Energy infrastructure giant Energy Transfer Equity (ETE) reported first quarter distributable cash flow of $349 million or 33 cents per share, up 10% over the same period last year and beating some analysts' estimates, but expressed doubt that its $38 billion acquisition of Williams (WMB - Get Report) can close.

ETE's net income attributable to partners was $312 million, up 9.8%.

Meanwhile, affiliate Energy Transfer Partners (ETP) reported adjusted first quarter Ebitda of $1.41 billion, up $46 million over the same period last year and above some analysts' expectations. Its distributable cash flow attributable to its partners totaled $793 million, $51 million less than the same period last year, while its net income was $376 million, up $108 million over last year.

On a conference call with analysts and investors, ETE management said given the inability of its legal counsel Latham & Watkins  to render an opinion on the tax consequences of its merger, the acquisition won't be able to close, regardless of whether Williams gains shareholder approval for the deal. "We will engage with Williams to attempt to get a transaction that can close, but the one we have now cannot," chairman and CEO Kelcy Warren (pictured) said.

Warren said ETE has made it clear that an all equity structure would be best for ETE and for Williams, rather than the current equity and cash deal. "To burden [the company] with that much debt is just not good business judgment," he said. "We would prefer to remove the cash component."

Either party can walk away from the deal after June 28. That deadline can be extended if it hasn't obtained regulatory approvals, but ETE expects to have those by then.

Jefferies analyst Christopher Sighinolfi said ETP's higher-than-projected cash flows from intrastate assets offset weaker-than-projected profits from its midstream segment, which he's growing more cautious about as volumes declined for the second quarter in a row despite several new, large-scale projects. "We are, however, pleased to see midstream costs under control as operating expenses fell by around 21%," he said, noting they're back down to historical levels.

Analysts at Tudor, Pickering, Holt expect ETP's cash flow gap to widen - which could affect distributions to stockholders - given reversal of hedge impacts and increasing maintenance burdens.

Last month ETE announced a distribution of 28.5 cent per unit, or $1.14 annually, flat over last quarter but up 16% year-over-year. ETP also announced a quarterly distribution of $1.055 per unit, or $4.22 annualized, flat over last quarter but up 4% year-over-year.

ETE said its $1.5 billion revolving credit facility had $965 million of outstanding borrowings and its leverage ratio was 2.87 times while ETP's $3.75 billion credit facility had $4 million of outstanding borrowings and its leverage ratio was 4.27 times.

ETP further lowered its growth capital expenditure assumption to between $2.6 billion and $2.87 billion, down 31.6% from the fourth quarter, its biggest cut from its liquids segment.

Dallas-based ETE has been in a fight with Tulsa, Okla.-based Williams Cos. over the merger agreement inked in September of last year, with ETE appearing to want out due to deteriorating deal economics given the industry downturn and Williams wanting ETE to make good on its offer.

Williams filed litigation against ETE and Warren in a Delaware court on April 6, seeking to unwind a private offering of Series A convertible preferred units ETE disclosed on March 9, which it claims is wrongful interference with their merger agreement. On May 3 ETE filed a counterclaim, asserting that Williams materially breached its obligations under the merger agreement by blocking ETE's attempts to complete the offering and bringing action against Warren.

"We believe these items remain the most important aspects of both companies' near-term valuation prospects," Jefferies' Sighinolfi said.

On Wednesday ETE said in a filing with the Securities and Exchange Commission that there was substantial risk that the merger wouldn't be consummated because of the tax consequences. ETE said Williams believes the risks are minimal and offered two alternatives, but it didn't disclose what they were and didn't think they will work.

If it goes through, the transaction would create the third largest energy company in North America and one of the five largest energy companies in the world.