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FILED PURSUANT TO RULE 424(b))(5)
REGISTRATION NO. 333-67005
REGISTRATION NO. 333-61086
Prospectus Supplement to Prospectus dated November 25, 1998.
1,748,635 Units
Lakehead Pipe Line Partners, L.P.
Class A Common Units
Representing Limited Partner Interests
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The Class A Common Units represent limited partner interests in Lakehead
Pipe Line Partners, L.P. The Class A Common Units are listed on the New York
Stock Exchange under the symbol "LHP." The last reported sale price of the Class
A Common Units on May 16, 2001 was $45.75 per unit.
See "Risk Factors" beginning on page 5 of the accompanying prospectus and
on page S-12 of this prospectus supplement to read about certain factors you
should consider before buying Class A Common Units.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Per Unit Total
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Initial price to public..................................... $45.750 $80,000,051
Underwriting discount....................................... $ 1.944 $ 3,399,346
Proceeds, before expenses, to Lakehead...................... $43.806 $76,600,705
To the extent that the underwriter sells more than 1,748,635 Class A Common
Units, the underwriter has the option to purchase up to an additional 229,507
Class A Common Units from Lakehead at the initial price to public less the
underwriting discount.
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The underwriter expects to deliver the Class A Common Units to purchasers
on May 22, 2001.
GOLDMAN, SACHS & CO.
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Prospectus Supplement dated May 16, 2001.
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SYSTEM MAP
[SYSTEM MAP]
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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 "Lakehead" mean Lakehead Pipe Line Partners, L.P. and include
our subsidiary operating partnership, Lakehead Pipe Line Company, Limited
Partnership. Our Class A Common Units represent limited partner interests in
Lakehead Pipe Line 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 the Class B Common Units are
referred to in this prospectus supplement as "units."
LAKEHEAD
WHO WE ARE
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. Lakehead Pipe Line Company, Inc., an indirect wholly owned
subsidiary of Enbridge Inc., of Canada, serves as 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 "Lakehead System"
and a subsidiary of Enbridge Inc., Enbridge Pipelines Inc. owns the Canadian
portion of the System, which we refer to as the "Enbridge 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.
Our principal executive offices are located at Lake Superior Place, 21 West
Superior Street, Duluth, Minnesota 55802-2067, and the telephone number at these
offices is (218) 725-0100. You may contact us through Mr. Tracy Barker of our
Investor Relations Department by phone at (403) 231-5949, toll-free at (877)
575-3282 or by facsimile at (403) 231-5989.
COMPETITIVE ADVANTAGES
We believe that the Lakehead System has several advantages over other
transporters of crude oil with which we compete.
- The Lakehead System is among the lowest cost transporters of crude oil
and natural gas liquids in North America based on costs per barrel mile
transported.
- The Lakehead System's extensive length, large diameter pipe and the use
of a number of parallel lines rather than a single line enables us to
transport multiple types of crude oil more efficiently.
- The Lakehead System supplies western Canadian crude oil to the Midwest
region of the United States, an area that is experiencing rising crude
oil demand and declining crude oil production. This area has historically
provided producers of western Canadian crude oil with the highest return,
or sales price less transportation costs, relative to other available
United States markets.
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OUR BUSINESS STRATEGY
Our primary strategy is to grow cash distributions through profitable
expansion of the Lakehead System and through development and acquisition of
complementary businesses with a risk profile similar to that of our current
crude oil and natural gas liquids transportation business. Please read
"-- Growth Beyond the Lakehead System."
EXPANSION OF THE LAKEHEAD SYSTEM
The System serves as a strategic link between the western Canadian oil
fields and the markets of the Midwest United States and eastern Canada. In
response to market conditions, we plan to maintain the service capability of the
Lakehead System and to expand its capacity and efficiency where appropriate. To
the extent allowed under orders of the United States Federal Energy Regulatory
Commission, referred to as the "FERC," or by agreement with customers, we expect
to file additional tariff increases and surcharges from time to time to reflect
these ongoing expansions.
Major capacity expansion projects completed in the last five years include:
- 1996 System Expansion Program -- This expansion program provided an
additional 120,000 barrels per day of capacity on the Lakehead System
from Superior to Chicago area markets (40,000 barrels of which were
required to offset the impact on deliverability of increased heavy crude
oil volumes). This expansion program, which increased delivery capability
to Chicago area markets by approximately 80,000 barrels per day, was
completed in December 1996 at a cost of approximately $65 million.
- System Expansion Project II, or SEP II -- This expansion was completed in
early 1999. SEP II involved the construction of a new pipeline from our
pipeline terminal at Superior, Wisconsin, to the Chicago area markets at
a cost of approximately $480 million. The pipeline provides an additional
170,000 barrels per day of delivery capacity on the Lakehead System from
Superior to Chicago. Under a tariff agreement with our customers, we
implemented a tariff surcharge that recovers the costs of, and provides
an equity return on, the SEP II facilities. The tariff agreement allows
us to earn a return on our SEP II equity investment that varies depending
on the level of SEP II capacity utilization on the Canadian portion of
the System.
- Terrace Expansion Program (Phase I) -- 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-stage expansion of
both the U.S. and Canadian portions of the System. We expect the Terrace
program ultimately to provide an additional net 350,000 barrels per day
of capacity to the System. Phase I of the Terrace program was completed
in 1999 and included construction of new 36-inch diameter pipeline
facilities from Kerrobert, Saskatchewan to Clearbrook, Minnesota that
added 170,000 barrels per day of capacity. Our portion of the cost of
Phase I was approximately $140 million.
SYSTEM EXPANSION PROJECTS UNDER DEVELOPMENT
- Enbridge has announced that Phase II of the Terrace program will proceed
in 2001 with construction of facilities to increase capacity on the
Canadian portion of the System. While Phase II does not involve
construction on the Lakehead System, we expect to benefit directly from
the approximately 40,000 barrels 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." Subject to timely approval by the National Energy Board in
Canada, we expect that Phase II will be placed into service in 2002.
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- Phase III of the Terrace expansion program is primarily designed to
increase heavy oil transportation capacity on the Lakehead System between
Clearbrook, Minnesota and Superior, Wisconsin by approximately 140,000
barrels per day. We expect this phase of the program will be required in
late 2003. This phase and other future expansion projects on the System
are subject to ongoing discussions with producers.
- The Canadian Association of Petroleum Producers, who we refer to as
"CAPP," has provided notification requesting that we add facilities to
enhance PADD 2 market access. The project was part of the future phases
portion of the Terrace program. The cost of this project is approximately
$35 million and is expected to be placed into service in 2003.
Under a tariff agreement with our customers approved by FERC, we
implemented in 1999 a tariff surcharge for Terrace 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
assumes that all three phases of the Terrace project will be completed. If CAPP
does not provide notice on or before July 1, 2001 to proceed with Phase III, the
tariff agreement approved by the FERC provides that we will determine the tariff
surcharge on a cost of service basis to allow recovery of, and a return on, our
Terrace investment, including any revenue variances between the application of
the toll increment and the actual annual Terrace cost of service. We expect that
CAPP will likely provide notice for Phase III on or before the notice date, or
alternatively, will seek an extension of the deadline.
ENBRIDGE PROJECTS
Enbridge has also recently completed North American crude oil pipeline
projects that are connected to the System. We believe that, although these
projects are not owned by us, they are complementary to and will result in
increased deliveries on the Lakehead System. These projects include:
- Enbridge Toledo -- Enbridge completed construction of a new pipeline that
connects our facilities at Stockbridge, Michigan to two refineries in the
Toledo, Ohio area. This pipeline has a capacity of 80,000 barrels per day
of heavy crude oil and commenced service in February 1999.
- Enbridge Pipelines (Athabasca) -- In March 1999, Enbridge completed
construction of a new 30-inch diameter pipeline for the delivery of heavy
crude oil from the Athabasca oil sands region near Fort McMurray, Alberta
to Hardisty, Alberta. At Hardisty, the Athabasca pipeline accesses other
pipeline systems including Enbridge's portion of the System in western
Canada. This project provides new pipeline capacity to accommodate
anticipated growth in production from the Alberta Oil Sands. When fully
powered, the Athabasca pipeline is anticipated to have an ultimate
capacity of approximately 570,000 barrels per day. Enbridge has entered
into a 30-year transportation arrangement with Suncor Energy Inc., the
initial shipper on the Athabasca pipeline.
PROSPECTS FOR GROWTH IN THE SUPPLY OF WESTERN CANADIAN CRUDE OIL
We believe both the near- and long-term outlook for supplies of western
Canadian crude oil and increasing deliveries on the Lakehead System are
positive. Although crude oil prices have been strong for the past year,
exploration and production activity initially lagged behind this price recovery,
as producers of western Canadian crude oil were cautious to invest in new
production. During 2000, production increased modestly and we believe that
production will continue to grow. We base our belief largely upon a significant
increase in oil well completions in western Canada in recent periods and the
expectation of completion of projects for production of synthetic crude oil from
the Alberta Oil Sands in 2001. As a leading indicator for conventional crude oil
production, oil well completions in 2000 more than doubled from the prior year,
as approximately
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5,500 wells were completed in 2000 compared with approximately 2,700 wells in
1999. We expect 2001 to be a strong drilling year, with the number of oil well
completions surpassing 2000 levels. Although there has been a bias toward
natural gas drilling, crude oil exploration is now on the rise and we expect
this trend to continue through 2001. We believe this resurgence is also
supported by external forecasts for oil prices over the next several years.
Forecasts for the price of West Texas Intermediate crude oil are in the
low-to-mid-twenty dollars per barrel range for the next several years. We
believe that this price level is sufficient to sustain continued growth in crude
oil production from the Western Canadian Sedimentary Basin, particularly from
the Alberta Oil Sands.
We believe that our intermediate-term outlook of increasing demand for
transportation services on the System has been confirmed by CAPP with its recent
notification to us that we proceed with our addition of facilities to enhance
PADD 2 market access and Enbridge Pipelines Terrace Expansion Program Phase II
in Canada. The PADD 2 market access project will allow us better access to the
Chicago market and provide further operational flexibility. The Terrace Phase II
project is designed to add 40,000 barrels per day of additional heavy crude oil
capacity to the Enbridge System in western Canada by the first half of 2002.
Forecast production, for which Terrace Phase II is designed, is expected to
access U.S. midwest refineries via the Lakehead System.
In the long-term, we believe we are well positioned to benefit from the
expected increases in western Canadian crude oil supply through a combination of
existing capacity and planned future expansion. 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. $30 billion and
representing more than two million barrels per day of potential incremental
production. Those projects that are completed are expected to provide
substantial increases in the production of heavy and synthetic crude oil in
western Canada well into the future.
GROWTH BEYOND THE LAKEHEAD SYSTEM
Diversification of our energy transportation business is a key objective of
our strategic plan. Business development efforts to grow though the development
and acquisition of complementary businesses are a focus of the strategic plan.
The initial emphasis will be on crude oil, refined products and natural gas
pipelines and terminals that fit our investment profile of accretive cash flows
and low investment risk. We expect such assets will become available with the
continuing rationalization of the energy infrastructure in the United States, as
existing owners focus on other core aspects of their businesses. We believe that
we are well positioned to participate in these opportunities, as we are an
established operator with a strong track record of reliability and access to
low-cost sources of capital.
We intend to expand beyond the market we currently serve in PADD 2 by
seeking out new opportunities throughout the United States. We are particularly
interested in the U.S. Gulf Coast area. External forecasts indicate that crude
oil production in the Gulf of Mexico will increase by about one million barrels
per day over the next five years and will require additional infrastructure to
transport the crude oil to shore. We will actively pursue these opportunities to
provide terminal and logistics solutions to the major crude oil producers in
this region.
We regularly analyze and discuss with others potential acquisitions, some
of which may be significant relative to our current size. We intend to finance
our acquisition activities through a combination of new debt and equity
financing, but our growth may be restrained if debt and equity capital are not
available to us on acceptable terms or if we cannot obtain necessary approvals,
including any required special committee approvals.
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As discussed below, we expect to complete a $33.0 million acquisition of
pipeline assets from our affiliate, Enbridge or our general partner. We may in
the future acquire other mature energy transportation assets from our general
partner. Those acquisitions may include a portion of the assets recently
acquired by our general partner in connection with its acquisition of Midcoast
Energy Resources Inc. in a transaction valued at approximately $600 million.
