GP’s affiliates, ETE and the ETE Entities may compete with ETC.

ETC’s partnership agreement provides that ETC GP will be restricted from engaging in any business activities other than acting as ETC’s general partner, those activities incidental to its ownership of interests in ETC and certain additional activities enumerated in the ETC partnership agreement. The restrictions contained in ETC GP’s limited liability company agreement are subject to a number of exceptions. Affiliates of ETC GP, ETE and the ETE Entities will not be prohibited from engaging in other businesses or activities that might be in direct competition with ETC except to the extent they compete using ETC’s confidential information. For additional information regarding these agreements, please read “Additional Information About ETC—Certain Relationships and Related Party Transactions.”

ETC GP has a call right that may require ETC shareholders to sell their common shares at an undesirable time or price.

If at any time more than 90% of ETC’s outstanding common shares are owned by ETC GP and its affiliates, ETC GP will have the right (which it may assign to any of its affiliates or ETC), but not the obligation, to acquire all, but not less than all, of the remaining ETC common shares held by public shareholders at a price equal to the greater of (x) the current market price of such shares as of the date three days before notice of exercise of the call right is first mailed and (y) the highest price paid by ETC GP or its affiliates for such shares during the 90-day period preceding the date such notice is first mailed. As a result, ETC shareholders may be required to sell their common shares at an undesirable time or price and may not receive any return of or on their investment. ETC shareholders may also incur a tax liability upon a sale of their common shares. For additional information about the call right, please read “Additional Information About ETC—Description of Our Partnership Agreement—Call Right.”

Risks Related to the Businesses of ETE and the ETE Entities

Since ETC’s cash flows will consist exclusively of distributions from ETE and ETE’s cash flows consist primarily of distributions from the ETE Entities, risks to the businesses of ETE and the ETE Entities are also risks to ETC. Set forth below are the risks to the businesses of ETE and the ETE Entities, the occurrence of which could have a negative impact on their respective financial performance and decrease the amount of cash the ETE Entities are able to distribute to ETE, which, in turn, could decrease the amount of cash ETE is able to distribute to ETC.

The ETE Entities do not control, and therefore may not be able to cause or prevent certain actions by, certain of their joint ventures.

Certain of the ETE Entities’ joint ventures have their own governing boards, and the ETE Entities may not control all of the decisions of those boards. Consequently, it may be difficult or impossible for the ETE Entities

 

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to cause the joint venture entity to take actions that the ETE Entities believe would be in their or the joint venture’s best interests. Likewise, the ETE Entities may be unable to prevent actions of the joint venture.

If the unitholders of the ETE Entities remove such ETE Entity’s general partner, ETE or ETP may be required to sell or exchange its general partner interest and IDRs, as applicable, in such ETE Entity, and ETE would lose the ability to manage and control such ETE Entity.

ETE currently manages its investment in the ETE Entities through its ownership of ETP GP and Sunoco GP, as well as ETP’s ownership of SXL GP. The partnership agreements of the ETE Entities, however, give their respective unitholders the right to remove the general partners upon the affirmative vote of holders of 66 2/3% of such ETE Entity’s outstanding units. If ETP GP, SXL GP or Sunoco GP withdraws as the general partner of ETP, SXL or Sunoco, as applicable, in compliance with such entity’s partnership agreement or is removed as general partner where cause (as defined in each such partnership agreement) does not exist and a successor general partner is elected in accordance with such partnership agreement, ETE or ETP, as the case may be, could elect to receive cash in exchange for its general partner interest in ETP, SXL or Sunoco, as the case may be, and the ETP, SXL and Sunoco IDRs (if then owned by ETE or ETP, as the case may be). If ETP GP, SXL GP or Sunoco GP withdraws in circumstances other than those described in the preceding sentence and a successor general partner is elected in accordance with ETP’s, SXL’s or Sunoco’s partnership agreement, the successor general partner will have the option to purchase the general partner interest in such ETE Entity and the ETP, SXL and Sunoco IDRs (if then owned by ETE or ETP, as the case may be) for their fair market value. If ETP GP, SXL GP, Sunoco GP or the successor general partner do not exercise their options, the interests of ETP GP, SXL GP and Sunoco GP, as the case may be, would be converted into common units of the applicable entity based on an independent valuation. In each case, ETP GP, SXL GP and Sunoco GP would also lose their ability to manage ETP, SXL and Sunoco, as the case may be.

Cost reimbursements due to the ETE general partner may be substantial and may reduce ETE’s ability to pay distributions to its unitholders.

Prior to making any distributions to its unitholders, ETE will reimburse the ETE general partner for all expenses it has incurred on ETE’s behalf. In addition, the ETE general partner and its affiliates may provide ETE with services for which ETE will be charged reasonable fees as determined by the ETE general partner. The reimbursement of these expenses and the payment of these fees could adversely affect ETE’s ability to make distributions to its unitholders. The ETE general partner has sole discretion to determine the amount of these expenses and fees.

In addition, under Delaware law, the ETE general partner has unlimited liability for ETE’s obligations, such as ETE’s debts and environmental liabilities, except for ETE’s contractual obligations that are expressly made without recourse to the ETE general partner. To the extent the ETE general partner incurs obligations on ETE’s behalf, ETE is obligated to reimburse or indemnify it. If ETE is unable or unwilling to reimburse or indemnify the ETE general partner, the ETE general partner may take actions to cause ETE to make payments of these obligations and liabilities. Any such payments could reduce the amount of distributable cash flow to ETE unitholders and cause the value of ETE common units to decline.

ETE is dependent on third parties, including key personnel of ETP under a shared services agreement, to provide the financial, accounting, administrative and legal services necessary to operate its business.

ETE relies on the services of key personnel of ETP, including the ongoing involvement and continued leadership of Kelcy L. Warren, one of the founders of ETP’s midstream business, as well as other key members of ETP’s management team such as Marshall S. (Mackie) McCrea, III, President and Chief Operating Officer. Mr. Warren and Mr. McCrea have been integral to the success of ETP’s midstream and intrastate transportation and storage businesses because of their ability to identify and develop strategic business opportunities. Losing the

 

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leadership of either Mr. Warren or Mr. McCrea could make it difficult for ETP to identify internal growth projects and accretive acquisitions, which could have a material adverse effect on ETP’s ability to increase the cash distributions paid on its partnership interests.

ETP’s executive officers that provide services to ETE pursuant to a shared services agreement allocate their time between ETE and ETP. To the extent that these officers face conflicts regarding the allocation of their time, ETE may not receive the level of attention from them that the management of its business requires. If ETP is unable to provide ETE with a sufficient number of personnel with the appropriate level of technical accounting and financial expertise, ETE’s internal accounting controls could be adversely impacted.

The ETE Entities are exposed to the credit risk of their respective customers, and an increase in the nonpayment and nonperformance by their respective customers could have a material adverse impact on the financial condition and results of operations of the ETE Entities and could reduce their respective ability to make distributions to their unitholders, including to ETE.

The risks of nonpayment and nonperformance by the ETE Entities’ respective customers are a major concern in their respective businesses. Participants in the energy industry have been subjected to heightened scrutiny from the financial markets in light of past collapses and failures of other energy companies. The ETE Entities are subject to risks of loss resulting from nonpayment or nonperformance by their respective customers, especially during the current low commodity price environment impacting many oil and gas producers. As a result, the current commodity price volatility and the tightening of credit in the financial markets may make it more difficult for customers to obtain financing and, depending on the degree to which this occurs, there may be a material increase in the nonpayment and nonperformance by the ETE Entities’ respective customers. The ETE Entities’ customers and counterparties include industrial customers, local distribution companies, natural gas producers and marketers whose creditworthiness may be suddenly and disparately impacted by, among other factors, commodity price volatility, deteriorating energy market conditions, and public and regulatory opposition to energy producing activities. The current low commodity price environment has, in particular, negatively impacted natural gas producers causing them significant economic stress including, in some cases, to file for bankruptcy protection or to renegotiate contracts. To the extent one or more of the ETE Entities’ key customers commences bankruptcy proceedings, the ETE Entities’ contracts with such customers may be subject to rejection under applicable provisions of the United States Bankruptcy Code, or may be renegotiated. Further, during any such bankruptcy proceeding, prior to the assumption, rejection or renegotiation of such contracts, the bankruptcy court may temporarily authorize the payment of value for the ETE Entities’ services less than contractually required, which could have a material adverse effect on the ETE Entities’ business, results of operations, cash flows and financial condition. For example, Chesapeake Energy Corporation and its affiliates, which accounted for approximately 18% of WMB’s consolidated revenues for the year ended December 31, 2015, have experienced significant, negative financial results due to sustained low commodity prices. If ETE and the ETE Entities fail to adequately assess the creditworthiness of existing or future customers and counterparties or otherwise do not take or are unable to take sufficient mitigating actions, including obtaining sufficient collateral, deterioration in their creditworthiness and any resulting increase in nonpayment and/or nonperformance by them could cause ETE and the ETE Entities to write down or write off accounts receivable. Such write-downs or write-offs could negatively affect ETE’s and the ETE Entities’ operating results in the periods in which they occur, and, if significant, could have a material adverse effect on their business, results of operations, cash flows and financial condition. In addition, the ETE Entities’ risk management activities are subject to the risks that a counterparty may not perform its obligation under the applicable derivative instrument, the terms of the derivative instruments are imperfect, and the ETE Entities’ risk management policies and procedures are not properly followed. Any material nonpayment or nonperformance by the ETE Entities’ respective customers or their derivative counterparties could reduce their ability to make distributions to ETE unitholders. Any substantial increase in the nonpayment and nonperformance by the ETE Entities’ customers could have a material adverse effect on the ETE Entities’ respective results of operations and operating cash flows.

 

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Income from ETP’s midstream, transportation, terminalling and storage operations is exposed to risks due to fluctuations in the demand for and price of natural gas, NGLs and oil that are beyond ETP’s control.

