Research Update

December 17, 2015

__________________________________________________________
Williams Companies + Energy Transfer Equity
No Thanks
Key Points

The proposed acquisition of The Williams Companies (WMB) by Energy Transfer

Equity (ETE) is highly unusual because the WMB shareholders are not expected to
receive a premium stock price in return for selling control of their company to ETE.
We have serious doubts about the magnitude of commercial synergies ETE claims can be
achieved through the proposed business combination.
In our opinion, the newly created security being offered to WMB shareholders is lacking
in comparison to our expectations for WMB stock on a stand-alone basis.
We believe the cash component of the proposed transaction is insufficient to overcome
the deficiencies of the newly created security, and the risk of a negative stock market
reaction if the combined company comes up short on managements overly optimistic
synergy forecasts.
The structure of the proposed acquisition is notable for its potential to confuse investors.
The transaction includes two temporary mechanisms designed to support the dividend
and stock price of the newly created security for a finite period of time.
We believe the fairness opinions1 provided to the WMB directors may have leveraged
these temporary mechanisms to overstate the potential benefits of the acquisition for
WMB shareholders.
We believe WMB stockholders should ask themselves: Why does the stock Im being
offered need to be supported in the first place?
The two investment banks that presented fairness opinions to the WMB board of
directors are conflicted because they stand to receive approximately 4X and 10X more in
fees if the acquisition closes compared to their take if the deal does not close2
We feel strongly that WMB shareholders would realize more value per share from a No
vote than a Yes vote in the upcoming proxy solicitation for the deal.

A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms
of a merger, acquisition, or other corporate transaction are fair and reasonable.
2
Source: S4 Document (i.e. Proxy) dated 11-24-15; Readers are encouraged to review the S4 Document in its
entirety at the following link: http://ir.energytransfer.com/phoenix.zhtml?c=106094&p=IROLsecToc&TOC=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9vdXRsaW5lLnhtbD9yZXBvPXRlbmsmaXBhZ2U9
MTA1OTY5OTkmc3Vic2lkPTU3&ListAll=1
Please see disclosures on last page

Background
On the morning of September 28, 2015, Energy Transfer Equity, LP (ETE) and The Williams
Companies, Inc. (WMB) announced a business combination transaction valued at
approximately $37.7 billion. Under the terms of the acquisition, Energy Transfer Corp, LP
(ETC), a newly formed affiliate of ETE, would acquire WMB for a combination of cash and/or
common shares of ETC. WMB stockholders have the right to elect to receive as merger
consideration either ETC common shares, or cash. WMB stockholders electing to receive stock
would receive a fixed exchange ratio of 1.8716 ETC common shares for each share of WMB
common stock, before giving effect to proration. If all WMB stockholders elect to receive all
cash or all stock, then each share of WMB stock would receive $8.00 in cash and 1.5274 ETC
common shares.
Based on the market price of ETE stock on September 25, 2015 (the last business day prior to the
announcement), the value of the offer was $43.50 per WMB share, subject to future changes in
the ETE stock price.
The agreement announced on September 28, emerged from approximately three months of
deliberation by the WMB board of directors, after the board rejected the initial acquisition offer
from ETE on June 21, 2015 valued at $64.00 per WMB share at the time.

A Takeover without a Premium

On the day the proposed acquisition was announced WMB stock dropped 12.1%.3 As first
impressions go, Mr. Market gave this deal two-thumbs-down from the get-go.
It is highly unusual for a company being acquired to see its stock price decline on the day the
transaction is announced. The material decline in the WMB stock price in response to the
acquisition demonstrates that WMB shareholders were not offered a normal premium for
control of their shares.
Promoters4 of the acquisition tried to imply a takeover premium for the WMB shareholders by
assuming WMB stock would have performed poorly relative to peers between June 19, 2015 (the
last day of stock market trading before the disclosure of ETEs initial offer for WMB), and the
date of the acquisition agreement on September 28, 2015. The following statement was included
in the joint press release announcing the proposed acquisition:
A compelling transaction that provides Williams stockholders with:
An attractive premium to the implied trading price of WMB assuming WMB traded
in line with either the Alerian Index or its midstream peers since the date of ETEs
initial offer.
3