Midcoast transports, gathers, processes and markets natural gas and other
hydrocarbon products through over 80 company-owned pipelines covering
approximately 4,100 miles in ten states, the Gulf of Mexico and Canada.
Neither we nor Enbridge have identified any particular assets owned by
Enbridge or our general partner for transfer to us, and no proposal for an
acquisition of any of these assets is currently pending. We cannot predict
which, if any, energy transportation assets owned by Enbridge or our general
partner we may ultimately acquire or the terms of any such acquisitions. Any
acquisitions from Enbridge or our general partner will depend on a number of
factors, including the availability of acceptable alternative acquisition
opportunities from third parties and our financing capability at the time
acquisition opportunities may arise.
RECENT DEVELOPMENTS
MANAGEMENT TRANSITION
On May 11, 2001, we announced the intention of our general partner to
appoint Dan C. Tutcher as President of our general partner effective June 1,
2001, succeeding J. Richard Bird. Mr. Bird will remain a member of our general
partner's board of directors and will continue to have operational and
development responsibility for our existing assets.
Mr. Tutcher was Chairman of the Board, President and Chief Executive
Officer of Midcoast Energy Resources Inc. from its formation in 1992. Mr.
Tutcher also serves on the board of the Interstate Natural Gas Association of
America and the Gas Processors Association.
NORTH DAKOTA ACQUISITION
On March 8, 2001, we announced a definitive agreement to acquire the assets
of Enbridge Pipelines (North Dakota) Inc. from Enbridge. The assets consist of a
950-mile crude oil pipeline system with capacity of 84,000 barrels per day,
which transports crude oil from Montana, North Dakota and western Canadian oil
fields to the Lakehead System and a connecting carrier at Clearbrook, Minnesota.
The purchase price for this transaction is approximately $33.0 million, and the
closing is expected to occur in late May, 2001. The terms of this acquisition
were negotiated and approved by a special committee of independent directors of
our general partner.
SAFETY REGULATIONS
During 2001, various previously enacted legislative and regulatory changes
to the Pipeline Safety Act come into effect, including those that affect
pipeline operator qualifications and integrity plans for pipelines in high
consequence areas. We do not expect the changes to have a material adverse
impact on our operations, as we believe our established safety and integrity
programs already meet or exceed the new standards. Please read "Items 1 & 2
Business and Properties -- Environmental and Safety Regulation -- Safety
Regulation" in our Annual Report on Form 10-K for the year ended December 31,
2000 (our "Form 10-K").
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THE OFFERING
The following information assumes, unless otherwise noted, that the
underwriter does not exercise the option we granted to it to buy additional
Class A Common Units in the offering.
SECURITIES OFFERED......... 1,748,635 Class A Common Units. (1,978,142 Class A
Common Units if the underwriter's over-allotment
option is exercised in full.)
UNITS TO BE OUTSTANDING
AFTER THE OFFERING......... 26,738,635 Class A Common Units (representing a
85.5% limited partner interest)
3,912,750 Class B Common Units (representing a
12.5% limited partner interest)
USE OF PROCEEDS............ We estimate that we will receive net proceeds from
this offering of approximately $76.2 million. We
will use these proceeds to repay outstanding
indebtedness under our credit facility. Pending
repayment of this indebtedness, we may invest a
portion of the proceeds in short-term investment
grade securities. We may reborrow funds under the
revolving credit facility to expand the Lakehead
System and to acquire companies, businesses or
assets complementary to our business and to fund
capital expenditures for working capital. Please
read "Use of Proceeds."
RISK FACTORS............... An investment in the Class A Common Units involves
some risk. Please read "Risk Factors" in this
prospectus supplement and in the accompanying
prospectus.
NEW YORK STOCK EXCHANGE
SYMBOL................... LHP
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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
We have derived the summary historical financial and operating data as of
and for each of the years ended December 31, 1998, 1999 and 2000 from our
audited financial statements and related notes. We have derived the summary
historical financial and operating data as of March 31, 2000 and 2001 and for
the three-month periods then ended from our unaudited financial statements
which, in the opinion of management, include all adjustments necessary for a
fair presentation of the data. The results for the three-month period ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the full fiscal year. 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, 2000, and our Quarterly Report on Form 10-Q for the three months ended March
31, 2001, both of which are incorporated by reference in this prospectus
supplement and the accompanying prospectus.
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
INCOME STATEMENT DATA:
Operating revenue................................ $ 287.7 $ 312.6 $ 305.6 $ 78.8 $ 71.9
-------- -------- -------- -------- --------
Power, operating and administrative expenses... 140.9 124.5 128.0 30.2 31.8
Depreciation................................... 41.4 57.8 61.1 15.3 15.4
-------- -------- -------- -------- --------
Total operating expenses......................... 182.3 182.3 189.1 45.5 47.2
-------- -------- -------- -------- --------
Operating income................................. 105.4 130.3 116.5 33.3 24.7
Interest and other income........................ 6.0 3.4 4.8 1.6 0.7
Interest expense................................. (21.9) (54.1) (60.4) (14.6) (15.2)
Minority interest................................ (1.0) (0.9) (0.7) (0.2) (0.1)
-------- -------- -------- -------- --------
Net income....................................... $ 88.5 $ 78.7 $ 60.2 $ 20.1 $ 10.1
======== ======== ======== ======== ========
Net income per unit.............................. $ 3.07 $ 2.48 $ 1.78 $ 0.62 $ 0.27
======== ======== ======== ======== ========
Cash distribution per unit....................... $ 3.36 $ 3.49 $ 3.50 $ 0.875 $ 0.875
======== ======== ======== ======== ========
Weighted average units outstanding (millions).... 26.2 28.0 28.9 28.9 28.9
FINANCIAL POSITION DATA (AT PERIOD END):
Cash and cash equivalents........................ $ 47.0 $ 40.0 $ 37.2 $ 49.6
Property, plant and equipment, net............... 1,296.2 1,321.3 1,281.9 1,268.9
Total assets................................... 1,414.4 1,413.7 1,376.7 1,369.8
Long-term debt................................... 814.5 784.5 799.3 799.3
Partners' capital
Class A common unitholders..................... $ 453.4 $ 533.1 $ 488.6 $ 473.2
Class B common unitholders..................... 37.3 47.4 42.1 40.1
General partner................................ 4.3 5.6 5.2 5.1
-------- -------- -------- --------
Total partners' capital(1)..................... $ 495.0 $ 586.1 $ 535.9 $ 517.4
======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(2)........................................ $ 146.8 $ 188.1 $ 177.6 $ 48.6 $ 40.1
Cash flow from operating activities.............. 103.6 101.6 117.3 49.5 46.7
Cash flow from (used in) investing activities.... (427.9) (91.1) (20.7) 0.5 (6.3)
Cash flow from (used in) financing activities.... 252.7 (17.5) (99.4) (37.9) (28.0)
Capital expenditures............................. 487.3 82.9 21.7 0.2 2.4
OPERATING DATA:
Barrel miles (billions)(3)....................... 391 350 341 85 83
Deliveries (thousands of barrels per day)(4):
United States.................................. 992 898 976 948 980
Eastern Canada................................. 570 471 362 414 367
-------- -------- -------- -------- --------
Total................................... 1,562 1,369 1,338 1,362 1,347
======== ======== ======== ======== ========
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(1) At March 31, 2001, includes $1.0 million of accumulated other comprehensive
loss relating to floating-to-fixed interest rate swaps.
(2) 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 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.
(3) "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.
(4) "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.
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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 SHOULD CONSULT YOUR OWN TAX
ADVISOR ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF
AN INVESTMENT IN 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, see "Tax Considerations" elsewhere in this prospectus
supplement.
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 2001 (assuming quarterly distributions on the Class A
Common Units with respect to that period are equal to the current quarterly
distribution rate of $0.875 per unit), you will be allocated an amount of U.S.
federal taxable income for the tax year ended December 31, 2001, that is less
than 10% of the amount of cash distributed to you with respect to the tax year
ended December 31, 2001. We further 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 and 2004 that is
less than 10% and, for 2003, 20% to 30%, of the amount of cash distributed to
you with respect to each such period (assuming quarterly distributions on the
Class A Common Units with respect to each such period are equal to $0.875 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 assume completion of the North Dakota acquisition
described above, but do not assume any other 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" in this prospectus supplement and "Investment
in Lakehead 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 below and
those described in the accompanying prospectus. If any of the following 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 part of your investment.
You should consider carefully these risk factors 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.
RISKS OF OUR BUSINESS
WE DEPEND ON THE SUPPLY OF WESTERN CANADIAN CRUDE OIL.
The Lakehead System and our financial performance depend on adequate
supplies of western Canadian crude oil. In 1999 and 2000, 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 Lakehead System in the future also depends on
increased supplies of western Canadian crude oil. For a discussion of the
forecast for future supply of crude oil produced in western Canada, please read
"Business -- Supply and Demand for Western Canadian Crude Oil."
We depend on producers of western Canadian crude oil who use the Enbridge
System to reach markets in the United States and eastern Canada. If producers
elect to ship on other pipeline systems or sell their crude oil to western
Canadian refiners, we may transport lower volumes of crude oil through our
pipeline system. In addition, if the Enbridge System transports less crude oil
because of testing, line repair, reduced operating pressures or other reasons,
we might transport less crude oil on our pipeline system. Subject to our
potential ability to increase tariff rates to offset lower volumes as discussed
below, 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.
Demand for western Canadian crude oil and natural gas liquids in the
geographic areas served by the System 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, the primary
destination market served by the Lakehead System, exceeds current refining
capacity. We believe that the System has several advantages over other
transporters of crude oil with which it competes and the System is among the
lowest cost transporters of crude oil and natural gas liquids in North America
based on costs per barrel mile transported.
The Enbridge System includes a section that extends from Sarnia, Ontario to
Montreal, Quebec ("Line 9") which, at one time, flowed in a west-to-east
direction. During 1999, after negotiations with a group of refiners, Enbridge
Pipelines reversed the flow of Line 9. Consequently, crude oil is now imported
into the Province of Ontario, Canada from foreign sources through the facilities
of Portland Pipe Line Corporation, Montreal Pipe Line Limited and Enbridge
Pipelines. This offshore crude oil supply has resulted in a decrease in the
level of our deliveries of crude oil into the Ontario market. However, we expect
that this decrease will be offset by an increase in deliveries to the Chicago
area and other markets we serve.
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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.
We cannot predict whether or how these or other factors will affect demand
for the use of our pipeline system. 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.
WE CANNOT ALWAYS CONTROL THE RATES THAT WE CHARGE.
Since the Lakehead System is an interstate common carrier, our pipeline
operations are regulated by the FERC under the Interstate Commerce Act.
Uncertainty surrounds the applicable regulatory standards for establishing
tariff rates for liquids pipelines. In October 1996, the FERC approved a
Settlement Agreement between us, CAPP and the Alberta Department of Energy on
all then outstanding contested tariff rates. The Settlement Agreement provided
that the agreed underlying tariff rates will be subject to indexing as
prescribed by FERC regulation and that CAPP and Alberta Department of Energy
will not challenge any rates within the indexed ceiling for a period of five
years expiring October 2001. In addition to this base indexing methodology, our
tariff rates include a cost-of-service surcharge to recover the cost of, and to
provide a return on, our investment in SEP II and a fixed amount surcharge
relating to the Terrace project. If our tariff rates were successfully
challenged in the future, we could be adversely affected.
As a general rule, pipelines must use the indexing methodology to change
rates. However, the FERC has retained cost-based ratemaking as one of several
alternatives to the indexing approach. We believe that regulations of the FERC
would 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, although we cannot assure you that we will be allowed to do
so. Even if we were able eventually to raise our rates in such a case, we might
still have lower revenues during the time before our rate increases became
effective.
Please read "Items 1. and 2. Business and Properties -- Regulation and
Tariffs" in our Form 10-K.
FUTURE ACQUISITIONS MAY PRESENT DIFFICULTIES AND CHALLENGES FOR US.
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. Although we currently have pending, and expect to
close soon, the acquisition of crude oil pipeline assets located in North
Dakota, we do not have significant experience in acquiring other businesses. In
connection with evaluating and making any acquisitions in the future, we will be
required to make various assumptions regarding the future combined results of
the then-existing and to be acquired operations. We cannot assure you that our
assumptions will in fact be correct or that any acquisition will achieve the
desired financial objectives. In addition, any acquisition may present various
risks and challenges, including:
- risk of failing to integrate the operations or management of an acquired
business or a significant delay in such integration; and
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- diversion of management's attention.