The prices for natural gas, NGLs and oil (including refined petroleum products) reflect market demand that fluctuates with changes in global and U.S. economic conditions and other factors, including:

 

   

the level of domestic natural gas, NGL, and oil production;

 

   

the level of natural gas, NGL, and oil imports and exports, including LNG;

 

   

actions taken by natural gas and oil producing nations;

 

   

instability or other events affecting natural gas and oil producing nations;

 

   

the impact of weather and other events of nature on the demand for natural gas, NGLs and oil;

 

   

the availability of storage, terminal and transportation systems, and refining, processing and treating facilities;

 

   

the price, availability and marketing of competitive fuels;

 

   

the demand for electricity;

 

   

the cost of capital needed to maintain or increase production levels and to construct and expand facilities;

 

   

the impact of energy conservation and fuel efficiency efforts; and

 

   

the extent of governmental regulation, taxation, fees and duties.

In the past, the prices of natural gas, NGLs and oil have been extremely volatile, and ETP expects this volatility to continue.

Any loss of business from existing customers or ETP’s inability to attract new customers due to a decline in demand for natural gas, NGLs, or oil could have a material adverse effect on ETP’s revenues and results of operations. In addition, significant price fluctuations for natural gas, NGL and oil commodities could materially affect ETP’s profitability.

A material decrease in demand or distribution of crude oil available for transport through SXL’s pipelines or terminal facilities could materially and adversely affect ETE’s and ETP’s results of operations, financial position, or cash flows.

The volume of crude oil transported through SXL’s crude oil pipelines and terminal facilities depends on the availability of attractively priced crude oil produced or received in the areas serviced by its assets. A period of sustained crude oil price declines could lead to a decline in drilling activity, production and import levels in these areas. Similarly, a period of sustained increases in the price of crude oil supplied from any of these areas, as compared to alternative sources of crude oil available to SXL’s customers, could materially reduce demand for crude oil in these areas. In either case, the volumes of crude oil transported in SXL’s crude oil pipelines and terminal facilities could decline, and it could likely be difficult to secure alternative sources of attractively priced crude oil supply in a timely fashion or at all. If SXL is unable to replace any significant volume declines with additional volumes from other sources, ETE’s and ETP’s results of operations, financial position, or cash flows could be materially and adversely affected.

The ETE Entities are affected by competition from other midstream, transportation and storage and retail marketing companies.

The ETE Entities experience competition in all of their respective business segments. With respect to ETP’s midstream operations, ETP competes for both natural gas supplies and customers for its services. Competitors include major integrated oil companies, interstate and intrastate pipelines and companies that gather, compress, treat, process, transport, store and market natural gas.

 

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ETP’s natural gas and NGL transportation pipelines and storage facilities compete with other interstate and intrastate pipeline companies and storage providers in the transportation and storage of natural gas and NGLs. The principal elements of competition among pipelines are rates, terms of service, access to sources of supply and the flexibility and reliability of service. Natural gas and NGLs also competes with other forms of energy, including electricity, coal, fuel oils and renewable or alternative energy. Competition among fuels and energy supplies is primarily based on price; however, non-price factors, including governmental regulation, environmental impacts, efficiency, ease of use and handling, and the availability of subsidies and tax benefits also affects competitive outcomes.

In markets served by ETP’s NGL pipelines, ETP competes with other pipeline companies and barge, rail and truck fleet operations. ETP also faces competition with other storage and fractionation facilities based on fees charged and the ability to receive, distribute and/or fractionate the customer’s products.

ETP’s crude oil and refined products pipeline operations face significant competition from other pipelines for large volume shipments. These operations also face competition from trucks for incremental and marginal volumes in areas served by SXL’s pipelines. Further, ETP’s refined product terminals compete with terminals owned by integrated petroleum companies, refining and marketing companies, independent terminal companies and distribution companies with marketing and trading operations.

ETP and Sunoco also face strong competition in the market for the sale of retail gasoline and merchandise. ETP’s competitors include service stations operated by fully integrated major oil companies and other well-recognized national or regional retail outlets, often selling gasoline or merchandise at aggressively competitive prices. The actions of retail marketing competitors, including the impact of foreign imports, could lead to lower prices or reduced margins for the products ETP and Sunoco sell, which could have an adverse effect on ETP’s and Sunoco’s businesses or results of operations.

The ETE Entities may be unable to retain or replace existing midstream, transportation, terminalling and storage customers or volumes due to declining demand or increased competition in oil, natural gas and NGL markets, which would reduce revenues and limit future profitability.

The retention or replacement of existing customers and the volume of services that the ETE Entities provide at rates sufficient to maintain or increase current revenues and cash flows depends on a number of factors beyond ETC’s control, including the price of and demand for oil, natural gas, and NGLs in the markets the ETE Entities serve and competition from other service providers.

A significant portion of ETP’s sales of natural gas are to industrial customers and utilities. As a consequence of the volatility of natural gas prices and increased competition in the industry and other factors, industrial customers, utilities and other gas customers are increasingly reluctant to enter into long-term purchase contracts. Many customers purchase natural gas from more than one supplier and have the ability to change suppliers at any time. Some of these customers also have the ability to switch between gas and alternate fuels in response to relative price fluctuations in the market. Because there are many companies of greatly varying size and financial capacity that compete with ETP in the marketing of natural gas, ETP often competes in natural gas sales markets primarily on the basis of price.

ETP also receives a substantial portion of revenues by providing natural gas gathering, processing, treating, transportation and storage services. While a substantial portion of their services are sold under long-term contracts for reserved service, they also provide service on an unreserved or short-term basis. Demand for ETP’s services may be substantially reduced due to changing market prices. Declining prices may result in lower rates of natural gas production resulting in less use of services, while rising prices may diminish consumer demand and also limit the use of services. In addition, ETP’s competitors may attract its customers’ business. If demand declines or competition increases, ETP may not be able to sustain existing levels of unreserved service or renew or extend long-term contracts as they expire or it may reduce their rates to meet competitive pressures.

 

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Revenue from ETP’s NGL transportation systems and refined products storage is also exposed to risks due to fluctuations in demand for transportation and storage service as a result of unfavorable commodity prices, competition from nearby pipelines, and other factors. ETP receives substantially all of its transportation revenues through dedicated contracts under which the customer agrees to deliver the total output from particular processing plants that are connected only to its transportation system. Reduction in demand for natural gas or NGLs due to unfavorable prices or other factors, however, may result lower rates of production under dedicated contracts and lower demand for ETP’s services. In addition, ETP’s refined products storage revenues are primarily derived from fixed capacity arrangements between ETP and its customers, a portion of its revenue is derived from fungible storage and throughput arrangements, under which ETP’s revenue is more dependent upon demand for storage from its customers.

The volume of crude oil and products transported through ETP’s oil pipelines and terminal facilities depends on the availability of attractively priced crude oil and refined products in the areas serviced by ETP’s assets. A period of sustained price reductions for crude oil or products could lead to a decline in drilling activity, production and refining of crude oil, or import levels in these areas. A period of sustained increases in the price of crude oil or products supplied from or delivered to any of these areas could materially reduce demand for crude oil or products in these areas. In either case, the volumes of crude oil or products transported in ETP’s oil pipelines and terminal facilities could decline.

The loss of existing customers by the ETE Entities’ midstream, transportation, terminalling and storage facilities or a reduction in the volume of the services customers purchase from them, or their inability to attract new customers and service volumes would negatively affect revenues, be detrimental to growth, and adversely affect results of operations.

ETP’s midstream facilities and transportation pipelines are attached to basins with naturally declining production, which it may not be able to replace with new sources of supply.

In order to maintain or increase throughput levels on ETP’s gathering systems and transportation pipeline systems and asset utilization rates at its treating and processing plants, ETP must continually contract for new natural gas supplies and natural gas transportation services.

A substantial portion of ETP’s assets, including its gathering systems and processing and treating plants, are connected to natural gas reserves and wells that without additional wells or incremental capital investments experience declining production over time. ETP’s gas transportation pipelines are also dependent upon natural gas production in areas served by its gathering systems or in areas served by other gathering systems or transportation pipelines that connect with its transportation pipelines. ETP may not be able to obtain additional contracts for natural gas supplies for its natural gas gathering systems, and may be unable to maintain or increase the levels of natural gas throughput on its transportation pipelines. The primary factors affecting its ability to connect new supplies of natural gas to its gathering systems include its success in contracting for existing natural gas supplies that are not committed to other systems and the level of drilling activity and production of natural gas near its gathering systems or in areas that provide access to its transportation pipelines or markets to which ETP’s systems connect. ETP has no control over the level of drilling activity in its areas of operation, the amount of reserves underlying the wells and the rate at which production from a well will decline. In addition, ETP has no control over producers or their production and contracting decisions.

While a substantial portion of ETP’s services are provided under long-term contracts for reserved service, it also provides service on an unreserved basis. The reserves available through the supply basins connected to its gathering, processing, treating, transportation and storage facilities may decline and may not be replaced by other sources of supply. A decrease in development or production activity could cause a decrease in the volume of unreserved services ETP provides and a decrease in the number and volume of its contracts for reserved transportation service over the long run, which in each case would adversely affect revenues and results of operations.

 

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If ETP is unable to replace any significant volume declines with additional volumes from other sources, its results of operations and cash flows could be materially and adversely affected.

ETP is entirely dependent upon third parties for the supply of refined products such as gasoline and diesel for its retail marketing business.

ETP is required to purchase refined products from third-party sources, including the joint venture that acquired Sunoco, Inc.’s Philadelphia refinery. ETP may also need to contract for new ships, barges, pipelines or terminals which it has not historically used to transport these products to its markets. The inability to acquire refined products and any required transportation services at favorable prices may adversely affect ETP’s business and results of operations.

The profitability of certain activities in ETP’s natural gas gathering, processing, transportation and storage operations is largely dependent upon natural gas commodity prices, price spreads between two or more physical locations and market demand for natural gas and NGLs.

For a portion of the natural gas gathered on ETP’s systems, ETP purchases natural gas from producers at the wellhead and then gathers and delivers the natural gas to pipelines where ETP typically resells the natural gas under various arrangements, including sales at index prices. Generally, the gross margins ETP realizes under these arrangements decrease in periods of low natural gas prices.

ETP also enters into percent-of-proceeds arrangements, keep-whole arrangements, and processing fee agreements pursuant to which ETP agrees to gather and process natural gas received from the producers.

