Filed pursuant to Rule 424(B)(5)
Registration No. 333-59758
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 10, 2001)
2,200,000 CLASS A COMMON UNITS
ENBRIDGE ENERGY PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
$42.75 PER UNIT
---------
We are selling 2,200,000 Class A Common Units as described in this
prospectus supplement and the accompanying prospectus. The underwriters named in
this prospectus supplement may purchase up to 330,000 additional units from us
under certain circumstances.
Our units are traded on the New York Stock Exchange under the symbol "EEP."
The last reported sale price of the units on February 26, 2002 was $42.75 per
unit.
--------------
INVESTING IN OUR CLASS A COMMON UNITS INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND BEGINNING ON PAGE 4 OF THE
ACCOMPANYING PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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PER COMMON UNIT TOTAL
--------------- -----------
Public Offering Price $42.750 $94,050,000
Underwriting Discount $ 1.817 $ 3,997,400
Proceeds to Enbridge Energy, before expenses $40.933 $90,052,600
The underwriters are offering the units subject to various conditions. The
underwriters expect to deliver the units to purchasers on or about March 4,
2002.
--------------
SALOMON SMITH BARNEY GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
BANC OF AMERICA SECURITIES LLC
RBC CAPITAL MARKETS
February 26, 2002
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-4
Risk Factors................................................ S-12
Use of Proceeds............................................. S-12
Capitalization.............................................. S-13
Underwriting................................................ S-14
Legal Matters............................................... S-15
PROSPECTUS
About this Prospectus....................................... 3
Risk Factors................................................ 4
Where You Can Find More Information......................... 10
Forward-Looking Statements.................................. 11
The Partnership............................................. 11
Use of Proceeds............................................. 12
Cash Distributions.......................................... 12
Conflicts of Interest and Fiduciary Responsibilities........ 17
Tax Considerations.......................................... 20
Investment in Enbridge Energy by Employee Benefit Plans..... 36
Plan of Distribution........................................ 37
Legal Matters............................................... 38
Experts..................................................... 39
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
This document is in two parts. The first part is the prospectus supplement,
which describes our business and the specific terms of this Class A Common Unit
offering. The second part, the accompanying prospectus, gives more general
information, some of which may not apply to this offering.
If the description of the offering varies between the prospectus supplement
and the accompanying prospectus, you should rely on the information in this
prospectus supplement.
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the underwriters have not, authorized anyone to provide you with
different information. We are not making an offer of the Class A Common Units in
any jurisdiction where the offer is not permitted. You should not assume that
the information contained in this prospectus supplement, the accompanying
prospectus or in the documents incorporated by reference in this prospectus
supplement or the accompanying prospectus is accurate as of any date other than
the date on the front of those documents.
S-2
SYSTEM MAP
[Map showing locations of the Enbridge System, the Lakehead System, the North
Dakota System and the East Texas System and identifying Phase I, II, and III of
the Terrace expansion program.]
S-3
PROSPECTUS SUPPLEMENT SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION FROM THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE CLASS A COMMON
UNITS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS INCLUDE
SPECIFIC TERMS OF THE OFFERING OF THE CLASS A COMMON UNITS, INFORMATION ABOUT
OUR BUSINESS AND OUR FINANCIAL DATA. YOU SHOULD READ THE ENTIRE PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS WE HAVE INCORPORATED
BY REFERENCE CAREFULLY, INCLUDING THE "RISK FACTORS" SECTIONS AND OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS, BEFORE MAKING AN INVESTMENT
DECISION.
AS USED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,"WE,"
"US," "OUR" AND "ENBRIDGE ENERGY" MEAN ENBRIDGE ENERGY PARTNERS, L.P. AND
INCLUDES OUR SUBSIDIARY OPERATING PARTNERSHIP, ENBRIDGE ENERGY, LIMITED
PARTNERSHIP, AND OUR OTHER SUBSIDIARIES. "ENBRIDGE" MEANS ENBRIDGE INC. OUR
CLASS A COMMON UNITS REPRESENT LIMITED PARTNER INTERESTS IN ENBRIDGE ENERGY
PARTNERS, L.P. WE ALSO HAVE LIMITED PARTNER INTERESTS THAT ARE REPRESENTED BY
CLASS B COMMON UNITS. ALL OF OUR CLASS B COMMON UNITS ARE OWNED BY OUR GENERAL
PARTNER. THE CLASS A COMMON UNITS AND THE CLASS B COMMON UNITS ARE REFERRED TO
IN THIS PROSPECTUS SUPPLEMENT AS "UNITS."
ENBRIDGE ENERGY
WHO WE ARE
We are a publicly traded Delaware limited partnership that owns and operates
through our subsidiaries a regulated crude oil and natural gas liquids pipeline
business and a natural gas gathering and processing business in the United
States. A wholly-owned subsidiary of Enbridge serves as our general partner.
With assets of nearly $8.2 billion as of December 31, 2001, Enbridge, which is
based in Calgary, Alberta, provides energy transportation, distribution and
related services in North America and internationally. We and an affiliate of
Enbridge transport crude oil and natural gas liquids through the longest oil and
natural gas liquids pipeline system in the world, which we refer to as the
"System." We own the U.S. portion of the System, which we refer to as the
"Lakehead System," and a subsidiary of Enbridge, Enbridge Pipelines Inc., owns
the Canadian portion, which we refer to as the "Enbridge System."
S-4
The following chart shows our organization and ownership structure as of the
date of this prospectus supplement before giving effect to this offering. The
ownership percentages referred to in this prospectus supplement reflect the
approximate effective ownership interest in us and our subsidiary operating
partnership on a combined basis.
[Chart showing the organizational structure and equity ownership of the
following companies
COMPANY OWNER OWNERSHIP INTEREST
------- ----- ------------------
Enbridge Pipelines Inc. Enbridge Inc. 100%
Enbridge Energy Company, Inc. Enbridge Pipelines Inc. 100%
Enbridge Energy Partners, L.P. Enbridge Energy Company, Inc. 11.75% limited partner interest
Enbridge Energy Company, Inc. 1% general partner interest
Public Unitholders 87.25% limited partner interest
North Dakota System and East Texas System Enbridge Energy Partners, L.P. 100%
(through various subsidiaries)
Enbridge Energy, Limited Partnership Enbridge Energy Partners, L.P. 98.9899% limited partner interest
Enbridge Energy Company, Inc. 1.0101% general partner interest]
The System is approximately 3,100 miles long, including our portion, which
is approximately 1,880 miles long. The System is the primary transporter of
crude oil from western Canada to the United States and is the only pipeline that
transports crude oil from western Canada to the Province of Ontario, Canada. The
System serves all the major refining centers in the Great Lakes region of the
United States and in Ontario.
The Lakehead System includes 15 connections to pipelines and refineries at
various locations in the United States, including the refining areas in and
around Chicago, Illinois; Minneapolis-St. Paul, Minnesota; Detroit, Michigan;
Toledo, Ohio; Buffalo, New York; and Patoka/Wood River, Illinois. It has three
main terminals at Clearbrook, Minnesota, Superior, Wisconsin and Griffith,
Indiana. These terminals gather crude oil prior to injection into the Lakehead
System and allow for more flexible scheduling of oil movements.
In addition to the Lakehead System, we also own a smaller feeder pipeline
system, which we refer to as the "North Dakota System," that transports crude
oil from Montana, North Dakota and western Canadian oil fields to the Lakehead
System and to a connecting carrier at Clearbrook, Minnesota. We acquired the
North Dakota System in May 2001 for a purchase price of $35.4 million.
In November 2001, we acquired natural gas gathering, treating and processing
assets located in east Texas, which we refer to as the "East Texas System," for
$230.5 million. Please read "Recent Developments" below.
Our principal executive offices are located at 1100 Louisiana, Suite 3300,
Houston, Texas 77002. You may contact us through Mr. Tracy Barker of our
Investor Relations Department by phone at (713) 821-2237, toll-free at
(866) 337-4635 or by facsimile at (713) 821-2230.
COMPETITIVE ADVANTAGES
We believe that we are well positioned to execute successfully our business
strategy due to the following competitive strengths:
S-5
- The Lakehead System is among the lowest cost transporters of crude oil and
natural gas liquids in North America based on cost per barrel mile
transported.
- The Lakehead System's extensive length, large diameter pipe and use of a
number of parallel lines rather than a single line enables us to transport
multiple types of crude oil more efficiently.
- We supply western Canadian crude oil to the Midwest region of the United
States. This region is experiencing rising crude oil demand and declining
crude oil production.
- Our low cost of capital and strong management team with a track record of
profitable growth offers us an advantage in executing our growth strategy
through acquisitions.
RECENT DEVELOPMENTS
EAST TEXAS SYSTEM ACQUISITION
Effective November 30, 2001, we acquired natural gas gathering, treating and
processing assets located in east Texas for $230.5 million. The East Texas
System purchases natural gas directly from producers and delivers it to various
downstream purchasers. It also provides downstream transportation services to
the major intrastate and interstate pipelines in east Texas. The East Texas
System also delivers natural gas to local industrial and power plant markets,
which are connected directly to the pipeline system. The gathering assets
consist of a network of pipelines that collect natural gas from producing wells
and transport it to other pipelines for further transmission. We derive revenue
from gathering systems by transporting natural gas owned by others through our
pipelines for a transportation fee and by purchasing natural gas and utilizing
our pipelines to transport the natural gas to customers in another location
where it is then resold. Please read "Items 1 & 2. Business and Properties
-Acquisitions" in our Annual Report on Form 10-K for the year ended
December 31, 2001.
INCREASE IN DISTRIBUTIONS
Effective in January 2002, we increased our cash distribution rate to
unitholders from $0.875 per quarter to $0.90 per quarter, or to $3.60 per unit
on an annualized basis.
OUR BUSINESS STRATEGY
Our primary strategy is to grow cash distributions through the profitable
expansion of the Lakehead System and through development and acquisition of
complementary businesses with similar risk profiles to our current crude oil and
natural gas liquids transportation business. We plan to expand the Lakehead
System's capacity through the construction of Terrace Phase III and will seek to
enhance efficiency of the system where appropriate.
We will continue to analyze potential acquisitions, with a focus on crude
oil, refined products and natural gas pipelines, terminals and related
facilities. Major oil and gas companies have sold assets in recent years,
continuing the trend of rationalization of the energy infrastructure in the
United States. We expect this trend will continue and believe we are well
positioned to participate in these opportunities. We will seek opportunities
throughout the United States, particularly in the U.S. Gulf Coast area.
TERRACE EXPANSION PROGRAM
We and Enbridge are undertaking a major expansion of the System that we
refer to as the "Terrace expansion program." This expansion program consists of
a multi-phase expansion of both the Lakehead System and the Enbridge System.
Upon the completion of all three phases of the Terrace expansion program, we
expect that approximately 350,000 barrels per day of capacity will be added to
the System.
- Phase I of the Terrace expansion program was completed in 1999 and
included construction of new 36-inch diameter pipeline facilities from
Kerrobert, Saskatchewan to Clearbrook, Minnesota that
S-6
added approximately 170,000 barrels per day of capacity to the System. Our
share of the cost of Phase I was approximately $140 million.
- Construction of Phase II of the Terrace expansion program began in
June 2001 and it was placed in service in February 2002. While Phase II
does not involve construction on the Lakehead System, we expect to benefit
from the approximate 40,000 barrel per day increase in capacity of the
Enbridge System, as additional deliveries begin from the oil sands
deposits in the Province of Alberta, referred to as the "Alberta oil
sands."
- Phase III of the Terrace expansion program is designed primarily to
increase heavy oil transportation capacity on the Lakehead System between
Clearbrook, Minnesota and Superior, Wisconsin by approximately 140,000
barrels per day. The Canadian Association of Petroleum Producers, which we
refer to as "CAPP," provided notice in June 2001 to proceed with this
phase. Following permitting approval, construction on this phase of the
program began in late 2001. The estimated cost to us of Terrace Phase III
is approximately $210 million, the majority of which is expected to be
spent in 2002. We expect Phase III will be placed in service in 2003.
- CAPP also has provided notification requesting additional pipeline
facilities to enhance market access to PADD 2. PADD 2 consists of the
states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota,
Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee
and Wisconsin. This project is part of the future phases portion of the
Terrace expansion program. The estimated cost of this project is
approximately $35 million and, subject to final approvals, the project is
expected to be in service in 2003.
Under a tariff agreement with our customers approved in 1999 by the Federal
Energy Regulatory Commission, which we refer to as the "FERC," we implemented a
tariff surcharge for the Terrace expansion program of approximately $0.013 per
barrel (for light crude oil from the Canadian border to Chicago). On April 1,
2001, the surcharge was increased to $0.026 per barrel. The tariff surcharge is
based on the completion of all three phases of the Terrace expansion program.
PROSPECTS FOR GROWTH IN THE SUPPLY OF WESTERN CANADIAN CRUDE OIL
We believe that the outlook for increased crude oil production in western
Canada continues to be positive, as evidenced by a recently completed Enbridge
forecast and CAPP's June 2001 request to proceed with Phase III of the Terrace
expansion program. The timing of this growth will depend on the level of crude
oil prices and drilling activity, and the timing of completion of projects to
produce heavy and synthetic oil from the Alberta oil sands. During the last
quarter of 2001, volumes were starting to improve as one of the Alberta oil
sands expansion projects was placed into service. We expect these volumes to
continue to increase during 2002. As a result, based on a recent survey of
shippers, we anticipate that deliveries on the Lakehead System will average
approximately 1.33 to 1.40 million barrels per day during 2002.
In the near-term, we believe that we are well positioned to benefit from the
expected increases in western Canadian crude oil supply through utilization of a
combination of existing capacity and expansions currently underway. Canada has
substantial reserves of non-conventional hydrocarbon resources consisting
predominantly of the Alberta oil sands. Firms involved in the production of
heavy and synthetic crude oil from the oil sands region of western Canada have
announced expansion projects over the next ten years with value in excess of
Cdn. $40.0 billion and representing more than two million barrels per day of
potential incremental production. Alberta oil sands projects are expected to
provide substantial increases in the production of heavy and synthetic crude oil
in western Canada well into the future.
S-7
GROWTH BEYOND THE LAKEHEAD SYSTEM
Diversification of the energy transportation business through the
development of complementary businesses and through acquisitions is a key
objective of our strategic plan. We intend to focus our business development
efforts on crude oil and refined products pipelines, natural gas systems,
storage terminals and related facilities with a risk profile similar to that of
the Lakehead System. We expect such assets will become available with the
continuing trend of rationalization of the energy infrastructure in the United
States, as existing owners focus on other core aspects of their businesses and
improve upon their financial position. We are well positioned to participate in
these opportunities, as we are an established, low-cost operator with a strong
track record of reliability.
We intend to expand beyond the market currently served in PADD 2 by seeking
out new opportunities throughout the U.S., particularly in the U.S. Gulf Coast
area. We intend to actively pursue opportunities to provide terminal and
logistics solutions to the major crude oil and natural gas producers. Our
acquisitions of the North Dakota System and the East Texas System represent our
initial steps to implement our geographic and commodity product diversification
strategy.
We relocated our head office from Duluth, Minnesota to Houston, Texas in
November 2001. This relocation occurred due to the Enbridge purchase of Midcoast
Energy Resources, Inc., a then publicly traded Houston-based natural gas
gathering, transportation and processing company. As a result of this purchase,
the business development team of Midcoast provides support to our growth
strategy. This team has an established track record of profitable growth and
experience with emerging Mid-continent and Gulf Coast transportation
opportunities.
S-8
THE OFFERING
The following information assumes, unless otherwise noted, that the
underwriters do not exercise the option we have granted to them to purchase up
to 330,000 additional Class A Common Units to cover over-allotments.
SECURITIES OFFERED........................ 2,200,000 Class A Common Units (2,530,000 Class A Common
Units if the underwriters' over-allotment option is
exercised in full).
UNITS TO BE OUTSTANDING AFTER THE 31,253,634 Class A Common Units (representing a 87.98%
OFFERING.................................. limited partner interest)
3,912,750 Class B Common Units (representing a 11.02%
limited partner interest)
USE OF PROCEEDS........................... We estimate that we will receive net proceeds from the
offering of approximately $89.9 million, or
approximately $103.4 million if the underwriters'
over-allotment option is exercised in full. Of that
amount, we will use approximately $75 million to repay
indebtedness we owe to an affiliate of Enbridge. That
indebtedness was incurred to finance a portion of the
purchase price of the East Texas System and the North
Dakota System. We intend to use the balance of the net
proceeds to repay a portion of the amount outstanding
under our revolving credit facilities. Please read "Use
of Proceeds."
RISK FACTORS.............................. An investment in our Class A Common Units involves risk.
Please read "Risk Factors" in this prospectus supplement
and in the accompanying prospectus.
NEW YORK STOCK EXCHANGE SYMBOL............ EEP
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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
We have derived the summary historical financial data as of and for each of
the years ended December 31, 1999, 2000 and 2001 from our audited financial
statements and related notes. You should read the information below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical financial statements and related
notes appearing in our Annual Report on Form 10-K for the year ended
December 31, 2001, which is incorporated by reference in this prospectus
supplement and the accompanying prospectus.