In addition, we may not be able to consummate any acquisitions in the
future or be able 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 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 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. Accordingly, 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.
RISKS RELATED TO OUR DEBT AND OUR ABILITY TO DISTRIBUTE CASH
Agreements relating to our debt restrict our ability to make cash
distributions, incur additional debt and take other specified actions.
We had long-term debt of approximately $800 million in face value as of
March 31, 2001. Substantially all of our assets secured $500 million of this
debt. In addition, we will probably incur additional indebtedness to fund a
portion of our expansion programs and capital expenditures. Our long-term debt
as of March 31, 2001 consisted of:
- $310 million of first mortgage notes (the "First Mortgage Notes"), which
have no principal payments due until 2002;
- $190 million outstanding under a $350 million revolving bank credit
facility (the "Revolving Credit Facility");
- $100 million of 7.9% senior notes due 2012 (the "7.9% Notes");
- $100 million of 7% senior notes due 2018 (the "7% Notes"); and
- $100 million of 7 1/8% senior notes due 2028 (the "7 1/8% Notes" and,
together with the 7.9% and the 7% Notes, the "Senior Notes").
The Revolving Credit Facility currently matures in September 2005. The
maturity date will be automatically extended each year by an additional year
unless the banks give us notice that they will not extend the maturity date.
Please read "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in our Form 10-K.
Our debt agreements relating to the First Mortgage Notes, the Revolving
Credit Facility and the Senior Notes contain various restrictions. Most
importantly, the First Mortgage Notes restrict the amount of new debt that our
operating partnership can issue and may restrict the operations of our operating
partnership; and the 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. In addition, the 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 our unitholders. In addition, the operating partnership will be
prevented from making distributions to us if there is a continuing default on
any of its debt.
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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.
RISKS RELATED TO TAXES
WE MAY BE TAXED AS A CORPORATION RATHER THAN AS A PARTNERSHIP.
Fulbright & Jaworski L.L.P., our legal counsel, has rendered its opinion
that, under current law, Lakehead 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 such facts are incorrect,
particularly facts relating to the nature of our gross income, Lakehead 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 supplement.
If Lakehead is classified as an association taxable as a corporation, items
of our income, gain, loss, deduction and credit would not flow through to our
unitholders. 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) and, in the absence
of earnings and profits, 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).
ALLOCATION OF TAXABLE INCOME AND LOSS.
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 Lakehead 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 issued in this offering. For example, a pre-contribution gain
exists for assets that have been contributed to Lakehead by the general partner.
Our counsel believes that the curative allocations will prevent a shift of the
income tax liability with respect to this gain from the general partner to the
holders of Class A Common Units and that these allocations are therefore
consistent with the principles of Section 704(c) of the Internal Revenue Code,
and with the principles of the applicable regulations of the United States
Department of Treasury.
However, the Internal Revenue Service could challenge these allocations. A
successful IRS challenge to the curative allocations would shift the tax
consequences associated with the differences between the fair market value and
tax basis of Lakehead's assets in a manner that, in the view of our counsel,
would be contrary to the policy of Section 704(c). Because these curative
allocations are consistent with our counsel's view of the purposes of Section
704(c) and the associated Treasury Regulations, our counsel believes that it is
unlikely the IRS will challenge the curative allocations. However, the
application of the Treasury Regulations under Section 704(c) to a publicly
traded partnership existing prior to the promulgation of the regulations is
unclear. If the IRS were to litigate the matter, a court may not respect the
curative allocations. Our counsel believes that there is substantial authority
(within the meaning of Section 6662 of the Code) for our tax reporting position,
and that no penalties would be applicable if the IRS were to litigate
successfully against the curative allocations. A failure by the IRS to respect
the curative allocations would result in ratios of taxable income to cash
distributions received by the holders of Class A Common Units that are
materially higher than the estimates in this prospectus supplement.
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
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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.
UNIFORMITY OF CLASS A COMMON UNITS MAY NOT BE MAINTAINED.
Because we cannot match transferors and transferees of Class A Common
Units, we must attempt to maintain uniformity of the economic and tax
characteristics of the Class A Common Units. In order to do this, we have
adopted and will continue to adopt certain depreciation and amortization
conventions that do not conform with all aspects of the applicable Treasury
Regulations. If the IRS were successful in challenging our conventions,
uniformity would be affected and gain from the sale of Class A Common Units
might be increased.
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USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $76.2 million. We will use these proceeds to repay outstanding
indebtedness under our credit facility. Pending repayment of this indebtedness,
we may invest a portion of the proceeds in short-term investment grade
securities. We may reborrow funds under the revolving credit facility to expand
the Lakehead System and to acquire companies, businesses or assets complementary
to our business and to fund capital expenditures for working capital. As of the
date of this prospectus supplement, we have not definitively identified any
acquisition for which we may use the net proceeds of this offering.
As of March 31, 2001, $190 million of indebtedness was outstanding under
the revolving credit facility at a weighted average interest rate of 5.8% per
annum, and $160 million was available for future borrowing. We incurred
substantially all of the indebtedness outstanding under the revolving credit
facility to fund capital expenditures and working capital requirements. The
revolving credit facility has a five-year term with an "evergreen" provision
that automatically extends the maturity date each year by an additional year
unless the banks give notice of their intent not to extend. The revolving credit
facility matures in September 2005.
CAPITALIZATION
The following table shows our capitalization at March 31, 2001, and as
adjusted to give effect to this offering and the application of the estimated
net offering proceeds to repay indebtedness under the revolving credit facility.
Please read "Use of Proceeds." You should read this table in conjunction with
our financial statements and the notes to the financial statements incorporated
by reference in this prospectus supplement and the accompanying prospectus.
AS OF MARCH 31, 2001
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN MILLIONS)
Long-term Debt:
First Mortgage Notes.................................. $ 310.0 $ 310.0
Revolving Credit Facility............................. 190.0 113.0
7.9% Senior Notes due 2012............................ 99.8 99.8
7% Senior Notes due 2018.............................. 99.8 99.8
7 1/8% Senior Notes due 2028.......................... 99.7 99.7
-------- --------
Total Long-term Debt.......................... 799.3 722.3
Partners' Capital....................................... 517.4 594.4
-------- --------
Total Capitalization.......................... $1,316.7 $1,316.7
======== ========
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BUSINESS
OVERVIEW
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 through our subsidiary operating partnership, Lakehead Pipe Line
Company, Limited Partnership, also a Delaware limited partnership. Lakehead Pipe
Line Company, Inc., an indirect wholly owned subsidiary of Enbridge Inc. of
Canada, 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 U.S. portion of the System, and Enbridge owns the Canadian portion of the
System through a subsidiary, Enbridge Pipelines Inc. 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 the
Province of Ontario. 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.
The System extends from Edmonton, Alberta, across the Canadian prairies to
the U.S. 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 Lakehead System in the United
States which is approximately 1,880 miles long.
Crude oil shipments tendered to the System originate primarily in oil
fields in the western Canadian provinces of Alberta, Saskatchewan, Manitoba,
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 Pipelines. Deliveries from the System are currently made in the prairie
provinces of Canada and, through the Lakehead 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.
All scheduling of shipments (including routes and storage) is handled by
Enbridge Pipelines in coordination with us. 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. The Lakehead 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 Lakehead
System and to provide tankage in order to allow for more flexible scheduling of
oil movements.
PROPERTIES
The Lakehead System consists of approximately 3,300 miles of pipe with
diameters ranging from 12 inches to 48 inches, 63 main line pump station
locations with a total of approximately 667,000 installed horsepower and 58
crude oil storage tanks with an aggregate working capacity of approximately 10
million barrels. The Lakehead System requires at all times for operation
approximately 14 million barrels of oil in the pipeline, all of which is owned
by the shippers. The Lakehead System regularly transports up to 45 different
types of liquid hydrocarbons including light, medium and heavy crude oil
(including bitumen), condensate, synthetic crudes and natural gas liquids.
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The Lakehead System is comprised of a number of separate segments as
follows:
- Canadian border to Clearbrook segment including portions of four
pipelines consisting of 18-, 20-, 26-, and 34-inch diameter pipe,
respectively, and a fifth line consisting of 36- and 48-inch diameter
pipe, with a total annual capacity of 1,727,000 barrels per day.
- Clearbrook to Superior segment including portions of three pipelines
consisting of 18-, 26-, and 34-inch diameter pipe, respectively, with a
total annual capacity of 1,464,000 barrels per day. This segment also
includes approximately 80 miles of 48-inch pipeline looping that
increases the capacity of this segment.
- Superior to Marysville segment consisting of 30-inch diameter pipe with
an annual capacity of 509,000 barrels per day.
- Superior to Chicago area segment including two pipelines of 24- and
34-inch diameter pipe with a total annual capacity of 889,000 barrels per
day.
- Chicago area to Marysville segment consisting of a 30-inch diameter pipe
with an annual capacity of 333,000 barrels per day.
- Canadian border to Buffalo segment consisting of 12- and 20-inch diameter
pipe with a total annual capacity of 74,000 barrels per day.
The estimated annual capacities noted above take into account receipt and
delivery patterns and ongoing pipeline maintenance, and reflect achievable
pipeline capacity over long periods of time.
SUPPLY AND DEMAND FOR WESTERN CANADIAN CRUDE OIL
SUPPLY
Substantially all of the shipments delivered through the Lakehead System
originate in oilfields in western Canada. The Lakehead System also receives:
- U.S. and Canadian production at Clearbrook through a connection with a
pipeline owned by a subsidiary of Enbridge;
- U.S. production at Lewiston, Michigan; and
- both U.S. and offshore production in the Chicago area.
Changes in supply from western Canada directly affect movements through the
Enbridge System and, therefore, the supply available for transportation through
the Lakehead System. Due to the integration of the Enbridge and Lakehead
Systems, Enbridge Pipelines regularly prepares forecasts of western Canadian
crude oil, which take into account deliveries on the Lakehead System.
The low crude oil prices experienced during 1998 and early 1999 caused a
decline in western Canadian producers' expenditures for oil exploration and
development, which in turn adversely affected the crude oil supply available in
western Canada. As a result, Enbridge Pipelines has updated its forecast of
western Canadian crude oil supply. This is a long-term outlook that involves
updated supply projections from the oil sands projects currently operating,
being expanded or that have been proposed in western Canada. We believe that
production from these projects is less sensitive to the short-term fluctuations
in the price of crude oil due to the magnitude of committed capital expenditures
involved.
The updated Enbridge Pipelines forecast projects that the supply of western
Canadian crude oil will be approximately 2,145,000 barrels per day in 2001 and
approximately 2,300,000 barrels per day in 2002. This updated forecast projects
the supply of crude oil to rise to approximately
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2,600,000 barrels per day in 2004 and to approximately 2,974,000 barrels per day
by 2010. The forecast quantity of crude oil was made subject to numerous
uncertainties and assumptions, including a crude oil price of $26.35 per barrel
in 2000 rising to $29.00 in 2010. On March 28, 2001, the benchmark West Texas
Intermediate crude oil price closed at $26.31 per barrel.
While the projected supply of crude oil for 2001 and 2002 is lower than the
forecast that supported the Terrace Expansion Project, the updated Enbridge
Pipelines forecast supports the need for additional pipeline facilities beyond
the Terrace Phase I facilities. Phase II includes construction of facilities to
increase capacity on the Canadian portion of the System. While Phase II does not
involve construction on the Lakehead System, we expect to benefit directly from
the approximately 40,000 barrels per day increase in capacity as additional
volumes from the Alberta Oil Sands come on stream. Subject to final approval of
the NEB, Phase II is expected to be placed in service during 2002.
The NEB had previously released a report titled "Canada's Oil Sands: A
Supply and Market Outlook to 2015" in October 2000. The base case scenario
resulted in total western Canadian production that in 2005 was approximately
100,000 barrels per day higher than the most recent Enbridge Pipelines forecast.
We believe that the outlook for increased crude oil production in western
Canada continues to be positive, as evidenced by the Enbridge Pipelines
forecast, the NEB study and CAPP's recent request to proceed with Terrace Phase
II. The timing of growth in the supply of western Canadian crude oil, however,
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. We anticipate that deliveries on the Lakehead System in 2001
will be approximately 1,400,000 to 1,450,000 barrels per day based on a recent
survey of shippers. Based on this forecast, we estimate our net income will be
between $75 million and $80 million in 2001 before taking into account any costs
related to our relocation to Houston, Texas.