Source: Bloomberg
For the purpose of this report, promoters refers to the parties who have expressed support for the proposed
acquisition, including the executive leadership and board of directors of ETE, certain directors of WMB, and the
investment advisors who provided fairness opinions to the WMB directors.
4

Please see disclosures on last page

WMB was doing just fine without ETE

A review of the facts reveals that the WMB shareholders were never offered a premium for their
shares not even a hypothetical premium as the promoters of the acquisition have tried to
suggest. The chart below reflects the performance of WMB stock relative to the Alerian MLP
Index5 between year-end 2014 and the last day of market trading prior to the original acquisition
offer from ETE. Through the first five-and-a-half months of the year WMB was ahead of its
peer-group index by more than 17 percentage points.

WMB vs. Alerian MLP Index

12-31-14 to 6-19-15

Source: Bloomberg

The Alerian MLP Index tracks the price and yield performance of large-cap and mid-cap energy Master Limited
Partnerships (MLPs). The index is capitalization weighted among 50 MLPs.
Please see disclosures on last page

WMB performed less well, but still above average, during the period when
negotiations with ETE were publicly known
This next chart reflects the relative performance of WMB stock from the final trading day before
the public announcement of the initial offer from ETE through the announcement of the
proposed acquisition on September 28, 2015. WMB stock outperformed the Alerian MLP Index
by 3.90% during this period. Presumably this is the premium referenced in the joint press
release announcing the acquisition.

WMB vs. Alerian MLP Index

6-19-15 to 9-28-15

Source: Bloomberg

Please see disclosures on last page

Once the acquisition was announced the wheels came off for WMB
stockholders
When the measurement period is extended to include the period after the acquisition
announcement, WMB performed worse than the Alerian MLP Index, possibly dragged down by
its association with the even worse performance of ETE stock. This graph includes the
performance of ETE along with WMB and the Alerian MLP Index from the last trading day
before ETEs initial offer through December 11, 2015.

WMB vs. Alerian MLP Index

6-19-15 to 12-11-15

Source: Bloomberg

Please see disclosures on last page

The following information is quoted directly from the fairness opinion of one of the two
investment advisors in the deal, as reported in the S4 Document:
(Investment Advisor) performed premiums paid analyses based on the premiums paid,
where applicable, in selected energy industry transactions with a transaction value
greater than $5 billion announced from 2009 through the date of (Investment
Advisors) opinion and an adjusted set of such selected transactions that excluded
related-party transactions. The analyses were based on the one-day, 5-days and 30days implied premiums paid in such precedent transactions, respectively.
The analyses indicated the following premiums paid:
Energy Industry Transactions
1-Day
Mean
23.8%
Median
18.1%

5-Days
25.8%
22.0%

30-Days
24.2%
24.4%

Adjusted Set of Energy Industry Transactions

Mean
Median

31.1%
31.6%

34.7%
35.8%

31.1%
30.6%

Source: S4 Document dated 11-24-15, pg. 134

We calculated the premium offered to WMB shareholders based upon the offer price of
$43.50 per share on the day of the acquisition announcement (before the 12.1% decline in
WMB stock that day), and the average price of WMB over the trailing 1-Day, 5-Days and 30Days ending 9-25-15, the final trading day prior to the acquisition announcement. Here is the
data:

ETE Offer to WMB Announced on 9-28-15

Premium for WMB

1-Day
4.6%

5-Days
0.3%

30-Days
-7.1%

Source: Bloomberg

The data above suggests WMB stockholders are being asked to accept a discount in
exchange for affiliating with ETE under the terms of the proposed acquisition.