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER UNIT DATA)
INCOME STATEMENT DATA:
Operating revenue......................................... $ 312.6 $ 305.6 $ 340.4
-------- -------- --------
Power, operating and administrative expenses, cost of
gas................................................... 124.5 128.0 180.7
Depreciation............................................ 57.8 61.1 63.8
-------- -------- --------
Total operating expenses.................................. 182.3 189.1 244.5
-------- -------- --------
Operating income.......................................... 130.3 116.5 95.9
Interest and other income................................. 3.4 4.8 2.8
Interest expense.......................................... (54.1) (60.4) (59.3)
Minority interest......................................... (0.9) (0.7) (0.5)
-------- -------- --------
Net income................................................ $ 78.7 $ 60.2 $ 38.9
======== ======== ========
Net income per unit....................................... $ 2.48 $ 1.78 $ 0.98
======== ======== ========
Cash distribution per unit................................ $ 3.485 $ 3.50 $ 3.50
Weighted average units outstanding (millions)............. 28.0 28.9 30.2
FINANCIAL POSITION DATA (AT PERIOD END):
Cash and cash equivalents................................. $ 40.0 $ 37.2 $ 40.2
Property, plant and equipment, net........................ 1,321.3 1,281.9 1,486.6
Total assets.......................................... 1,413.7 1,376.7 1,649.2
Long-term debt............................................ 784.5 799.3 715.4
Partners' capital
Class A common unitholders.............................. 533.1 488.6 577.0
Class B common unitholder............................... 47.4 42.1 48.8
General partner......................................... 5.6 5.2 6.5
Accumulated other comprehensive income.................. -- -- 11.9
-------- -------- --------
Total Partners' capital................................... $ 586.1 $ 535.9 $ 644.2
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA (1)................................................ $ 188.1 $ 177.6 $ 159.7
Cash flow from operating activities....................... 101.6 117.3 122.3
Cash flow used in investing activities.................... (91.1) (20.7) (299.1)
Cash flow from (used in) financing activities............. (17.5) (99.4) 179.8
Acquisitions and capital expenditures included in
investing activities.................................... (82.9) (21.7) (300.0)
OPERATING DATA:
Barrel miles (billions) (2)............................... 350 341 333
Deliveries (thousands of barrels per day) (3):
United States........................................... 898 976 960
Eastern Canada.......................................... 471 362 355
-------- -------- --------
Total................................................. 1,369 1,338 1,315
======== ======== ========
(1) EBITDA is defined for this purpose as operating income before depreciation.
EBITDA is used as a supplemental financial measurement in the evaluation of
our business and should not be considered
S-10
as an alternative to net income as an indicator of our performance or as an
alternative to cash flow as a measure of liquidity. EBITDA is presented here
to provide additional information but it is not a measure recognized under
accounting principles generally accepted in the United States of America.
Furthermore, the presentation of EBITDA in this schedule may not be
comparable to similarly titled measures used by others.
(2) "Barrel miles" is a measurement of how fully a pipeline is used over its
length and is calculated by multiplying the amount of each individual
delivery (measured in barrels) by the distance it is shipped (measured in
miles) and then adding the results so obtained for all deliveries.
(3) "Deliveries" means the amount of liquid hydrocarbons delivered by a pipeline
to certain points along the system and is quantified using a barrel as a
unit of measure. "Barrels per day" delivery data is a measurement of average
deliveries for the indicated period and is computed by dividing the number
of barrels delivered for the period by the number of days in the period.
TAX CONSIDERATIONS
THE TAX CONSEQUENCES TO YOU OF AN INVESTMENT IN CLASS A COMMON UNITS WILL
DEPEND IN PART ON YOUR OWN TAX CIRCUMSTANCES. YOU ARE ENCOURAGED TO CONSULT YOUR
OWN TAX ADVISOR ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO
YOU OF AN INVESTMENT IN OUR CLASS A COMMON UNITS.
For a discussion of the principal U.S. federal income tax considerations
associated with our operations and the purchase, ownership and disposition of
Class A Common Units, please read "Tax Considerations" in the accompanying
prospectus.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
We estimate that if you purchase a Class A Common Unit in this offering and
hold the unit through the record date for the distribution with respect to the
final calendar quarter of 2004, you will be allocated an amount of U.S. federal
taxable income for 2002, 2003 and 2004 that averages less than 10% of the amount
of cash distributed to you with respect to each such period. Our estimate
assumes that quarterly distributions on the units with respect to each such
period are equal to the current quarterly distribution rate of $0.90 per unit.
These estimates are based on numerous assumptions regarding our business and
operations, including assumptions as to tariffs, capital expenditures, growth,
financings, cash flows and anticipated cash distributions. In particular, these
estimates do not assume any acquisitions. These estimates and assumptions are
subject to, among other things, numerous business, economic, regulatory and
competitive uncertainties beyond our control and to tax reporting positions
(including estimates of the relative fair market values of our assets and the
validity of curative allocations) that we have adopted or intend to adopt and
with which the Internal Revenue Service could disagree. Accordingly, the
estimates may not turn out to be correct. The actual percentage of distributions
that will constitute taxable income could be higher or lower, and any
differences could be material.
OWNERSHIP OF CLASS A COMMON UNITS BY TAX-EXEMPT ENTITIES, REGULATED INVESTMENT
COMPANIES AND FOREIGN INVESTORS
Ownership of Class A Common Units by tax-exempt entities, regulated
investment companies and foreign investors raises issues unique to such persons.
Please read "Tax Considerations" and "Investment in Enbridge Energy by Employee
Benefit Plans" in the accompanying prospectus.
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RISK FACTORS
Before you invest in our Class A Common Units, you should be aware that such
an investment involves various risks, including those described in the
accompanying prospectus and in the documents we have incorporated by reference.
If any of those risks actually occurs, then our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of the Class A Common Units could decline, and you could lose all
or part of your investment. You should consider carefully the risk factor below
and those beginning on page 4 of the accompanying prospectus, together with all
of the other information included in this prospectus supplement, the
accompanying prospectus and the documents we have incorporated by reference
before buying Class A Common Units.
OUR RESULTS MAY BE ADVERSELY AFFECTED BY COMMODITY PRICE VOLATILITY, RISKS
ASSOCIATED WITH OUR HEDGING ACTIVITIES AND FERC REGULATION AFFECTING OUR EAST
TEXAS SYSTEM.
The East Texas System includes natural gas gathering, treating and
processing assets in east Texas. Commodity price exposure is inherent in gas
purchase and resale activities and in gas processing. To the extent we engage in
hedging activities to reduce our commodity price exposure, we may be prevented
from realizing the benefits of price increases above the level of the hedges.
Further, hedging contracts are subject to the risk that the other party may
prove unable or unwilling to perform its obligations under such contracts.
The rates charged for certain services related to interconnects with
interstate pipelines on the East Texas System are regulated by the FERC under
the Natural Gas Policy Act of 1978. Although the East Texas System is not
subject to FERC jurisdiction under the Natural Gas Act, the FERC periodically
proposes and implements new rules and regulations affecting the natural gas
industry and rates subject to FERC jurisdiction. New FERC initiatives or orders
may adversely affect the rates charged for services by the East Texas System.
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $89.9 million ($103.4 million if the underwriters exercise their
over-allotment option in full). Of that amount, we will use approximately
$75.0 million to repay the indebtedness we owe to an affiliate of Enbridge. That
indebtedness was incurred to finance a portion of the purchase price of the East
Texas System and the North Dakota System. It bears interest at LIBOR plus 1% and
matures in January 2007. We intend to use the balance of the net proceeds to
repay a portion of the amount outstanding under our revolving credit facilities
described below. As of February 20, 2002, approximately $194 million was
outstanding under those facilities. Borrowings under those facilities were used
to fund the Terrace expansion program and other capital enhancements.
On January 29, 2002, we established two new unsecured credit facilities, a
$300.0 million three-year term facility and a $300.0 million 364-day facility,
to replace the then existing $350.0 million revolving credit facility. Under the
terms of these new facilities, we and our subsidiary operating partnership may
borrow funds up to a combined maximum of $300.0 million under the three-year
term facility and a combined maximum of $300.0 million under the 364-day
facility. Upon closing of the new facilities, indebtedness under the
$350.0 million revolving credit facility was refinanced with indebtedness drawn
under the new credit facilities, and the $350.0 million revolving credit
facility was terminated.
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CAPITALIZATION
The following table shows our capitalization at December 31, 2001, and as
adjusted to give effect to this offering and the application of the estimated
net offering proceeds to repay as described under "Use of Proceeds." You should
read this table in conjunction with our financial statements and related notes
appearing in our Annual Report on Form 10-K for the year ended December 31,
2001, which is incorporated by reference in this prospectus supplement and the
accompanying prospectus. The following table assumes that the underwriters do
not exercise the option we granted to them to buy additional Class A Common
Units in this offering.
AS OF DECEMBER 31, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS)
Current Portion of First Mortgage Notes..................... $ 31.0 $ 31.0
Long-term Debt:
First Mortgage Notes...................................... 279.0 279.0
Revolving Credit Facility(1).............................. 137.0 121.2
7% Senior Notes due 2018.................................. 100.0 100.0
7 1/8% Senior Notes due 2028.............................. 100.0 100.0
7.9% Senior Notes due 2012................................ 100.0 100.0
Unamortized Discount...................................... (0.6) (0.6)
-------- --------
Total Long-term Debt.................................... 715.4 699.6
Loan from Enbridge Affiliate................................ 176.2 101.2
Partners' Capital........................................... 644.2 735.0
-------- --------
Total Capitalization.................................... $1,566.8 $1,566.8
======== ========
--------------
(1) On January 29, 2002, we established two new unsecured credit facilities, a
$300.0 million three-year term facility and a $300.0 million 364-day
facility to replace the then existing $350.0 million revolving credit
facility. Upon closing of the new facilities, indebtedness under the
$350.0 million revolving credit facility was refinanced with indebtedness
drawn under the new credit facilities, and the $350.0 million revolving
credit facility was terminated. As of February 20, 2002, approximately
$194 million was drawn under the new credit facilities.
S-13
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
agreed to purchase, and we have agreed to sell to that underwriter, the number
of Class A Common Units set forth opposite the underwriter's name.
NUMBER OF CLASS A
UNDERWRITER COMMON UNITS
----------- ------------------
Salomon Smith Barney Inc.................................... 880,000
Goldman, Sachs & Co......................................... 550,000
A.G. Edwards & Sons, Inc.................................... 330,000
Banc of America Securities LLC.............................. 220,000
RBC Dain Rauscher Inc....................................... 220,000
----------
Total....................................................... 2,200,000
==========
The underwriting agreement provides that the obligations of the underwriters
to purchase the Class A Common Units included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the Class A Common Units (other than those covered
by the over-allotment option described below) if they purchase any of the
Class A Common Units.
The underwriters propose to offer some of the Class A Common Units directly
to the public at the public offering price set forth on the cover page of this
prospectus supplement and some of the Class A Common Units to dealers at the
public offering price less a concession not to exceed $1.06 per Class A Common
Unit. The underwriters may allow, and dealers may reallow, a concession not to
exceed $0.10 per Class A Common Unit on sales to other dealers. If all of the
Class A Common Units are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 330,000 additional
Class A Common Units at the public offering price less the underwriting
discount. The underwriters may exercise the option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent the option is exercised, each underwriter must purchase a number of
additional Class A Common Units approximately proportionate to such
underwriter's initial purchase commitment.
Enbridge Energy Partners, L.P. and its general partner have agreed that, for
a period of 90 days from the date of this prospectus supplement, they will not,
without the prior written consent of Salomon Smith Barney, dispose of or hedge
any Class A or Class B Common Units or any securities convertible into or
exercisable or exchangeable for Class A or Class B Common Units. Salomon Smith
Barney, in its sole discretion, may release any of the securities subject to
these lock-up agreements at any time without notice.
The Class A Common Units are listed on the New York Stock Exchange under the
symbol "EEP."
Because the National Association of Securities Dealers, Inc. views the
Class A Common Units offered hereby as interests in a direct participation
program, this offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules.
The following table shows the underwriting discounts and commissions that we
are to pay to the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional Class A Common Units.
PAID BY ENBRIDGE ENERGY
PARTNERS, L.P.
-------------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per Unit.................................................... $ 1.817 $ 1.817
Total....................................................... $3,997,400 $4,597,010
S-14
In connection with the offering, Salomon Smith Barney, on behalf of the
underwriters, may purchase and sell Class A Common Units in the open market.
These transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of Class A Common
Units in excess of the number of units to be purchased by the underwriters in
the offering, which creates a syndicate short position. "Covered" short sales
are sales of Class A Common Units made in an amount up to the number of Class A
Common Units represented by the underwriters' over-allotment option. In
determining the source of Class A Common Units to close out the covered
syndicate short position, the underwriters will consider, among other things,
the price of Class A Common Units available for purchase in the open market as
compared to the price at which they may purchase Class A Common Units through
the over-allotment option. Transactions to close out the covered syndicate short
involve either purchases of Class A Common Units in the open market after the
distribution has been completed or the exercise of the over-allotment option.
The underwriters may also make "naked" short sales of Class A Common Units in
excess of the over-allotment option. The underwriters must close out any naked
short position by purchasing Class A Common Units in the open market. A naked
short position is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the Class A Common Units in
the open market after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of bids for or purchases of
Class A Common Units in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney repurchases Class A Common Units originally sold by that
syndicate member in order to cover syndicate short positions or make stabilizing
purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Class A Common Units. They may also cause the
price of the Class A Common Units to be higher than the price that otherwise
would exist in the open market in the absence of these transactions. The
underwriters may conduct these transactions on the New York Stock Exchange or in
the over-the-counter market, or otherwise. If the underwriters commence any of
these transactions, they may be discontinued at any time.
We estimate that our total expenses of this offering will be approximately
$200,000. The underwriters have agreed to reimburse us for certain expenses.
The underwriters have performed investment banking and advisory services for
us from time to time for which they have received customary fees and expenses.
The underwriters may, from time to time, engage in transactions with and perform
services for us in the ordinary course of their business.
Enbridge Energy Partners, L.P., its general partner and Enbridge Energy,
Limited Partnership have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the underwriters may be required to make in respect
of any of those liabilities.
LEGAL MATTERS
Fulbright & Jaworski L.L.P., Houston, Texas, will issue opinions about the
validity of the Class A Common Units offered hereby and various legal matters in
connection with the offering on our behalf. Baker Botts L.L.P., Houston, Texas,
the underwriters' counsel, will also issue opinions about various legal matters
in connection with the offering on behalf of the underwriters.
S-15
PROSPECTUS
$500,000,000 CLASS A COMMON UNITS
ENBRIDGE ENERGY PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
-------------
We may offer and sell up to $500,000,000 of our Class A Common Units in one
or more separate offerings with this prospectus. We will determine the prices
and terms of the sales at the time of each offering and will describe them in a
supplement to this prospectus.
This prospectus can be used to offer or sell units only if it is accompanied
by a prospectus supplement. The prospectus supplement will contain important
information about us and the units that is not included in this prospectus. You
should read this prospectus and the prospectus supplement carefully.
We may sell these units to underwriters or dealers, or we may sell them
directly to other purchasers. Please read "Plan of Distribution." The prospectus
supplement will list any underwriters and the compensation that they will
receive. The prospectus supplement will also show you the total amount of money
that we will receive from selling the units, after we pay certain expenses of
the offering.
The Class A Common Units are listed on the New York Stock Exchange under the
symbol "EEP." Prior to September 5, 2001, our name was Lakehead Pipe Line
Partners, L.P. and our trading symbol was "LHP."
Our executive offices are located at Lake Superior Place, 21 West Superior
Street, Duluth, Minnesota 55802, and our telephone number is (218) 725-0100.
After November 1, 2001, our executive offices will be located at 1100 Louisiana,
Suite 2900, Houston, Texas 77002 and our telephone number will be
(713) 650-8900.
INVESTING IN THE UNITS INVOLVES RISK. YOU SHOULD CONSIDER EACH OF THE
FACTORS DESCRIBED OR REFERENCED UNDER "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS
PROSPECTUS AND IN ANY APPLICABLE PROSPECTUS SUPPLEMENT BEFORE PURCHASING ANY
UNITS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dated October 10, 2001
TABLE OF CONTENTS
About this Prospectus....................................... 3
Risk Factors................................................ 4
Where You Can Find More Information......................... 10
Forward-Looking Statements.................................. 11
The Partnership............................................. 11
Use of Proceeds............................................. 12
Cash Distributions.......................................... 12
Conflicts of Interest and Fiduciary Responsibilities........ 17
Tax Considerations.......................................... 20
Investment in Enbridge Energy by Employee Benefit Plans..... 36
Plan of Distribution........................................ 37
Legal Matters............................................... 38
Experts..................................................... 39
--------------
You should rely only on the information contained in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
have not authorized anyone else to provide you with different information. We
are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of those documents.
2
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission ("SEC") using a "shelf" registration
process. Under this shelf registration process, we may sell the Class A Common
Units described in this prospectus in one or more offerings up to a total dollar
amount of $500,000,000. This prospectus provides you with a general description
of us and the Class A Common Units. Each time we sell Class A Common Units with
this prospectus, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add to, update or change information in this prospectus. The
information in this prospectus is accurate as of the date on the cover page. You
should carefully read both this prospectus and any prospectus supplement,
together with additional information described under the heading "Where You Can
Find More Information."
As used in this prospectus, "we," "us," "our," and "Enbridge Energy" means
Enbridge Energy Partners, L.P. and includes our subsidiary operating
partnership, Enbridge Energy, Limited Partnership. "Enbridge" refers to
Enbridge Inc. of Canada, which is the indirect owner of our general partner. We
and Enbridge transport crude oil and other liquid hydrocarbons through the
world's longest liquid petroleum pipeline system, which we refer to as the
"System." We own the U.S. portion of the System, which we refer to as the
"Enbridge Energy System" and a subsidiary of Enbridge, Enbridge Pipelines Inc.,
owns the Canadian portion of the System, which we refer to as the "Enbridge
System." Our Class A Common Units represent limited partner interests in
Enbridge Energy Partners, L.P. We also have limited partner interests that are
represented by Class B Common Units. All of our Class B Units are owned by our
general partner. The Class A Common Units and Class B Common Units are referred
to in this prospectus as "units."