Under percent-of-proceeds arrangements, ETP generally sells the residue gas and NGLs at market prices and remits to the producers an agreed upon percentage of the proceeds based on an index price. In other cases, instead of remitting cash payments to the producer, ETP delivers an agreed upon percentage of the residue gas and NGL volumes to the producer and sells the volumes it keeps to third parties at market prices. Under these arrangements, revenues and gross margins decline when natural gas prices and NGL prices decrease. Accordingly, a decrease in the price of natural gas or NGLs could have an adverse effect on ETP’s revenues and results of operations.

Under keep-whole arrangements, ETP generally sells the NGLs produced from its gathering and processing operations at market prices. Because the extraction of the NGLs from the natural gas during processing reduces the Btu content of the natural gas, ETP must either purchase natural gas at market prices for return to producers or make a cash payment to producers equal to the value of this natural gas. Under these arrangements, gross margins generally decrease when the price of natural gas increases relative to the price of NGLs.

When ETP processes the gas for a fee under processing fee agreements, it may guarantee recoveries to the producer. If recoveries are less than those guaranteed to the producer, ETP may suffer a loss by having to supply liquids or its cash equivalent to keep the producer whole.

ETP also receives fees and retains gas in kind from its natural gas transportation and storage customers. ETP’s fuel retention fees and the value of gas that ETP retains in kind are directly affected by changes in natural gas prices. Decreases in natural gas prices tend to decrease fuel retention fees and the value of retained gas.

In addition, ETP receives revenue from its off-gas processing and fractionating system in South Louisiana primarily through customer agreements that are a combination of keep-whole and percent-of-proceeds arrangements, as well as from transportation and fractionation fees. Consequently, a large portion of ETP’s off gas processing and fractionation revenue is exposed to risks due to fluctuations in commodity prices. In addition, a decline in NGL prices could cause a decrease in demand for ETP’s off-gas processing and fractionation services and could have an adverse effect on ETP’s results of operations.

 

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Capital projects will require significant amounts of debt and equity financing which may not be available to ETE or the ETE Entities on acceptable terms, or at all.

ETE and the ETE Entities plan to fund their growth capital expenditures, including any new future pipeline construction projects and improvements or repairs to existing facilities that the ETE Entities may undertake, with proceeds from sales of their debt and equity securities and borrowings under their respective revolving credit facilities; however, ETE and the ETE Entities cannot be certain that they will be able to issue debt and equity securities on terms satisfactory to them, or at all. In addition, they may be unable to obtain adequate funding under their current revolving credit facilities because their lending counterparties may be unwilling or unable to meet their funding obligations. If the ETE Entities are unable to finance their expansion projects as expected, the ETE Entities, as applicable, could be required to seek alternative financing, the terms of which may not be attractive to the applicable ETE Entity, or to revise or cancel its expansion plans.

A significant increase in the ETE Entities’ indebtedness that is proportionately greater than the ETE Entities’ respective issuances of equity could negatively impact the ETE Entities’ respective credit ratings or their ability to remain in compliance with the financial covenants under their respective revolving credit agreements, which could have a material adverse effect on the ETE Entities’ financial condition, results of operations and cash flows.

The credit and risk profile of ETE could adversely affect the credit ratings and profile of the ETE Entities.

The credit and business risk profile of ETE may be a factor in credit evaluations of the ETE Entities as publicly traded limited partnerships due to the significant influence of ETE over their respective business activities, including their cash distributions, acquisition strategy and business risk profile. Another factor that may be considered is the financial condition of ETE, including its degree of financial leverage and dependence on the ETE Entities to service its debt. Although ETE has taken certain steps in its organizational structure, financial reporting and contractual relationships to reflect the separateness of ETE from the ETE Entities, the credit ratings and business risk profile of ETE could adversely affect the ratings and risk profile of the ETE Entities, which could increase their borrowing costs or hinder their ability to raise capital.

A downgrade of ETE’s or the ETE Entities’ respective credit ratings could impact their liquidity, access to capital and costs of doing business, and maintaining credit ratings is under the control of independent third parties.

A downgrade of ETE’s or the ETE Entities’ credit rating might increase their respective cost of borrowing and could require them to post collateral with third parties, negatively impacting their available liquidity. ETE’s and the ETE Entities’ ability to access capital markets could also be limited by a downgrade of their credit rating and other disruptions. Such disruptions could include:

 

   

economic downturns;

 

   

deteriorating capital market conditions;

 

   

declining market prices for natural gas, NGLs and other commodities;

 

   

terrorist attacks or threatened attacks on their facilities or those of other energy companies; and

 

   

the overall health of the energy industry, including the bankruptcy or insolvency of other companies.

As of December 31, 2015, ETE had approximately $7 billion of debt on a stand-alone basis and approximately $36.97 billion of consolidated debt, excluding the debt of its joint ventures. In addition, in connection with the merger, ETE expects to incur an additional $6.05 billion of debt to fund the cash consideration for the transaction and to assume approximately $4.2 billion of debt outstanding under WMB’s senior notes. In light of the sustained commodity price environment and ETE’s current leverage and credit profile, there is a risk that the incurrence of such additional debt could adversely affect ETE’s credit ratings. Any downgrade in ETE’s credit ratings following the transaction could adversely affect the investment grade credit

 

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ratings of ETP, SXL and WPZ, and the credit rating of Sunoco. ETP and WPZ currently maintain investment grade ratings by Moody’s, S&P and Fitch. However, those current ratings may not remain in effect for any given period of time and a rating may be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. If Moody’s, S&P or Fitch were to downgrade the long-term rating of any of the ETE Entities, particularly below investment grade, ETE’s consolidated borrowing costs could significantly increase, which would adversely affect ETE’s consolidated financial results, and the terms of ETE’s credit agreements could become significantly more restrictive. The potential pool of investors and funding sources could also decrease. Further, due to the relationship between ETE and the ETE Entities, any downgrade of ETE’s credit ratings could also result in a downgrade in one or more of the ETE Entities’ credit ratings. Ratings from credit agencies are not recommendations to buy, sell or hold ETE’s securities, and each rating should be evaluated independently of any other rating.

Additionally, if, within 90 days of the closing date of the merger, either Moody’s or S&P downgrades the rating of the Applicable WPZ Notes, there will be a change of control under the Applicable WPZ Notes Indentures. As a result, WPZ will be obligated to offer to purchase all or any part of such series of Applicable WPZ Notes at a purchase price equal to 101% of the principal amount of thereof, plus accrued and unpaid interest thereon to the date of repurchase. The aggregate principal amount of the Applicable WPZ Notes is $2.9 billion. Please see “Risks Related to the Businesses of ETE and the ETE Entities—The ETE Entities are exposed to the credit risk of their respective customers, and an increase in the nonpayment and nonperformance by their respective customers could have a material adverse impact on the financial condition and results of operations of the ETE Entities and could reduce their respective ability to make distributions to their unitholders, including to ETE.”

In connection with the merger, ETE has entered into an Amended and Restated Commitment Letter with a syndicate of 20 banks, pursuant to which the banks have committed to provide a 364-day secured term loan credit facility (which may, at ETE’s option, be extended for an additional year) in an aggregate principal amount of $6.05 billion (or such lesser amount that ETE may elect to borrow). The commitment is based on a term sheet that specifies general terms for the definitive loan documentation and is subject to customary conditions for commitments of this type, including the negotiation and execution of satisfactory definitive documentation. ETE currently has a significant amount of debt and the incurrence of additional debt in connection with the merger may adversely affect ETE and the ETE Entities’ future operations and business. Further, to the extent commodity prices remain low or decline further, or ETE has limited access to the capital markets due to a credit ratings downgrade or other disruptions, ETE’s ability to refinance this $6.05 billion facility or ETE’s $1.5 billion senior secured revolving credit facility, which matures in December 2018, on commercially reasonable terms or at all may be materially impacted.

Credit rating agencies perform independent analysis when assigning credit ratings. The analysis includes a number of criteria including, but not limited to, business composition, market and operational risks, as well as various financial tests. Credit rating agencies continue to review the criteria for industry sectors and various debt ratings and may make changes to those criteria from time to time. Credit ratings are not recommendations to buy, sell or hold investments in the rated entity. Ratings are subject to revision or withdrawal at any time by the rating agencies, and there can be no assurance that ETE or the ETE Entities will maintain their current credit ratings.

In order for ETE to maintain its credit ratings at current ratings levels, it may need to sell assets, issue additional equity securities, reduce cash distributions to unitholders or a combination thereof. ETE states that in furtherance of maintaining its credit ratings, it completed the private offering of Convertible Units. WMB has commenced litigation seeking to unwind such offering. While ETE believes WMB’s claims are without merit, if WMB is successful in unwinding the Convertible Units offering, it could have a negative impact on ETE’s efforts to maintain its ratings with Moody’s, S&P or Fitch.

 

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The use of derivative financial instruments could result in material financial losses by the ETE Entities.

From time to time, the ETE Entities have sought to reduce their exposure to fluctuations in commodity prices and interest rates by using derivative financial instruments and other risk management mechanisms and by their trading, marketing and/or system optimization activities. To the extent that the ETE Entities hedge their commodity price and interest rate exposures, they forego the benefits they would otherwise experience if commodity prices or interest rates were to change favorably. In addition, even though monitored by management, the ETE Entities’ derivatives activities can result in losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the derivative arrangement, the hedge is imperfect, commodity prices move unfavorably related to the ETE Entities’ physical or financial positions, or internal hedging policies and procedures are not followed.

The accounting standards regarding hedge accounting are very complex, and even when the ETE Entities engage in hedging transactions that are effective economically (whether to mitigate their exposure to fluctuations in commodity prices, or to balance the ETE Entities’ exposure to fixed and variable interest rates), these transactions may not be considered effective for accounting purposes. Accordingly, ETE’s and the ETE Entities’ consolidated financial statements may reflect some volatility due to these hedges, even when there is no underlying economic impact at that point. It is also not always possible for the ETE Entities to engage in a hedging transaction that completely mitigates their exposure to commodity prices. ETE’s and the ETE Entities’ consolidated financial statements may reflect a gain or loss arising from an exposure to commodity prices for which the ETE Entities are unable to enter into a completely effective hedge.

In addition, even though monitored by management, the ETE Entities’ derivatives activities can result in losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the derivative arrangement, the hedge is imperfect, commodity prices move unfavorably related to the ETE Entities’ physical or financial positions or hedging policies and procedures are not followed.