Please see disclosures on last page

$2 Billion in Potential Commercial Synergies???6

The following bullet points are copied verbatim from the September 28, 2015 press release
issued jointly by WMB and ETE to announce the proposed acquisition:
ETE and Williams believe there are numerous meaningful benefits from a proposed
combination:
ETE Stakeholders

At closing, the transaction will be immediately accretive to distributable cash flow

and distributions per unit for ETE and is expected to be credit positive to ETEs
credit ratings;
ETEs distribution growth rate is expected to remain at its current level;
as a result of diligence, the size of both the expected cost savings and the anticipated
commercial synergies exceeds ETEs previous expectations and will help ensure that
the duration of ETEs distribution growth rate will be longer as a result of the
transaction;
the introduction of cash into the transaction consideration has reduced the ETC
share issuance by over 260 million shares (or approximately 18.5% of the overall
ETC share issuance);
the number of possible opportunities to migrate assets within the Energy Transfer
family and find additional commercial opportunities, not currently quantified, within
the expanded asset base will increase significantly, thereby creating more value for
ETP, SXL, WPZ and SUN,7 which in turn will result in increased cash flow growth
for ETE;
the ability of ETE to broaden its overall shareholder base through the ETC
structure; and
the creation of ETC will result in increased liquidity for ETE unitholders because of
the option for ETE unitholders to exchange ETE common units for ETC common
shares.

The source information for this section of the report about potential commercial synergies comes from five primary
sources: 1) ETE analyst day presentation materials dated 11-17-15; 2) Williams Quarterly Data Book Q3 2015:
http://investor.williams.com/sites/williams.investorhq.businesswire.com/files/doc_library/additional/Williams_Data
book_WMB_and_WPZ.pdf ; 3) Williams Financial Highlights and Operating Statistics 9-30-15:
http://investor.williams.com/sites/williams.investorhq.businesswire.com/files/doc_library/additional/WMB_3Q_201
5_Analyst_Package.pdf ; 4) Conference Call with ETE Management; 5) Well Fargo Securities report dated 10-8-15:
ETE: Further Thoughts on the Deal Takeaways from Meeting with Management
7
ETP, SXL, WPZ and SUN are ticker symbols for the following publicly traded MLPs, respectively: Energy
Transfer Partners, Sunoco Logistics Partners, Williams Partners and Sunoco LP. ETP, SXL and SUN are affiliated
with ETE. WPZ is currently affiliated with WMB.
Please see disclosures on last page

WMB Stakeholders
A compelling transaction that provides Williams stockholders with:

an attractive premium to the implied trading price of WMB assuming WMB traded in
line with either the Alerian index or its midstream peers since the date of ETEs
initial offer;
a pro forma level of dividend per ETC common shares received that will exceed the
2016 dividend per WMB share that Williams had forecast on a pro forma basis for
the Williams/WPZ merger;
ETC dividend growth superior to that of Williams on a pro forma basis for the
proposed Williams/WPZ merger;
the option to elect cash in the transaction will allow Williams stockholders to
monetize, on a taxable basis, all or some of their investment in WMB, subject only to
the aggregate $6.05 billion pool of cash consideration being fully utilized;
the exchange of WMB shares for ETC common shares is expected to be tax free to
WMB stockholders, except with respect to cash received;
for each outstanding ETC common share, ETC will receive from ETE the same cash
distribution per quarter as ETE distributes with respect to each ETE common unit;
ETC will benefit from a dividend equalization agreement through calendar 2018 that
ensures that ETC shareholders will receive the identical cash dividend as an ETE
unitholder;
the CCR is intended to address any trading price differences between ETC and ETE
during the two-year period following closing;
ETE will become co-obligor of Williams existing debt and Williams credit facility
will be terminated at closing; and
ETC common shares are expected to have tremendous liquidity, a strong growth
profile and the potential for inclusion in the S&P 500 index (similar to WMBs
current inclusion in that index).