3
RISK FACTORS
Before you invest in our Class A Common Units, you should consider carefully
the risk factors described below together with all of the other information
included in the prospectus, any prospectus supplement and the documents we have
incorporated by reference.
If any of the following risks actually occur, then our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of the Class A Common Units could decline, and you
could lose all or part of your investment.
RISKS OF OUR BUSINESS
AN INADEQUATE SUPPLY OF WESTERN CANADIAN CRUDE OIL CAN ADVERSELY AFFECT OUR
BUSINESS.
The volume of shipments on the Enbridge Energy System and our financial
performance depend on adequate supplies of western Canadian crude oil.
Insufficient supplies can adversely affect our business by limiting shipments on
our pipeline system. In 1999 and 2000, for example, our crude oil deliveries
declined compared with 1998. This decline resulted primarily from decreased
crude oil production in western Canada, which in turn resulted primarily from
reduced spending levels for exploration and development activities in western
Canada. These reduced spending levels resulted from low oil prices in 1998 and
the first part of 1999. Our ability to increase deliveries and to expand the
Enbridge Energy System in the future also depends on increased supplies of
western Canadian crude oil.
There is some risk that regulations of the Federal Energy Regulatory
Commission, which we refer to as the "FERC," would not allow us to raise our
rates if our pipeline system transported significantly less crude oil and if
there was a large difference between our rates and our costs. Even if the FERC
allowed us to raise our rates in such a case, we might still have lower revenues
during the time before our rate increases became effective. If our pipeline
system transports lower volumes of crude oil, our revenues could decrease, and
we could have less cash to distribute to our unitholders.
OUR PIPELINE SYSTEM MIGHT BE USED LESS IF DEMAND FOR CRUDE OIL AND NATURAL GAS
LIQUIDS DECREASES.
If our pipeline system transports lower volumes of crude oil and natural gas
liquids, our revenues could decrease and we could have less cash to distribute
to our unitholders. The volumes we transport depend largely on the demand for
western Canadian crude oil and natural gas liquids in the Midwest region of the
United States, which is the principal geographic area served by our pipeline
system.
A variety of factors could cause the demand for crude oil and natural gas
liquids to fall in the markets that we serve. These factors include:
- economic conditions;
- fuel conservation measures;
- alternative fuel requirements;
- government regulation; and
- technological advances in fuel economy and energy generation devices.
Demand for western Canadian crude oil in our geographic markets also is affected
by the delivery of other crude oil and refined products into the same areas.
Existing pipeline capacity for the delivery of crude oil to the Midwest region
of the United States exceeds current refining capacity.
A SUCCESSFUL CHALLENGE TO OUR TARIFF RATES COULD REDUCE OUR REVENUES.
Since the Enbridge Energy System is an interstate common carrier, our tariff
rates are regulated by the FERC under the Interstate Commerce Act. If our tariff
rates were successfully challenged in the future and we had to lower rates, our
revenues would be reduced. Application of the regulatory standards for
establishing tariff rates for liquids pipelines is sometimes uncertain.
4
COMPETITION WITH OTHER PIPELINES AND REFINERIES MAY REDUCE OUR REVENUES.
We face competition for transporting western Canadian crude oil from other
pipelines, which may reduce our revenues. We compete with other crude oil and
refined product pipelines and other methods of delivering crude oil and refined
products to the refining centers of Minneapolis-St. Paul, Minnesota; Chicago,
Illinois; Detroit, Michigan; Toledo, Ohio; Buffalo, New York; Sarnia, Ontario
and the refinery market and pipeline hub located in the Patoka/Wood River area
of southern Illinois. Refineries in the markets we serve compete with those in
western Canada for supplies of western Canadian crude oil. Shipments on our
pipeline system may be reduced if producers choose to sell their crude oil for
use in western Canada. Please read "Items 1 and 2. Business and
Properties--Competition" in our Form 10-K and Forms 10-K/A for the year ended
December 31, 2001.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS, INCLUDING ANY REMEDIATION OF SOIL
OR WATER POLLUTION OR HYDROSTATIC TESTING OF OUR PIPELINE SYSTEM, MAY INCREASE
OUR COSTS AND REDUCE OUR REVENUES.
Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety. Pipeline operations
always involve the risk of costs or liabilities related to environmental
protection and operational safety matters. As a result, we may incur costs or
liabilities of this type in the future. It is also possible that we will have to
pay amounts in the future because of changes in environmental and safety laws or
enforcement policies or claims for environmental-related damage to persons or
property. If we cannot recover these costs from insurance or through higher
tariffs, we could be adversely affected and we could have less cash to
distribute to our unitholders.
We have hydrostatically tested parts of our pipeline system in the past,
which means that we have tested the structural integrity of our pipelines by
filling them with water at high pressures. We may decide that we need to do
additional hydrostatic testing in the future, or a regulatory authority may
require such testing. If this testing occurs, it could result in significant
expense arising out of treatment and disposal of the test water and lost
transportation revenues while the pipelines are being tested. In addition, if
Enbridge performs hydrostatic testing on its pipelines in Canada, this could
reduce deliveries into our pipeline system because lower volumes would be
received from western Canada.
FUTURE ACQUISITIONS MAY BE UNSUCCESSFUL IF WE ARE UNABLE TO RAISE FINANCING ON
ACCEPTABLE TERMS, IF WE INCORRECTLY PREDICT COMBINED RESULTS, OR IF WE ARE
UNABLE TO INTEGRATE OPERATIONS AND MANAGEMENT.
The acquisition of complementary businesses with risk profiles similar to
that of our current crude oil and natural gas liquids transportation business is
a focus of our strategic plan. Any acquisition may present various risks and
challenges, including:
- the risk of incorrect assumptions regarding the future combined results of
the then-existing and to be acquired operations;
- the risk of failing to integrate the operations or management of an
acquired business or a significant delay in such integration; and
- diversion of management's attention.
In addition, we may be unable to consummate any acquisitions in the future or be
unable to raise, on terms acceptable to us, any debt or equity financing that
may be required for any such acquisition.
THE NEED FOR SPECIAL COMMITTEE OR UNITHOLDER APPROVALS MAY LIMIT OUR ABILITY
TO GROW BY ACQUIRING ASSETS FROM ENBRIDGE.
We may not be able to acquire assets from Enbridge or our general partner as
part of our strategy to diversify our energy transportation business. We
anticipate that the terms of any acquisition from Enbridge or our general
partner would be either submitted for the approval of our unitholders or
negotiated on our behalf by a special committee of the board of directors of our
general partner comprised of members who are not otherwise affiliated with
Enbridge or our general partner. The special committee would be
5
authorized in its discretion to accept or reject any proposed acquisition from
Enbridge or our general partner and to engage independent counsel and financial
advisors to assist it.
RISKS ARISING FROM OUR PARTNERSHIP STRUCTURE AND RELATIONSHIPS WITH OUR GENERAL
PARTNER
OUR GENERAL PARTNER MAY HAVE CONFLICTS OF INTEREST.
Since our general partner is related to both Enbridge and us, conflicts of
interest between us and Enbridge may arise from time to time. The following
situations could give rise to conflicts of interest:
- The general partner determines the amount and timing of any capital
expenditures, borrowings and reserves, which can impact the amount of cash
that is distributed by us to our unitholders and to the general partner.
- The general partner determines which expenditures are capital expenditures
that are necessary to maintain our pipeline system. (Those expenditures
reduce the cash from operations that is used to make distributions to our
unitholders.)
- The general partner determines whether to issue additional units or other
equity securities or whether to purchase outstanding units.
- The general partner controls payments to Enbridge for any services
rendered for our benefit, subject to the limitations described in
"Conflicts of Interest and Fiduciary Responsibilities."
- The general partner determines which costs are reimbursable by us.
- The general partner controls the enforcement of obligations owed to us by
the general partner.
- The general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
There also may be conflicts of interest if Enbridge conducts businesses that
compete with our pipeline system. We have an agreement with Enbridge that
generally allows Enbridge to pursue its business interests, even if these
interests involve pipelines in the U.S. This agreement and our partnership
agreement do not restrict Enbridge from engaging in businesses that it was
engaged in at the time of our initial public offering in December 1991, even if
such business competes with ours. With the reversal of a section of the Enbridge
System that extends from Sarnia to Montreal, which we refer to as "Line 9",
Enbridge competes with us to supply crude oil to the Ontario market. Our
agreement with Enbridge expressly permitted this reversal. Please read
"Conflicts of Interest and Fiduciary Responsibilities."
Our partnership agreement allows the general partner to resolve conflicts of
interest by considering the interests of all the parties to the conflict.
Therefore, the general partner can consider the interests of Enbridge if a
conflict of interest arises. This is very different from the more familiar legal
duty of a trustee, who must act solely in the best interests of the trust's
beneficiary. Please read "Conflicts of Interest and Fiduciary Responsibilities."
We are very dependent on Enbridge and the Enbridge System. Nearly all of the
crude oil and natural gas liquids we ship comes from the Enbridge System in
Canada, and shipments on our pipeline system are scheduled by Enbridge in
coordination with our general partner. In addition, neither we nor the general
partner has any employees. In operating our pipeline system, we and the general
partner rely solely on employees of Enbridge and its affiliates.
PROVISIONS OF OUR PARTNERSHIP AGREEMENT LIMIT THE GENERAL PARTNER'S FIDUCIARY
DUTIES TO US AND TO OUR UNITHOLDERS.
Our partnership agreement limits the fiduciary duties of the general partner
to us and to our unitholders that would otherwise exist under Delaware law. In
addition, our unitholders have effectively consented to certain actions and
conflicts of interest that might otherwise be deemed a breach of fiduciary or
other duties under state law. These modifications of the standards of fiduciary
duty may make it much more difficult for a unitholder to successfully challenge
the actions of, or failure to act by, the general
6
partner as being in breach of a fiduciary duty. Please read "Conflicts of
Interest and Fiduciary Responsibilities."
WE CAN ISSUE AN UNLIMITED NUMBER OF ADDITIONAL UNITS OR OTHER EQUITY
SECURITIES, AND ANY ISSUANCES COULD RESULT IN REDUCED CASH DISTRIBUTIONS TO
YOU AND HARM THE MARKET VALUE OF YOUR UNITS.
We can issue an unlimited number of additional units or other equity
securities, including equity securities with rights to distributions and
allocations or rights in liquidation superior to the Class A Common Units
offered by this prospectus. If we issue more units or other equity securities,
your proportionate ownership interest in Enbridge Energy will be reduced. This
could cause the market price of your units to fall, reduce the cash
distributions paid to you as a unitholder, or both.
OUR GENERAL PARTNER CAN SELL ITS CLASS B COMMON UNITS, WHICH COULD HARM THE
MARKET VALUE OF YOUR UNITS.
A public sale by the general partner of a significant portion of the
3,912,750 Class B Common Units that it currently owns could reduce the market
price of your Class A Common Units. Our partnership agreement allows the general
partner to cause us to register for public sale any units held by the general
partner or its affiliates. Since the Class B Common Units are economically
similar to your Class A Common Units, a public sale of Class B Common Units
could absorb some of the trading market demand for Class A Common Units. In
addition, the general partner and its affiliates may sell their units in private
transactions at any time, which could have a similar effect on the market for
your Class A Common Units.
THE GENERAL PARTNER MAY INCREASE OUR CASH RESERVES, WHICH MAY REDUCE YOUR CASH
DISTRIBUTIONS.
The general partner has broad discretion in establishing cash reserves for
the proper conduct of our business. These cash reserves include reserves for
future capital expenditures. If we increase cash reserves, the amount of cash
that we can distribute to our unitholders may decrease.
YOUR CONTROL OVER OUR MANAGEMENT IS LIMITED AND IT IS DIFFICULT TO REMOVE THE
GENERAL PARTNER.
The general partner generally manages the activities of Enbridge Energy, and
unitholders do not have the right to elect the general partner or its directors
or officers on an annual basis. In addition, it is difficult to remove our
general partner because the vote of at least 66 2/3% of the outstanding Class A
Common Units is required to do so. As a result, the unitholders have only
limited control over our management.
YOU MAY BE REQUIRED TO SELL YOUR CLASS A COMMON UNITS TO THE GENERAL PARTNER
AT A TIME OR ON TERMS THAT ARE UNSATISFACTORY TO YOU.
If at any time less than 15% of the outstanding units are held by persons
other than the general partner and its affiliates, the general partner has the
right to purchase all of the outstanding units at the price described in our
partnership agreement, which may be lower than the then current market price.
You may be required to sell your units at a time you did not wish to do so and
at a price that is less than the current market price for your Class A Common
Units.
IT IS DIFFICULT TO ENFORCE CIVIL LIABILITIES AGAINST OUR OFFICERS, DIRECTORS
AND CONTROLLING PERSONS.
Some of the officers and directors of our general partner and some of our
controlling persons (as defined under U.S. federal securities laws) are not U.S.
residents and have most of their assets outside of the United States. As a
result, it might be difficult for you to serve process on these persons. You
might want to serve process on them if you are suing them for civil liabilities
under U.S. federal securities law. Our Canadian lawyers have told us that it may
not be possible to enforce U.S. judgments against these persons if the judgment
is based solely on the U.S. federal securities laws.
7
RISKS RELATED TO OUR DEBT AND OUR ABILITY TO DISTRIBUTE CASH
AGREEMENTS RELATING TO OUR DEBT RESTRICT OUR ABILITY TO MAKE CASH
DISTRIBUTIONS, WHICH COULD ADVERSELY AFFECT THE VALUE OF YOUR UNITS, AND TO
INCUR ADDITIONAL DEBT, WHICH MAY RESTRICT OUR ABILITY TO GROW THROUGH
ACQUISITIONS.
Our debt agreements relating to our First Mortgage Notes, our Revolving
Credit Facility and our Senior Notes contain various restrictions. Most
importantly,
- our First Mortgage Notes restrict the amount of new debt that our
operating partnership can issue and may restrict its operations;
- our Revolving Credit Facility restricts the amount of new debt that we and
our operating partnership can issue and may restrict our operations and
those of our operating partnership; and
- our First Mortgage Notes and the Revolving Credit Facility restrict cash
distributions that the operating partnership can make to us.
This is important because the operating partnership is our primary source of
cash. Therefore, restrictions on the operating partnership's ability to make
distributions to us may reduce our ability to make distributions to you. In
addition, the operating partnership will be prevented from making distributions
to us if there is a continuing default on any of its debt.
RISKS RELATED TO TAXES
You are encouraged to read "Tax Considerations" for a more complete
discussion of the expected and potential material income tax consequences of
owning and disposing of Class A Common Units.
WE MAY BE CLASSIFIED AS AN ASSOCIATION TAXABLE AS A CORPORATION RATHER THAN AS
A PARTNERSHIP, WHICH WOULD SUBSTANTIALLY REDUCE THE VALUE OF OUR CLASS A
COMMON UNITS.
Our classification as an association taxable as a corporation would result
in a material reduction in the anticipated cash flow and after-tax return to
you, and this would likely result in a substantial reduction in the value of
your Class A Common Units. If we are classified as an association taxable as a
corporation, items of our income, gain, loss, deduction and credit would not
flow through to you. In addition, we would have to pay U.S. federal income tax
on our net income at corporate rates. Distributions that we make to you would be
treated as dividend income to the extent of current or accumulated earnings and
profits, as calculated for U.S. federal income tax purposes. In the absence of
earnings and profits, those distributions would be treated as a nontaxable
return of capital to the extent of your adjusted tax basis in your units or as
capital gain after your tax basis in your units is reduced to zero.
Fulbright & Jaworski L.L.P., our legal counsel, has rendered its opinion
that, under current law, Enbridge Energy will be classified as a partnership for
U.S. federal income tax purposes. Counsel's opinion is based on certain factual
representations made by the general partner. If any of those facts are
incorrect, particularly facts relating to the nature of our gross income,
Enbridge Energy could be classified as an association taxable as a corporation
for U.S. federal income tax purposes. Please read "Tax
Considerations--Partnership Status" elsewhere in this prospectus.
IF THE IRS DOES NOT RESPECT OUR CURATIVE TAX ALLOCATIONS, YOUR AFTER-TAX
RETURN ON YOUR INVESTMENT IN OUR CLASS A COMMON UNITS WOULD BE ADVERSELY
AFFECTED.
Our partnership agreement allows curative allocations of income, deduction,
gain and loss by us to account for differences between the tax basis and fair
market value of property at the time the property is contributed or deemed
contributed to Enbridge Energy and to account for differences between the fair
market value and book basis of our assets existing at the time of issuance of
any Class A Common Units. If the Internal Revenue Service, which we refer to as
the "IRS," does not respect our curative allocations, ratios of taxable income
to cash distributions received by the holders of Class A Common Units will be
materially higher than any estimates in any accompanying prospectus supplement.
8
YOUR TAX LIABILITY COULD EXCEED YOUR CASH DISTRIBUTIONS OR PROCEEDS FROM SALES
OF CLASS A COMMON UNITS.
You will be required to pay U.S. federal income tax and, in some cases,
state and local income taxes on your allocable share of our income, even if you
do not receive cash distributions from us. You will not necessarily receive cash
distributions equal to the tax on your allocable share of our taxable income.
Further, if we have a large amount of nonrecourse liabilities, you may incur a
tax liability that is greater than the money you receive when you sell your
Class A Common Units. See "Tax Considerations--Allocation of Enbridge Energy's
Income, Gain, Losses, Deductions and Credits" and "Tax
Considerations--Disposition of Class A Common Units."
A UNITHOLDER MAY BE REQUIRED TO FILE TAX RETURNS WITH AND PAY INCOME TAXES TO
THE STATES WHERE WE OWN PROPERTY AND CONDUCT BUSINESS.