ETP’s natural gas and NGL revenues depend on ETP’s customers’ ability to use ETP’s pipelines and third-party pipelines over which ETP has no control.

ETP’s natural gas transportation, storage and NGL businesses depend, in part, on its customers’ ability to obtain access to pipelines to deliver gas to and receive gas from them. Many of these pipelines are owned by parties not affiliated with ETE or ETP. Any interruption of service on ETP’s pipelines or third-party pipelines due to testing, line repair, reduced operating pressures, or other causes or adverse change in terms and conditions of service could have a material adverse effect on ETP’s ability, and the ability of its customers, to transport natural gas to and from its pipelines and facilities and a corresponding material adverse effect on their transportation and storage revenues. In addition, the rates charged by interconnected pipelines for transportation to and from ETP’s facilities affect the utilization and value of its storage services. Significant changes in the rates charged by those pipelines or the rates charged by other pipelines with which the interconnected pipelines compete could also have a material adverse effect on storage revenues.

Shippers using ETP’s oil pipelines and terminals are also dependent upon its pipelines and connections to third-party pipelines to receive and deliver crude oil and refined products. Any interruptions or reduction in the capabilities of these pipelines due to testing, line repair, reduced operating pressures, or other causes could result in reduced volumes transported in ETP’s pipelines or through its terminals. Similarly, if additional shippers begin transporting volume over interconnecting oil pipelines, the allocations of pipeline capacity to ETP’s existing shippers on these interconnecting pipelines could be reduced, which also could reduce volumes transported in its pipelines or through its terminals. Allocation reductions of this nature are not infrequent and are beyond ETP’s control. Any such interruptions or allocation reductions that, individually or in the aggregate, are material or continue for a sustained period of time could have a material adverse effect on ETP’s results of operations, financial position or cash flows.

 

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The inability of the ETE Entities to continue to access lands owned by third parties, including tribal lands, could adversely affect their ability to operate and adversely affect their financial results.

The ETE Entities’ ability to operate their pipeline systems and terminal facilities on certain lands owned by third parties, including lands held in trust by the United States for the benefit of a Native American tribe, will depend on their success in maintaining existing rights-of-way and obtaining new rights-of-way on those lands. Securing extensions of existing and any additional rights-of-way is also critical to the ETE Entities’ ability to pursue expansion projects. ETE and the ETE Entities cannot provide any assurance that the ETE Entities will be able to acquire new rights-of-way or maintain access to existing rights-of-way upon the expiration of the current grants or that all of the rights-of-way will be obtainable in a timely fashion. Transwestern’s existing right-of-way agreements with the Navajo Nation, Southern Ute, Pueblo of Laguna and Fort Mojave tribes extend through November 2029, September 2020, December 2022 and April 2019, respectively. The ETE Entities’ financial position could be adversely affected if the costs of new or extended right-of-way grants cannot be recovered in rates.

Further, whether the ETE Entities have the power of eminent domain for their pipelines varies from state to state, depending upon the type of pipeline and the laws of the particular state. In either case, the ETE Entities’ must compensate landowners for the use of their property and, in eminent domain actions, such compensation may be determined by a court. The inability to exercise the power of eminent domain could negatively affect the ETE Entities’ business if they were to lose the right to use or occupy the property on which their pipelines are located.

In addition, the ETE Entities do not own all of the land on which their oil terminal facilities and retail service stations are located. The ETE Entities have rental agreements for approximately 32.6% of the company or dealer-operated retail service stations where they currently control the real estate and have rental agreements for certain logistics facilities. As such, the ETE Entities are subject to the possibility of increased costs under rental agreements with landowners, primarily through rental increases and renewals of expired agreements. The ETE Entities are also subject to the risk that such agreements may not be renewed. Additionally, certain facilities and equipment (or parts thereof) used by the ETE Entities are leased from third parties for specific periods. The ETE Entities inability to renew leases or otherwise maintain the right to utilize such facilities and equipment on acceptable terms, or the increased costs to maintain such rights, could have a material adverse effect on ETE’s financial condition, results of operations and cash flows.

The ETE Entities may not be able to fully execute their growth strategies if they encounter increased competition for qualified assets.

The ETE Entities each have strategies that contemplate growth through the development and acquisition of a wide range of midstream and other energy infrastructure assets while maintaining strong balance sheets. These strategies include constructing and acquiring additional assets and businesses to enhance their ability to compete effectively and diversify their respective asset portfolios, thereby providing more stable cash flow. The ETE Entities regularly consider and enter into discussions regarding the acquisition of additional assets and businesses, stand-alone development projects or other transactions that the ETE Entities believe will present opportunities to realize synergies and increase cash flow.

Consistent with their strategies, managements of the ETE Entities may, from time to time, engage in discussions with potential sellers regarding the possible acquisition of additional assets or businesses. Such acquisition efforts may involve management’s participation in processes that involve a number of potential buyers, commonly referred to as “auction” processes, as well as situations in which an ETE Entity believes it is the only party or one of a very limited number of potential buyers in negotiations with the potential seller. ETE and the ETE Entities cannot assure that the ETE Entities’ acquisition efforts will be successful or that any acquisition will be completed on favorable terms.

 

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In addition, the ETE Entities each are experiencing increased competition for the assets they purchase or contemplate purchasing. Increased competition for a limited pool of assets could result in the ETE Entities losing to other bidders more often or acquiring assets at higher prices, both of which would limit the ETE Entities’ ability to fully execute their respective growth strategies. Inability to execute their respective growth strategies may materially adversely impact the ETE’s and ETE Entities’ results of operations.

An impairment of goodwill and intangible assets could reduce ETE’s and the ETE Entities earnings.

As of December 31, 2015, ETE’s consolidated balance sheets reflected $7.47 billion of goodwill and $5.43 billion of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. Accounting principles generally accepted in the United States require ETE to test goodwill for impairment on an annual basis or when events or circumstances occur, indicating that goodwill might be impaired. Long-lived assets such as intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If ETE determines that any of its goodwill or intangible assets were impaired, ETE would be required to take an immediate charge to earnings with a correlative effect on partners’ capital and balance sheet leverage as measured by debt to total capitalization.

During the fourth quarter of 2015, ETE performed goodwill impairment tests on their reporting units and recognized goodwill impairments of: (i) $99 million in the Transwestern reporting unit due primarily to the market declines in current and expected future commodity prices in the fourth quarter of 2015 and (ii) $106 million in the Lone Star Refinery Services reporting unit due primarily to changes in assumptions related to potential future revenues decrease as well as the market declines in current and expected future commodity prices.

The ETE Entities’ results of operations and their ability to grow and to increase distributions to unitholders will depend in part on their ability to make acquisitions that are accretive to their respective distributable cash flow.

The ETE Entities may be unable to make accretive acquisitions for any of the following reasons, among others:

 

   

inability to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;

 

   

inability to raise financing for such acquisitions on economically acceptable terms; or

 

   

inability to outbid by competitors, some of which are substantially larger than the ETE Entities and may have greater financial resources and lower costs of capital.

Furthermore, even if the ETE Entities consummate acquisitions that they believe will be accretive, those acquisitions may in fact adversely affect their results of operations or result in a decrease in distributable cash flow per unit. Any acquisition involves potential risks, including the risk that the ETE Entities may:

 

   

fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;

 

   

decrease their liquidity by using a significant portion of their available cash or borrowing capacity to finance acquisitions;

 

   

significantly increase their interest expense or financial leverage if the acquisitions are financed with additional debt;

 

   

encounter difficulties operating in new geographic areas or new lines of business;

 

   

incur or assume unanticipated liabilities, losses or costs associated with the business or assets acquired for which there is no indemnity or the indemnity is inadequate;

 

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be unable to hire, train or retrain qualified personnel to manage and operate their growing business and assets;

 

   

less effectively manage their historical assets, due to the diversion of management’s attention from other business concerns; or

 

   

incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.

If the ETE Entities consummate future acquisitions, their respective capitalization and results of operations may change significantly. As the ETE Entities determine the application of their funds and other resources, their respective unitholders will not have an opportunity to evaluate the economic, financial and other relevant information that the ETE Entities will consider.

If the ETE Entities do not continue to construct new pipelines, their future growth could be limited.

The ETE Entities’ results of operations and their ability to grow and to increase distributable cash flow per unit will depend, in part, on their ability to construct pipelines that are accretive to their respective distributable cash flow. The ETE Entities may be unable to construct pipelines that are accretive to distributable cash flow for any of the following reasons, among others:

 

   

inability to identify pipeline construction opportunities with favorable projected financial returns;

 

   

inability to raise financing for their identified pipeline construction opportunities; or

 

   

inability to secure sufficient transportation commitments from potential customers due to competition from other pipeline construction projects or for other reasons.

Furthermore, even if an ETE Entity constructs a pipeline that it believes will be accretive, the pipeline may in fact adversely affect its results of operations or fail to achieve results projected prior to commencement of construction.

Expanding the ETE Entities’ business by constructing new pipelines and related facilities subjects the ETE Entities to risks.

One of the ways that the ETE Entities have grown their respective businesses is through the construction of additions to existing gathering, compression, treating, processing and transportation systems. The construction of a new pipeline and related facilities (or the improvement and repair of existing facilities) involves numerous regulatory, environmental, political and legal uncertainties beyond the ETE Entities’ control and requires the expenditure of significant amounts of capital to be financed through borrowings, the issuance of additional equity or from operating cash flow. If any of the ETE Entities undertakes these projects, they may not be completed on schedule or at all or at the budgeted cost. A variety of factors outside the ETE Entities’ control, such as weather, natural disasters and difficulties in obtaining permits and rights-of-way or other regulatory approvals, as well as the performance by third-party contractors may result in increased costs or delays in construction. Cost overruns or delays in completing a project could have a material adverse effect on the ETE Entities’ results of operations and cash flows. Moreover, revenues may not increase immediately following the completion of a particular project. For instance, if an ETE Entity builds a new pipeline, the construction will occur over an extended period of time, but the ETE Entity may not materially increase its revenues until long after the project’s completion. In addition, the success of a pipeline construction project will likely depend upon the level of oil and natural gas exploration and development drilling activity and the demand for pipeline transportation in the areas proposed to be serviced by the project as well as the ETE Entities’ abilities to obtain commitments from producers in the area to utilize the newly constructed pipelines. In this regard, the ETE Entities may construct facilities to capture anticipated future growth in oil or natural gas production in a region in which such growth does not materialize. As a result, new facilities may be unable to attract enough throughput or contracted capacity reservation commitments to achieve the ETE Entities’ expected investment return, which could adversely affect their results of operations and financial condition.