WPZ Stakeholders

There is no expected impact to WPZs credit ratings as a result of the ETE/Williams

combination;
WPZ unitholders will have greater distributable cash flow from material cost savings
and synergies of up to $400 million per annum with WPZ joining the Energy
Transfer shared service model;

Please see disclosures on last page

the combination will create new commercial opportunities for WPZ, including the
potential to acquire assets from the overall Energy Transfer group, that will improve
WPZs business outlook, cash flow growth and overall financial profile;
WPZ unitholders will benefit from having a general partner, ETE, that, based on the
unique intrinsic financial and strategic optionality in the Energy Transfer family,
will be in a position to help WPZ fully realize its long-term growth potential; and
WPZ will receive a $428 million break-up fee for the termination of its merger
agreement with WMB payable to all outstanding limited partnership units of WPZ
including WMBs approximate 60 percent ownership

Of the 22 bullet points listed above as potential benefits of the proposed acquisition, several
derive their value from projected commercial synergies of Well Over $2 billion.8 The
details behind this $2 billion estimate of potential EBITDA9 from commercial synergies emerged
in the weeks following the acquisition announcement via guidance provided to professional
investors (including ourselves) in one-on-one meetings, and during a two-day analyst meeting
held in Dallas, Texas on November 16-17, 2015. As we have come to understand the sources
for the commercial synergy estimate, we are suspicious of the $2 billion+ target highlighted
in the announcement of the proposed acquisition and in subsequent presentations to
analysts.
For example, ETE has guided Wall Street analysts to project a substantial uplift to EBITDA from
commercial synergies in the Northeast liquids business of the combined companies. However,
investor presentations from WMB/WPZ seem to indicate these companies dont control
enough volume in the Northeast region to achieve ETEs synergy expectations in the
region.
ETE has also guided analysts to anticipate a material EBITDA uplift from the replacement of
leased compression services with in-house capabilities following the business combination. This
forecast seems curious to us because WMB/WPZ gained access to captive compression services
through the acquisition of Access Midstream Partners in 2014. We suspect that some, if not
most of the EBITDA uplift ETE has projected from this idea may already be captured in
the economics of WMB/WPZs existing business model.

Source: Slide 20 of the WMB/ETE joint investor presentation dated 9-28-15. Link:
http://ir.energytransfer.com/phoenix.zhtml?c=106094&p=irol-presentations
9
EBITDA is a commonly used financial acronym that stands for Earnings Before Interest, Taxes, Depreciation and
Amortization. EBITDA is a standard measure of cash flow in corporate accounting.
Please see disclosures on last page

10

A third example involves forecasts for substantial incremental EBITDA by diverting

WMB/WPZ controlled NGL volumes in the Rockies region to baseload a new pipeline that
connects with ETEs Godley processing plant and Mont Belvieu. Here again, ETEs estimate
of the volume of controlled production for this project seems inconsistent with data
contained in investor presentations from WMB/WPZ. Moreover, the pricing for this project
embedded in ETEs EBITDA guidance seems well above our understanding of current market
prices in the region.
As a final example, ETE estimates there may be a substantial EBITDA opportunity by
connecting ETEs Transwestern system with WPZs Northwestern system, and adding bidirectional capability to the network. This idea makes for a nice map, but we believe there is
little to be gained by interconnecting the pipes in this supply area because they are already
connected at the outlet of the processing plants in the San Juan Basin.
Knowing the stock market can be cruel to companies that over-promise and under-deliver, we
are concerned ETC stock may be doomed to disappoint investors and Wall Street analysts
if our less optimistic estimates for the combined companys synergy targets are even
approximately right.

The Synergy Estimate May Be Unachievable Regardless of its Accuracy

The most important observation about the estimated synergies in the proposed business
combination may be that the projects necessary to achieve these synergies require capital for
execution. Information contained in analyst presentation materials from ETE10 show estimated
capital requirements of $5 billion in order to achieve the full $2 billion in commercial synergies
from the proposed acquisition. In the currently harsh market climate for midstream energy
companies, including ETE and WMB, we believe the likely cost of capital to fund this $5
billion of necessary capital spending might be too high to allow most of the proposed
synergy projects to be economical.
We look forward to an update on this topic early next year when ETE/WMB management
is likely to host meetings with analysts and investors to discuss the proposed acquisition.