In some cases, a unitholder may be required to file income tax returns with
and pay income taxes to the states in which we own property and conduct
business, which are currently Illinois, Indiana, Michigan, Minnesota, Montana,
New York, North Dakota and Wisconsin. In the future, we may acquire property or
do business in other states or in foreign jurisdictions. In addition to tax
liabilities to such state and foreign jurisdictions, the owner of a Class A
Common Unit may also incur tax and filing responsibilities to localities within
such jurisdictions.
OWNERSHIP OF CLASS A COMMON UNITS RAISES ISSUES FOR TAX-EXEMPT ENTITIES AND
OTHER INVESTORS.
An investment in our Class A Common Units by tax-exempt entities, including
employee benefit plans, individual retirement accounts, Keogh plans and other
retirement plans, regulated investment companies and foreign persons raises
issues unique to them. Virtually all of the income derived from our Class A
Common Units by a tax-exempt entity will be "unrelated business taxable income"
and will be taxable to the tax-exempt entity. Additionally, no significant part
of our gross income will be considered qualifying income for purposes of
determining whether a unitholder qualifies as a regulated investment company.
Further, a unitholder who is a nonresident alien, a foreign corporation or other
foreign person will be required to file a federal income tax return and pay tax
on his share of our taxable income because he will be regarded as being engaged
in a trade or business in the United States as a result of his ownership of a
Class A Common Unit.
OUR REGISTRATION WITH THE SECRETARY OF THE TREASURY AS A "TAX SHELTER" MAY
INCREASE YOUR RISK OF AN IRS AUDIT.
Because we are a registered "tax shelter" with the Secretary of the
Treasury, a unitholder may face an increased risk of an IRS audit resulting in
taxes payable on our income as well as income not related to us. We could be
audited by the IRS and adjustments to our income or losses could be made. Any
unitholder owning less than a 1% profit interest in us has very limited rights
to participate in the income tax and audit process. Further, any adjustments in
our tax returns will lead to adjustments in the unitholders' tax returns and may
lead to audits of unitholders' tax returns and adjustments of items unrelated to
us. Each unitholder is responsible for any tax owed as the result of an
examination of his personal tax return.
OUR TREATMENT OF A PURCHASER OF CLASS A COMMON UNITS AS HAVING THE SAME TAX
BENEFITS AS THE SELLER COULD BE CHALLENGED, RESULTING IN A REDUCTION IN VALUE
OF THE CLASS A COMMON UNITS.
Because we cannot match transferors and transferees of Class A Common Units,
we are required to maintain the uniformity of the economic and tax
characteristics of these units in the hands of the purchasers and sellers of
these units. We do so by adopting certain depreciation conventions that do not
conform with all aspects of the Treasury regulations. An IRS challenge to these
conventions could adversely affect the tax benefits to you of ownership of the
Class A Common Units and could have a negative impact on their value. Please
read "Tax Considerations--Uniformity of Class A Common Units."
9
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information with the
SEC. You may read and copy any materials we file at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding us and other issuers that file electronically with the SEC. Our SEC
filings are also available at our website at http://www.enbridgepartners.com.
You can also obtain information about us at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we have
filed with the SEC, which means that we can disclose important information to
you without actually including the specific information in this prospectus by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. Information that we file later with the
SEC will automatically update and may replace information in this prospectus and
information previously filed with the SEC. We incorporate by reference the
documents listed below and any future filings made with the SEC under Sections
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until we sell
all of the Class A Common Units offered by this prospectus.
- Our Annual Report on Form 10-K for the fiscal year ended December 31, 2000
(the "Form 10-K"), filed March 30, 2001 (File No. 1-10934);
- Our Current Report on Form 8-K filed March 13, 2001 (File No. 1-10934);
- Our Current Report on Form 8-K filed May 7, 2001 (File No. 1-10934);
- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
filed May 15, 2001 (File No. 1-10934);
- Our Current Report on Form 8-K filed May 17, 2001 (File No. 1-10934);
- Our Current Report on Form 8-K filed June 4, 2001 (File No. 1-10934);
- Our Current Report on Form 8-K filed June 13, 2001 (File No. 1-10934);
- Our Amended Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2000 (the "Form 10-K/A"), filed July 12, 2001 (File
No. 1-10934);
- The description of the Class A Common Units contained in our Registration
Statement on Form 8-A, dated November 14, 1991, as amended by Amendment
No. 1 to Form 8-A on Form 8, filed December 9, 1991, Amendment No. 2 on
Form 8-A/A, filed May 2, 1997 and Amendment No. 3 on Form 8-A/A, filed
August 8, 2001 (File No. 1-10934);
- Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
filed August 14, 2001 (File No. 1-10934);
- Our Current Report on Form 8-K filed September 5, 2001 (File
No. 1-10934); and
- Our Second Amended Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2000, filed October 9, 2001 (File No. 1-10934).
We will provide you a copy of these filings, at no cost, if you contact us at:
Mr. Tracy Barker
Investor Relations
800-525-3999
403-231-5949
investor@enbridgepartners.com
10
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, any accompanying
prospectus supplement and the documents we incorporate by reference contain
forward-looking statements. These statements use forward-looking words such as
"may," "will," "anticipate," "believe," "expect," "project" or other similar
words. These statements discuss goals, intentions and expectations as to future
trends, plans, events, results of operations or financial condition or state
other "forward-looking" information. These statements reflect Enbridge Energy's
current views with respect to future events and are subject to various risks,
uncertainties and assumptions including, but not limited, to the price of crude
oil, the supply of western Canadian crude oil, the willingness of western
Canadian producers to ship on the Enbridge Energy System, governmental
regulatory policies, competitive factors, our ability to acquire other companies
and assets and other conditions. These factors and conditions are subject to
risks and uncertainties that may cause our actual results to differ
substantially from those expressed or implied by these statements. When
considering these forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this prospectus, any prospectus
supplement and the documents we have incorporated by reference. We will not
update these statements unless the securities laws require us to do so.
THE PARTNERSHIP
We are a publicly traded Delaware limited partnership that owns and operates
a regulated crude oil and natural gas liquids pipeline business in the United
States. Enbridge Energy Company, Inc., an indirect wholly owned subsidiary of
Enbridge, serves as our general partner. We and Enbridge transport crude oil and
other liquid hydrocarbons for our customers through the world's longest liquid
petroleum pipeline system. We own the United States portion of the System and a
subsidiary of Enbridge, Enbridge Pipelines, owns the Canadian portion of the
System. The System is the primary transporter of crude oil from western Canada
to the United States and is the only pipeline system that transports crude oil
from western Canada to eastern Canada. The System serves all the major refining
centers in the Great Lakes region of the United States, as well as the Province
of Ontario, Canada.
Crude oil shipments tendered to the System originate primarily in oil fields
in the western Canadian provinces of Alberta, Saskatchewan, Manitoba and British
Columbia and in the Northwest Territories of Canada. Shipments reach the System
through facilities owned and operated by third parties or affiliates of
Enbridge. Deliveries from the System are currently made in the prairie provinces
of Canada and, through the Enbridge Energy System, to the Great Lakes and
Midwest regions of the United States and to Ontario, Canada. These deliveries
are made principally to refineries either directly or through connecting
pipelines of other companies or affiliates of Enbridge.
The System extends from Edmonton, Alberta, across the Canadian prairies to
the United States border near Neche, North Dakota. From Neche, the System
continues on to Superior, Wisconsin, where it splits into two branches with one
branch traveling through the upper Great Lakes region and the other through the
lower Great Lakes region of the United States. Both branches reenter Canada near
Marysville, Michigan. From Marysville, the System continues on to Toronto,
Ontario, with lateral lines to Nanticoke, Ontario and the Buffalo, New York
area. The System is approximately 3,100 miles long, including the Enbridge
Energy System in the United States, which is approximately 1,880 miles long.
Enbridge handles all scheduling of shipments, including routes and storage,
in coordination with us. The Enbridge Energy System includes 15 connections to
other pipelines and refineries at various locations in the United States,
including the refining areas in and around Minneapolis-St. Paul, Minnesota,
Chicago, Illinois, Detroit, Michigan, Toledo, Ohio, Buffalo, New York and
Patoka/Wood River, Illinois. The Enbridge Energy System has three main terminals
at Clearbrook, Minnesota, Superior, Wisconsin and Griffith, Indiana. The
terminals are used to gather crude oil prior to injection into the Enbridge
Energy System and to provide tankage in order to allow for more flexible
scheduling of oil movements.
11
USE OF PROCEEDS
Unless otherwise specified in a related prospectus supplement, the net
proceeds received by us from the sale of the Class A Common Units will be used
for general partnership purposes, including the operation and expansion of our
pipeline system, acquisitions and the repayment of debt incurred for these
purposes. As of the date of this prospectus, we have not definitively identified
any material acquisitions of businesses or assets for which we may use a portion
of the net proceeds of this offering. We anticipate that any businesses or
assets that we acquire in the future would be complementary to our existing
businesses and have comparable risk profiles.
CASH DISTRIBUTIONS
GENERAL
One of our principal objectives is to generate cash from our operations and
to distribute Available Cash to our unitholders and our general partner.
"Available Cash" means generally, with respect to any calendar quarter, the sum
of all of our cash receipts plus net reductions to cash reserves less the sum of
all of our cash disbursements and net additions to cash reserves. The full
definition of Available Cash is set forth in "--Certain Defined Terms." The
definition of Available Cash permits our general partner to establish cash
reserves that it determines are necessary or appropriate to provide for the
proper conduct of our business (including cash reserves for future capital
expenditures), to stabilize distributions of cash to our unitholders and the
general partner or as necessary to comply with the terms of any of our
agreements or obligations. The general partner has broad discretion in
establishing reserves, and its decisions regarding reserves could have a
significant impact on the amount of Available Cash distributed to our
unitholders and the general partner. The timing of additions and reductions to
reserves may impact the amount of incentive distributions payable to the general
partner and may result in the realization of taxable income by unitholders
before funds related to that income are distributed.
We will distribute 100% of our Available Cash as of the end of each calendar
quarter on or about 45 days after the end of such calendar quarter to
unitholders of record on the record date and to the general partner. The record
date will generally be the last day of the month immediately following the close
of a calendar quarter.
Cash distributions will be characterized as either distributions of Cash
from Operations or Cash from Interim Capital Transactions. The distinction is
important because it affects the amount of cash that is distributed to the
unitholders relative to the general partner. To the extent a distribution is
Cash from Interim Capital Transactions, the general partner may receive a
smaller share. Please read "--Quarterly Distributions of Available
Cash--Distributions of Cash from Operations" and "--Quarterly Distributions of
Available Cash--Distributions of Cash from Interim Capital Transactions" below.
Cash from Operations, which is determined on a cumulative basis, generally
means the $54 million cash balance we had on the date of our initial public
offering in 1991, plus all cash generated by our operations, after deducting
related cash expenditures, reserves and certain other items.
Cash from Interim Capital Transactions is generated by:
- borrowings and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the
ordinary course of business);
- sales of units or other equity interests for cash; and
- sales or other dispositions of any assets for cash (other than inventory,
accounts receivable and other current assets and assets disposed of in the
ordinary course of business).
The full definitions of Cash from Operations, Interim Capital Transactions
and Cash from Interim Capital Transactions are set forth in "--Certain Defined
Terms."
Cash distributions will be treated as distributions of Cash from Operations
if the sum of all amounts distributed to the unitholders and to the general
partner (including any incentive distributions) does not
12
exceed the aggregate amount of all Cash from Operations from December 27, 1991
(the date Enbridge Energy commenced operations) through the end of the calendar
quarter prior to such distribution. Any cash distributed in excess of that
amount will be deemed to constitute Cash from Interim Capital Transactions and
distributed accordingly. Please read "--Quarterly Distributions of Available
Cash" and "--Distributions of Cash from Interim Capital Transactions" and
"--Adjustment of the Target Distributions."
If we distribute cash that is Cash from Interim Capital Transactions in an
aggregate amount per unit equal to $21.50 (the offering price of the Class A
Common Units in our initial public offering in December 1991), the distinction
between Cash from Operations and Cash from Interim Capital Transactions will
cease, and all cash will, in general, be distributed as Cash from Operations.
Please read "--Quarterly Distributions of Available Cash" and "--Distributions
of Cash from Interim Capital Transactions." To date, we have not distributed
Cash from Interim Capital Transactions. We do not anticipate distributing
significant amounts of Cash from Interim Capital Transactions in the future.
Capital expenditures that are necessary to maintain our pipeline system (as
opposed to expanding or improving it) will reduce the amount of Cash from
Operations. Therefore, if the general partner determines that a substantial
portion of our capital expenditures were necessary to maintain our pipeline
system, the amount of cash distributions that are deemed to constitute Cash from
Operations might decrease and the amount of cash distributions that are Cash
from Interim Capital Transactions might increase.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
We will distribute to our unitholders and our general partner 100% of our
Available Cash for each quarter. The amount of cash distributed will depend on
our future performance.
DISTRIBUTIONS OF CASH FROM OPERATIONS
Quarterly distributions of Cash from Operations will be divided as follows:
FIRST, 98% to all unitholders, pro rata, and 2% to the general partner,
until all unitholders have received distributions of $0.59 per unit for such
quarter (the "First Target Distribution");
SECOND, 85% to all unitholders, pro rata, and 15% to the general partner,
until all unitholders have received distributions of $0.70 per unit for such
quarter (the "Second Target Distribution");
THIRD, 75% to all unitholders, pro rata, and 25% to the general partner,
until all unitholders have received distributions of $0.99 per unit for such
quarter (the "Third Target Distribution"); and
THEREAFTER, 50% to all unitholders, pro rata, and 50% to the general
partner.
The following table illustrates the allocation of Cash from Operations among
the unitholders and the general partner for each quarter.
MARGINAL PERCENTAGE INTEREST
IN DISTRIBUTION
-----------------------------
QUARTERLY DISTRIBUTION UNITHOLDERS GENERAL PARTNER
-------------------------- ----------- ---------------
First Target Distribution......... up to $0.59 98% 2%
Second Target Distribution........ over $0.59 and up to $0.70 85% 15%
Third Target Distribution......... over $0.70 and up to $0.99 75% 25%
Thereafter........................ over $0.99 50% 50%
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Cash from Interim Capital Transactions will be made 98% to
all unitholders, pro rata, and 2% to the general partner until all distributions
of Cash from Interim Capital Transactions since our initial public offering
aggregate $21.50 per unit. Thereafter, all distributions will be distributed as
if they
13
were Cash from Operations, and because the Target Distributions will have been
reduced to zero, as described under "--Adjustment of the Target Distributions,"
the general partner's share of distributions of Available Cash will increase, in
general, to 50% of all distributions of Available Cash. Notwithstanding the
foregoing, if the Target Distributions have been reduced to zero as a result of
distributions of Cash from Interim Capital Transactions and the holders of the
Class A Common Units have ever failed to receive the First Target Distribution,
distributions will first be made 98% to all holders of Class A Common Units and
2% to the general partner until there has been distributed in respect of each
Class A Unit then outstanding (taking into account all prior distributions of
Available Cash constituting Cash from Operations) Available Cash constituting
Cash from Operations since inception in an amount equal to the First Target
Distribution for all periods since inception. To date, the holders of the
Class A Common Units have always received at least the First Target
Distribution.
Distributions of Cash from Interim Capital Transactions will not reduce
Target Distributions in the quarter in which they are distributed.
ADJUSTMENT OF THE TARGET DISTRIBUTIONS
The Target Distributions will be proportionately adjusted if any combination
or subdivision of units occurs (whether effected by a distribution payable in
units or otherwise). In addition, if a distribution is made of Cash from Interim
Capital Transactions, the Target Distributions will be adjusted downward by
multiplying each amount, as the same may have been previously adjusted, by a
fraction, the numerator of which is the Unrecovered Initial Unit Price (as
defined below) immediately after giving effect to such repayment and the
denominator of which is the Unrecovered Initial Unit Price immediately prior to
such repayment. The "Unrecovered Initial Unit Price" is the amount by which
$21.50 exceeds the aggregate per unit distributions of Cash from Interim Capital
Transactions on the Class A Common Units. If and when the Unrecovered Initial
Unit Price is zero, the Target Distributions each will have been reduced to
zero.
The Target Distributions may also be adjusted if legislation is enacted that
causes us to become taxable as a corporation or otherwise subjects us to
taxation as an entity for federal income tax purposes. In such event, the Target
Distributions for each quarter thereafter would be reduced to an amount equal to
the product of (i) each of the Target Distributions multiplied by (ii) one minus
the sum of (x) the effective federal income tax rate to which we are subject as
an entity (expressed as a fraction) plus (y) the effective overall state and
local income tax rate to which we are subject as an entity (expressed as a
fraction) for the taxable year in which such quarter occurs.
DISTRIBUTION OF CASH ON LIQUIDATION
When we dissolve or liquidate, our assets will be sold or otherwise disposed
of, and the capital account balances of the unitholders and the general partner
will be adjusted to reflect any resulting gain or loss. The proceeds of
liquidation will first be applied to the payment of our creditors in the order
of priority provided in our partnership agreement and by law and thereafter will
be distributed to the unitholders and the general partner in accordance with
their respective capital account balances, as adjusted.