 

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ETP depends on certain key producers for a significant portion of its supplies of natural gas. The loss of, or reduction in, any of these key producers could adversely affect ETP’s business and operating results.

ETP relies on a limited number of producers for a significant portion of its natural gas supplies. These contracts have terms that range from month-to-month to life of lease. As these contracts expire, ETP will have to negotiate extensions or renewals or replace the contracts with those of other suppliers. ETP may be unable to obtain new or renewed contracts on favorable terms, if at all. The loss of all or even a portion of the volumes of natural gas supplied by these producers and other customers, as a result of competition or otherwise, could have a material adverse effect on ETP’s business, results of operations, and financial condition.

ETP depends on key customers to transport natural gas through its pipelines.

ETP relies on a limited number of major shippers to transport certain minimum volumes of natural gas on their respective pipelines. The failure of the major shippers on ETP’s or its joint ventures’ pipelines or of other key customers to fulfill their contractual obligations under these contracts could have a material adverse effect on the cash flow and results of operations of ETE, ETP or ETP’s joint ventures, as applicable, were unable to replace these customers under arrangements that provide similar economic benefits as these existing contracts.

Mergers among the ETE Entities’ customers and competitors could result in lower volumes being shipped on their respective pipelines or products stored in or distributed through their terminals, as applicable, or reduced margins or volumes.

Mergers between existing customers could provide strong economic incentives for the combined entities to utilize their existing systems instead of the systems of the ETE Entities in those markets where the systems compete. As a result, the ETE Entities could lose some or all of the volumes and associated revenues from these customers and could experience difficulty in replacing those lost volumes and revenues, which could materially and adversely affect the ETE Entities’ respective results of operations, financial position, or cash flows.

A portion of SXL’s and Sunoco, Inc.’s general and administrative services have been outsourced to third-party service providers. Fraudulent activity or misuse of proprietary data involving its outsourcing partners could expose them to additional liability.

SXL and Sunoco, Inc. utilize both affiliate entities and third parties in the processing of its information and data. Breaches of its security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about SXL, Sunoco, Inc. or their respective customers, including the potential loss or disclosure of such information or data as a result of fraud or other forms of deception, could expose SXL or Sunoco, Inc. to a risk of loss or misuse of this information, result in litigation and potential liability for SXL or Sunoco, Inc., lead to reputational damage, increase compliance costs, or otherwise harm its business.

The ETE Entities’ interstate pipelines are subject to laws, regulations and policies governing the rates they are allowed to charge for their services, which may prevent the ETE Entities from fully recovering their costs.

Laws, regulations and policies governing interstate natural gas pipeline rates could affect the ability of the ETE Entities’ interstate pipelines to establish rates, to charge rates that would cover future increases in its costs, or to continue to collect rates that cover current costs.

The ETE Entities are required to file tariff rates (also known as recourse rates) with the FERC that shippers may elect to pay for interstate natural gas transportation services. The ETE Entities may also agree to discount these rates on a not unduly discriminatory basis or negotiate rates with shippers who elect not to pay the recourse rates. The ETE Entities must also file with the FERC all negotiated rates that do not conform to their tariff rates and all changes to their tariff or negotiated rates. The FERC must approve or accept all rate filings for the ETE Entities to be allowed to charge such rates.

 

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The FERC may review existing tariffs rates on its own initiative or upon receipt of a complaint filed by a third party. The FERC may, on a prospective basis, order refunds of amounts collected if it finds the rates to have been shown not to be just and reasonable or to have been unduly discriminatory. The FERC has recently exercised this authority with respect to several other pipeline companies. If the FERC were to initiate a proceeding against the ETE Entities and find that their rates were not just and reasonable or unduly discriminatory, the maximum rates customers could elect to pay the ETE Entities may be reduced and the reduction could have an adverse effect on their revenues and results of operations.

The costs of the ETE Entities’ interstate pipeline operations may increase and the ETE Entities may not be able to recover all of those costs due to FERC regulation of their rates. If the ETE Entities propose to change their tariff rates, their proposed rates may be challenged by the FERC or third parties, and the FERC may deny, modify or limit the ETE Entities’ proposed changes if they are unable to persuade the FERC that changes would result in just and reasonable rates that are not unduly discriminatory. The ETE Entities also may be limited by the terms of rate case settlement agreements or negotiated rate agreements with individual customers from seeking future rate increases, or the ETE Entities may be constrained by competitive factors from charging their tariff rates.

To the extent the ETE Entities’ costs increase in an amount greater than their revenues increase, or there is a lag between their cost increases and their ability to file for, and obtain rate increases, their operating results would be negatively affected. Even if a rate increase is permitted by the FERC to become effective, the rate increase may not be adequate. The ETE Entities cannot guarantee that their interstate pipelines will be able to recover all of their costs through existing or future rates.

The ability of interstate pipelines held in tax-pass-through entities, like ETE and the ETE Entities, to include an allowance for income taxes as a cost-of-service element in their regulated rates has been subject to extensive litigation before the FERC and the courts for a number of years. It is currently the FERC’s policy to permit pipelines to include in cost-of-service a tax allowance to reflect actual or potential income tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such income. Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis. Under the FERC’s policy, ETE and the ETE Entities thus remain eligible to include an income tax allowance in the tariff rates they charge for interstate natural gas transportation. The effectiveness of the FERC’s policy and the application of that policy remains subject to future challenges, refinement or change by the FERC or the courts.

The ETE Entities’ interstate pipelines are subject to laws, regulations and policies governing terms and conditions of service, which could adversely affect their business and operations.

In addition to rate oversight, the FERC’s regulatory authority extends to many other aspects of the business and operations of the ETE Entities’ interstate pipelines, including:

 

   

operating terms and conditions of service;

 

   

the types of services interstate pipelines may or must offer their customers;

 

   

construction of new facilities;

 

   

acquisition, extension or abandonment of services or facilities;

 

   

reporting and information posting requirements;

 

   

accounts and records; and

 

   

relationships with affiliated companies involved in all aspects of the natural gas and energy businesses.

Compliance with these requirements can be costly and burdensome. In addition, the ETE Entities cannot guarantee that the FERC will authorize tariff changes and other activities the ETE Entities might propose in a

 

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timely manner and free from potentially burdensome conditions. Future changes to laws, regulations, policies and interpretations thereof in these areas may impair the ability of the ETE Entities’ interstate pipelines to compete for business, may impair their ability to recover costs or may increase the cost and burden of operation.

Rate regulation or market conditions may not allow ETP to recover the full amount of increases in the costs of its crude oil and products pipeline operations.

Transportation provided on ETP’s common carrier interstate crude oil and products pipelines is subject to rate regulation by the FERC, which requires that tariff rates for transportation on these oil pipelines be just and reasonable and not unduly discriminatory. If ETP proposes new or changed rates, the FERC or interested persons may challenge those rates and the FERC is authorized to suspend the effectiveness of such rates for up to seven months and to investigate such rates. If, upon completion of an investigation, the FERC finds that the proposed rate is unjust or unreasonable, it is authorized to require the carrier to refund revenues in excess of the prior tariff during the term of the investigation. The FERC also may investigate, upon complaint or on its own motion, rates that are already in effect and may order a carrier to change its rates prospectively. Upon an appropriate showing, a shipper may obtain reparations for damages sustained for a period of up to two years prior to the filing of a complaint.

The primary ratemaking methodology used by the FERC to authorize increases in the tariff rates of petroleum pipelines is price indexing. The FERC’s ratemaking methodologies may limit ETP’s ability to set rates based on ETP’s costs or may delay the use of rates that reflect increased costs. In addition, if the FERC’s indexing methodology changes, the new methodology could materially and adversely affect ETP’s financial condition, results of operations or cash flows.

Under the Energy Policy Act of 1992, certain interstate pipeline rates were deemed just and reasonable or “grandfathered.” Revenues are derived from such grandfathered rates on most of ETP’s FERC-regulated pipelines. A person challenging a grandfathered rate must, as a threshold matter, establish a substantial change since the date of enactment of the Energy Policy Act, in either the economic circumstances or the nature of the service that formed the basis for the rate. If the FERC were to find a substantial change in circumstances, then the existing rates could be subject to detailed review and there is a risk that some rates could be found to be in excess of levels justified by the pipeline’s costs. In such event, the FERC could order ETP to reduce pipeline rates prospectively and to pay refunds to shippers.

If the FERC’s petroleum pipeline ratemaking methodologies procedures changes, the new methodology or procedures could adversely affect ETP’s business and results of operations.

State regulatory measures could adversely affect the business and operations of the ETE Entities’ midstream and intrastate pipeline and storage assets.

The ETE Entities’ midstream and intrastate transportation and storage operations are generally exempt from FERC regulation under the NGA, but FERC regulation still significantly affects their business and the market for their products. The rates, terms and conditions of service for the services they provide in their intrastate gas pipelines and gas storage are subject to FERC regulations under Section 311 of the NGPA. ETP’s HPL System, East Texas pipeline, Oasis pipeline and ET Fuel System provide such services. Under Section 311, rates charged for transportation and storage must be fair and equitable. Amounts collected in excess of fair and equitable rates are subject to refund with interest, and the terms and conditions of service, set forth in the pipeline’s statement of operating conditions, are subject to FERC review and approval. Should the FERC determine not to authorize rates equal to or greater than the ETE Entities’ costs of service, their cash flow would be negatively affected.

The ETE Entities’ midstream and intrastate gas and oil transportation pipelines and their intrastate gas storage operations are subject to state regulation. All of the states in which they operate midstream assets, intrastate pipelines or intrastate storage facilities have adopted some form of complaint-based regulation, which allow producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to

 

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the fairness of rates and terms of access. The states in which the ETE Entities operate have ratable take statutes, which generally require gatherers to take, without undue discrimination, production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes have the effect of restricting the ETE Entities’ right as an owner of gathering facilities to decide with whom they contract to purchase or transport natural gas. Should a complaint be filed in any of these states or should regulation become more active, the ETE Entities’ businesses may be adversely affected.