10

Source: ETE Analyst Day Presentation dated 11-17-15

Please see disclosures on last page

11

Structured to Confuse?
The structure of the proposed acquisition is highly unusual because it includes two
mechanisms that fundamentally alter the intrinsic value of the security WMB shareholders would
receive in the transaction (i.e. ETC) after a specific time period. The following two bullet points
from the acquisition press release address these mechanisms:

ETC will benefit from a dividend equalization agreement through calendar 2018 that
ensures that ETC shareholders will receive the identical cash dividend as an ETE
unitholder;
the contingent consideration right (CCR) is intended to address any trading price
differences between ETC and ETE during the two-year period following closing;

These features create an approximate two-year window immediately following the proposed
acquisition when ETC should be expected to pay the same dividend as ETE, and trade at a
substantially similar stock price as ETE due to the CCR. This is a critical feature of the
transaction: We believe the investment advisors to the deal relied upon the temporary
linking of ETC to ETE to justify a higher valuation multiple and a lower estimated
dividend yield for ETC stock within the valuation models they used to compare the merits
of the proposed transaction with the stand-alone case for WMB.
To us, it seems misleading to compare the stand-alone case for WMB with ETC during the
period when ETC would be temporarily propped up with training wheels. Yet this seems to
be what both investment advisors did in the fairness opinions they presented to the WMB board
of directors.11

11

Details of the fairness opinion from both investment bankers are included in the S4 Document dated 11-24-15.
References to the fairness opinions in this report are sourced from information contained in the S4 Document.

Please see disclosures on last page

12

To reach a more realistic judgement about the relative merits of both stocks, we believe the
valuation assumptions for ETC should acknowledge that the training wheels designed to support
its stock price are temporary. Without the dividend equalization scheme and the CCR, we
believe it is rational to expect ETC to trade at a material discount to ETE and WMB (on a
stand-alone basis) for the following reasons:12

1) ETC would be a junior security to ETE, whereas WMB is not junior to anything.
2) ETC would be burdened with incentive distribution rights (IDRs)13 that require ETC to
pay an increasing percentage of its cash flow to ETE over time, whereas ETE and WMB
are beneficiaries of IDRs from their affiliated MLPs.
3) The IDR burden at ETC would have the effect of reducing the growth rate of cash flow
available for ETC shareholders over time, thus reducing capacity for future dividends,
and dampening the likely valuation multiple for the stock.
4) Shareholders of ETC would have no authority to elect or remove members of the board
of directors that governs its business, whereas shareholders of WMB currently enjoy such
rights.
5) ETC would be governed by a board of directors whose members are selected by one
individual, who also serves as chairman of the board.
6) Based on disclosures included in the S4 Document, the board that governs ETC would be
held to a lesser standard of fiduciary duty relative to a typical corporation, including
WMB.
7) There would be inherent conflicts of interest between ETE shareholders, and ETC
shareholders (See Appendix A for details), whereas WMB shareholders are not
threatened by such conflicts.
8) ETC shareholders would be powerless to prevent ETE from taking actions that benefit
ETE shareholders at the expense of ETC shareholders because of the poor governance
structure of ETC.
9) WMB is included in the S&P 500 Index,14 whereas ETC would not be.

12

The source for each of the points listed here is the S4 Document dated 11-24-15.
A description of Incentive Distribution Rights (IDRs) and their impact on stock market valuation is included in
Appendix A to this report.
14
The S&P 500 Index tracks the price and yield performance of approximately 500 stocks that represent the leading
companies in all major industry groups in the U.S. economy. The index is capitalization-weighted. The index is one
of the worlds most widely followed benchmarks, with substantial investment capital committed to matching the
index by investing in its constituent companies. Inclusion in the index is considered by many to be a benefit due to
the access it brings to this large pool of investment capital.
13

Please see disclosures on last page

13

Linking ETC to ETE May Not Even Be a Good Idea

We would argue that WMB stock deserves a premium valuation multiple relative to ETC, even if
ETC is given undue credit for the dividend equalization and CCR mechanisms that temporarily
link it to ETE. We base this in part on a comparison of balance sheet metrics for WMB as a
stand-alone company relative to ETE
Balance Sheet Data15
As of 9-30-15