Generally, the holders of Class A Common Units will have no preference over
the general partner or holders of Class B Units upon our dissolution and
liquidation and will instead be entitled to share with the general partner and
the holders of Class B Units in the remainder of our assets in proportion to
their respective capital account balances as adjusted as provided in our
partnership agreement. Any gain (or unrealized gain attributable to assets
distributed in kind) will be allocated among the unitholders and the general
partner as follows:
FIRST, to each unitholder and the general partner having a deficit balance
in its capital account to the extent of and in proportion to such deficit
balance;
SECOND, any remaining gain would be allocated 98% to all unitholders, pro
rata, and 2% to the general partner, until the capital account for each
Class A Unit is equal to the Unrecovered Capital (as defined below) in
respect of such Class A Unit;
14
THIRD, any then remaining gain would be allocated 98% to the holders of
Class B Units, pro rata, and 2% to the general partner until the capital
account for each Class B Unit is equal to the Unrecovered Capital in respect
of such Class B Unit;
FOURTH, any then remaining gain would be allocated 98% to all unitholders,
pro rata, and 2% to the general partner until the capital account for each
unit is equal to the sum of the Unrecovered Capital in respect of such unit
plus any cumulative arrearages then existing in the First Target
Distribution in respect of such unit for each quarter since inception;
FIFTH, any then remaining gain would be allocated 85% to all unitholders,
pro rata, and 15% to the general partner until the capital account for each
unit is equal to the sum of:
- the Unrecovered Capital in respect of such unit, plus
- any cumulative arrearages then existing in the First Target Distribution
in respect of such unit, plus
- the excess of the Second Target Distribution over the First Target
Distribution for each quarter since inception, less
- the amount of any distributions of Available Cash constituting Cash from
Operations in respect of such unit in excess of the First Target
Distribution that were distributed 85% to the unitholders pro rata and 15%
to the general partner for each quarter since inception
(the sum of the second and third bullet points less the fourth bullet point
being the "Target Amount");
SIXTH, any then remaining gain would be allocated 75% to all unitholders,
pro rata, and 25% to the general partner, until the capital account for each
unit is equal to the sum of:
- the Unrecovered Capital in respect of each unit, plus
- the Target Amount, plus
- the excess of the Third Target Distribution over the Second Target
Distribution for each quarter since inception, less
- the amount of any distributions of Available Cash constituting Cash from
Operations in respect of such unit in excess of the Second Target
Distribution that were distributed 75% to the unitholders pro rata and 25%
to the general partner for each quarter since inception; and
THEREAFTER, any then remaining gain would be allocated 50% to all
unitholders, pro rata, and 50% to the general partner.
Unrecovered Capital with respect to a unit means, in general, the amount
equal to the excess of (i) $21.50 over (ii) the aggregate per unit distributions
of Cash from Interim Capital Transactions in respect of such unit. Any loss or
unrealized loss will be allocated to the unitholders and the general partner
first in proportion to the positive balances in the unitholders' and general
partner's capital accounts until all such balances are reduced to zero, and,
thereafter, to the general partner.
CERTAIN DEFINED TERMS
The following terms have the respective meanings set forth below:
"Available Cash" means, with respect to any calendar quarter, THE SUM OF:
(a) all cash receipts of Enbridge Energy during such quarter from all
sources (including distributions of cash received from the Operating
Partnership); and
(b) any reduction in cash reserves established in prior quarters (either
by reversal or utilization),
LESS THE SUM OF:
(aa) all cash disbursements of Enbridge Energy during such quarter
(excluding cash distributions to unitholders and to the general partner);
15
(bb) any cash reserves established in such quarter in such amounts as
the general partner shall determine to be necessary or appropriate in its
reasonable discretion
- to provide for the proper conduct of the business of Enbridge Energy
(including cash reserves for possible rate refunds or future capital
expenditures) or
- to provide funds for distributions with respect to any of the next four
quarters; and
(cc) any other cash reserves established in such quarter in such amounts
as the general partner determines in its reasonable discretion to be
necessary because the distribution of such amounts would be prohibited by
applicable law or by any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which Enbridge Energy is a
party or by which it is bound or its assets are subject.
Taxes paid by Enbridge Energy on behalf of, or amounts withheld with respect
to, all or less than all of the unitholders shall not be considered cash
disbursements of Enbridge Energy that reduce "Available Cash," but the payment
or withholding thereof shall be deemed to be a distribution of "Available Cash"
to such unitholders. Alternatively, in the discretion of the general partner,
such taxes (if pertaining to all unitholders) may be considered to be cash
disbursements of Enbridge Energy that reduce "Available Cash," but the payment
or withholding thereof shall not be deemed to be a distribution of "Available
Cash" to unitholders. Notwithstanding the foregoing, "Available Cash" shall not
include any cash receipts or reductions in reserves or take into account any
disbursements made or reserves established after commencement of the dissolution
and liquidation of Enbridge Energy.
"Cash from Interim Capital Transactions" means cash distributed by Enbridge
Energy in excess of the cumulative amount that is Cash from Operations.
"Cash from Operations" means, at any date but prior to the commencement of
the dissolution and liquidation of Enbridge Energy, on a cumulative basis, the
cash balance of Enbridge Energy at December 27, 1991 (excluding any cash on hand
from the exercise of the Underwriters' over-allotment option), plus all cash
receipts of Enbridge Energy from its operations (excluding any cash proceeds
from Interim Capital Transactions) during the period since December 27, 1991
through such date less the sum of:
- all cash operating expenditures of Enbridge Energy, including, without
limitation, taxes paid by Enbridge Energy as an entity after December 27,
1991;
- all cash debt service payments of Enbridge Energy during such period
(other than payments or prepayments of principal and premium required by
reason of loan agreements (including covenants and default provisions
therein) or by lenders, in each case in connection with sales or other
dispositions of assets or made in connection with refinancing or refunding
of indebtedness, provided that any payment or prepayment of principal,
whether or not then due, shall be determined at the election and in the
discretion of the general partner to be refunded or refinanced by any
indebtedness incurred or to be incurred by Enbridge Energy simultaneously
with or within 180 days prior to or after such payment or prepayment to
the extent of the principal amount of such indebtedness so incurred);
- all cash capital expenditures of Enbridge Energy during such period
necessary to maintain the service capability of our pipeline system;
- an amount equal to the incremental revenues collected pursuant to a rate
increase that are, at such date, subject to possible refund and for which
the general partner has established a cash reserve;
- any cash reserves outstanding as of such date that the general partner
determines in its reasonable discretion to be necessary or appropriate to
provide for the future cash payment of items of the type referred to in
(a) through (c) above; and
- any cash reserves outstanding as of such date that the general partner
determines to be necessary or appropriate in its reasonable discretion to
provide funds for distributions with respect to any one or
16
more of the next four quarters, all as determined on a consolidated basis
after elimination of intercompany items and the general partner interest
of the general partner in the Operating Partnership.
Taxes paid by Enbridge Energy on behalf of, or amounts withheld with respect
to, all or less than all of the unitholders shall not be considered cash
operating expenditures of Enbridge Energy that reduce "Cash from Operations,"
but the payment or withholding thereof shall be deemed to be a distribution of
Available Cash to such unitholders. Alternatively, in the discretion of the
general partner, such taxes (if pertaining to all unitholders) may be considered
to be cash disbursements of Enbridge Energy that reduces "Cash from Operations,"
but the payment or withholding thereof shall not be deemed to be a distribution
to unitholders.
"Interim Capital Transactions" means in general, extraordinary transactions
that have an impact on the capital of Enbridge Energy, which are defined in the
Partnership Agreement to be:
- borrowings and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the
ordinary course of business) by Enbridge Energy;
- sales of equity interests by Enbridge Energy; and
- sales or other voluntary or involuntary dispositions of any assets of
Enbridge Energy (other than sales or other dispositions of inventory in
the ordinary course of business, sales or other dispositions of other
current assets including accounts receivable or sales or other
dispositions of assets as part of normal retirements or replacements), in
each case prior to the commencement of the dissolution and liquidation of
Enbridge Energy.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Certain conflicts of interest could arise as a result of the relationships
among us, the general partner and Enbridge and its affiliates. The general
partner makes all decisions relating to us. The following officers of the
general partner who make such decisions are also officers of Enbridge and its
affiliates:
- D.C. Tutcher (President);
- L.H. DeBriyn (Vice President, Special Projects);
- G. L. Sevick (Vice President, Operations);
- M.A. Maki (Controller);
- J.K. Whelen (Treasurer);
- J.L. Balko (Chief Accountant); and
- C. Kaitson (Corporate Secretary).
In addition, Enbridge indirectly owns all of the capital stock of the
general partner. The directors and officers of Enbridge have fiduciary duties to
manage Enbridge, including its investments in its affiliates (including the
general partner), in a manner beneficial to the shareholders of Enbridge. In
general, the general partner has a fiduciary duty to manage us in a manner
beneficial to the unitholders. However, our partnership agreement allows the
general partner to take into account the interests of parties in addition to us
and the unitholders in resolving conflicts of interest. Our partnership
agreement also may restrict the remedies available to unitholders for actions
taken that might otherwise constitute breaches of fiduciary duty. The duties of
the directors and officers of the general partner and Enbridge to their
shareholders and affiliates may, therefore, conflict with the duties of the
general partner to the unitholders.
Potential conflicts of interest could arise in the situations described
below, among others:
(a) The amount of cash expenditures, borrowings and reserves in any
quarter may affect whether or the extent to which there is sufficient Cash
from Operations to make distributions to the unitholders. In addition, the
general partner's determination to make a capital expenditure to maintain
our pipeline system or its determination as to what portion of a capital
expenditure was
17
made to maintain our pipeline system may have the same effect. Borrowings
and issuances of additional units also increase the amount of Available Cash
and, in the case of working capital borrowings, the amount of Cash from
Operations. The Partnership Agreement provides that any borrowings by us, or
the approval thereof by the general partner, will not constitute a breach of
any duty by the general partner to us or the unitholders, including
borrowings that have the purpose or effect of enabling the general partner
to receive incentive distributions. Further, any actions taken by the
general partner consistent with the standards of reasonable discretion set
forth in the definitions of Available Cash, Cash from Operations and Interim
Capital Transactions will not breach any duty of the general partner to us
or the unitholders. Please read "Cash Distributions."
(b) Under the terms of our partnership agreement and the partnership
agreement of the Operating Partnership, the general partner will exercise
its discretion in managing our business. As a result, the general partner is
not restricted from paying Enbridge or its affiliates for any services
rendered on terms that are fair and reasonable to us. The general partner
will determine which of its direct or indirect costs (including costs
allocated to the general partner by Enbridge and its affiliates) are
reimbursable by us. Employees of Enbridge and its affiliates currently
provide services to the general partner for our benefit pursuant to a
Services Agreement between Enbridge (U.S.) Inc., an affiliate of Enbridge,
and the general partner. Substantially all of the shipments of crude oil and
natural gas liquids delivered by the Enbridge Energy System originate from
the Enbridge System, and Enbridge handles all scheduling of shipments
(including routes and storage) in coordination with us.
(c) The general partner has certain varying percentage interests and
priorities with respect to Available Cash. Please read "Cash Distributions."
The timing and amount of cash receipts may be affected by various
determinations made by the general partner under our partnership agreements
(including, for example, those relating to the timing of any capital
transaction, the establishment and maintenance of reserves, the timing of
expenditures, the incurrence of debt and other matters).
(d) Enbridge and its affiliates may from time to time offer to us the
opportunity to acquire selected mature assets held by U.S. subsidiaries of
Enbridge. The terms of any sales of assets from Enbridge or its affiliates
to us will involve a conflict of interest. The general partner intends that
any transactions will be subject to negotiation and approval by a special
committee of independent members of our general partner's board of
directors.
(e) Neither of our partnership agreements nor any of the other
contemporaneous agreements, contracts and arrangements between us, on the
one hand, and the general partner, Enbridge and its affiliates, on the other
hand, were or will be the result of arm's-length negotiations. The interests
of the unitholders have not been represented by separate legal counsel in
connection with the preparation of such agreements, contracts or
arrangements.
(f) The decision whether we or the general partner should purchase
outstanding units at any time may involve the general partner or Enbridge in
a conflict of interest.
(g) Enbridge and its affiliates (other than the general partner) are
expressly permitted by the terms of our partnership agreement to engage in
any businesses and activities, including in certain instances, those in
direct competition with us, except as described below under "--Restrictions
on General Partner Activity."
(h) As a matter of practice and whenever possible, the general partner
limits the liability under our contractual arrangements to all assets, with
the other party to have no recourse against the general partner or its
assets other than its interest in us. In some circumstances, that may result
in the terms of the transaction being less favorable to us than would
otherwise be the case. Our partnership agreement provides that such action
does not constitute a breach of the general partner's fiduciary obligations.
(i) We are, and may in the future be, a party to various agreements to
which the general partner and its affiliates, including Enbridge, are also
parties and that provide certain benefits to us. However,
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unitholders do not have the right under these agreements to enforce directly
the obligations of the general partner or of those affiliates in our favor.
Therefore, the unitholders must depend on the general partner to enforce
those obligations, including obligations that it or its affiliates may owe
to Enbridge Energy.
RESTRICTIONS ON GENERAL PARTNER ACTIVITY
The general partner's activities are restricted. The sole business of the
general partner is to act as general partner of us and our Operating
Partnership, to manage certain subsidiaries and to undertake ancillary
activities. Further, our partnership agreement provides that no subsidiary of
the general partner will engage in or acquire any business that is in direct
material competition with the business as conducted at the time of our formation
in 1991, subject to the exceptions set forth below. None of the instruments to
which we or the Operating Partnership is a party imposes any restriction on the
ability of Enbridge and its affiliates, other than the general partner, to
engage in any business. Enbridge agreed, however, in a separate agreement (the
"Distribution Support Agreement") that for so long as an affiliate of Enbridge
is the general partner of us and our Operating Partnership, Enbridge and its
other subsidiaries will not engage in or acquire any business that is in direct
material competition with our business as conducted at the time of our formation
in 1991, subject to the following important exceptions:
FIRST, there is no restriction on the ability of Enbridge and its other
subsidiaries to continue to engage in businesses, including the normal
development of those businesses in the future, in which they were engaged as
of December 1991 and that are or may be in the future in competition with
us;
SECOND, the scope of the competition restriction is limited geographically
to those routes and products in respect of which we provided transportation
as of December 1991. For example, Enbridge and its other subsidiaries would
be permitted to acquire a pipeline business in which transportation is made
over routes not served by us or involving products not transported by us as
of December 1991;
THIRD, Enbridge and its other subsidiaries may acquire any competitive
business as part of a larger acquisition so long as the majority of the
value of the business or assets acquired, in Enbridge's judgement, is not
attributable to the competitive business; and
FOURTH, Enbridge and its other subsidiaries may acquire any competitive
business if it is first offered for acquisition to us and we fail to
approve, after submission to a unitholder vote, the making of such
acquisition. The approval of the holders of a majority of the outstanding
units (excluding any units held by the general partner and its affiliates)
is required for us to exercise our right to accept such an offer.
Except as specified above, Enbridge and its affiliates are not restricted by
the terms of the Distribution Support Agreement or our partnership agreements
from engaging in businesses that may be in competition with us. In addition, our
partnership agreement specifically states that it will not constitute a breach
of the general partner's fiduciary duty for Enbridge or its other subsidiaries
to take advantage of any business opportunity in preference to or to the
exclusion of us, except as specifically limited by the restrictions described
above.
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER
The general partner is generally accountable to us and the unitholders as a
fiduciary. Consequently, the general partner must exercise good faith and
integrity in handling our assets and affairs. In contrast to the relatively
well-developed state of the law concerning fiduciary duties owed by officers and
directors to the shareholders of a corporation, the law concerning the duties
owed by general partners to the other partners and to their partnerships is
relatively undeveloped. The Delaware Revised Uniform Limited Partnership Act
(the "Delaware Act") provides that Delaware limited partnerships may, in their
partnership agreements, restrict or expand the fiduciary duties that might
otherwise be applied by a court in analyzing the standard of duty owed by
general partners to limited partners. Our partnership agreement, as permitted by
the Delaware Act, contains various provisions that have the effect of
restricting the
19
fiduciary duties that might otherwise be owed by the general partner to us and
our partners. In addition, holders of Class A Common Units are deemed to have
consented to certain actions and conflicts of interest that might otherwise be
deemed a breach of fiduciary or other duties under state law.
Our partnership agreement provides that whenever a conflict of interest
arises between the general partner or its affiliates, on the one hand, and us or
any unitholder, on the other hand, the general partner will be authorized, in
resolving such conflict or determining such action, to consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices, if applicable, generally accepted
accounting or engineering practices or principles and such additional factors as
the general partner determines in its sole discretion to be relevant, reasonable
or appropriate under the circumstances. The same considerations will apply
whenever our partnership agreement requires the general partner to act in a
manner that is fair and reasonable to us or the unitholders. Thus, unlike the
strict duty of a trustee who must act solely in the best interests of his
beneficiary, our partnership agreement permits the general partner to consider
the interests of all parties to a conflict of interest, including the interests
of the general partner and its affiliates, including Enbridge. Our partnership
agreement also provides that in certain circumstances the general partner will
act in its sole discretion, in good faith or pursuant to other appropriate
standards.
Our partnership agreement also provides that any standard of care and duty
imposed on the general partner will be modified, waived or limited as required
to permit the general partner to act under our partnership agreement and to make
any decision pursuant to the authority prescribed in our partnership agreement
so long as such action is reasonably believed by the general partner to be in
our best interests. Further, our partnership agreement provides that the general
partner will not be liable for monetary damages to us or the unitholders for
errors of judgement or for any other acts or omissions if the general partner
acted in good faith. We are required, under the terms of our partnership
agreement, to indemnify the general partner and its officers, directors,
employees and agents against liabilities, costs and expenses, if the general
partner or such persons acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, our best interests and, with respect to
any criminal proceeding, had no reasonable cause to believe their conduct was
unlawful. This indemnification provision could include indemnification of the
general partner for its negligent acts.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The fiduciary obligations of general partners is a developing area of the
law. The general partner has not obtained an opinion of counsel covering the
provisions set forth in our partnership agreement that purport to waive or
restrict fiduciary duties of the general partner.
TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax counsel
("Counsel"), and discloses all material U.S. federal income tax consequences to
individuals who are citizens or residents of the United States. Unless otherwise
noted, this section is Counsel's opinion with respect to the matters set forth
except for statements of fact and the representations and estimates of the
results of future operations of the general partner included in such discussion
as to which no opinion is expressed. Counsel bases its opinions on its
interpretation of the Internal Revenue Code of 1986, as amended (the "Code") and
Treasury Regulations issued thereunder, judicial decisions, the facts set forth
in this prospectus and factual representations made by the general partner.
Counsel's opinions are subject to both the accuracy of such facts and the
continued applicability of such legislative, administrative and judicial
authorities, all of which authorities are subject to changes and interpretations
that may or may not be retroactively applied.
We have not requested a ruling from the Internal Revenue Service ("IRS")
with respect to our classification as a partnership for federal income tax
purposes or any other matter affecting us.
20
Accordingly, the IRS may adopt positions that differ from Counsel's conclusions
expressed herein. We may need to resort to administrative or court proceedings
to sustain some or all of Counsel's conclusions, and some or all of these
conclusions ultimately may not be sustained. The costs of any contest with the
IRS will be borne directly or indirectly by some or all of the unitholders and
the general partner. Furthermore, neither we nor Counsel can assure you that the
tax consequences of investing in units will not be significantly modified by
future legislation or administrative changes or court decisions. Any such
modifications may or may not be retroactively applied.
It is impractical to comment on all aspects of federal, state, local and
foreign laws that may affect the tax consequences of the transactions
contemplated by the sale of units made by this prospectus and of an investment
in such units. Moreover, taxpayers such as tax-exempt entities, regulated
investment companies and insurance companies may be subject to rules and
regulations unique to their status or form of organization in addition to those
rules and regulations described herein. A prospective unitholder is encouraged
to consult his own tax advisor about the tax consequences peculiar to his
circumstances. Unless the context otherwise requires, references in this section
to "Enbridge Energy," "we" or "us" are references to both Enbridge Energy and
the Operating Partnership.
PARTNERSHIP STATUS
An organization that is classified for U.S. federal income tax purposes as a
partnership is not a taxable entity and incurs no U.S. federal income tax
liability. Instead, each partner of a partnership is required to take into
account in computing his U.S. federal income tax liability his allocable share
of income, gains, losses, deductions and credits of the partnership, regardless
of whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of cash distributed is in
excess of the partner's adjusted tax basis in his partnership interest.
Counsel is of the opinion that, under current law, Enbridge Energy and the
Operating Partnership will each be classified as a partnership for U.S. federal
income tax purposes. Counsel has rendered its opinion in reliance upon the
accuracy of the following representations made by the general partner:
1. Neither Enbridge Energy nor the Operating Partnership has elected or
will elect to be classified as an association taxable as a corporation.
2. Enbridge Energy and the Operating Partnership have been operated and
will be operated in accordance with applicable state partnership statutes
and their respective partnership agreements.
3. For each taxable year, more than 90% of the gross income of Enbridge
Energy has been and will be income that is "qualifying income" within the
meaning of Section 7704(d) of the Code.
Counsel's opinion as to the classification of Enbridge Energy is based on
the assumption that if the general partner ceases to be a general partner, any
successor general partner (or general partners) will make and satisfy such
representations. In this regard, if the general partner were to withdraw as a
general partner at a time when there is no successor general partner, or if the
successor general partner could not satisfy the above representations, then the
IRS might attempt to classify Enbridge Energy as an association taxable as a
corporation.
Counsel's opinion as to the partnership status of Enbridge Energy is based
principally upon its interpretation of Treasury Regulations under Section 7701
of the Code and Section 7704 of the Code, and upon the continuing accuracy of
the representations made by the general partner described above.
Section 7704 of the Code provides that publicly traded partnerships will,
generally, be taxed as corporations. Section 7704 of the Code provides an
exception to its general rule (the "Natural Resource Exception") in the case of
a publicly traded partnership if 90% or more of its gross income for every
taxable year consists of "qualifying income." Whether Enbridge Energy will
continue to meet the Natural Resource Exception is a matter to be determined by
Enbridge Energy's operations and the facts existing at the time of
determination. However, the general partner will use its best efforts to cause
Enbridge Energy to operate in such fashion as is necessary for Enbridge Energy
to continue to meet the Natural Resource Exception.
21
If Enbridge Energy fails to meet the Natural Resource Exception (other than
a failure determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery), Enbridge Energy will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day in which it fails to meet the Natural Resource
Exception) in return for stock in such corporation, and then distributed such
stock to the Partners in liquidation of their interests in Enbridge Energy. This
contribution and liquidation should be tax-free to unitholders and Enbridge
Energy, so long as Enbridge Energy, at such time, does not have liabilities in
excess of the adjusted tax basis of its assets. Thereafter, Enbridge Energy will
be treated as an association taxable as a corporation for U.S. federal income
tax purposes.
If Enbridge Energy is classified as a corporation for U.S. federal income
tax purposes, Enbridge Energy will be a separate taxpayer, and its income,
gains, losses, deductions and credits will be reported on its own U.S. federal
income tax return instead of being passed through to unitholders. Enbridge
Energy's net income will be subject to U.S. federal income tax at the applicable
corporate rate. Distributions made to unitholders generally will be treated as
either a taxable dividend to the extent of its current and accumulated earnings
and profits, as determined for U.S. federal income tax purposes, or, in the
absence of earnings and profits, as a nontaxable return of capital to the extent
of the unitholder's adjusted tax basis in his units and thereafter as taxable
capital gain, provided the units are held as "capital assets" within the meaning
of Section 1221 of the Code. Accordingly, the classification of Enbridge Energy
as an association taxable as corporation would result in a material reduction in
a unitholder's cash flow and after-tax return.
The discussion below is based on the assumption that Enbridge Energy and the
Operating Partnership will each be classified as a partnership for U.S. federal
income tax purposes. If that assumption proves to be erroneous, most, if not
all, of the tax consequences described below would not be applicable to
unitholders, and distributions to unitholders would be materially reduced.
LIMITED PARTNER STATUS
Unitholders who become limited partners pursuant to the provisions of our
partnership agreement will be treated as partners of Enbridge Energy for U.S.
federal income tax purposes.
Counsel is also of the opinion that (i) assignees who have executed and
delivered transfer applications and are awaiting admission as limited partners
and (ii) unitholders whose units are held in street name or by another nominee
will be treated as partners for U.S. federal income tax purposes. As there is no
direct authority addressing assignees of units who are entitled to execute and
deliver transfer applications and thereby become entitled to direct the exercise
of attendant rights, but who fail to execute and deliver such transfer
applications, Counsel's opinion does not extend to such persons. Furthermore, a
purchaser or other transferee of units who does not execute and deliver a
transfer application may not receive certain tax information or reports
furnished to unitholders unless the units are held in a nominee or street name
account and the nominee or broker has executed and delivered a transfer
application with respect to such units.
A beneficial owner of units whose units have been transferred to a "short
seller" to complete a short sale would appear to lose his status as a partner
with respect to such units for U.S. federal income tax purposes. Please read
"--Tax Treatment of Operations--Treatment of Units Loaned to Cover Short Sales."
Income, gain, losses, deductions and credits would not appear to be
reportable by a unitholder who is not a partner for U.S. federal income tax
purposes, and any cash distributions received by such a unitholder would be
fully taxable as ordinary income. These holders are encouraged to consult their
own tax advisors with respect to their status as partners in Enbridge Energy for
U.S. federal income tax purposes.
22
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No U.S. federal income tax will be paid by Enbridge Energy. Instead, each
unitholder will be required to report on his income tax return his allocable
share of income, gains, losses, deductions and credits without regard to whether
he receives cash distributions. Consequently, a unitholder may be allocated
income from Enbridge Energy even if he has not received a cash distribution.
Each unitholder will be required to report on his U.S. federal income tax return
his allocable share of our income, gain, losses, deductions and credits for our
taxable year ending with or within the taxable year of the unitholder.
TREATMENT OF ENBRIDGE ENERGY DISTRIBUTIONS
Cash distributions by Enbridge Energy generally will not be taxable to a
unitholder for U.S. federal income tax purposes to the extent of his adjusted
tax basis in his units immediately before the distribution. Cash distributions
in excess of a unitholder's adjusted tax basis generally will be considered to
be a gain from the sale or exchange of the units, taxable in accordance with the
rules described under "Disposition of Class A Common Units" below. Any reduction
in a unitholder's share of Enbridge Energy's liabilities for which no partner,
including the general partner, bears the economic risk of loss ("nonrecourse
liabilities") will be treated as a distribution of cash to such unitholder. To
the extent that distributions by Enbridge Energy cause a unitholder's "at risk"
amount, as determined under Section 465 of the Code, to be less than zero at the
end of any taxable year, he must recapture as income in the year of such
distributions any losses deducted in previous years. Please read "--Limitations
on Deductibility of Enbridge Energy Losses."
A decrease in a unitholder's percentage interest in Enbridge Energy because
of its issuance of additional units will decrease his share of Enbridge Energy's
nonrecourse liabilities, thus resulting in a corresponding deemed distribution
of cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his basis in his units, if such
distribution reduces the unitholder's share of Enbridge Energy's "unrealized
receivables" (including depreciation recapture) and/or "substantially
appreciated inventory items," as such terms are defined in Section 751 of the
Code (collectively, "Section 751 Assets"). Our partnership agreement provides
that recapture income will be allocated, to the extent possible, to the
unitholders who were allocated the deductions giving rise to the treatment of
gain as recapture income. Such allocations, along with allocations in accordance
with principles under Section 704(c) of the Code, should minimize the risk to a
holder of Class A Common Units of recognition of ordinary income under
Section 751(b) of the Code upon a non-pro rata distribution of cash or property.
The IRS may contend, however, that such a deemed exchange of Section 751 Assets
has occurred and therefore, ordinary income must be recognized under
Section 751(b) of the Code by unitholders on such a non-pro rata distribution of
cash or other property.
SPECIAL ALLOCATION OF GROSS INCOME
As provided in our partnership agreement, the holders of Class A Common
Units may be allocated amounts of gross income that would otherwise be allocated
to the holders of Class B Units (the "Special Allocation"). With respect to
taxable years 1999 and 2000, the amounts of the Special Allocations were
$11 million and $13 million, respectively. Thereafter, the Special Allocation to
be made each year will increase by $2 million every two years until the taxable
year beginning with 2012, for which the Special Allocation will be $25 million
for that year and for each taxable year thereafter. Notwithstanding the above,
the Special Allocation will not be made (or will be reduced) in any taxable year
to the extent that a purchaser of a Class A Common Unit in Enbridge Energy's
initial public offering would be allocated taxable income with respect to such
taxable year that would exceed 65% of the amount of cash distributed to such a
unitholder with respect to that taxable year. However, there can be no assurance
that the ratio of taxable income to cash distributed with respect to any taxable
year will not exceed 65%. Based on the current level of distributions, the
general partner anticipates that the Special Allocation will be used in its
23
entirety for the taxable year 2001. To the extent that the Special Allocation is
not made in any year, it cannot be carried forward.
TAX BASIS OF UNITS
A unitholder's initial tax basis in his units will be the amount paid for
the units plus his share of Enbridge Energy's nonrecourse liabilities. The
initial tax basis will be increased by the unitholder's share of Enbridge
Energy's income and by increases in his share of Enbridge Energy's nonrecourse
liabilities. That basis will be decreased (but not below zero) by distributions
from Enbridge Energy, by the unitholder's share of Enbridge Energy's losses and
by the unitholder's share of expenditures of Enbridge Energy that are not
deductible in computing its taxable income and are not required to be
capitalized. A limited partner will have no share of Enbridge Energy's debt
which is recourse to the general partner, but will have a share, generally based
on his share of profits, of Enbridge Energy's nonrecourse liabilities. Please
read "--Disposition of Class A Common Units--Recognition of Gain or Loss."
LIMITATIONS ON DEDUCTIBILITY OF ENBRIDGE ENERGY LOSSES
The deduction by a unitholder of his share of Enbridge Energy's losses will
be limited to the adjusted tax basis in his units (the "basis limitation") and,
in the case of an individual unitholder or a corporate unitholder, if more than
50% of the value of its stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount for which the
unitholder is considered to be "at risk" under Section 465 of the Code (the "at
risk" limitation") with respect to Enbridge Energy's activities, if that amount
is less than his adjusted tax basis. A unitholder must recapture losses deducted
in previous years to the extent that distributions cause his "at risk" amount to
be less than zero at the end of any taxable year. Losses disallowed to a
unitholder or recaptured as a result of these limitations will carry forward and
will be allowable to the extent that his adjusted tax basis or "at risk" amount,
whichever is the limiting factor, is subsequently increased. Upon the taxable
disposition of a unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the "at risk" limitation but may not be
offset by losses suspended by the basis limitation. Any excess loss above that
gain previously suspended by the "at risk" limitation or basis limitation is no
longer utilizable.
Under Section 465 of the Code, a unitholder will generally be "at risk" to
the extent of his adjusted tax basis in his units, excluding any portion of the
basis attributable to his share of Enbridge Energy's nonrecourse liabilities,
reduced by any amount of money the unitholder borrowed to purchase his units if
the lender of such borrowed funds owns an interest in Enbridge Energy, is
related to such unitholder or can look only to the purchased units for
repayment. A unitholder's "at risk" amount will increase or decrease as the
adjusted tax basis of the unitholder's units increases or decreases (other than
tax basis increases or decreases attributable to increases or decreases in his
share of Enbridge Energy nonrecourse liabilities).
The passive loss limitation under Section 469 of the Code generally provides
that individuals, estates, trusts and certain closely held corporations and
personal service corporations can only deduct losses from passive activities
(generally activities in which the taxpayer does not materially participate)
only to the extent of the taxpayer's income from such passive activities. The
passive loss limitation is to be applied separately with respect to each
publicly traded partnership. Consequently, a unitholder's allocable share of any
passive losses generated by Enbridge Energy, if any, will only be available to
offset future passive income generated by Enbridge Energy and will not be
available to offset income from other passive activities or investments
(including other publicly traded partnerships) or salary or active business
income. Passive losses that are not deductible because they exceed the
unitholder's allocable share of the income generated by Enbridge Energy may be
deducted in full when the unitholder disposes of his entire investment in
Enbridge Energy in a fully taxable transaction to an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions, such as the "at risk" limitation and the basis limitation.
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LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." The IRS has announced that Treasury Regulations will be issued that
characterize "net passive income" from a publicly traded partnership as
"investment income" for purposes of the limitations on the deductibility of
investment interest, and until such Treasury Regulations are issued, "net
passive income" from a publicly traded partnership shall be treated as
"investment income." Therefore, a unitholder's "net passive income" from
Enbridge Energy will be treated as "investment income" for this limitation on
interest deductions. In addition, the unitholder's share of Enbridge Energy's
portfolio income will be treated as investment income. Investment interest
expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- a partnership's interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income pursuant to
the passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
ALLOCATION OF ENBRIDGE ENERGY'S INCOME, GAIN, LOSSES, DEDUCTIONS AND CREDITS
In general, if Enbridge Energy has a net profit, items of income, gain,
losses, deductions and credits will be allocated among the general partner and
the unitholders in accordance with their respective percentage interests in
Enbridge Energy. If Enbridge Energy has a net loss, items of income, gain,
losses, deductions and credits generally for both book and tax purposes will be
allocated, first, to the general partner and the unitholders in accordance with
their respective percentage interests to the extent of their positive capital
accounts (as maintained under our partnership agreement), and second, to the
general partner. In addition, by reason of the Special Allocation discussed in
"--Tax Consequences of Unit Ownership--Special Allocation of Gross Income,"
there is a high probability that the holders of Class A Common Units will
continue to be allocated amounts of gross income with respect to taxable years
of Enbridge Energy that would otherwise be allocated to the holders of Class B
Units. Although Enbridge Energy does not expect that its operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of Enbridge Energy income and gain will be allocated
in an amount and manner sufficient to eliminate the negative balance as quickly
as possible. On a liquidating sale of assets, our partnership agreement provides
separate gain and loss allocations designed, to the extent possible, to
eliminate a deficit in any unitholder's capital account and to produce capital
accounts that, when followed on liquidation, will result in each unitholder
recovering the Unrecovered Capital, and his distributive share of any additional
value.
Notwithstanding the above, as required by Section 704(c) of the Code,
certain items of Enbridge Energy's income, deduction, gain and loss will be
specially allocated for U.S. federal income tax purposes to account for the
difference between the adjusted tax basis and fair market value of property
contributed to Enbridge Energy by the general partner ("Contributed Property"),
and to account for the difference between the fair market value of Enbridge
Energy's assets and their carrying value on Enbridge Energy's books at the time
of any offering made pursuant to this prospectus. In addition, certain items of
recapture income will be allocated to the extent possible to the unitholder
allocated the deduction or curative allocation (discussed below) giving rise to
the treatment of such gain as recapture income in order to minimize the
recognition of ordinary income by some unitholders, but these allocations may
not be
25
respected by the IRS. If these allocations of recapture are not respected, the
amount of the income or gain allocated to a unitholder will not change but
instead a change in the character of the income allocated to the unitholder
would result.
Treasury Regulations permit curative allocations similar to those provided
for by our partnership agreement. However, the application of those Treasury
Regulations in the context of a publicly traded partnership existing at the time
of promulgation is unclear. Because such curative allocations are consistent
with Counsel's view of the purposes of Section 704(c) and with the principles of
the Treasury Regulations, Counsel believes that it is unlikely that the IRS will
challenge the curative allocations. However, if the IRS were to litigate the
matter, it is uncertain whether the curative allocations would be respected by a
court. Counsel believes that there is substantial authority (within the meaning
of Section 6662 of the Code) for Enbridge Energy's tax reporting position, and
that no penalties would be applicable if the IRS were to litigate successfully
against the curative allocations. Because Enbridge Energy has a relatively low
tax basis in its properties, a successful challenge by the IRS of the curative
allocation would result in ratios of taxable income to cash distributions
received by holders of Class A Common Units that are materially higher than the
estimates that may be set forth in any accompanying prospectus supplement.