DEMAND
For strategic planning purposes, the U.S. government segregates the United
States into five Petroleum Administration for Defense Districts, referred to as
PADDs. The oil industry utilizes these districts in reporting statistics
regarding oil supply and demand. The Lakehead System services the northern tier
of PADD 2. We believe that modestly increasing crude oil demand and declining
inland U.S. domestic production are contributing to an increasing need for
importing crude oil into the PADD 2 market. We also believe that PADD 2 will
continue to provide an excellent market for western Canadian shippers as returns
to crude oil producers are expected to remain attractive. Moreover, we believe
that PADD 2 will remain the most attractive market for western Canadian supply
since it is currently the largest North American processor of western Canadian
heavy crude oil and has the greatest potential for converting refining capacity
from light to heavy crude.
Although western Canadian producers experience competition from Venezuelan
and Mexican heavy crude oil in PADD 2, western Canadian heavy crude oil is
expected to remain the dominant supply source for the region. We believe that
Latin American heavy crude oil will continue to provide the balancing supply to
the PADD 2 region. In the short-term, Latin American deliveries to PADD 2 are
expected to decrease as the supply of western Canadian crude oil continues to
recover from the negative impact of the 1998 and 1999 price decline. Over the
long-term, we expect that producers of Latin American heavy crude oil will
concentrate on PADD 3 and PADD 5 markets, where they receive a higher return
compared to PADD 2.
Based on the most recent forecast completed by Enbridge Pipelines, exports
from western Canada to the United States are projected to increase to
approximately 1,805,000 barrels per day in 2005 and remain at that level or
above through 2010. This is approximately 600,000 barrels per day higher than
1999 exports. Of the exports to the United States, PADD 2 would receive
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approximately 1,448,000 barrels per day in 2005, approximately 500,000 barrels
per day higher than 1999.
Deliveries to Ontario averaged approximately 362,000 barrels per day in
2000. Demand in Ontario is expected to grow to approximately 640,000 barrels per
day over the next several years. Since 1999, our deliveries to Ontario have been
impacted by the reversal of Enbridge Line 9 from Montreal to Sarnia. Based on
our forecast, and assuming no expansion of Line 9, our deliveries to Ontario are
expected to approximate 2000 levels in 2001 and grow, on average, nearly 4% per
year through 2002-2005.
Crude oil refineries in Ontario generally process light sweet and light
sour crude oil, and the supply of conventional light sweet and light sour crude
oil in western Canada is expected to decline. Ontario refiners cannot process
significantly greater amounts of western Canadian heavy crude oil without
substantial reconfiguration of their refineries. To the extent Ontario refiners
have found it difficult to obtain light crude oil supply from western Canada at
an economic price, refiners recently have accessed foreign light crude volumes
through the reversed facilities of Line 9. Light crude oil movements originating
in the Chicago area for delivery to Ontario via the Lakehead System declined
following the reversal of Line 9 in 1999, averaging approximately 63,500 barrels
per day for 1999, and approximately 15,000 barrels per day in 2000. Line 9 has
an annual capacity of approximately 240,000 barrels per day and, in 2000,
operated at approximately 210,000 barrels per day. The ongoing utilization level
of Line 9 will be dependent upon global crude oil market dynamics.
TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax counsel
("Counsel"), and addresses 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 U.S. federal income tax
purposes or any other matter affecting us. 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 Class A Common 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 Class A Common Units made by this prospectus and of
an investment in Class A Common 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 should consult
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his own tax advisor about the tax consequences peculiar to his circumstances.
Unless the context otherwise requires, references in this section to "Lakehead,"
"we" or "us" are references to both Lakehead and Lakehead Pipe Line Company,
Limited Partnership (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, Lakehead 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 Lakehead nor the Operating Partnership has elected or will
elect to be classified as an association taxable as a corporation.
2. Lakehead 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
Lakehead 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 Lakehead 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 Lakehead as an association taxable as a
corporation.
Counsel's opinion as to the partnership status of Lakehead is based
principally upon its interpretation of Treasury Regulations under Sections 7701
and 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 Lakehead will continue to
meet the Natural Resource Exception is a matter to be determined by Lakehead's
operations and the facts existing at the time of determination. However, the
general partner will use its best efforts to cause Lakehead to operate in such
fashion as is necessary for Lakehead to continue to meet the Natural Resource
Exception.
If Lakehead 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), Lakehead 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 unitholders in liquidation of their units. This contribution and
liquidation should be tax-free to unitholders and Lakehead, so
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long as Lakehead, at such time, does not have liabilities in excess of the
adjusted tax basis of its assets. Thereafter, Lakehead will be treated as an
association taxable as a corporation for U.S. federal income tax purposes.
If Lakehead is classified as a corporation for U.S. federal income tax
purposes, Lakehead 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. Lakehead'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 Lakehead 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 Lakehead 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 Lakehead 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 Class A Common 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 Class A Common
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 Class A
Common Units who does not execute and deliver a transfer application may not
receive certain tax information or reports furnished to unitholders unless the
Class A Common 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 Class A Common Units.
A unitholder who loans all or part of his Class A Common Units to a "short
seller" to complete a short sale would appear to lose his status as a partner
with respect to such loaned Class A Common Units for U.S. federal income tax
purposes. See "-- Tax Treatment of Operations -- Treatment of Class A Common
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 unitholders should
consult their own tax advisors with respect to their status as partners in
Lakehead for U.S. federal income tax purposes.
TAX CONSEQUENCES OF CLASS A COMMON UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No U.S. federal income tax will be paid by Lakehead. Instead, each
unitholder will be required to report on his income tax return his allocable
share of income, gains, losses,
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deductions and credits without regard to whether he receives cash distributions.
Consequently, a unitholder may be allocated income from Lakehead 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, gains,
losses, deductions and credits for Lakehead's taxable year ending with or within
the taxable year of the unitholder.
TREATMENT OF LAKEHEAD'S CASH DISTRIBUTIONS
Cash distributions by Lakehead 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 Class A Common Units immediately before the distribution. Cash
distributions in excess of a unitholder's adjusted tax basis generally will be
treated as a gain from the sale or exchange of the Class A Common Units, taxable
in accordance with the rules described under "Disposition of Class A Common
Units" below. Additionally, to the extent that cash distributions by Lakehead
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.
See "-- Limitations on Deductibility of Lakehead Losses."
Any reduction in a unitholder's share of Lakehead'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. A decrease in a unitholder's percentage interest in Lakehead because
of its issuance of additional units will decrease his share of Lakehead's
nonrecourse liabilities, thus resulting in a corresponding deemed distribution
of cash. A non-pro rata distribution of cash or property may result in ordinary
income to a unitholder, regardless of his basis in his Class A Common Units, if
such distribution reduces the unitholder's share of Lakehead'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"). Lakehead's 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. It is not expected that Lakehead will incur any material amounts of
liabilities that will be treated as nonrecourse liabilities for U.S. federal
income tax purposes.
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 Common 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 Lakehead'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 cash distributions, the
general partner anticipates that the Special
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Allocation will be used in its 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 CLASS A COMMON UNITS
A unitholder's initial tax basis in his Class A Common Units will be the
amount paid for the Class A Common Units plus his share of Lakehead's
nonrecourse liabilities. The initial tax basis will be increased by the
unitholder's share of Lakehead's income and by increases in his share of
Lakehead's nonrecourse liabilities. That basis will be decreased (but not below
zero) by distributions from Lakehead, by the unitholder's share of Lakehead's
losses and by the unitholder's share of expenditures of Lakehead that are not
deductible in computing its taxable income and are not required to be
capitalized. A limited partner will have no share of Lakehead's debt which is
recourse to the general partner, but will have a share, generally based on his
share of profits, of Lakehead's nonrecourse liabilities. See "-- Disposition of
Class A Common Units-Recognition of Gain or Loss."
LIMITATIONS ON DEDUCTIBILITY OF LAKEHEAD'S LOSSES
The deduction by a unitholder of his share of Lakehead's losses will be
limited to the adjusted tax basis in his Class A Common 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 Lakehead'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 Class A Common 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 Class A Common Units, excluding any
portion of the basis attributable to his share of Lakehead's nonrecourse
liabilities, reduced by any amount of money the unitholder borrowed to purchase
his Class A Common Units if the lender of such borrowed funds owns an interest
in Lakehead, is related to such unitholder or can look only to the purchased
Class A Common Units for repayment. A unitholder's "at risk" amount will
increase or decrease as the adjusted tax basis of the unitholder's Class A
Common Units increases or decreases (other than tax basis increases or decreases
attributable to increases or decreases in his share of Lakehead's 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 Lakehead, if any, will only be available to offset
future passive income generated by Lakehead 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 Lakehead may be deducted in full when the unitholder
disposes of his entire investment in
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Lakehead 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.
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
Lakehead will be treated as "investment income" for this limitation on interest
deductions. In addition, the unitholder's share of Lakehead's portfolio income
will be treated as investment income. Investment interest expense includes (i)
interest on indebtedness properly allocable to property held for investment,
(ii) a partnership's interest expense attributed to portfolio income and (iii)
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 Class
A Common 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 LAKEHEAD'S INCOME, GAIN, LOSSES, DEDUCTIONS AND CREDITS
In general, if Lakehead has a net profit, items of income, gain, loss,
deduction and credit will be allocated among the general partner and the
unitholders in accordance with their respective percentage interests in
Lakehead. If Lakehead 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 Class A Common 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 Lakehead that would otherwise be allocated to the holders of Class B
Common Units. Although Lakehead does not expect that its operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of Lakehead 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, (i) to
eliminate a deficit in any unitholder's capital account and (ii) to produce
capital accounts that, when followed on liquidation, 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 Lakehead'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
Lakehead by the general partner ("Contributed Property"), and to account for the
difference between the fair market value of Lakehead's assets and their carrying
value on Lakehead'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
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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
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 Lakehead's tax reporting position, and that no
penalties would be applicable if the IRS were to litigate successfully against
the curative allocations. Because Lakehead has a relatively low tax basis in its
assets, 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 Lakehead'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 Common
Units.
TAX TREATMENT OF OPERATIONS
INCOME AND DEDUCTIONS IN GENERAL
Each unitholder will be required to report on his U.S. federal income tax
return his allocable share of Lakehead's income, gain, loss, deduction and
credit for the taxable year of Lakehead 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 Lakehead makes a distribution of
cash to the unitholder.
A unitholder who owns Class A Common Units at any time during a quarter and
who disposes of such Class A Common Units prior to the record date set for a
distribution with respect to such quarter will be allocated items of Lakehead'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.
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ACCOUNTING METHOD AND TAXABLE YEAR
Lakehead uses the calendar year as its taxable year and the accrual method
of accounting for U.S. federal income tax purposes.
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis established for the various assets of Lakehead 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 Lakehead by the general partner
was initially equal to the adjusted tax basis of the general partner in such
assets immediately before their contribution to Lakehead. See "-- Allocation of
Lakehead's Income, Gain, Losses, Deductions and Credits."
Lakehead 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 Lakehead. 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 Lakehead would be
increased accordingly. Any such increase could be material.
SECTION 754 ELECTION
Lakehead 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 Lakehead's properties ("inside basis") pursuant to Section
743(b) of the Code to fair market value (as reflected by his purchase price).
The 743(b) adjustment is attributed solely to a purchaser of Class A Common
Units and is not added to the basis of Lakehead's assets. (For purposes of this
discussion, a unitholder's inside basis in Lakehead's assets will be considered
to have two components: (i) his share of Lakehead'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 Class A Common Units even if that convention is not
consistent with certain Treasury Regulations. See "-- Tax Treatment of
Operations-Uniformity of Class A Common Units" below.
Although Counsel is unable to opine as to the validity of such an approach,
Lakehead 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 Regulations 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, Lakehead will
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apply the rules described in the Treasury Regulations and legislative history.
If Lakehead determines that such position cannot reasonably be taken, Lakehead
may adopt a depreciation or amortization convention under which all purchasers
acquiring Class A Common 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 Lakehead's assets. Such an aggregate approach may result in lower annual
depreciation or amortization deductions than would otherwise be allowable to
certain unitholders. See "-- Tax Treatment of Operations-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 Lakehead to goodwill. As an intangible asset, goodwill would be
amortizable over a longer period of time than Lakehead's tangible assets.