Net Debt/EBITDA
EBITDA/Interest Exp.
Common Equity/Total Assets
Long-Term Debt/Equity
Long-Term Debt/Capital
Long-Term Debt/Total Assets
Source: Bloomberg

WMB
7.4x
3.0x
14.5%
119.4%
52.0%
42.9%

ETE
8.2x
2.5x
-1.3%
157.3%
61.1%
51.8%

And in part based upon the actual trading history of both stocks:
Enterprise Value-to-EBITDA Ratio16
Periods Ending 9-30-15

Trailing 12-Mo. Average

Trailing 24-Mo. Average
Trailing 36-Mo. Average
Source: Bloomberg

WMB
23.7
24.3
21.5

ETE
20.0
21.1
20.4

Conflicted Investment Bankers

The most plausible explanation we can surmise for the investment bankers to assume a lower
valuation multiple for WMB versus ETC is that the bankers have an interest that incentivizes
them to support the proposed acquisition. This is in fact the case because the compensation for
both investment banks is substantially favored by a completed transaction to the tune of
approximately 10-to-1 for one advisor, and 4-to-1 for the other.

15

Net Debt is the sum of short-term debt, plus long-term debt, minus cash; EBITDA is Earnings Before Interest,
Taxes, Depreciation and Amortization; Interest Expense is the amount paid for interest on debt over the prior 12mos.; Equity is the retained capital on the balance sheet, as reported by Bloomberg as of 9-30-15; Capital is the sum
of equity capital and debt, as reported by Bloomberg as of 9-30-15; Total Assets is the value of total assets on the
balance sheet, as reported by Bloomberg as of 9-30-15.
16
Enterprise Value is the sum of the stock market capitalization and outstanding debt of a company; The Enterprise
Value-to-EBITDA ratio is a commonly used ratio to compare the valuation multiple of one company with another,
or one company with an average for an index or an industry sector.
Please see disclosures on last page

14

The following item is quoted on page 127 of the S4 Document dated 11-24-15:
(Investment Advisor 1) is acting as financial advisor to WMB in connection with the
merger. As compensation for its services in connection with the merger, $2.0 million
became payable by WMB to (Investment Advisor) as a retainer fee upon the execution by
WMB and (Investment Advisor) of an engagement letter. An additional fee of $2.5 million
became payable by WMB to (Investment Advisor) upon the delivery of (Investment
Advisors) opinion, which is referred to as the Opinion Fee. The Opinion Fee was not
contingent upon the conclusion of (Investment Advisors) opinion, nor upon the
consummation of the merger. Upon the closing of the merger, an additional fee will
become payable by WMB to (Investment Advisor) in an amount equal to approximately
$43.3 million.

The following item is quoted on page 142 of the S4 Document dated 11-24-15:
For acting as financial advisor to WMB in connection with the merger, (Investment
Advisor 2) will receive a fee for such services in the amount of $23 million, plus a
discretionary amount to be agreed at the discretion of the WMB Board to appropriately
compensate (Investment Advisor) in the light of the magnitude and complexity of the
transaction. A portion of (Investment Advisors) fee has been payable since June 2015 as a
monthly fee in the amount of $500,000 per month. A further $2.5 million of (Investment
Advisors) fee became payable upon the rendering of (Investment Advisors) opinion. The
remainder of (Investment Advisors) fee is contingent upon the closing of the merger.