Counsel is of the opinion that, with the exception of the curative
allocations, the Special Allocation and the allocation of recapture income
discussed above will be respected for U.S. federal income tax purposes in
determining each unitholder's allocable share of Enbridge Energy's income, gain,
loss and deduction. There are, however, uncertainties in the Treasury
Regulations relating to allocations of partnership taxable items, and investors
should be aware that some of the allocations in our partnership agreement may be
successfully challenged by the IRS.
If an allocation contained in our partnership agreement is not respected for
U.S. federal income tax purposes, notwithstanding the opinion of Counsel, items
of income, gain, loss, deduction and credit will be reallocated to the
unitholders and the general partner in accordance with their respective
interests in such items. Such reallocation among the unitholders and the general
partner of such items of income, gain, loss, deduction and credit allocated
under our partnership agreement could result in additional taxable income to the
unitholders. If the Special Allocation is not given effect, the gross income
subject to these allocations will be allocated to the holders of Class B Units.
TAX TREATMENT OF OPERATIONS
INCOME AND DEDUCTIONS IN GENERAL
Each unitholder will be required to report on his U.S. income tax return his
allocable share of Enbridge Energy's income, gain, loss, deduction and credit
for the taxable year of Enbridge Energy ending within or with the taxable year
of the unitholder. Such items must be included on the unitholder's U.S. federal
income tax return without regard to whether Enbridge Energy makes a distribution
of cash to the unitholder.
A unitholder who owns units at any time during a quarter and who disposes of
such units prior to the record date set for a distribution with respect to such
quarter will be allocated items of Enbridge Energy's income and gain
attributable to the months in such quarter during which such units were owned
but will not be entitled to receive such cash distribution.
ACCOUNTING METHOD AND TAXABLE YEAR
Enbridge Energy uses the calendar year as its taxable year and the accrual
method of accounting for U.S. federal income tax purposes.
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INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis established for the various assets of Enbridge Energy will be
used for purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of such assets. The aggregate tax
basis established for the assets contributed to Enbridge Energy by the general
partner was initially equal to the adjusted tax basis of the general partner in
such assets immediately before their contribution to Enbridge Energy. Please
read "Allocation of Enbridge Energy's Income, Gain, Losses, Deductions and
Credits."
Enbridge Energy has both tangible assets of substantial value (including the
pipeline and related equipment) and rights of way of substantial value.
Amortization deductions in respect of such assets are based on determinations as
to their relative fair market values and useful lives by Enbridge Energy. The
IRS may (i) challenge either the fair market values or the useful lives assigned
to such assets or (ii) seek to characterize intangible assets as nonamortizable
goodwill. If any such challenge or characterization were successful, the
deductions allocated to a unitholder in respect of such assets would be reduced
or eliminated and a unitholder's share of taxable income from Enbridge Energy
would be increased accordingly. Any such increase could be material.
SECTION 754 ELECTION
Enbridge Energy has made the election permitted by Section 754 of the Code.
Such an election is irrevocable without the consent of the IRS. The election
generally permits a purchaser of Class A Common Units to adjust his share of the
adjusted tax basis in Enbridge Energy's properties ("inside basis") pursuant to
Section 743(b) of the Code to fair market value (as reflected by his unit
price). The 743(b) adjustment is attributed solely to a purchaser of Class A
Common Units and is not added to the basis of Enbridge Energy's assets. (For
purposes of this discussion, a unitholder's inside basis in Enbridge Energy's
assets will be considered to have two components: (i) his share of Enbridge
Energy's actual basis in such assets ("Common Basis") and (ii) his
Section 743(b) adjustment allocated to each such asset.)
Treasury Regulations under Section 743 of the Code require, if the remedial
allocation method is adopted, a portion of the Section 743(b) adjustment
attributable to recovery property to be depreciated over the remaining cost
recovery period for the Section 704(c) built-in gain. Under Treasury Regulations
Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Code rather than cost recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. Our
partnership agreement authorizes the general partner to adopt a convention to
preserve the uniformity of units even if that convention is not consistent with
certain Treasury Regulations. Please read "--Uniformity of Class A Common Units"
below.
Although Counsel is unable to opine as to the validity of such an approach,
Enbridge Energy intends to depreciate or amortize the portion of a
Section 743(b) adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized Section 704(c)
built-in gain using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of such property, or treat that portion as non-amortizable to the extent
attributable to property the Common Basis of which is not depreciable or
amortizable. This method is consistent with the Treasury Regulation under
Section 743 but is arguably inconsistent with Treasury Regulations
Section 1.167(c)(1)(a)(6). To the extent such Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized
Section 704(c) built in gain, Enbridge Energy will apply the rules described in
the Treasury Regulations and legislative history. If Enbridge Energy determines
that such position cannot reasonably be taken, Enbridge Energy may adopt a
depreciation or amortization convention under which all purchasers acquiring
units in the same month would receive depreciation or amortization, whether
attributable to Common Basis or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in Enbridge Energy's
assets. Such an aggregate approach may result in lower annual depreciation or
amortization
27
deductions than would otherwise be allowable to certain unitholders. Please read
"Uniformity of Class A Common Units" below.
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060 of the Code. Based on these principles, the
IRS may seek to reallocate some or all of any Section 743(b) adjustment not
allocated by Enbridge Energy to goodwill. As an intangible asset, goodwill would
be amortizable over a longer period of time than Enbridge Energy's tangible
assets.
A Section 754 election is advantageous if the transferee's basis in his
units is higher than such units' share of Enbridge Energy's aggregate adjusted
tax basis in its assets immediately prior to the transfer. In such case,
pursuant to the election, the transferee would take a new and higher basis in
his share of Enbridge Energy's assets for purposes of calculating, among other
items, his depreciation deductions and his share of any gain or loss on a sale
of Enbridge Energy's assets. Conversely, a Section 754 election is
disadvantageous if the transferee's basis in such units is lower than such
units' share of Enbridge Energy's aggregate adjusted tax basis in its assets
immediately prior to the transfer. Thus, the price that a unitholder will be
able to obtain upon the sale of his units may be affected either favorably or
adversely by the Section 754 election.
The calculations involved in the Section 754 election are complex and will
be made by Enbridge Energy on the basis of certain assumptions as to the value
of Enbridge Energy's assets and other matters. There is no assurance that the
determinations made by Enbridge Energy will not be successfully challenged by
the IRS and that the deductions attributable to them will not be disallowed or
reduced. If the IRS requires a different basis adjustment to be made, and if, in
the general partner's opinion, the expense of compliance exceeds the benefit of
the election, the general partner may seek permission from the IRS to revoke the
Section 754 election. If such permission is granted, a purchaser of units
subsequent to such revocation may incur an increased tax liability.
ALTERNATIVE MINIMUM TAX
Each unitholder will be required to take into account his distributive share
of items of Enbridge Energy's income, gain, loss, deduction and credit for
purposes of the alternative minimum tax. A portion of Enbridge Energy's
depreciation deductions may be treated as an item of tax preference for this
purpose.
A unitholder's alternative minimum taxable income derived from Enbridge
Energy may be higher than his share of Enbridge Energy's net income because
Enbridge Energy may use accelerated methods of depreciation for purposes of
computing U.S. federal taxable income or loss. Prospective unitholders are
encouraged to consult with their tax advisors as to the impact of an investment
in Class A Common Units on their liability for the alternative minimum tax.
VALUATION AND TAX BASIS OF ENBRIDGE ENERGY PROPERTY
The U.S. federal income tax consequences of the ownership and disposition of
units will depend in part on estimates by the general partner of the relative
fair market values, and determinations of the initial tax bases of the assets of
Enbridge Energy. Although the general partner may from time to time consult with
professional appraisers with respect to valuation matters, many of the relative
fair market value estimates will be made solely by the general partner. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss, deductions and credits previously
reported by unitholders might change, and unitholders might be required to
adjust their tax liability for prior years.
TREATMENT OF UNITS LOANED TO COVER SHORT SALES
A unitholder whose units are loaned to a "short seller" to cover a short
sale of units may be considered as having disposed of ownership of such units.
If so, he would no longer be a partner with
28
respect to those units during the period of such loan. As a result, during such
period, any income, gain, deductions, losses and credits of Enbridge Energy with
respect to those units would appear not to be reportable by such unitholder, any
cash distributions received by the unitholder with respect to those units would
be fully taxable and all of such distributions would appear to be treated as
ordinary income. Counsel has not rendered an opinion regarding the treatment of
a unitholder whose units are loaned to a short seller to cover a short sale of
units; therefore, unitholders desiring to assure their status as partners should
modify their brokerage account agreements, if any, to prohibit their brokers
from borrowing their units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of partnership interests.
Other provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a taxpayer
as having sold an "appreciated" partnership interest (in other words, one in
which gain would be recognized if it were sold, assigned or otherwise terminated
at its fair market value) if the taxpayer or related persons enter into a short
sale, an offsetting notional principal contract, or a futures or forward
contract with respect to the partnership interest or substantially identical
property. Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to a partnership interest, the taxpayer will be treated as having sold
such position if the taxpayer or a related party then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue Treasury Regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
DISPOSITION OF CLASS A COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of units equal to the difference
between the amount realized and the unitholder's adjusted tax basis in the units
sold. A unitholder's amount realized will be measured by the sum of the cash and
the fair market value of other property received plus his share of Enbridge
Energy's nonrecourse liabilities. Since the amount realized includes a
unitholder's share of Enbridge Energy's nonrecourse liabilities, the gain
recognized on the sale of units may result in a tax liability in excess of any
cash received from such sale.
Prior distributions by Enbridge Energy in excess of cumulative net taxable
income in respect of a Class A Common Unit that decreased a unitholder's
adjusted tax basis in such Class A Common Unit will, in effect, become taxable
income if the Class A Unit is sold at a price greater than the unitholder's
adjusted tax basis in such unit, even if the price is less than his original
cost.
Except as noted below and provided the unit is held as a "capital asset"
within the meaning of Section 1221 of the Code, gain or loss recognized by a
unitholder (other than a "dealer" in units) on the sale or exchange of a unit
will generally be taxable as capital gain or loss, and the gain or loss will
generally be a long term capital gain or loss if the unit is held for more than
one year. A substantial portion of this gain or loss, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" owned by
Enbridge Energy. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Ordinary income attributable to
"unrealized receivables," "inventory items" and depreciation recapture may
exceed net taxable gain realized upon the sale of the unit and may be recognized
even if there is a net taxable capital loss realized on the sale of the unit.
Thus, a unitholder may recognize both ordinary income and a capital loss upon
disposition of units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of a corporation.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must combine those interests and
maintain a single adjusted tax basis. Upon a sale or other
29
disposition of some of the interests, a portion of that tax basis must be
allocated to the interests sold using an equitable apportionment method.
Although the ruling is unclear as to how the holding period of these interests
is determined once they are combined, recently finalized Treasury Regulations
allow a selling partner who can identify the partnership interest transferred
with an ascertainable holding period to elect to use the actual holding period
of the transferred interest. Thus, according to the ruling, a unitholder will be
unable to select high or low basis units to sell as would be the case with
corporate stock, but, according to the Treasury Regulations, may designate the
specific units sold for purposes of determining the holding period of the units
transferred. A unitholder electing to use the actual holding period of units
transferred must consistently use that identification method for all subsequent
sales or exchanges of units. A unitholder considering the purchase of additional
units or a sale of units purchased in separate transactions is encouraged to
consult his tax advisor as to the possible consequences of the ruling and
application of the final Treasury Regulations.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, Enbridge Energy's income, gain, losses, deductions and credits
will be determined annually and will be prorated on a monthly basis and
subsequently apportioned among the unitholders in proportion to the number of
units owned by them as of the opening of the first business day of the month to
which they relate. However, gain or loss realized on a sale or other disposition
of Enbridge Energy's assets other than in the ordinary course of business will
be allocated among the unitholders as of the opening of the NYSE on the first
business day of the month in which such gain or loss is recognized. As a result
of this monthly allocation, a unitholder transferring units in the open market
may be allocated income, gain, losses, deductions and credits accrued after the
transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and accordingly, Counsel does not opine on the
validity of the method of allocating income, gain, losses, deductions and
credits between the transferors and the transferees of Class A Common Units. If
a monthly convention is not allowed by the Treasury Regulations (or only applies
to transfers of less than all of the unitholder's units), income, gain, losses,
deductions and credits of Enbridge Energy might be reallocated among the
unitholders. The general partner is authorized to revise Enbridge Energy's
method of allocation between the transferors and transferees (as well as among
partners whose interests otherwise vary during a taxable period) to conform to a
method permitted by Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes of
such units prior to the record date set for a distribution with respect to such
quarter will be allocated items of Enbridge Energy's income, gain, losses,
deductions and credits attributable to such quarter during which such units were
owned, but will not be entitled to receive such cash distribution.
NOTIFICATION REQUIREMENTS
A unitholder who sells or exchanges units is required to notify Enbridge
Energy in writing of such sale or exchange within 30 days of the sale or
exchange and in any event no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. Enbridge Energy is
required to notify the IRS of such transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker.
Additionally, a transferor and a transferee of a unit will be required to
furnish statements to the IRS, filed with their U.S. federal income tax returns
for the taxable year in which the sale or exchange occurred, which set forth the
amount of the consideration received for such unit that is allocated to goodwill
or going concern value of Enbridge Energy. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
30
CONSTRUCTIVE TERMINATION
Enbridge Energy and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Enbridge Energy capital and profits within a 12-month period. A
termination of Enbridge Energy will cause a termination of the Operating
Partnership. A termination of Enbridge Energy will result in the closing of
Enbridge Energy's taxable year for all unitholders. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending December 31, the
closing of Enbridge Energy's taxable year may result in more than 12 months'
taxable income or loss of Enbridge Energy being includable in his taxable income
for the year of termination. New tax elections required to be made by Enbridge
Energy, including a new election under Section 754 of the Code, must be made
subsequent to a termination, and a termination could result in a deferral of
Enbridge Energy deductions for depreciation. A termination could also result in
penalties if Enbridge Energy were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of, or
subject Enbridge Energy to, any tax legislation enacted prior to the
termination.
ENTITY-LEVEL COLLECTIONS
If Enbridge Energy is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any unitholder or former
unitholder, the general partner is authorized to pay such taxes from Enbridge
Energy funds. Such payments, if made, will be deemed current distributions of
cash to the unitholders and the general partner. The general partner is
authorized to amend our partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
subsequent distributions so that after giving effect to such deemed
distributions, the priority and characterization of distributions otherwise
applicable under our partnership agreement is maintained as nearly as is
practicable. Payments by Enbridge Energy as described above could give rise to
an overpayment of tax on behalf of an individual unitholder, in which event the
unitholder could file a claim for credit or refund.
UNIFORMITY OF CLASS A COMMON UNITS
Since Enbridge Energy cannot match transferors and transferees of Class A
Common Units, uniformity of the economic and tax characteristics of the Class A
Common Units to a purchaser of such Class A Common Units must be maintained. In
the absence of uniformity, compliance with a number of U.S. federal income tax
requirements could be substantially diminished. A lack of uniformity can result
from a literal application of Treasury Regulations Section 1.167(c)-1(a)(6). Any
such non-uniformity could have a negative impact on the value of a unitholder's
interest in Enbridge Energy.
Consistent with the recently finalized Treasury Regulations under
Section 743, Enbridge Energy intends to depreciate the portion of a
Section 743(b) adjustment attributable to unrealized appreciation in the value
of Contributed Property or Adjusted Property, as defined in our partnership
agreement, (to the extent of any unamortized Section 704(c) built-in gain) using
a rate of depreciation or amortization derived from the depreciation method and
useful life applied to the Common Basis of such property, or treat that portion
as non-amortizable to the extent attributable to property the Common Basis of
which is not amortizable, consistent with the Treasury Regulations under
Section 743, but despite its inconsistency with Treasury Regulations
Section 1.167(c)-1(a)(6). Please read "--Tax Treatment of Operations--Section
754 Election" above. To the extent that the Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized
Section 704(c) built-in gain, Enbridge Energy will apply the rules described in
the Treasury Regulations and legislative history. If Enbridge Energy determines
that such position cannot reasonably be taken, Enbridge Energy may adopt a
depreciation convention under which all purchasers acquiring Class A Common
Units in the same month would receive depreciation and amortization deductions,
whether attributable to Common Basis or Section 743(b) basis, based upon the
same applicable rate as if they had purchased a direct interest in Enbridge
Energy's property. If such an aggregate approach is adopted, annual depreciation
and amortization deductions might be lower than
31
would otherwise be allowable to certain unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. Such convention will not be adopted if
Enbridge Energy determines that the loss of such depreciation and amortization
deductions will have a material adverse effect on the unitholders. If Enbridge
Energy chooses not to utilize this aggregate method, Enbridge Energy may use any
other reasonable depreciation and amortization convention to preserve the
uniformity of the intrinsic tax characteristics of any Class A Common Units that
would not have a material adverse effect on the unitholders. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If such a challenge were to be sustained, the uniformity of
Class A Common Units may be affected, and gain from the sale of units might be
increased without the benefit of additional deductions. Please read
"--Disposition of Class A Common Units--Recognition of Gain or Loss."