A Section 754 election is advantageous if the transferee's basis in his
Class A Common Units is higher than such Class A Common Units' share of
Lakehead'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 Lakehead's assets for purposes of
calculating, among other items, his depreciation deductions and his share of any
gain or loss on a sale of Lakehead's assets. Conversely, a Section 754 election
is disadvantageous if the transferee's basis in such Class A Common Units is
lower than such Class A Common Units' share of Lakehead'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 Lakehead on the basis of certain assumptions as to the value of
Lakehead's assets and other matters. There is no assurance that the
determinations made by Lakehead 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 Class A
Common 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 Lakehead's income, gain, loss, deduction and credit for
purposes of the alternative minimum tax. A portion of Lakehead's depreciation
deductions may be treated as an item of tax preference for this purpose.
A unitholder's alternative minimum taxable income derived from Lakehead may
be higher than his share of Lakehead's net income because Lakehead may use
accelerated methods of depreciation for purposes of computing U.S. federal
taxable income or loss. Prospective unitholders should 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 LAKEHEAD PROPERTY
The U.S. federal income tax consequences of the ownership and disposition
of Class A Common 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 Lakehead. 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
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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, deduction
and credit previously reported by unitholders might change, and unitholders
might be required to adjust their tax liability for prior years.
TREATMENT OF CLASS A COMMON UNITS LOANED TO COVER SHORT SALES
A unitholder whose Class A Common Units are loaned to a "short seller" to
cover a short sale of Class A Common Units may be considered as having disposed
of ownership of such loaned Class A Common Units. If so, he would no longer be a
partner with respect to those Class A Common Units during the period of such
loan. As a result, during such period, items of Lakehead's income, gain,
deduction, loss and credit allocable to those Class A Common Units would appear
not to be reportable by such unitholder, any cash distributions received by the
unitholder with respect to those Class A Common 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 Class
A Common Units are loaned to a short seller to cover a short sale of Class A
Common 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 Class A Common 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 Class A Common Units equal to
the difference between the amount realized and the unitholder's adjusted tax
basis in the Class A Common 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 Lakehead's nonrecourse liabilities. Since the amount
realized includes a unitholder's share of Lakehead's nonrecourse liabilities,
the gain recognized on the sale of Class A Common Units may result in a tax
liability in excess of any cash received from such sale.
Prior distributions by Lakehead 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 Common Unit is sold at a price greater than the unitholder's adjusted
tax basis in such Class A Common Unit, even if the price is less than his
original cost.
Except as noted below and provided the Class A Common 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") on the sale or exchange of a
Class A Common Unit will generally be taxable as
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capital gain or loss, and the gain or loss will generally be a long term capital
gain or loss if the Class A Common 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 Lakehead. 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 Class A Common Unit and may be
recognized even if there is a net taxable capital loss realized on the sale of
the Class A Common Unit. Thus, a unitholder may recognize both ordinary income
and a capital loss upon disposition of Class A Common 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 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 Class A Common Units to sell as would be the case with corporate stock,
but, according to the Treasury Regulations, may designate the specific Class A
Common Units sold for purposes of determining the holding period of the Class A
Common Units transferred. A unitholder electing to use the actual holding period
of Class A Common Units transferred must consistently use that identification
method for all subsequent sales or exchanges of Class A Common Units. A
unitholder considering the purchase of additional Class A Common Units or a sale
of Class A Common Units purchased in separate transactions should 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, items of Lakehead's income, gain, loss, deduction and credit
will be determined annually and will be prorated on a monthly basis and
subsequently apportioned among the unitholders in proportion to the number of
Class A Common 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 Lakehead'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 Class A Common
Units in the open market may be allocated items of Lakehead's income, gain,
loss, deduction and credit 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 items of Lakehead's income, gain, loss,
deduction and credit 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 Class A
Common Units), items of Lakehead's income, gain, loss, deduction and credit
might be reallocated among the unitholders. The general partner is authorized to
revise Lakehead'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 Class A Common Units at any time during a quarter and
who disposes of such Class A Common Units prior to the record date set for a
cash distribution with
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respect to such quarter will be allocated items of Lakehead's income, gain,
loss, deduction and credit attributable to such quarter during which such Class
A Common Units were owned, but will not be entitled to receive such cash
distribution.
NOTIFICATION REQUIREMENTS
A unitholder who sells or exchanges Class A Common Units is required to
notify Lakehead 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. Lakehead 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 Class A Common 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 Class A Common Unit that is allocated to
goodwill or going concern value of Lakehead. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
Lakehead 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 Lakehead capital and profits within a 12-month period. A termination of
Lakehead will cause a termination of the Operating Partnership. A termination of
Lakehead will result in the closing of Lakehead'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 Lakehead's taxable year may
result in more than 12 months' taxable income or loss of Lakehead being
includable in his taxable income for the year of termination. New tax elections
required to be made by Lakehead, 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 Lakehead deductions for depreciation. A termination
could also result in penalties if Lakehead were unable to determine that the
termination had occurred. Moreover, a termination might either accelerate the
application of, or subject Lakehead to, any tax legislation enacted prior to the
termination.
ENTITY-LEVEL COLLECTIONS
If Lakehead is required or elects under applicable law to pay any federal,
state or local tax on behalf of any unitholder or former unitholder, the general
partner is authorized to pay such taxes from Lakehead's 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 Class A Common 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 Lakehead 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 Lakehead 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)-
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1(a)(6). Any such non-uniformity could have a negative impact on the value of a
unitholder's interest in Lakehead.
Consistent with the recently finalized Treasury Regulations under Section
743, Lakehead 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). See
"-- Disposition of Class A Common Units-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, Lakehead will
apply the rules described in the Treasury Regulations and legislative history.
If Lakehead determines that such position cannot reasonably be taken, Lakehead
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
Lakehead's property. If such an aggregate approach is adopted, annual
depreciation and amortization deductions might be lower than 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 Lakehead determines that the
loss of such depreciation and amortization deductions will have a material
adverse effect on the unitholders. If Lakehead chooses not to utilize this
aggregate method, Lakehead 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. See "-- 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
Common 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 Common Units. The general
partner must be reasonably assured, based on advice of counsel, that the Class B
Common 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 Common Units will be treated as one class
of units.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Class A Common 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.
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Virtually all of the taxable income derived by such an organization from
the ownership of a Class A Common 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 Lakehead's gross income will qualify
as such income.
Non-resident aliens and foreign corporations, trusts or estates that own
Class A Common Units will be considered to be engaged in business in the United
States on account of ownership of Class A Common Units. As a consequence, they
will be required to file U.S. federal income tax returns for their allocable
shares of Lakehead'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,
Lakehead 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 Lakehead'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 Lakehead to change these procedures.
Because a foreign corporation that owns Class A Common 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 Lakehead'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 Class A Common Unit will be subject to U.S. federal income tax on
gain realized on the disposition of such Class A Common 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 Class A Common Unit if that
foreign unitholder has owned less than 5% in value of the Class A Common Units
during the five-year period ending on the date of the disposition and if the
Class A Common Units are regularly traded on an established securities market at
the time of the disposition.
ADMINISTRATIVE MATTERS
LAKEHEAD INFORMATION RETURNS AND AUDIT PROCEDURES
Lakehead 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 Lakehead's income, gain, loss,
deduction and credit for the preceding taxable year of Lakehead. If Lakehead
elects large partnership treatment under the Code, this tax information will be
provided to unitholders by March 15th for the preceding taxable year of Lakehead
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. See "Allocation of Lakehead's Income, Gain, Losses,
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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 Class A Common Units.
The U.S. federal income tax information returns filed by Lakehead 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 Lakehead 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, Lakehead 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 Lakehead but also non-partnership items.
Partnerships generally are treated as separate entities for purposes of
U.S. federal income 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 for one partner to be designated as the
"Tax Matters Partner" for these purposes. Lakehead's partnership agreement
appoints the general partner as the Tax Matters Partner.
The Tax Matters Partner will make certain elections on behalf of Lakehead
and unitholders and can extend the statute of limitations for assessment of tax
deficiencies against unitholders with respect to Lakehead's taxable items. The
Tax Matters Partner may bind any unitholder with less than a 1% profits interest
in Lakehead 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 Lakehead 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 Lakehead'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 Lakehead 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: (i) taxable income or loss from passive loss limitation
activities; (ii) taxable income or loss from other activities (such as portfolio
income or loss); (iii) net capital gains (or net capital loss) to the extent
allocable to passive loss limitation activities and other activities; (iv) a net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other
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activities; (v) general credits; (vi) low-income housing credit; (vii)
rehabilitation credit; (viii) tax-exempt interest; (ix) for certain
partnerships, foreign taxes paid and foreign source partnership items; and (x)
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 Class A Common
Units. It is unlikely that Lakehead will elect to have these provisions apply
because of the cost of their application.
NOMINEE REPORTING
Persons who hold Class A Common Units in Lakehead as a nominee for another
person are required to furnish to Lakehead: (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 Class A Common 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 Lakehead. The nominee is required to supply the
beneficial owner of the Class A Common Units with the information furnished to
Lakehead.
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
Lakehead 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 Lakehead, has registered Lakehead as a tax shelter in the absence
of assurance that Lakehead 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. Lakehead has been issued the following tax shelter
registration number: 92008000124. ISSUANCE OF THE TAX SHELTER REGISTRATION
NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN LAKEHEAD OR THE CLAIMED TAX
BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. Lakehead must
furnish its tax shelter registration number to the unitholders, and a unitholder
who sells or otherwise transfers a Class A Common Unit in a subsequent
transaction must furnish Lakehead's tax shelter registration number to the
transferee. The penalty for failure of the transferor of a Class A Common Unit
to furnish such tax shelter registration number to the transferee is $100 for
each such failure. The unitholders must disclose the tax shelter registration
number of Lakehead 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
Lakehead is claimed or income of Lakehead is included. A unitholder who fails to
disclose the tax
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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 include Lakehead. If any Lakehead 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, Lakehead must disclose the pertinent facts on its U.S.
federal tax information. In addition, Lakehead 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 Class A Common Units. Lakehead owns property and does business
in Illinois, Indiana, Michigan, Minnesota, 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 CLASS A COMMON UNITS. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER
SHOULD CONSULT, AND MUST DEPEND UPON, HIS 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 CLASS A COMMON UNITS.
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UNDERWRITING
We and Goldman, Sachs & Co. have entered into an underwriting agreement
with respect to the 1,748,635 Class A Common Units being offered. Subject to
certain conditions, Goldman Sachs has agreed to purchase these units.
If Goldman Sachs sells more Class A Common Units than the total 1,748,635
Class A Common Units being offered, Goldman Sachs has an option to buy up to an
additional 229,507 Class A Common Units from us to cover such sales. Goldman
Sachs may exercise that option for 30 days following the close of the offering.
The following table shows the per unit and total underwriting discounts and
commissions to be paid to the underwriter by us. Such amounts are shown assuming
both no exercise and full exercise of Goldman Sachs' option to purchase 229,507
additional Class A Common Units.
Paid by Lakehead Pipe Line Partners, L.P. No Exercise Full Exercise
----------------------------------------- ----------- -------------
Per unit............................................... $ 1.944 $ 1.944
Total.................................................. $3,399,346 $3,845,508
Class A Common Units sold by Goldman Sachs to the public initially will be
offered at the initial price to public set forth on the cover of this prospectus
supplement. Any Class A Common Units sold by Goldman Sachs to securities dealers
may be sold at a discount of up to $1.16 per unit from the initial price to
public. Any such securities dealers may resell any units purchased from Goldman
Sachs to certain other brokers or dealers at a discount of up to $0.10 per unit
from the initial price to public. If all of the Class A Common Units are not
sold at the initial price to public, Goldman Sachs may change the offering price
and the other selling terms.
We and our general partner have agreed with Goldman Sachs not to dispose of
or hedge any Class A or Class B Common Units or securities convertible into or
exchangeable for Class A or Class B Common Units during the period from the date
of this prospectus supplement continuing through the date 90 days after the date
of this prospectus supplement, except with the prior written consent of Goldman
Sachs. This agreement does not apply to any existing employee benefit plans.