The ETE Entities’ intrastate transportation operations located in Texas are also subject to regulation as gas utilities by the TRRC. Texas gas utilities must publish the rates they charge for transportation and storage services in tariffs filed with the TRRC, although such rates are deemed just and reasonable under Texas law unless challenged in a complaint.

The ETE Entities are subject to other forms of state regulation, including requirements to obtain operating permits, reporting requirements, and safety rules (see description of federal and state pipeline safety regulation below). Violations of state laws, regulations, orders and permit conditions can result in the modification, cancellation or suspension of a permit, civil penalties and other relief.

Certain of the ETE Entities’ assets may become subject to regulation.

The distinction between federally unregulated gathering facilities and FERC-regulated transmission pipelines under the NGA has been the subject of extensive litigation and may be determined by the FERC on a case-by-case basis, although the FERC has made no determinations as to the status of ETP’s facilities. Consequently, the classification and regulation of ETP’s gathering facilities could change based on future determinations by the FERC, the courts or Congress. If ETP’s gas gathering operations become subject to FERC jurisdiction, the result may adversely affect the rates ETP is able to charge and the services ETP currently provides, and may include the potential for a termination of ETP’s gathering agreements with its customers.

Intrastate transportation of NGLs is largely regulated by the state in which such transportation takes place. Lone Star’s NGL Pipeline transports NGLs within the state of Texas and is subject to regulation by the TRRC. This NGLs transportation system offers services pursuant to an intrastate transportation tariff on file with the TRRC. Lone Star’s NGL pipeline also commenced the interstate transportation of NGLs in 2013, which is subject to FERC’s jurisdiction under the Interstate Commerce Act and the Energy Policy Act of 1992. Both intrastate and interstate NGL transportation services must be provided in a manner that is just, reasonable, and non-discriminatory. The tariff rates established for interstate services were based on a negotiated agreement; however, if FERC’s rate making methodologies were imposed, they may, among other things, delay the use of rates that reflect increased costs and subject the ETE Entities to potentially burdensome and expensive operational, reporting and other requirements. In addition, the rates, terms and conditions for shipments of crude oil, petroleum products and NGLs on the ETE Entities’ pipelines are subject to regulation by FERC if the NGLs are transported in interstate or foreign commerce whether by the ETE Entities’ pipelines or other means of transportation. Since the ETE Entities do not control the entire transportation path of all crude oil, petroleum products and NGLs on their pipelines, FERC regulation could be triggered by the ETE Entities’ respective customers’ transportation decisions. Any of the foregoing could adversely affect revenues and cash flow related to these assets.

The ETE Entities may incur significant costs and liabilities resulting from performance of pipeline integrity programs and related repairs.

Pursuant to authority under the NGPSA and HLPSA, as amended by the PSI Act, the PIPES Act and the 2011 Pipeline Safety Act, PHMSA has established a series of rules requiring pipeline operators to develop and implement integrity management programs for gas transmission and hazardous liquid pipelines that, in the event of a pipeline leak or rupture could affect “high consequence areas,” which are areas where a release could have the most significant adverse consequences, including high population areas, certain drinking water sources, and unusually sensitive ecological areas.

 

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These regulations require operators of covered pipelines to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

identify and characterize applicable threats to pipeline operations that could impact a high consequence area;

 

   

improve data collection, integration and analysis;

 

   

repair and remediate the pipeline as necessary; and

 

   

implement preventive and mitigating actions.

In addition, states have adopted regulations similar to existing PHMSA regulations for intrastate gathering and transmission lines. At this time, the ETE Entities cannot predict the ultimate cost of compliance with applicable pipeline integrity management regulations, as the cost will vary significantly depending on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing. The ETE Entities will continue their pipeline integrity testing programs to assess and maintain the integrity of their pipelines. The results of these tests could cause them to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of their pipelines. Any changes to pipeline safety laws by Congress and regulations by PHMSA that result in more stringent or costly safety standards could have a significant adverse effect on the ETE Entities and similarly situated midstream operators. For instance, changes to regulations governing the safety of gas and hazardous liquid transmission pipelines and gathering lines are being considered by PHMSA, including, for example, revising the definitions of “high consequence areas” and “gathering lines” and strengthening integrity management requirements as they apply to existing regulated operators and to currently exempt operators should certain exemptions be removed. Most recently, the PHMSA has considered changes to its rural gathering exemption, including publishing a notice of proposed rulemaking relating to hazardous liquid pipelines in October 2015, in which the agency is seeking public comment on, among other things, extending reporting requirements to all gravity and gathering lines, requiring periodic inline integrity assessments of pipelines that are located outside of high consequence areas, and requiring the use of leak detection systems on pipelines in all locations, including outside of high consequence areas.

The businesses of ETE and the ETE Entities involve the generation, handling and disposal of hazardous substances, hydrocarbons and wastes and may be adversely affected by environmental and worker health and safety laws and regulation.

The operations of ETE and the ETE Entities are subject to stringent federal, state and local laws and regulations governing the discharge of materials into the environment, worker health and safety and protection of the environment. These laws and regulations may require the acquisition of permits for ETE’s and the ETE Entities’ operations, result in capital expenditures to manage, limit, or prevent emissions, discharges or releases of various materials from ETE’s and the ETE Entities’ pipelines, plants and facilities, impose specific health and safety standards addressing worker protection, and impose substantial liabilities for pollution resulting from ETE’s and the ETE Entities’ operations. Several governmental authorities, such as the EPA and state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them and frequently mandate difficult and costly remediation measures and other actions. Failure to comply with these laws, regulations and permits may result in the assessment of significant administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctive relief. Certain environmental laws impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances, hydrocarbons or wastes have been disposed or released, even under circumstances where the substances, hydrocarbons or wastes have been released by a predecessor operator. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by noise, odor or the release of hazardous substances, hydrocarbons or wastes into the environment.

 

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ETE and the ETE Entities may incur substantial environmental costs and liabilities because of the underlying risk inherent to their operations. Although ETE and the ETE Entities have established financial reserves for their estimated environmental remediation liabilities, additional contamination or conditions may be discovered, resulting in increased remediation costs, liabilities for natural resource damages that could substantially increase their costs for site remediation projects. Accordingly, there can be no assurance that ETE’s and the ETE Entities’ current reserves are adequate to cover all future liabilities, even for currently known contamination.

Changes in environmental laws and regulations occur frequently, and changes that result in significantly more stringent and costly waste handling, emission standards, or storage, transport, disposal or remediation requirements could have a material adverse effect on ETE’s and the ETE Entities’ operations or financial position. For example, in October 2015, the EPA published a final rule under the Clean Air Act, lowering the NAAQS for ground-level ozone to 70 parts per billion for the 8-hour primary and secondary ozone standards. Compliance with this final rule or any other new regulations could, among other things, require installation of new emission controls on some of ETE’s and the ETE Entities’ equipment, result in longer permitting timelines or new restrictions or prohibitions with respect to permits or projects, and significantly increase ETE’s and the ETE Entities’ capital expenditures and operating costs, which could adversely impact their respective businesses. Historically, ETP has previously been able to satisfy the more stringent NOx emission reduction requirements that affect its compressor units in ozone non-attainment areas at reasonable cost, but there is no assurance that ETP will not incur material costs in the future to meet any new, more stringent ozone standard.

Product liability claims and litigation could adversely affect the business and results of operations of ETE and the ETE Entities.

Product liability is a significant commercial risk. Substantial damage awards have been made in certain jurisdictions against manufacturers and resellers based upon claims for injuries caused by the use of or exposure to various products. There can be no assurance that product liability claims against ETE and the ETE Entities would not have a material adverse effect on their business or results of operations.

Along with other refiners, manufacturers and sellers of gasoline, Sunoco is a defendant in numerous lawsuits that allege MTBE contamination in groundwater. Plaintiffs, who include water purveyors and municipalities responsible for supplying drinking water and private well owners, are seeking compensatory damages (and in some cases injunctive relief, punitive damages and attorneys’ fees) for claims relating to the alleged manufacture and distribution of a defective product (MTBE-containing gasoline) that contaminates groundwater, and general allegations of product liability, nuisance, trespass, negligence, violation of environmental laws and deceptive business practices. There has been insufficient information developed about the plaintiffs’ legal theories or the facts that would be relevant to an analysis of the ultimate liability to Sunoco Inc. These allegations or other product liability claims against Sunoco Inc. could have a material adverse effect on ETE’s and ETP’s business or results of operations.

The adoption of climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the services the ETE Entities provide.

The EPA has determined that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public health and the environment because emissions of such gases are contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted rules under the Clean Air Act that, among other things, establish Prevention of Significant Deterioration (“PSD”) construction and Title V operating permit reviews for greenhouse gas emissions from certain large stationary sources that already are potential major sources of certain principal, or criteria, pollutant emissions, which reviews could require securing PSD permits at covered facilities emitting greenhouse gases and meeting “best available control technology” standards for those greenhouse gas emissions. In addition, the EPA has adopted rules requiring the monitoring and annual reporting of greenhouse gas emissions from specified onshore and offshore production facilities and onshore processing, transmission and storage facilities in the United States,

 

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which includes certain of the ETE Entities’ operations. More recently, on October 22, 2015, the EPA published a final rule that expands the petroleum and natural gas system sources for which annual greenhouse gas emissions reporting is currently required to include greenhouse gas emissions reporting beginning in the 2016 reporting year for certain onshore gathering and boosting systems consisting primarily of gathering pipelines, compressors and process equipment used to perform natural gas compression, dehydration and acid gas removal. While Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases, there has not been significant activity in the form of adopted legislation. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing greenhouse gas emissions by means of cap and trade programs. The adoption of any legislation or regulations that requires reporting of greenhouse gases or otherwise restricts emissions of greenhouse gases from the ETE Entities’ equipment and operations could require them to incur significant added costs to reduce emissions of greenhouse gases or could adversely affect demand for the natural gas and NGLs they gather and process or fractionate. For example, in August 2015, the EPA announced proposed rules, expected to be finalized in 2016, that would establish new controls for methane emissions from certain new, modified or reconstructed equipment and processes in the oil and natural gas source category, including oil and natural gas production and natural gas processing and transmission facilities as part of an overall effort to reduce methane emissions by up to 45% from 2012 levels in 2025. On an international level, the United States is one of almost 200 nations that agreed in December 2015 to an international climate change agreement in Paris, France that calls for countries to set their own greenhouse gas emissions targets and be transparent about the measures each country will use to achieve its greenhouse gas emissions targets.