Because of the Special Allocation of gross income to the Class A Common
Units, the capital accounts underlying the Class A Common Units will likely
differ, perhaps materially, from the capital accounts underlying the Class B
Units. Our partnership agreement contains a method by which the general partner
may cause the capital accounts underlying the Class A Common Units to equal the
capital accounts underlying the Class B Units. The general partner must be
reasonably assured, based on advice of counsel, that the Class B Units and the
Class A Common Units share the same intrinsic economic and U.S. federal income
tax characteristics, in all material respects, before the Class A Common Units
and the Class B Units will be treated as one class of units.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from U.S. federal
income tax (including individual retirement accounts and other retirement plans)
are subject to U.S. federal income tax on unrelated business taxable income.
Virtually all of the taxable income derived by such an organization from the
ownership of a unit will be unrelated business taxable income and thus will be
taxable to such a unitholder.
A regulated investment company or mutual fund is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of stocks
or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of Enbridge Energy's gross income will
qualify as such income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States on
account of ownership of units. As a consequence, they will be required to file
U.S. federal income tax returns for their shares of Enbridge Energy's income,
gain, loss, deduction and credit and pay U.S. federal income tax at regular
rates on such income.
Generally, a partnership is required to pay a withholding tax on the portion
of the partnership's income that is effectively connected with the conduct of a
U.S. trade or business and which is allocable to the foreign partners,
regardless of whether any actual distributions have been made to these partners.
However, under rules applicable to publicly traded partnerships, Enbridge Energy
will withhold (currently at the rate of 39.6%) on actual cash distributions made
quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to Enbridge Energy's
Transfer Agent on a Form W-8 BEN or applicable substitute form in order to
obtain credit for the taxes withheld. A change in applicable law may require
Enbridge Energy to change these procedures.
32
Because a foreign corporation that owns units will be treated as engaged in
a U.S. trade or business, that corporation may be subject to U.S. branch profits
tax at a rate of 30%, in addition to regular U.S. federal income tax, on its
share of Enbridge Energy's income and gain (as adjusted for changes in the
foreign corporation's "U.S. net equity") which are effectively connected with
the conduct of a U.S. trade or business. That tax may be reduced or eliminated
by an income tax treaty between the U.S. and the country with respect to which
the foreign corporate unitholder is a "qualified resident." In addition, this
type of unitholder is subject to special information reporting requirements
under Section 6038C of the Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to U.S. federal income tax on gain realized
on the disposition of such unit to the extent that such gain is effectively
connected with a U.S. trade or business of the foreign unitholder. Apart from
the ruling, a foreign unitholder will not be taxed or subject to withholding
upon the disposition of a unit if that foreign unitholder has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
ENBRIDGE ENERGY INFORMATION RETURNS AND AUDIT PROCEDURES
Enbridge Energy intends to furnish each unitholder, within 90 days after the
close of each calendar year, certain tax information, including a Schedule K-1,
that sets forth each unitholder's allocable share of Enbridge Energy's income,
gain, loss, deduction and credit for the preceding taxable year of Enbridge
Energy. If Enbridge Energy elects large partnership treatment under the Code,
this tax information will be provided to unitholders by March 15th for the
preceding taxable year of Enbridge Energy as required. In preparing this
information, which will generally not be reviewed by Counsel, the general
partner will use various accounting and reporting conventions, some of which
have been mentioned in the previous discussion, to determine the respective
unitholder's allocable share of income, gain, loss, deduction and credit. Please
read "Allocation of Enbridge Energy's Income, Gain, Losses, Deductions and
Credits," "Tax Treatment of Operations--Initial Tax Basis, Depreciation and
Amortization" and "Section 754 Election" and "Disposition of Class A Common
Units--Allocations Between Transferors and Transferees." There is no assurance
that any such conventions will yield a result that conforms to the requirements
of the Code, Treasury Regulations or administrative interpretations of the IRS.
The general partner cannot assure prospective unitholders that the IRS will not
successfully contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could negatively affect the value
of the units.
The U.S. federal income tax information returns filed by Enbridge Energy may
be audited by the IRS. Adjustments resulting from such audit may require each
unitholder to file an amended tax return, and possibly may result in an audit of
the unitholder's return. If Enbridge Energy elects large partnership treatment,
partnership adjustments would not result in unitholders having to file amended
returns. Instead, these adjustments generally would flow through to the
unitholders for the year in which the adjustment takes effect. Thus, the current
year unitholders' share of current year partnership items of income, gains,
losses, deductions and credits would be adjusted to reflect partnership audit
adjustments that take effect in that year. In addition, in lieu of flowing
adjustments through to its unitholders, Enbridge Energy may elect to pay an
imputed underpayment. In either case, unitholders could bear significant
economic burdens associated with tax adjustments relating to periods predating
their acquisition of units. Any audit of a unitholder's return could result in
adjustments of not only Enbridge Energy but also non-partnership items.
Partnerships generally are treated as separate entities for purposes of U.S.
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss, deduction and credit is determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners. The Code provides
33
for one partner to be designated as the "Tax Matters Partner" for these
purposes. Our partnership agreement appoints the general partner as the Tax
Matters Partner.
The Tax Matters Partner will make certain elections on behalf of Enbridge
Energy and unitholders and can extend the statute of limitations for assessment
of tax deficiencies against unitholders with respect to Enbridge Energy items.
The Tax Matters Partner may bind any unitholder with less than a 1% profits
interest in Enbridge Energy to a settlement with the IRS unless the unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (to which
all the unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any unitholder having at least a 1% profits interest in Enbridge
Energy and by unitholders having, in the aggregate, at least a 5% profits
interest. However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his U.S. federal income tax return that is not consistent with the
treatment of the item on Enbridge Energy's return to avoid the requirement that
all items be treated consistently on both returns. Intentional or negligent
disregard of the consistency requirement may subject a unitholder to substantial
penalties. Under the Code, partners in a partnership electing to be treated as a
large partnership are required to treat all partnership items in a manner
consistent with the partnership return.
If Enbridge Energy elects to be treated as a large partnership, each partner
would take into account separately his share of the following items, determined
at the partnership level:
- taxable income or loss from passive loss limitation activities;
- taxable income or loss from other activities (such as portfolio income or
loss);
- net capital gains (or net capital loss) to the extent allocable to passive
loss limitation activities and other activities;
- a net alternative minimum tax adjustment separately computed for passive
loss limitation activities and other activities;
- general credits;
- low-income housing credit;
- rehabilitation credit;
- tax-exempt interest;
- for certain partnerships, foreign taxes paid and foreign source
partnership items; and
- any other items designated by the IRS to be separately treated.
A number of other changes to the tax compliance and administrative rules
relating to partnerships that elect large partnership treatment have been made.
As stated above, one provision requires that each partner in an electing large
partnership take into account his share of any adjustments to partnership items
in the year such adjustments are made. Under current law, adjustments relating
to partnership items for a previous taxable year are taken into account by those
persons who were partners in the previous taxable year. Alternatively, a
partnership could elect to or, in some circumstances, could be required to, pay
directly the tax resulting from any such adjustments. In either case, therefore,
unitholders could bear significant economic burdens associated with tax
adjustments relating to periods predating their acquisition of units. It is
unlikely that Enbridge Energy will elect to have these provisions apply because
of the cost of their application.
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NOMINEE REPORTING
Persons who hold units in Enbridge Energy as a nominee for another person
are required to furnish to Enbridge Energy: (i) the name, address and taxpayer
identification number of the beneficial owners and the nominee; (ii) whether the
beneficial owner is (a) a person that is not a "United States person" (as
defined in Section 7701 of the Code), (b) a foreign government, an international
organization or any wholly owned agency or instrumentality of either of the
foregoing, or (c) a tax-exempt entity; (iii) the amount and description of the
units held, acquired or transferred for the beneficial owners; and (iv) certain
information including the dates of acquisitions and transfers, means of
acquisitions and transfers and acquisition cost for purchases, as well as the
amount of the net proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether they are a "United
States person" and certain information on units they acquire, hold or transfer
for their own account. A penalty of $50 per failure (up to a maximum of $100,000
per calendar year) is imposed by the Code for failure to report such information
to Enbridge Energy. The nominee is required to supply the beneficial owner of
the units with the information furnished to Enbridge Energy.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
Enbridge Energy will not be subject to the registration requirement on the basis
that it will not constitute a tax shelter. However, the general partner, as
principal organizer of Enbridge Energy, has registered Enbridge Energy as a tax
shelter in the absence of assurance that Enbridge Energy will not be subject to
tax shelter registration and in light of the substantial penalties that might be
imposed if registration is required and not undertaken. Enbridge Energy has been
issued the following shelter registration number: 92008000124. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN ENBRIDGE ENERGY OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
Enbridge Energy must furnish the registration number to the unitholders, and a
unitholder who sells or otherwise transfers a unit in a subsequent transaction
must furnish the registration number to the transferee. The penalty for failure
of the transferor of a unit to furnish such registration number to the
transferee is $100 for each such failure. The unitholders must disclose the tax
shelter registration number of Enbridge Energy on Form 8271 to be attached to
the U.S. federal income tax return on which any deduction, loss, credit or other
benefit generated by Enbridge Energy is claimed or income of Enbridge Energy is
included. A unitholder who fails to disclose the tax shelter registration number
on his U.S. federal income tax return, without reasonable cause for such
failure, will be subject to a $250 penalty for each such failure. Any penalties
discussed herein are not deductible for U.S. federal income tax purposes.
ACCURACY--RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
such portion and that the taxpayer acted in good faith with respect to such
portion.
A substantial understatement of U.S. federal income tax in any taxable year
exists if the amount of the understatement exceeds the greater of 10% of the tax
required to be shown on the return for the taxable year or $5,000 ($10,000 for
most corporations). The amount of any understatement subject to penalty
generally is reduced if any portion is attributable to a position adopted on the
return with respect to which there is, or was, "substantial authority" or as to
which there is reasonable basis and the pertinent facts are disclosed on the
return. Certain more stringent rules apply to "tax shelters," a term that does
not appear to
35
include Enbridge Energy. If any Enbridge Energy item of income, gain, loss,
deduction or credit included in the distributive shares of the unitholders might
result in such an "understatement" of income for which no "substantial
authority" exists, Enbridge Energy must disclose the pertinent facts on its U.S.
federal tax information. In addition, Enbridge Energy will make a reasonable
effort to furnish sufficient information for unitholders to make adequate
disclosure on their U.S. federal income tax returns to avoid liability for this
penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
OTHER TAX CONSIDERATIONS
Prospective investors should consider state and local tax consequences of an
investment in Enbridge Energy. Enbridge Energy owns property and does business
in Illinois, Indiana, Michigan, Minnesota, Montana, New York, North Dakota and
Wisconsin. The unitholder will likely be required to file state income tax
returns and/or to pay such taxes in such states and may be subject to penalties
for failure to comply with such requirements. Some of the states may require
that a partnership withhold a percentage of income from amounts that are to be
distributed to a partner that is not a resident of the state. The amounts
withheld, which may be greater or less than a particular partner's income tax
liability to the state, generally do not relieve the non-resident partner from
the obligation to file a state income tax return. In addition, an obligation to
file tax returns or to pay taxes may arise in other states.
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND TAX
CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES, OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER IS ENCOURAGED TO
CONSULT, AND MUST DEPEND UPON, HIS OR HER OWN TAX COUNSEL OR OTHER ADVISOR WITH
REGARD TO THOSE MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO
FILE ALL STATE AND LOCAL, AS WELL AS UNITED STATES FEDERAL, INCOME TAX RETURNS
THAT MAY BE REQUIRED. COUNSEL HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL
TAX CONSEQUENCES OF AN INVESTMENT IN US.
INVESTMENT IN ENBRIDGE ENERGY BY EMPLOYEE BENEFIT PLANS
An investment in Enbridge Energy by an employee benefit plan is subject to
certain additional considerations because persons with discretionary control of
assets of such plans (a "fiduciary") are subject to the fiduciary responsibility
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and transactions are subject to restrictions imposed by Section 4975
of the Code. As used herein, the term "employee benefit plan" includes, but is
not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh
plans, Simplified Employee Pension Plans, and tax deferred annuities or
Individual Retirement Accounts ("IRAs") established or maintained by an employer
or employee organization. Among other things, consideration should be given to
(i) whether such investment is prudent under Section 404(a)(1)(B) of ERISA,
(ii) whether in making such investment such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA, and (iii) whether
such investment will result in recognition of unrelated business taxable income
by such plan. Please read "Tax Considerations--Tax-Exempt Organizations and
Certain Other Investors." Fiduciaries should determine whether an investment in
Enbridge Energy is authorized by the appropriate governing instrument and is an
appropriate investment for such plan.
36
In addition, a fiduciary of an employee benefit plan should consider whether
such plan will, by investing in Enbridge Energy, be deemed to own an undivided
interest in the assets of Enbridge Energy, with the result that the general
partner would also be a fiduciary of such plan and Enbridge Energy would be
subject to the regulatory restrictions of ERISA, including its prohibited
transaction rules, as well as the prohibited transaction rules of the Code.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan; i.e., IRAs
established or maintained by individuals rather than an employer or employee
organization) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties who are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
Under Department of Labor regulations the assets of an entity in which employee
benefit plans acquire equity interests would not be deemed "plan assets" if,
among other things, (i) the equity interests acquired by employee benefit plans
are publicly offered securities-- I.E., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered pursuant to certain provisions of the federal
securities law, (ii) the entity is an "operating company"-- I.E., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital, or (iii) there is no significant investment by
benefit plan investors, which is defined to mean that less than 25% of the value
of each class of equity interest is held by the employee benefit plans referred
to above, IRAs and other employee benefit plans not subject to ERISA (such as
government plans). Enbridge Energy's assets are not expected to be considered
"plan assets" under these regulations because it is expected that the investment
will satisfy the requirements in (i) above, and may also satisfy the
requirements in (ii) and (iii).
PLAN OF DISTRIBUTION
We may sell the Class A Common Units to one or more underwriters for public
offering and sale, or we may sell the Class A Common Units to investors directly
or through agents. The applicable prospectus supplement will name any
underwriter or agent involved in the offer and sale of the Class A Common Units.
Underwriters may offer and sell the Class A Common Units at fixed prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. We also may authorize underwriters acting
as our agents to offer and sell the Class A Common Units upon the terms and
conditions as are set forth in the applicable prospectus supplement. In
connection with the sale of Class A Common Units, underwriters may be deemed to
have received compensation from us in the form of underwriting discounts or
commissions and also may receive commissions from purchasers of the Class A
Common Units for whom they may act as agent. Underwriters may sell the Class A
Common Units to or through dealers. Dealers may receive compensation in the form
of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
The applicable prospectus supplement will disclose any underwriting
compensation we pay to underwriters or agents in connection with the offering of
the Class A Common Units, and any discounts, concessions or commissions allowed
by underwriters to participating dealers. Underwriters, dealers and agents
participating in the distribution of the Class A Common Units may be deemed to
be underwriters, and any discounts and commissions they receive and any profit
they realize on resale of the Class A Common Units may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with us, to
indemnification against the contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If a prospectus supplement so indicates, we will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase the Class A Common Units to which such prospectus supplement relates,
providing for payment and delivery on a future date specified in such prospectus
37
supplement. There may be limitations on the minimum amount that may be purchased
by any such institutional investor or on the number of the Class A Common Units
that may be sold pursuant to such arrangements. Institutional investors include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and such other institutions
as we may approve. The obligations of the purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions except
that (i) the purchase by an institution of the Class A Common Units shall not be
prohibited under the applicable laws of any jurisdiction in the United States
and (ii) if the Class A Common Units are being sold to underwriters, we shall
have sold to such underwriters the total number of such Class A Common Units
less the number thereof covered by such arrangements. Underwriters will not have
any responsibility in respect of the validity of such arrangements or our
performance or such institutional investors thereunder.
If a prospectus supplement so indicates, the underwriters engaged in an
offering of Class A Common Units may purchase and sell Class A Common Units in
the open market. These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number of Class A Common
Units than they are required to purchase in the offering. "Covered" short sales
are sales made in an amount not greater than the underwriters' option to
purchase additional Class A Common Units from us in the offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional Class A Common Units or purchasing Class A Common
Units in the open market. In determining the source of Class A Common Units to
close out the covered short position, the underwriters will consider, among
other things, the price of Class A Common Units available for purchase in the
open market as compared to the price at which they may purchase Class A Common
Units through the overallotment option. "Naked" short sales are any sales in
excess of such option. The underwriters must close out any naked short position
by purchasing Class A Common Units in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the Class A Common Units in the open market
after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
Class A Common Units made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives of the underwriters have
repurchased Class A Common Units sold by or for the account of such underwriter
in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
Class A Common Units, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the Class A Common
Units. As a result, the price of the Class A Common Units may be higher than the
price that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued at any time. These transactions may be
effected on the NYSE, in the over-the-counter market or otherwise.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for us in the ordinary course of
business.
LEGAL MATTERS
The validity of the Class A Common Units is being passed upon by
Fulbright & Jaworski L.L.P., as counsel for Enbridge Energy. If the Class A
Common Units are being distributed in an underwritten offering, certain legal
matters will be passed upon for the Underwriters by counsel identified in the
related prospectus supplement.
38
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K of Enbridge Energy Partners, L.P.
for the year ended December 31, 2000 and the audited consolidated statement of
financial position of Enbridge Energy Company, Inc. as of December 31, 2000 and
1999, incorporated in this prospectus by reference to the Current Report on
Form 8-K of Enbridge Energy Partners, L.P. filed on May 7, 2001 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
39
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2,200,000 CLASS A COMMON UNITS
ENBRIDGE ENERGY PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
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PROSPECTUS SUPPLEMENT
FEBRUARY 26, 2002
(INCLUDING PROSPECTUS DATED OCTOBER 10, 2001)
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SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
BANC OF AMERICA SECURITIES LLC
RBC CAPITAL MARKETS
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