Odds & Ends

The first bullet point under the heading of potential benefits to WPZ shareholders in the initial
acquisition press release states, There is no expected impact to WPZs credit ratings as a result
of the ETE/Williams combination. In fact, on the very same day of the acquisition
announcement, Fitch Ratings Service downgraded the rating outlook for WPZ to
negative.17

FORTUNE magazine recently recognized WMB as the Most Admired U.S. Energy
Company in 2015. Link: http://investor.williams.com/press-release/williams/fortune-nameswilliams-most-admired-us-energy-company

17

Source: Bloomberg

Please see disclosures on last page

15

The following quote is from an interview with the chief financial officer of ETE on December 9,
2015.
We run our business at around 4.5x debt to EBITDA. That is sacrosanct. Its set in
stone. You cannot move it. You can have a little bit of deviation, but by and large,
thats where you need to run it.
- Jamie Welch, CFO, Energy Transfer Equity
Speaking on CNBC Squawk on the Street, Dec. 9, 2015, 10:47 a.m. ET
This quote seems noteworthy for its potential to confuse the listener. The leverage ratio Mr.
Welch is referencing is not for ETE, but one of ETEs affiliated MLPs, Energy Transfer
Partners (ETP). ETE owns just 3.61% of ETP, and it is entitled to IDRs from ETP. The
most recent leverage ratio for ETE (as reported above) is 8.2x.18
On December 9, 2015, WMB received a Platts 2015 Global Energy Award for its industry
leadership in the midstream sector. The annual award was open to all companies storing,
transporting or facilitating trade of energy; operators such as railways, tankers, storage, LNG
terminals and oil, gas and NGL pipelines.
Link: http://investor.williams.com/pressrelease/williams/williams-receives-platts-2015-global-energy-award-industry-leadership

Direct Quotes from the Proxy Statement:19

ETC shareholders will have limited voting rights on matters affecting ETCs business
and will not be entitled to elect or remove ETCs general partner or the general partners
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 ETEs business through their ownership of ETC.

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.

18
Source: CNBC transcript dated 12-9-15; EBITDA and Debt ratios calculated from Bloomberg data for the 12month period ending 9-30-15; Net Debt equals sum of short-term debt plus long-term debt minus cash; EBITDA is
Earnings Before Interest, Taxes, Depreciation and Amortization. Net debt ratio adjusted for ownership of MLP
Affiliates adds ETEs weighted ownership percentage of EBITDA and net debt for ETP, SXL and SUN.
19
The source for all of the items under this heading is the S4 Document dated 11-24-15.

Please see disclosures on last page

16

The members of the ETC GP Board will be designated and elected by the Existing GP
Owner

ETCs partnership agreement contains provisions that substantially reduce the

standards to which ETC GP would otherwise be held by state fiduciary duty law. For
example, ETCs partnership agreement:
permits ETC GP to make a number of decisions in its individual
capacity, as opposed to in its capacity as ETCs 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, ETCs 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 ETCs partnership agreement;

Our partnership agreement contains various provisions that eliminate and/or replace the
fiduciary duties that might otherwise be owed by our general partner. We have adopted
these provisions to allow our general partner or its affiliates to engage in transactions with us that
might otherwise be prohibited by state law fiduciary standards, and to take into account the
interests of other parties in addition to our interests when resolving conflicts of interest

In addition, when our general partner is acting in its individual capacity, as opposed to
in its capacity as our general partner, it may act without any fiduciary obligation to us or
our shareholders whatsoever. These contractual standards replace the obligations to which our
general partner would otherwise be held