In connection with the offering, Goldman Sachs 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. Short sales involve the sale by Goldman Sachs 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 Goldman
Sachs' option to purchase additional Class A Common Units from us in the
offering. Goldman Sachs may close out any covered short position by either
exercising its 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, Goldman Sachs 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 it may purchase
Class A Common Units through the overallotment option. "Naked" short sales are
any sales in excess of such option. Goldman Sachs 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 Goldman Sachs is 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 Goldman Sachs in the open market prior to the
completion of the offering.
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 may
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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 New York Stock Exchange, in the over-the-counter market or
otherwise.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $400,000.
In the ordinary course of their respective businesses, Goldman Sachs and
certain of its affiliates have engaged, and may in the future engage, in
investment banking or commercial banking transactions with us and our
affiliates.
Because the National Association of Securities Dealers, Inc. views the
Class A Common Units offered hereby as interests in a direct participation
program, the offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules.
We, together with our subsidiary operating partnership and our general
partner, have agreed to indemnify Goldman Sachs against certain liabilities,
including liabilities under the Securities Act of 1933.
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 other legal
matters in connection with the offering on our behalf. Baker Botts L.L.P., the
underwriter's counsel, will also issue opinions about various legal matters in
connection with the offering on behalf of the underwriter.
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PROSPECTUS
$200,000,000
LAKEHEAD PIPE LINE PARTNERS, L.P.
Class A Common Units
------------------
We may offer and sell up to $200,000,000 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 only be used to offer or sell units if it is accompanied
by a prospectus supplement. The prospectus supplement will contain important
information about us and the units which 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. See "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 these 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 "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.
YOU SHOULD CAREFULLY READ AND CONSIDER THE RISK FACTORS BEGINNING ON PAGE 5
OF THIS PROSPECTUS BEFORE BUYING UNITS.
THESE RISKS INCLUDE THE FOLLOWING:
- OUR PIPELINE SYSTEM DEPENDS ON ADEQUATE SUPPLIES OF AND DEMAND FOR WESTERN
CANADIAN CRUDE OIL.
- THE FEDERAL ENERGY REGULATORY COMMISSION REGULATES THE TARIFFS WE CHARGE
OUR CUSTOMERS. WE PLAN TO FILE TARIFF SURCHARGES IN LATE 1998 OR EARLY
1999 TO REFLECT CHANGES IN OUR COSTS AND THROUGHPUT FROM OUR CURRENT
SYSTEM EXPANSION PROGRAM. ANY SUCCESSFUL CHALLENGES TO OUR TARIFF RATES
COULD ADVERSELY AFFECT US AND REDUCE CASH DISTRIBUTIONS TO OUR
UNITHOLDERS.
- IN MAY 1997, THE ILLINOIS COMMERCE COMMISSION DENIED OUR APPLICATION FOR A
CERTIFICATE THAT WE NEED IN ORDER TO EXERCISE CONDEMNATION AUTHORITY IN
ILLINOIS FOR OUR CURRENT SYSTEM EXPANSION PROGRAM. ILLINOIS APPELLATE
COURTS HAVE REFUSED TO OVERTURN THE DENIAL. AS A RESULT, OBTAINING RIGHTS
OF WAY HAS BECOME MORE EXPENSIVE AND HAS TAKEN LONGER THAN IF WE HAD
CONDEMNATION AUTHORITY.
- OUR PARTNERSHIP AGREEMENT LIMITS THE LIABILITY AND MODIFIES THE FIDUCIARY
DUTIES OF OUR GENERAL PARTNER TO US AND OUR UNITHOLDERS. 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. CONFLICTS OF INTEREST BETWEEN US AND AFFILIATES OF OUR GENERAL
PARTNER COULD ARISE DUE TO OUR GENERAL PARTNER'S RELATIONSHIP WITH US AND
ITS AFFILIATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November 25, 1998
(superseded sections omitted)
41
TABLE OF CONTENTS
Who We Are................................ 3
About this Prospectus..................... 3
Where You Can Find More Information....... 3
Forward-Looking Statements................ 4
Risk Factors.............................. 5
Risks of Our Business................... 5
We Cannot Always Control the Rates
that We Charge..................... 5
Possible SEP II Right of Way
Acquisition and Permitting
Problems........................... 6
We Compete with Other Pipelines and
Refineries......................... 6
We May Have Significant Environmental
and Safety Costs and Liabilities... 7
Risks Arising From Our Partnership
Structure and Relationships with Our
General Partner....................... 8
Our General Partner May Have Conflicts
of Interest........................ 8
Our Partnership Agreement Restricts
the General Partner's Fiduciary
Duties............................. 9
We May Sell Additional Units.......... 9
Your Voting Rights are Limited........ 9
It is Difficult to Remove the General
Partner............................ 9
The General Partner Has a Limited Call
Right on the Class A Units......... 10
It is Difficult to Enforce Civil
Liabilities Against Our Officers,
Directors and Controlling
Persons............................ 10
Lakehead.................................. 11
Use of Proceeds........................... 12
Cash Distributions........................ 13
Conflicts of Interest and Fiduciary
Responsibilities........................ 19
Investment in Lakehead by Employee Benefit
Plans................................... 24
Plan of Distribution...................... 25
Experts................................... 26
-------------------------
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.
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WHO WE ARE
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. Lakehead Pipe Line Company, Inc., a wholly owned subsidiary of
Enbridge Inc. ("Enbridge") of Canada, serves as our general partner. Enbridge is
a publicly traded company that is a North American leader in energy services and
delivery. We and Enbridge are engaged in the transportation of crude oil and
other liquid hydrocarbons through the world's longest liquid petroleum pipeline
system (the "System"). We own the United States portion of the System and a
subsidiary of Enbridge, Enbridge Pipelines, Inc., owns the Canadian portion of
the System (the "Enbridge Pipeline System"). The System is the primary
transporter of crude oil from Western Canada to the United States.
As used in this prospectus, "we," "us," "our," the "Partnership" and
"Lakehead" mean Lakehead Pipe Line Partners, L.P. and include our subsidiary
operating partnership, Lakehead Pipe Line Company, Limited Partnership. Our
Class A Common Units ("Class A Units") represent limited partner interests in
Lakehead Pipe Line Partners, L.P. We also have limited partner interests that
are represented by Class B Common Units ("Class B Units"). All of our Class B
Units are owned by our general partner. The Class A and Class B Units are
referred to in this prospectus as "units."
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 Units
described in this prospectus in one or more offerings up to a total dollar
amount of $200,000,000. This prospectus provides you with a general description
of us and the Class A Units. Each time we sell Class A 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 November 25, 1998. 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."
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 document we file at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices located at Seven World Trade Center, New York, New York 10048, and at
500 West Madison Street, Chicago, Illinois 60661. Please call the SEC at
1-800-733-0330 for further information on their public reference room. Our SEC
filings are also available at our website at http://www.lakehead.com or at the
SEC's web site at http://www.sec.gov. 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
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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. 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 are incorporated by reference in this prospectus until we sell all of
the Class A Units offered by this prospectus.
- Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as
amended (the "Form 10-K");
- Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998;
- Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998,
as amended;
- Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998;
- Current Report on Form 8-K dated July 21, 1998, as amended; and
- Current Report on Form 8-K dated October 20, 1998.
You may request a copy of these filings, at no cost, by writing or calling
us at the following address:
Investor Relations
Lakehead Pipe Line Partners, L.P.
Lake Superior Place
21 West Superior Street
Duluth, Minnesota 55802
(800) 525-3999
(218) 725-0100
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, any prospectus
supplement and the documents we have incorporated by reference contain
forward-looking statements. Such 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 are based on current and
anticipated economic conditions, globally and in our markets, governmental
regulatory policies, competitive factors 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 such 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.
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RISK FACTORS
Before you invest in our Class A Units, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in the
prospectus, any prospectus supplement and the documents we have incorporated by
reference before buying Class A Units.
If any of the following 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 Units could decline, and you may
lose part of your investment.
RISKS OF OUR BUSINESS
WE CANNOT ALWAYS CONTROL THE RATES THAT WE CHARGE
Since we are an interstate common carrier, our pipeline operations are
regulated by the FERC under the Interstate Commerce Act. This Act allows the
FERC and certain other interested parties to challenge proposed or changed rates
and our current rates that are already effective. The FERC may suspend our
proposed or changed rates for up to seven months and may allow such rates to
become effective subject to investigation and potential refund. The FERC may
also reduce our current rates in the future and, upon an appropriate showing,
order that we pay reparations for damages caused by such rates during the two
years prior to the beginning of the FERC's investigation.
The FERC has used its current ratemaking methodology for liquids pipelines
since January 1, 1995. This methodology allows changes in the maximum rate we
can charge based on changes in a producer price index. The maximum rate is
adjusted up or down each year by the change in this price index minus 1%. The
current ratemaking methodology also allows pipelines or shippers to use
cost-based or market-based rates, instead of the index-based rates, in certain
circumstances. This method of determining rates may limit our ability to set
rates based on our true costs or may delay the implementation of rates that
reflect increased costs. If this occurs, it could adversely affect us. In
addition, if the FERC sets rates using the cost index, changes in this index
might not be large enough to fully reflect actual increases in our costs. It is
also possible that the index will rise by less than 1% or fall, causing the
maximum rates to fall. This happened in July 1998. See "Items 1 and 2. Business
and Properties -- Regulation" in the Form 10-K.
Many of the ratemaking issues contested in prior rate cases before the
FERC, in particular the FERC's oil pipeline ratemaking methodology, have not
been reviewed by a federal appeals court. An appeals court review of a FERC rate
case could result in a different ratemaking methodology. If this happens, it
could adversely affect us and reduce cash distributions to our unitholders.
The FERC is currently involved in a proceeding with another publicly traded
partnership that transports petroleum products. In this proceeding, the FERC
might further limit the tax allowance that is permitted in rates charged by
publicly traded partnerships. The FERC might also change its application of its
oil pipeline ratemaking methodology. The administrative law judge in this
proceeding issued an initial decision on September 25, 1997. This decision
considered the tax allowance issue as it affects publicly traded partnerships
and the FERC oil pipeline ratemaking methodology. The FERC is now
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reviewing this decision. In this review, the FERC could change its current
rulings on the tax allowance issue or the application of the FERC oil pipeline
ratemaking methodology in a way that might ultimately adversely affect us and
reduce cash distributions to our unitholders.
The level of tariffs established under the FERC's rules and regulations
affects our operating income and cash flow. We plan to file tariff surcharges in
late 1998 or early 1999 to reflect changes in our costs and throughput from our
System Expansion Program II ("SEP II") and Terrace Expansion Program
("Terrace"). In 1996, we entered into a settlement agreement with the
representative of most of our customers on all then outstanding contested
tariffs. That agreement sets forth guidelines for the tariff surcharge for SEP
II. However, some implementation details of the surcharge are still subject to
interpretation and possible negotiations. We have also entered into an agreement
with the same customer representative on the tariff surcharge for Terrace. On
October 27, 1998, we filed the agreements with the FERC as a settlement, seeking
advance approval for the tariff surcharges for SEP II and Terrace. See "Items 1
and 2. Business and Properties -- SEP II Expansion Program," "-- Terrace
Expansion Program" and "-- Tariffs" in the Form 10-K. However, the customers who
did not enter into these agreements may still challenge our tariff rate filings.
Any successful challenges to our tariff rates could adversely affect us and
reduce cash distributions to our unitholders.
POSSIBLE SEP II RIGHT OF WAY ACQUISITION AND PERMITTING PROBLEMS
In May 1997, the Illinois Commerce Commission denied our application for a
certificate that we need in order to exercise condemnation authority in Illinois
for our SEP II project. Illinois appellate courts have refused to overturn the
denial. As a result, obtaining rights of way has become more expensive and has
taken longer than if we had condemnation authority.
We are currently obtaining the environmental and construction permits that
we need to construct the new pipeline for SEP II. If it takes us longer than
anticipated to get these permits, it might take us longer to construct and begin
using this new pipeline.
WE COMPETE WITH OTHER PIPELINES AND REFINERIES
Pipelines have historically been the least expensive way to transport crude
oil over land for intermediate and long distances. As a result, our most
significant competitors for transporting western Canadian crude oil are other
pipelines. We also face competition, however, when producers choose to sell
their crude oil for use in western Canada. Enbridge has advised us that in 1997,
the Enbridge Pipeline System transported approximately 65% of total western
Canadian crude oil production of which approximately 90% was transported by our
pipeline system. The 35% of western Canadian crude oil not transported by the
Enbridge Pipeline System was refined in Alberta or Saskatchewan or transported
through other pipelines to British Columbia, Washington, Montana and other
states in the Northwest U.S. In the United States, our pipeline system competes
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; and Buffalo, New York, and, through a connecting pipeline, the refinery
market and pipeline hub located in the Patoka/Wood
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River area of southern Illinois. See "Items 1 and 2. Business and Properties --
Competition" in the Form 10-K.