The adoption of the Dodd-Frank Act and its implementing regulations could have an adverse effect on the ETE Entities’ ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with the ETE Entities’ businesses, resulting in their operations becoming more volatile and their cash flows less predictable.

Congress has adopted the Dodd-Frank Act, a comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as the ETE Entities, that participate in that market. This legislation was signed into law by President Obama on July 21, 2010 and requires the CFTC, the SEC and other regulators to promulgate rules and regulations implementing the new legislation. While certain regulations have been promulgated and are already in effect, the rulemaking and implementation process is still ongoing, and ETE and the ETE Entities cannot yet predict the ultimate effect of the rules and regulations on their business.

The Dodd-Frank Act expanded the types of entities that are required to register with the CFTC and the SEC as a result of their activities in the derivatives markets or otherwise become specifically qualified to enter into derivatives contracts. The ETE Entities will be required to assess their activities in the derivatives markets, and to monitor such activities on an ongoing basis, to ascertain and to identify any potential change in their regulatory status.

Reporting and recordkeeping requirements also could significantly increase operating costs and expose the ETE Entities to penalties for non-compliance and require additional compliance resources. Added public transparency as a result of the reporting rules may also have a negative effect on market liquidity which could also negatively impact commodity prices and the ETE Entities’ ability to hedge.

In October 2011, the CFTC has also issued regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents. However, in September 2012, the CFTC’s position limits rules were vacated by the U.S. District Court for the District of Columbia. In November 2013, the CFTC proposed new rules that would place limits on positions in certain core futures and equivalent swaps contracts for or linked to certain physical commodities, subject to exceptions for certain bona fide hedging transactions. As these new position limit rules are not yet final, the impact of those provisions on the ETE Entities is uncertain at this time.

 

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The CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and exchange trading. The associated rules require the ETE Entities, in connection with covered derivative activities, to comply with such requirements or take steps to qualify for an exemption to such requirements. The ETE Entities must obtain approval from the board of directors of their respective general partners and make certain filings in order to rely on the end-user exception from the mandatory clearing requirements for swaps entered into to hedge commercial risks. The application of mandatory clearing and trade execution requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that the ETE Entities use for hedging. The CFTC has not yet proposed rules designating any other classes of swaps, including physical commodity swaps, for mandatory clearing and exchange trading.

In addition, the Dodd-Frank Act requires that regulators establish margin rules for uncleared swaps. The application of such requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps the ETE Entities use for hedging. If any of the ETE Entities’ swaps do not qualify for the commercial end-user exception, posting of collateral could impact their liquidity and reduce cash available to them for capital expenditures, reducing the their ability to execute hedges to reduce risk and protect cash flow.

Rules promulgated under the Dodd-Frank Act further defined forwards as well as instances where forwards may become swaps. Because the CFTC rules, interpretations, no-action letters, and case law are still developing, it is possible that some arrangements that previously qualified as forwards or energy service contracts may fall in the regulatory category of swaps or options. In addition, the CFTC’s rules applicable to trade options may further impose burdens on the ETE Entities’ ability to conduct their traditional hedging operations and could become subject to CFTC investigations in the future.

The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through restrictions on the types of collateral the ETE Entities are required to post), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks the ETE Entities encounter, reduce the ETE Entities’ ability to monetize or restructure existing derivative contracts, and increase the ETE Entities’ exposure to less creditworthy counterparties. If the ETE Entities reduces their use of derivatives as a result of the legislation and regulations, ETE’s and the ETE Entities results of operations may become more volatile and their cash flows may be less predictable. Finally, if the ETE Entities fail to comply with applicable laws, rules or regulations, they may be subject to fines, cease-and-desist orders, civil and criminal penalties or other sanctions.

A natural disaster, catastrophe or other event could result in severe personal injury, property damage and environmental damage, which could curtail the operations of ETE and the ETE Entities and otherwise materially adversely affect their cash flow.

Some of the operations of ETE and the ETE Entities involve risks of personal injury, property damage and environmental damage, which could curtail their operations and otherwise materially adversely affect their cash flow. For example, natural gas facilities operate at high pressures, sometimes in excess of 1,100 pounds per square inch. Virtually all of the operations of ETE and the ETE Entities are exposed to potential natural disasters, including hurricanes, tornadoes, storms, floods and/or earthquakes.

If one or more facilities that are owned by ETE or the ETE Entities or that deliver natural gas or other products to ETE or the ETE Entities are damaged by severe weather or any other disaster, accident, catastrophe or event, their operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that supply the facilities of ETE and the ETE Entities or other stoppages arising from factors beyond their control. These interruptions might involve significant damage to people, property or the environment, and repairs might take from a week or less for a minor incident to six months or more for a major interruption. Any event that interrupts the revenues generated by the operations of ETE and the ETE Entities, or which causes them to make significant expenditures not covered by insurance, could reduce their cash available for paying distributions to their respective unitholders.

 

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As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, ETE and the ETE Entities may not be able to renew existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. If ETE and the ETE Entities were to incur a significant liability for which they were not fully insured, it could have a material adverse effect on their respective financial positions and results of operations. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.

Terrorist attacks aimed at the facilities of ETE and the ETE Entities could adversely affect their business, results of operations, cash flows and financial condition.

The United States government has issued warnings that energy assets, including the nation’s pipeline infrastructure, may be the future target of terrorist organizations. Some of the facilities of ETE and the ETE Entities are subject to standards and procedures required by the Chemical Facility Anti-Terrorism Standards. ETE and the ETE Entities believe they are in compliance with all material requirements; however, such compliance may not prevent a terrorist attack from causing material damage or disruption to their facilities or pipelines. Any such terrorist attack on the facilities or pipelines of ETE and the ETE Entities, those of their customers, or in some cases, those of other pipelines could have a material adverse effect on the business, financial condition and results of operations of ETE and the ETE Entities.

Cybersecurity breaches and other disruptions could compromise ETE’s information and expose ETE and the ETE Entities to liability, which would cause their business and reputation to suffer.

In the ordinary course of ETE’s and the ETE Entities respective business, they collect and store sensitive data, including intellectual property, proprietary business information and that of their customers, suppliers and business partners, and personal identification information of their employees, in their data centers and on their networks. The secure processing, maintenance and transmission of this information is critical to ETE’s and the ETE Entities’ operations and business strategy. Despite ETE’s and the ETE Entities’ security measures, their information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise ETE’s and the ETE Entities’ networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of their operations, damage to their reputation, and cause a loss of confidence in their products and services, which could adversely affect their business.

ETE’s and the ETE Entities’ information technology infrastructure is critical to the efficient operation of their business and essential to their ability to perform day-today operations. Breaches in ETE’s and the ETE Entities’ information technology infrastructure or physical facilities, or other disruptions, could result in damage to their assets, safety incidents, damage to the environment, potential liability or the loss of contracts, and have a material adverse effect on their operations, financial position and results of operations.

Additional deepwater drilling laws and regulations, delays in the processing and approval of drilling permits and exploration and oil spill-response plans, and other related restrictions arising after the Deepwater Horizon incident in the Gulf of Mexico may have a material adverse effect on the ETE Entities’ business, financial condition, or results of operations.

In response to the Deepwater Horizon incident and resulting oil spill in the United States Gulf of Mexico in 2010, the federal Bureau of Ocean Energy Management and the federal Bureau of Safety and Environmental Enforcement, each agencies of the U.S. Department of the Interior, have imposed new and more stringent permitting procedures and regulatory safety and performance requirements for new wells to be drilled in federal waters. Compliance with these more stringent regulatory restrictions resulted in greater uncertainty and inconsistencies in the decisions and rulings made by governmental agencies, delays in the processing and

 

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approval of drilling permits or exploration, development, oil spill-response and decommissioning plans, and possible additional regulatory initiatives could adversely affect or delay new drilling and ongoing development efforts. In addition, new regulatory initiatives may be adopted or enforced by the BOEM and/or the BSEE in the future that could result in additional delays, restrictions, or obligations with respect to oil and natural gas exploration and production operations conducted offshore by certain of the ETE Entities’ respective customers. For example, in September 2015, the BOEM issued draft guidance that would bolster supplemental bonding procedures for the decommissioning of offshore wells, platforms, pipelines, and other facilities. The BOEM is expected to issue the draft guidance in the form of a final Notice to Lessees and Operators by no later than mid-2016. These recent or any new rules, regulations, or legal initiatives could delay or disrupt the operations of the ETE Entities’ customers, increase the risk of expired leases due to the time required to develop new technology, result in increased supplemental bonding and costs, limit activities in certain areas, or cause the ETE Entities’ respective customers’ to incur penalties, or shut-in production or lease cancellation. Also, if material spill events similar to the Deepwater Horizon incident were to occur in the future, the United States or other countries could elect to again issue directives to temporarily cease drilling activities offshore and, in any event, may from time to time issue further safety and environmental laws and regulations regarding offshore oil and gas exploration and development. The overall costs imposed on the ETE Entities’ respective customers to implement and complete any such spill response activities or any decommissioning obligations could exceed estimated accruals, insurance limits, or supplemental bonding amounts, which could result in the incurrence of additional costs to complete. The ETE Entities cannot predict with any certainty the full impact of any new laws or regulations on their customers’ drilling operations or on the cost or availability of insurance to cover some or all of the risks associated with such operations. The occurrence of any of these developments has the potential to adversely impact the business of the ETE Entities as well as their financial position, results of operation and liquidity.

Increased regulation of hydraulic fracturing could result in reductions or delays in drilling and completing new oil and natural gas wells, which could adversely impact ETP’s revenues by decreasing the volumes of natural gas that ETP gathers, processes and transports.