CONTACT:
Keith C. Goddard, CFA
kgoddard@capitaladv.com

Please see disclosures on last page

Channing S. Smith, CFA

csmith@capitaladv.com

Monty L. Butts
mbutts@capitaladv.com

17

APPENDIX A
The Impact of Incentive Distribution Rights (IDRs) on Stock Market Valuation
There is a fundamental reason a stock with an IDR obligation should trade at a discount to a
stock without an IDR obligation. A typical structure for an IDR involves a General Partner (GP)
which is responsible for the management of the business, and a Limited Partner (LP) which
supports the financing of the business. The GP typically retains a 2% ownership in the LP,
leaving 98% of the ownership to be sold to the public as LP units.
At the outset of a typical IDR arrangement, the Distributable Cash Flow (DCF) of the business is
allocated between the GP and LP according to the pro-rata ownership of the business, but over
time as DCF grows, an increasing percentage of cash flow gets paid to the GP.
Many IDR structures allow for High Splits, which means for every additional dollar distributed
to the LP unit holders, a dollar is also distributed to the GP. This occurs even though the funding
for the investment that produces each incremental dollar of DCF is proportional to the ownership
interest. For example, if the GP interest is only 2%, the LP unit holders fund 98% of the capital
investment, while the GP pays just 2%. Yet each gets 50% of the incremental cash flow
produced by that investment.
Since the GP is responsible for management of the business, it is noteworthy that the GP has a
strong incentive to invest for future growth, even if the risk-return profile of the investment is
only marginally attractive. This creates an inherent conflict of interest between the GP and the
LP. For an investment to be attractive to the GP it only needs to generate enough cash flow to
give the GP and LP some level of distribution.
Consider a hypothetical project that returns $1.00 for every $10.00 invested, a seemingly
acceptable 10% return on investment. This project would deliver $0.50 each to the GP and LP in
a high-splits IDR structure for every $10.00 invested. However, instead of a 10% return, the LP
earns just 5.1% based on its capital investment of $9.80, while the GP earns a 250% return
because it only committed $0.20 to the project.
To be fair, most GPs own more than 2% of the LPs with whom they have IDRs. In the proposed
merger, ETE intends to retain an 18.5% ownership interest in ETC. Even so, there is an inherent
conflict of interest between ETE and ETC due to the unbalanced risk-reward tradeoff of future
investment spending to grow the business.

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18

Disclosures
Any opinion included in this report constitutes the judgment of Capital Advisors, Inc. as of the date of this report,
and are subject to change without notice.
This commentary does not purport to be a statement of all material facts relating to the securities mentioned. The
information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources
believed to be reliable. Opinions expressed herein are subject to change without notice.
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this
presentation has been compiled from third party sources and is believed to be reliable; however its accuracy is not
guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as
investment advice and does not give investment recommendations.
Security Recommendations: The investments presented are examples of the securities held, bought and/or sold in
the Capital Advisors strategies during the last 12 months. These investments may not be representative of the current
or future investments of those strategies. You should not assume that investments in the securities identified in this
presentation were or will be profitable. We will furnish, upon your request, a list of all securities purchased, sold or
held in the strategies during the 12 months preceding the date of this presentation. It should not be assumed that
recommendations made in the future will be profitable or will equal the performance of securities identified in this
presentation. Capital Advisors, Inc., or one or more of its officers or employees, may have a position in the
securities presented, and may purchase or sell such securities from time to time. Additional information, including
management fees and expenses, is provided on Capital Advisors Form ADV Part 2.
As with any investment strategy, there is potential for profit as well as the possibility of loss. Capital Advisors
does not guarantee any minimum level of investment performance or the success of any portfolio or investment
strategy. All investments involve risk (the amount of which may vary significantly) and investment
recommendations will not always be profitable. The investment return and principal value of an investment will
fluctuate so that an investors portfolio may be worth more or less than its original cost at any given time. The
underlying holdings of any presented portfolio are not federally or FDIC-insured and are not deposits or obligations
of, or guaranteed by, any financial institution. Performance information for periods greater than one year is
annualized.
Past performance is not a guarantee of future results. Capital Advisors, Inc. does not provide tax or legal advice
and recommends you consult with your tax and/or legal adviser for such guidance.
The S&P 500 Index tracks the price and yield performance of approximately 500 stocks that represent the leading
companies in all major industry groups in the U.S. economy. The index is capitalization-weighted. The index is one
of the worlds most widely followed benchmarks, with substantial investment capital committed to matching the
index by investing in its constituent companies. Inclusion in the index is considered by many to be a benefit due to
the access it brings to this large pool of investment capital.
The Alerian MLP Index tracks the price and yield performance of large-cap and mid-cap energy Master Limited
Partnerships. The index is capitalization weighted among 50 MLPs.
Please contact Capital Advisors for a list and description of all firm composites and/or copy of our most recent Form
ADV part 2: 1-866-230-5879
Presentation is prepared by: Capital Advisors, Inc. Copyright 2015, by Capital Advisors,
Inc. www.capitaladv.com

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