WE MAY HAVE SIGNIFICANT ENVIRONMENTAL AND SAFETY COSTS AND LIABILITIES
Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety. We believe that we
are currently in substantial compliance with these regulations. However,
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 cash distributions
to our unitholders could be reduced.
Federal, state and local laws and regulations impose strict controls on the
discharge of oil and certain other materials into navigable waters. These laws
and regulations can require us to pay civil and criminal penalties for
discharges. If there is a discharge, we also may have to pay for cleanup costs,
damage to natural resources and third party lawsuits. These laws require us to
use spill prevention control procedures, which include diking and similar
structures, to help prevent oil and other materials from getting into navigable
waters if there is a leak from our pipeline.
Contamination resulting from spills of crude oil and petroleum products is
not unusual within the petroleum pipeline industry. Spills of crude oil from our
pipelines have occurred in the past, and may occur in the future. In addition,
directional drilling of pipeline conduits when a pipeline is being constructed
can result in discharges of drilling related materials to the soil, groundwater,
surface waters or wetlands.
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. We believe that
there are suitable alternatives to hydrostatic testing, but such testing may
nevertheless be necessary or required in the future. 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.
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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 to 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 does not prevent Enbridge from pursuing 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. In addition, the current direction of
oil flow through part of the Enbridge Pipeline System from Sarnia to Montreal
may be reversed, as discussed in "-- Risks of Our Business -- Our Pipeline
System Might be Used Less if Demand for Crude Oil and Natural Gas Liquids
Falls." If the reversal of Enbridge's Montreal line occurs, Enbridge will
compete with us to supply crude oil to the Ontario market. Our agreement with
Enbridge expressly permits this reversal. See "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. See "Conflicts of Interest and Fiduciary Responsibilities."
We are very dependent on Enbridge and the Enbridge Pipeline System. Nearly
all of the crude oil and natural gas liquids we ship comes from the Enbridge
Pipeline 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
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employees. In operating our pipeline system, we and the general partner rely
solely on employees of Enbridge and its affiliates. Because Enbridge and its
affiliates are engaged in many other businesses and activities that require the
services of their employees, those employees may not be available when we need
them.
OUR PARTNERSHIP AGREEMENT RESTRICTS THE GENERAL PARTNER'S FIDUCIARY DUTIES
The general partner generally has a fiduciary duty to us and to our
unitholders. As a result, the general partner must exercise good faith and
integrity in handling our assets and affairs. However, Delaware law allows
Delaware limited partnerships to modify the fiduciary duties of their general
partners. Our partnership agreement does this and limits the fiduciary duties of
the general partner to us and to our unitholders. 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 partner as being in breach of a fiduciary duty. See
"Conflicts of Interest and Fiduciary Responsibilities."
WE MAY SELL ADDITIONAL UNITS
We can issue an unlimited number of additional units or other equity
securities, including equity securities with rights to distributions and
allocations or in liquidation superior to the Class A Units offered by this
prospectus. If we issue more units or other equity securities, your
proportionate ownership interest in Lakehead 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 partnership agreement allows the general partner to cause us to
register for sale any units held by the general partner or its affiliates. The
general partner currently owns 3,912,750 Class B Units. These registration
rights allow the general partner and its affiliates holding any units to request
registration of such units and to include any such units in a registration of
other units by us. In addition, the general partner and its affiliates may sell
their units in private transactions at any time.
YOUR VOTING RIGHTS ARE LIMITED
You have limited voting rights as a unitholder. The general partner
generally manages the activities of Lakehead. Unitholders do not have the right
to elect the general partner on an annual basis. As a result, the unitholders
have only limited control over our management. However, if the general partner
withdraws or is removed, the unitholders can elect the new general partner by a
majority vote of the outstanding units.
IT IS DIFFICULT TO REMOVE THE GENERAL PARTNER
A vote of at least 66 2/3% of the outstanding units is required to remove
the general partner. Units held by the general partner and its affiliates are
excluded from this vote.
Our partnership agreement does not allow the general partner to withdraw
voluntarily as general partner before January 1, 2000 (subject to a few
exceptions). However, the
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general partner can withdraw before this date if such withdrawal is approved by
the holders of at least 66 2/3% of the outstanding units (excluding units held
by the general partner or its affiliates). If the general partner withdraws or
is removed as our general partner, it will automatically be withdrawn as general
partner of our subsidiary operating partnership.
There is no agreement, however, that prevents Enbridge from selling all or
part of its ownership in the general partner.
THE GENERAL PARTNER HAS A LIMITED CALL RIGHT ON THE CLASS A UNITS
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.
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 federal securities laws of the United States.
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LAKEHEAD
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. The following chart shows our organization and ownership
structure as of the date of this prospectus before giving effect to this
offering. Except in the following chart, the ownership percentages referred to
in this prospectus reflect the approximate effective ownership interest in us
and our subsidiary operating partnership on a combined basis.
[CHART]
We and Enbridge are engaged in the transportation of crude oil and other
liquid hydrocarbons through the world's longest liquid petroleum pipeline
system. We own the United States portion of the System and Enbridge owns the
Canadian portion of the System. The System is the primary transporter of crude
oil from western Canada to the United States. It 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 and, through a connecting
pipeline, the Patoka/Wood River refinery market and pipeline hub in southern
Illinois.
Crude oil delivered to the Enbridge Pipeline System originates in oil
fields in the western Canadian provinces of Alberta, Saskatchewan, Manitoba and
British Columbia and in the Northwest Territories of Canada and is delivered to
the Enbridge Pipeline System through facilities owned and operated by third
parties or affiliates of Enbridge. Deliveries from the Enbridge Pipeline System
are currently made in the prairie provinces of Canada and, through our pipeline
system, in the Great Lakes and Midwest regions of the United
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States and the Province of Ontario. These deliveries are made principally to
refineries either directly or through connecting pipelines of other companies.
Our pipeline system extends approximately 1,750 miles from the Canadian
border near Neche, North Dakota, to the Canadian border near Marysville,
Michigan. Four separate pipelines run from the Canadian border near Neche to
Clearbrook, Minnesota and three of these pipelines continue on from Clearbrook
to Superior, Wisconsin. At Superior, our pipeline system continues as two
separate and diverging pipelines. One pipeline runs through the upper Great
Lakes region, and the other runs through the lower Great Lakes region of the
United States. Both pipelines re-enter Canada at a point near Marysville. Our
pipeline system also includes a lateral pipeline from the Canadian border near
Niagara Falls to the Buffalo, New York area. Crude oil and natural gas liquids
enter our pipeline system at the Canadian border from the Enbridge Pipeline
System and, to a lesser extent, at a number of other points. Deliveries of these
volumes are then scheduled into our pipeline system in accordance with customer
orders.
Enbridge handles all scheduling of shipments (including routes, storage,
etc.) in coordination with our general partner. Our pipeline system includes 16
connections to other pipelines and refineries at various locations in the United
States, including the refining centers of Minneapolis-St. Paul, Chicago,
Detroit, Toledo, and Buffalo, and, through a connecting pipeline, the
Patoka/Wood River refinery market and pipeline hub in southern Illinois. As of
September 30, 1998, our pipeline system had approximately nine million barrels
of tankage capacity at its three terminals at Clearbrook, Superior and Griffith,
Indiana. The tankage capacity is used both to gather crude oil prior to
injection into our pipeline system and to facilitate shipping different types of
petroleum. At Superior, we remove all petroleum from our pipeline system and
direct it into tankage. Then, when appropriate to meet the requirements of batch
movements, we reinject the petroleum into our pipeline system for delivery
through either the upper Great Lakes region or the lower Great Lakes region of
the United States.
USE OF PROCEEDS
Unless otherwise specified in a related prospectus supplement, the net
proceeds received by us from the sale of the Class A Units will be used for
general partnership purposes, including the expansion of our pipeline system.
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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 that is available for
distribution 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 in a year prior to that in which funds related thereto 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. See "-- 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 (i) 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), (ii) sales
of units or other equity interests for cash and (iii) 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, until the sum of all amounts distributed to the unitholders and to
the general partner (including any incentive distributions) equals the aggregate
amount of all Cash from Operations from December 27, 1991 (the date Lakehead
commenced operations) through the end of the calendar quarter prior to such
distribution. Any amount of cash distributed on such date in excess of the
aggregate amount of Cash from Operations will be deemed to constitute Cash from
Interim Capital Transactions and distributed accordingly. See "-- Quarterly
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Distributions of Available Cash -- Distributions of Cash from Interim Capital
Transactions" and "-- Adjustment of the Target Distributions."
If cash that is deemed to constitute Cash from Interim Capital Transactions
is distributed in an aggregate amount per unit equal to $21.50 (the offering
price of the Class A 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. See "-- Quarterly Distributions of Available
Cash -- Distributions of Cash from Interim Transactions." To date, we have not
distributed any cash that was deemed to constitute Cash from Interim Capital
Transactions. We do not anticipate that there will be significant amounts of
cash that are deemed to constitute Cash from Interim Capital Transactions
distributed to our unitholders in the future.
Capital expenditures that are necessary to maintain our pipeline system
will reduce the amount of Cash from Operations. Therefore, if the general
partner were to decide that a substantial portion of our capital expenditures
was 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 deemed to constitute Cash from Interim Capital
Transactions might increase.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
We will make quarterly cash distributions to our unitholders and our
general partner with respect to each calendar quarter prior to liquidation in an
amount equal to 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 Available Cash constituting Cash from Operations
will be made in the following manner:
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.
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The following table illustrates the percentage allocation of Available Cash
among the unitholders and the general partner up to the various target
distribution levels.
MARGINAL PERCENTAGE
INTEREST IN DISTRIBUTION
-------------------------
QUARTERLY DISTRIBUTION GENERAL
AMOUNT UP TO UNITHOLDERS PARTNER
---------------------- ------------- ---------
FIRST TARGET DISTRIBUTION........... $0.59 98% 2%
SECOND TARGET DISTRIBUTION.......... $0.70 85% 15%
THIRD TARGET DISTRIBUTION........... $0.99 75% 25%
THEREAFTER.......................... -- 50% 50%
The Target Distributions are each subject to adjustment as described below
under "-- Distributions of Cash from Interim Capital Transactions" and
"-- Adjustment of the Target Distributions." Notwithstanding the foregoing, if
the Target Distributions have been reduced to zero as a result of distributions
of Available Cash constituting Cash from Interim Capital Transactions and the
holders of the Class A Units have ever failed to receive the First Target
Distribution, distributions will first be made 98% to all holders of Class A
Units, pro rata, 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 Units have always received at least the First Target
Distribution.
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Available Cash constituting Cash from Interim Capital
Transactions will be made 98% to all unitholders, pro rata, and 2% to the
general partner until a hypothetical holder of a Class A Unit acquired in our
initial public offering has received with respect to such Class A Unit
distributions of Available Cash constituting Cash from Interim Capital
Transactions in an amount per Class A Common Unit equal to $21.50. Thereafter,
all distributions of Available Cash constituting Cash from Interim Capital
Transactions will be distributed as if they 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
Available Cash constituting Cash from Interim Capital Transactions and the
holders of the Class A Units have ever failed to receive the First Target
Distribution, distributions will first be made 98% to all holders of Class A
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 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.
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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) other than by reason of the issuance of
additional units for cash. In addition, if a distribution is made of Available
Cash constituting 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 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 UPON LIQUIDATION
Following the commencement of dissolution and liquidation proceedings, 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 such 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 so adjusted.