The natural gas of certain of ETP’s customers is developed from formations requiring hydraulic fracturing as part of the completion process. Fracturing is a process where water, sand and chemicals are injected under pressure into subsurface formations to stimulate production. While the underground injection of fluids is regulated by the EPA under the Safe Drinking Water Act, fracturing is excluded from regulation unless the injection fluid is diesel fuel. Congress has recently considered legislation that would repeal the exclusion, allowing the EPA to more generally regulate fracturing, and requiring disclosure of chemicals used in the fracturing process. If enacted, such legislation could require fracturing to meet permitting and financial responsibility, siting and technical specifications relating to well construction, plugging and abandonment. The EPA is also considering various regulatory programs directed at hydraulic fracturing. For example, in 2015, the EPA proposed regulations under the federal Clean Water Act to further regulate wastewater discharged from hydraulic fracturing operations. In May 2014, the EPA released an Advanced Notice of Proposed Rulemaking under the Toxic Substances Control Act, seeking public comment on possible reporting obligations. The adoption of new federal laws or regulations imposing reporting obligations on, or otherwise limiting or regulating, the hydraulic fracturing process could make it more difficult to complete oil and natural gas wells in shale formations, and increase the costs of compliance for ETP’s customers. In addition, the EPA is currently studying the potential adverse impact that each stage of hydraulic fracturing may have on the environment. A draft of the report was released in June 2015 for peer review and public comment. Several states in which ETP’s customers operate have also adopted regulations requiring disclosure of fracturing fluid components or otherwise regulate their use more closely.

On April 17, 2012, the EPA approved final rules establishing new air emission standards for oil and natural gas production and natural gas processing operations, including volatile organic compounds (“VOC”) emissions limits on certain oil and natural gas production operations. In September 2015, the EPA proposed similar rules that would impose VOC emissions limits on certain oil and natural gas operations that were previously unregulated, including hydraulically fractured oil wells, as well as methane emissions limits for certain new or modified oil and natural gas emissions sources. These rules may require a number of modifications to the

 

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operations of the ETE Entities and their customers, including the installation of new equipment to control emissions. In addition, the U.S. Department of the Interior released a final rule in March 2015 that updates existing regulation of hydraulic fracturing activities on federal lands, including requirements for chemical disclosure, well bore integrity and handling of flowback water. However, a federal district court judge issued a permanent injunction, which effectively blocks implementation of the rule pending the resolution of legal challenges. Compliance with these rules could result in additional costs, including increased capital expenditures and operating costs, the ETE Entities and their customers, which may adversely impact the ETE Entities’ business.

Additional federal or state legislation or regulation of hydraulic fracturing or related activities could result in operational delays, increased operating costs, and additional regulatory burdens on exploration and production operators. This could reduce production of natural gas and, in turn, adversely affect the revenues and results of operations of the ETE Entities by decreasing the volumes of natural gas and NGLs that they gather, process and transport.

ETP’s business is subject to federal, state and local laws and regulations that govern the product quality specifications of the petroleum products that SXL stores and transports.

The petroleum products that SXL stores and transports through SXL’s operations are sold by its customers for consumption into the public market. Various federal, state and local agencies have the authority to prescribe specific product quality specifications to commodities sold into the public market. Changes in product quality specifications could reduce SXL’s throughput volume, require SXL to incur additional handling costs or require the expenditure of significant capital. In addition, different product specifications for different markets impact the fungibility of products transported and stored in SXL’s pipeline systems and terminal facilities and could require the construction of additional storage to segregate products with different specifications. SXL may be unable to recover these costs through increased revenues.

In addition, SXL’s butane blending services are reliant upon gasoline vapor pressure specifications. Significant changes in such specifications could reduce butane blending opportunities, which would affect SXL’s ability to market its butane blending services licenses.

ETP’s business could be affected adversely by union disputes and strikes or work stoppages by Panhandle’s and Sunoco, Inc.’s unionized employees.

As of December 31, 2015, approximately 6% of ETP’s workforce is covered by a number of collective bargaining agreements with various terms and dates of expirations. There can be no assurances that Panhandle or Sunoco, Inc. will not experience a work stoppage in the future as a result of labor disagreements. Any work stoppage could, depending on the affected operations and the length of the work stoppage, have a material adverse effect on ETP’s business, financial position, results of operations or cash flows.

Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on ETP’s retail marketing business.

Federally mandated standards for use of renewable biofuels, such as ethanol and biodiesel in the production of refined products, are transforming traditional gasoline and diesel markets in North America. These regulatory mandates present production and logistical challenges for both the petroleum refining and ethanol industries, and may require ETP to incur additional capital expenditures or expenses particularly in ETP’s retail marketing business, which is conducted through Sunoco, Inc., Susser and Sunoco. ETP may have to enter into arrangements with other parties to meet its obligations to use advanced biofuels, with potentially uncertain supplies of these new fuels. If ETP is unable to obtain or maintain sufficient quantities of ethanol to support its blending needs, its sale of ethanol blended gasoline could be interrupted or suspended which could result in lower profits. There also will be compliance costs related to these regulations. ETP may experience a decrease in demand for refined petroleum products due to new federal requirements for increased fleet mileage per gallon or due to replacement of refined

 

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petroleum products by renewable fuels. In addition, tax incentives and other subsidies making renewable fuels more competitive with refined petroleum products may reduce refined petroleum product margins and the ability of refined petroleum products to compete with renewable fuels. A structural expansion of production capacity for such renewable biofuels could lead to significant increases in the overall production, and available supply, of gasoline and diesel in markets that ETP supplies. In addition, a significant shift by consumers to more fuel-efficient vehicles or alternative fuel vehicles (such as ethanol or wider adoption of gas/ electric hybrid vehicles), or an increase in vehicle fuel economy, whether as a result of technological advances by manufacturers, legislation mandating or encouraging higher fuel economy or the use of alternative fuel, or otherwise, also could lead to a decrease in demand, and reduced margins, for the refined petroleum products that ETP markets and sells.

It is possible that any, or a combination, of these occurrences could have a material adverse effect on ETP’s business or results of operations.

ETE’s and the ETE Entities’ operations could be disrupted if their information systems fail, causing increased expenses and loss of sales.

ETE’s and the ETE Entities business is highly dependent on financial, accounting and other data processing systems and other communications and information systems, including their enterprise resource planning tools. ETE and the ETE Entities process a large number of transactions on a daily basis and rely upon the proper functioning of computer systems. If a key system were to fail or experience unscheduled downtime for any reason, even if only for a short period, their operations and financial results could be affected adversely. ETE’s and the ETE Entities systems could be damaged or interrupted by a security breach, fire, flood, power loss, telecommunications failure or similar event. ETE and the ETE Entities have a formal disaster recovery plan in place, but this plan may not entirely prevent delays or other complications that could arise from an information systems failure. ETE’s and the ETE Entities’ business interruption insurance may not compensate them adequately for losses that may occur.

The costs of providing pension and other postretirement health care benefits and related funding requirements are subject to changes in pension fund values, changing demographics and fluctuating actuarial assumptions and may have a material adverse effect on ETE’s and the ETE Entities’ financial results. In addition, the passage of the Health Care Reform Act in 2010 could significantly increase the cost of providing health care benefits for employees.

Certain of ETE’s and the ETE Entities’ subsidiaries provide pension plan and other postretirement health care benefits to certain of their employees. The costs of providing pension and other postretirement health care benefits and related funding requirements are subject to changes in pension and other postretirement fund values, changing demographics and fluctuating actuarial assumptions that may have a material adverse effect on ETE’s and the ETE Entities’ future consolidated financial results. While certain of the costs incurred in providing such pension and other postretirement health care benefits are recovered through the rates charged by the ETE Entities’ regulated businesses, ETE’s and the ETE Entities’ subsidiaries may not recover all of the costs and those rates are generally not immediately responsive to current market conditions or funding requirements. Additionally, if the current cost recovery mechanisms are changed or eliminated, the impact of these benefits on operating results could significantly increase.

Operation of the LNG import/regasification facility and the LNG liquefaction facility/export terminal involves significant risks.

The LNG import/regasification facility and the LNG liquefaction facility/export terminal face operational risks, including the following:

 

   

the facilities’ performing below expected levels of efficiency;

 

   

breakdown or failures of equipment;

 

   

operational errors by vessel or tug operators;

 

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operational errors by ETE or any contracted facility operator, including BG Group plc (“BG Group”);

 

   

labor disputes; and

 

   

weather-related interruptions of operations.

LCL is dependent on project financing to fund the costs necessary to construct the liquefaction project. If project financing is unavailable to supply the funding necessary to complete the liquefaction project, LCL may not be able to secure alternative funding and FID may not be achieved.

LCL, an entity owned 60% by ETE and 40% by ETP, is in the process of developing a liquefaction project in conjunction with BG Group pursuant to a project development agreement entered into in September 2013. Pursuant to this agreement, each of LCL and BG Group are obligated to pay 50% of the development expenses for the liquefaction project, subject to reimbursement by the other party if such party withdraws from the project prior to both parties making a final investment decision (“FID”) to become irrevocably obligated to fully develop the project, subject to certain exceptions. Through December 31, 2015, LCL had incurred approximately $89 million of development costs associated with the liquefaction project that were funded by ETE and ETP, and ETE and ETP have indicated that they intend to provide the funding necessary for the remaining development costs, but they have no obligation to do so. If ETE and ETP are unwilling or unable to provide funding to LCL for their share of the remaining development costs, or if Royal Dutch Shell plc, which completed its acquisition of BG Group in February 2016, is unwilling or unable to provide funding for BG Group’s share of the remaining development costs, the liquefaction project could be delayed or cancelled.

The liquefaction project is subject to the right of each of LCL and BG Group to withdraw from the project in its sole discretion at any time prior to an affirmative FID.

The project development agreement provides that either LCL or BG Group may withdraw from the liquefaction project at any time prior to each party making an affirmative FID. LCL’s determination of whether to reach an affirmative FID is expected to be based upon a number of factors, including the expected cost to construct the liquefaction facility, the expected revenue to be generated by LCL pursuant to the terms of the liquefaction services agreement to be entered into between LCL and BG Group in connection with both parties reaching an affirmative FID, and the terms and conditions of the financing for the construction of the liquefaction facility. The determination by Royal Dutch Shell plc, as the acquiror of BG Group, of whether to reach an affirmative FID is expected be based on a number of factors, including the expected tolling charges it would be required to pay under the terms of the liquefaction