Generally, the holders of Class A 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 so adjusted. The manner of such
adjustment is 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;
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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 (a) the Unrecovered Capital in
respect of such unit, plus (b) any cumulative arrearages then existing in
the First Target Distribution in respect of such unit, plus (c) the excess
of the Second Target Distribution over the First Target Distribution for
each quarter since inception, less (d) 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 ((b) plus (c) less (d) 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 (a) the Unrecovered Capital in
respect of each unit, plus (b) the Target Amount, plus (c) the excess of
the Third Target Distribution over the Second Target Distribution for each
quarter since inception, less (d) 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, (i) the sum
of (a) all cash receipts of Lakehead 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 (ii) the sum of (aa) all cash disbursements of
Lakehead during such quarter (excluding cash distributions to unitholders and to
the general partner) and (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 (x) to provide for the proper conduct
of the business of Lakehead (including cash reserves for possible rate refunds
or future capital
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expenditures) or (y) 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 Lakehead is
a party or by which it is bound or its assets are subject. Taxes paid by
Lakehead on behalf of, or amounts withheld with respect to, all or less than all
of the unitholders shall not be considered cash disbursements of Lakehead 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 Lakehead 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 Lakehead.
"Cash from Interim Capital Transactions" means cash distributed by Lakehead
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 Lakehead, on a cumulative basis, the cash
balance of Lakehead at December 27, 1991 (excluding any cash on hand from the
exercise of the Underwriters' over-allotment option), plus all cash receipts of
Lakehead 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 (a) all cash operating expenditures of Lakehead, including, without
limitation, taxes paid by Lakehead as an entity after December 27, 1991, (b) all
cash debt service payments of Lakehead 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 Lakehead
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), (c) all cash capital expenditures of Lakehead during such period
necessary to maintain the service capability of our pipeline system, (d) 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, (e) 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 (f) 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 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 Lakehead on behalf of, or amounts withheld with respect to, all or less than
all of the unitholders shall not be
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considered cash operating expenditures of Lakehead 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 Lakehead 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 Lakehead, which are defined in the
Partnership Agreement to be (a) 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 Lakehead, (b) sales of equity
interests by Lakehead and (c) sales or other voluntary or involuntary
dispositions of any assets of Lakehead (other than (x) sales or other
dispositions of inventory in the ordinary course of business, (y) sales or other
dispositions of other current assets including accounts receivable or (z) 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
Lakehead.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Certain conflicts of interest could arise as a result of the relationships
among Enbridge and its affiliates, the general partner and Lakehead. The general
partner makes all decisions relating to Lakehead. Some of the officers of the
general partner who make such decisions may also be officers of Enbridge and its
affiliates. 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
Lakehead in a manner beneficial to the unitholders. However, the partnership
agreement of Lakehead (the "Partnership Agreement") contains provisions that
allow the general partner to take into account the interests of parties in
addition to Lakehead and the unitholders in resolving conflicts of interest. The
Partnership Agreement also contains provisions that may restrict the remedies
available to unitholders for actions taken that might otherwise constitute
breaches of fiduciary duty. The duty 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
Available Cash constituting Cash from Operations to make distributions to
the unitholders. In addition, the general partner's determination to make a
capital expenditure for the purpose of maintaining our pipeline system or
its determination as to what portion of a capital expenditure was made for
the purpose of maintaining 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
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borrowings by Lakehead, or the approval thereof by the general partner,
will not constitute a breach of any duty by the general partner to Lakehead
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 Lakehead or the unitholders. See "Cash
Distributions."
(b) Under the terms of the Partnership Agreement and the partnership
agreement of the Operating Partnership (the "Operating Partnership
Agreement" and, together with the Partnership Agreement, the "Partnership
Agreements"), the general partner will exercise its discretion in managing
the business of Lakehead. 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 Lakehead. 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
Lakehead. Employees of Enbridge and its affiliates currently provide
services to the general partner for the benefit of Lakehead pursuant to a
Services Agreement among Enbridge, an affiliate of Enbridge and the general
partner. Substantially all of the shipments of crude oil and natural gas
liquids delivered by our pipeline system originate from the Enbridge
Pipeline System, and Enbridge handles all scheduling of shipments
(including routes and storage) in coordination with the general partner.
(c) The general partner has certain varying percentage interests and
priorities with respect to Available Cash. See "Cash Distributions." The
timing and amount of cash receipts may be affected by various
determinations made by the general partner under the 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) Neither of the Partnership Agreements nor any of the other
agreements, contracts and arrangements between Lakehead, 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.
(e) The decision whether Lakehead or the general partner should
purchase outstanding units at any time may involve the general partner or
Enbridge in a conflict of interest.
(f) Enbridge and its affiliates (other than the general partner) are
expressly permitted by the terms of the Partnership Agreement to engage in
any businesses and activities, including in certain instances, those in
direct competition with Lakehead, except as described below under
"-- Restrictions on General Partner Activity." For example, Enbridge and a
group of refiners have developed a project to reverse the flow of a portion
of the Enbridge Pipeline System from Sarnia to Montreal, to transport crude
oil from Montreal to Sarnia. The reversal of this line would result in
Enbridge becoming a competitor of Lakehead for supplying crude oil to the
Ontario market.
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(g) Lakehead and the general partner do not have any employees and
rely solely on employees of Enbridge and its affiliates. Although the
general partner conducts no business other than acting as general partner
of Lakehead and the Operating Partnership and managing certain subsidiaries
and ancillary activities, Enbridge and its affiliates conduct business and
activities of their own in which Lakehead has no economic interest. As a
result, employees who provide services to the general partner may not be
available when needed.
(h) As a matter of practice and whenever possible, the general partner
limits the liability under contractual arrangements of Lakehead to all or
particular assets of Lakehead, with the other party to have no recourse
against the general partner or its assets other than its interest in
Lakehead. In some circumstances, such action of the general partner may
result in the terms of the transaction being less favorable to Lakehead
than would otherwise be the case. The Partnership Agreement provides that
such action does not constitute a breach of the general partner's fiduciary
obligations.
(i) Lakehead is, 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 Lakehead.
However, unitholders do not have the right under these agreements to
enforce directly the obligations of the general partner or of such
affiliates in favor of Lakehead. Therefore, the unitholders must depend
upon the general partner to enforce such obligations, including obligations
that it or such affiliates may owe to Lakehead.
RESTRICTIONS ON GENERAL PARTNER ACTIVITY
The general partner is subject to certain restrictions on its activities.
The sole business of the general partner is to act as general partner of
Lakehead and the Operating Partnership, to manage certain subsidiaries and to
undertake ancillary activities. Further, the 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 of Lakehead as conducted at
the time of its formation in 1991, subject to the exceptions set forth below.
None of the instruments to which Lakehead 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 Lakehead and
the Operating Partnership, Enbridge and its other subsidiaries will not engage
in or acquire any business that is in direct material competition with the
business of Lakehead as conducted at the time of its 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 Lakehead, including the potential reversal of the Montreal
extension to transport crude oil from Montreal to Sarnia;
SECOND, the scope of the competition restriction is limited
geographically to those routes and products in respect of which Lakehead
provided transportation as of December 1991. For example, Enbridge and its
other subsidiaries would be permitted
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to acquire a pipeline business in which transportation is made over routes
not served by Lakehead or involving products not transported by Lakehead 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 such competitive business; and
FOURTH, Enbridge and its other subsidiaries may acquire any
competitive business if it is first offered for acquisition to Lakehead and
Lakehead fails 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 Lakehead to exercise its 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 the Partnership Agreements
from engaging in businesses that may be in competition with Lakehead. In
addition, the 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 Lakehead, except as specifically limited by the
restrictions described above.
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER
The general partner is generally accountable to Lakehead and the
unitholders as a fiduciary. Consequently, the general partner must exercise good
faith and integrity in handling the assets and affairs of Lakehead. 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. The Partnership
Agreement, as permitted by the Delaware Act, contains various provisions that
have the effect of restricting the fiduciary duties that might otherwise be owed
by the general partner to Lakehead and its partners. In addition, holders of
Class A 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.
The Partnership Agreement provides that whenever a conflict of interest
arises between the general partner or its affiliates, on the one hand, and
Lakehead 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 the Partnership Agreement requires the
general partner to act in a manner that
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is fair and reasonable to Lakehead or the unitholders. Thus, unlike the strict
duty of a trustee who must act solely in the best interests of his beneficiary,
the 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. The 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.
The 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 the Partnership Agreement and to make
any decision pursuant to the authority prescribed in the Partnership Agreement
so long as such action is reasonably believed by the general partner to be in
the best interests of Lakehead. Further, the Partnership Agreement provides that
the general partner will not be liable for monetary damages to Lakehead or the
unitholders for errors of judgement or for any other acts or omissions if the
general partner acted in good faith. Lakehead is required, under the terms of
the 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, the best interests of Lakehead
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 the Partnership Agreement that purport to waive or
restrict fiduciary duties of the general partner. Unitholders should consult
their own legal counsel concerning the fiduciary responsibilities of the general
partner and its officers and directors and the remedies available to
unitholders.
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INVESTMENT IN LAKEHEAD BY EMPLOYEE BENEFIT PLANS
An investment in Lakehead 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.
See "Tax Considerations -- Tax-Exempt Organizations and Certain Other
Investors." Fiduciaries should determine whether an investment in Lakehead is
authorized by the appropriate governing instrument and is an appropriate
investment for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in Lakehead, be deemed to own an undivided
interest in the assets of Lakehead, with the result that the general partner
would also be a fiduciary of such plan and Lakehead 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). Lakehead'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).
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PLAN OF DISTRIBUTION
We may sell the Class A Units to one or more underwriters for public
offering and sale, or we may sell the Class A Units to investors directly or
through agents. Any underwriter or agent involved in the offer and sale of the
Class A Units will be named in the applicable prospectus supplement.
Underwriters may offer and sell the Class A 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 Units upon the terms and conditions as are
set forth in the applicable prospectus supplement. In connection with the sale
of Class A Units, underwriters may be deemed to have received compensation from
us in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of the Class A Units for whom they may act as agent.
Underwriters may sell the Class A 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.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of the Class A Units, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Underwriters, dealers
and agents participating in the distribution of the Class A Units may be deemed
to be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Class A 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 Units to which such prospectus supplement relates,
providing for payment and delivery on a future date specified in such prospectus
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 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 Units shall not be
prohibited under the applicable laws of any jurisdiction in the United States
and (ii) if the Class A Units are being sold to underwriters, we shall have sold
to such underwriters the total number of such Class A 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 Units may engage in transactions that stabilize, maintain or
otherwise affect the market price of the Class A Units at levels above those
that might otherwise prevail in the
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open market. Specifically, the underwriters may over-allot in connection with
the offering creating a short position in the Class A Units for their own
account. For the purposes of covering a syndicate short position or pegging,
fixing or maintaining the price of the Class A Units, the underwriters may place
bids for the Class A Units or effect purchases of the Class A Units in the open
market. A syndicate short position may also be covered by exercise of an
over-allotment option, if one is granted to the underwriters. Finally, the
underwriters may impose a penalty bid on certain underwriters and dealers. This
means that the underwriting syndicate may reclaim selling concessions allowed to
an underwriter or a dealer for distributing Class A Units in transactions to
cover syndicate short positions, in stabilization transactions or otherwise. The
underwriters will not be required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time.
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.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K of Lakehead Pipe Line Partners, L.P.
for the year ended December 31, 1997, as amended, and the audited balance sheet
of Lakehead Pipe Line Company, Inc. as of December 31, 1997 and 1996,
incorporated in this prospectus by reference to the Current Report on Form 8-K
of Lakehead Pipe Line Partners, L.P. dated July 21, 1998, as amended, 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.
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus supplement
or accompanying prospectus. You must not rely on any unauthorized information or
representations. This prospectus supplement and accompanying prospectus is an
offer to sell only the units offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus supplement and accompanying prospectus is current only as of its
date.
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TABLE OF CONTENTS
Prospectus Supplement
Page
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Prospectus Supplement Summary........ S-3
Risk Factors......................... S-12
Use of Proceeds...................... S-17
Capitalization....................... S-17
Business............................. S-18
Tax Considerations................... S-21
Underwriting......................... S-38
Legal Matters........................ S-39
Prospectus
Who We Are........................... 3
About This Prospectus................ 3
Where You Can Find More Information.. 3
Forward-Looking Statements........... 4
Risk Factors......................... 5
Lakehead............................. 11
Use of Proceeds...................... 12
Cash Distributions................... 13
Conflicts of Interest and Fiduciary
Responsibilities................... 19
Investment in Lakehead by Employee
Benefit Plans...................... 24
Plan of Distribution................. 25
Page
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Experts.............................. 26
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1,748,635 Units
LAKEHEAD PIPE LINE PARTNERS, L.P.
Class A Common Units
Representing Limited Partner Interests
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PROSPECTUS SUPPLEMENT
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GOLDMAN, SACHS & CO.
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