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As filed with the Securities and Exchange Commission on August 9, 2001
Registration No. 333-59758
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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LAKEHEAD PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 39-1715850
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
LAKE SUPERIOR PLACE
21 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802
(218) 725-0100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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S. MARK CURWIN
LAKE SUPERIOR PLACE
21 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802
(218) 725-0100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
JOHN A. WATSON
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TX 77010
(713) 651_5151
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration statement becomes effective, as determined by
market conditions.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post_effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED AUGUST 9, 2001
PROSPECTUS
$500,000,000 CLASS A COMMON UNITS
LAKEHEAD PIPE LINE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
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We may offer and sell up to $500,000,000 of our Class A Common Units in
one or more separate offerings with this prospectus. We will determine the
prices and terms of the sales at the time of each offering and will describe
them in a supplement to this prospectus.
This prospectus can be used to offer or sell units only if it is
accompanied by a prospectus supplement. The prospectus supplement will contain
important information about us and the units that is not included in this
prospectus. You should read this prospectus and the prospectus supplement
carefully.
We may sell these units to underwriters or dealers, or we may sell them
directly to other purchasers. Please read "Plan of Distribution". The prospectus
supplement will list any underwriters and the compensation that they will
receive. The prospectus supplement will also show you the total amount of money
that we will receive from selling the units, after we pay certain expenses of
the offering.
The Class A Common Units are listed on the New York Stock Exchange
under the symbol "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.
INVESTING IN THE UNITS INVOLVES RISK. YOU SHOULD CONSIDER EACH OF THE
FACTORS DESCRIBED OR REFERENCED UNDER "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS
PROSPECTUS AND IN ANY APPLICABLE PROSPECTUS SUPPLEMENT BEFORE PURCHASING ANY
UNITS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Dated August 9, 2001
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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TABLE OF CONTENTS
About this Prospectus........................................................................................ 3
Where You Can Find More Information.......................................................................... 3
Forward-Looking Statements................................................................................... 4
Risk Factors................................................................................................. 4
The Partnership............................................................................................. 12
Use of Proceeds............................................................................................... 13
Cash Distributions.......................................................................................... 13
Conflicts of Interest and
Fiduciary Responsibilities................................................................................ 18
Tax Considerations........................................................................................... 22
Investment in Lakehead by Employee
Benefit Plans............................................................................................. 36
Plan of Distribution......................................................................................... 37
Legal Matters................................................................................................ 38
Experts...................................................................................................... 39
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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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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed
with the Securities and Exchange Commission ("SEC") using a "shelf" registration
process. Under this shelf registration process, we may sell the Class A Common
Units described in this prospectus in one or more offerings up to a total dollar
amount of $500,000,000. This prospectus provides you with a general description
of us and the Class A Common Units. Each time we sell Class A Common Units with
this prospectus, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add to, update or change information in this prospectus. The
information in this prospectus is accurate as of the date on the cover page. You
should carefully read both this prospectus and any prospectus supplement,
together with additional information described under the heading "Where You Can
Find More Information."
As used in this prospectus, "we," "us," "our," and "Lakehead" means
Lakehead Pipe Line Partners, L.P. and includes our subsidiary operating
partnership, Lakehead Pipe Line Company, Limited Partnership. "Enbridge" refers
to Enbridge Inc. of Canada, which is the indirect owner of our general partner.
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 Class B Common Units are referred to in
this prospectus as "units."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information with
the SEC. You may read and copy any materials we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1_800_SEC_0330. The SEC maintains an Internet site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding us and other issuers that file electronically with the SEC. Our SEC
filings are also available at our website at http://www.lakehead.com. You can
also obtain information about us at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we have
filed with the SEC, which means that we can disclose important information to
you without actually including the specific information in this prospectus by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. Information that we file later with the
SEC will automatically update and may replace information in this prospectus and
information previously filed with the SEC. We incorporate by reference the
documents listed below and any future filings made with the SEC under Sections
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until we sell
all of the Class A Common Units offered by this prospectus.
-Our Annual Report on Form 10-K for the fiscal year ended December 31,
2000 (the "Form 10-K"), filed March 30, 2001;
- Our Current Report on Form 8-K filed March 13, 2001;
- Our Current Report on Form 8-K filed May 7, 2001;
-Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2001,filed May 15, 2001;
- Our Current Report on Form 8-K filed May 17, 2001;
- Our Current Report on Form 8-K filed June 4, 2001;
- Our Current Report on Form 8-K filed June 13, 2001;
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-Our Amended Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2000 (the "Form 10-K/A"), filed July 12, 2001; and
- The description of the Class A Common Units contained in our
Registration Statement on Form 8-A, dated November 14, 1991, as amended
by Amendment No. 1 to Form 8-A on Form 8, filed December 9, 1991,
Amendment No. 2 on Form 8-A/A, filed May 2, 1997 and Amendment No. 3 on
Form 8-A/A, filed August 8, 2001.
We will provide you a copy of these filings, at no cost, if you contact us at:
Mr. Tracy Barker
Investor Relations
800-525-3999
403-231-5949
investor@lakehead.com
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, any accompanying
prospectus supplement and the documents we incorporate by reference contain
forward-looking statements. These statements use forward-looking words such as
"may," "will," "anticipate," "believe," "expect," "project" or other similar
words. These statements discuss goals, intentions and expectations as to future
trends, plans, events, results of operations or financial condition or state
other "forward-looking" information. These statements reflect Lakehead's current
views with respect to future events and are subject to various risks,
uncertainties and assumptions including, but not limited, to the price of crude
oil, the supply of western Canadian crude oil, the willingness of western
Canadian producers to ship on the Lakehead System, governmental regulatory
policies, competitive factors, our ability to acquire other companies and assets
and other conditions. These factors and conditions are subject to risks and
uncertainties that may cause our actual results to differ substantially from
those expressed or implied by these statements. When considering these
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus, any prospectus supplement and the
documents we have incorporated by reference. We will not update these statements
unless the securities laws require us to do so.
RISK FACTORS
Before you invest in our Class A Common 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 Common 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 Common Units could
decline, and you could lose part of your investment. You should carefully
consider the following factors in evaluating an investment in the Class A Common
Units.
RISKS OF OUR BUSINESS
We depend on the supply of western Canadian crude oil.
The U.S. portion of our liquid petroleum pipeline system, which we
refer to as 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
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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.
We depend on producers of western Canadian crude oil who use the
Canadian portion of our system owned by Enbridge Pipelines Inc.,which we refer
to as 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.
Although we believe that regulations of the Federal Energy Regulatory
Commission, which we refer to as 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, we cannot be assured that we
will be allowed to do so. Even if the FERC allowed us to raise our rates in such
a case, we might still have lower revenues during the time before our rate
increases became effective. If our pipeline system transports lower volumes of
crude oil, our revenues could decrease and we could have less cash to distribute
to our unitholders.
Our pipeline system might be used less if demand for crude oil and natural gas
liquids decreases.
Demand for western Canadian crude oil and natural gas liquids in the
geographic areas served by the Enbridge System and the Lakehead System, which we
refer to collectively as our "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 our level of 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.
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:
o economic conditions;
o fuel conservation measures;
o alternative fuel requirements;
o government regulation; and
o 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.
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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, the Canadian Association of Petroleum
Producers, which we refer to as "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 phase two of the system expansion
program, referred to as SEP II, and a fixed amount surcharge relating to the
Terrace expansion project. While we do not expect our tariff rates to be
challenged upon expiration of the Settlement Agreement, if our tariff rates were
successfully challenged in the future, we could be adversely affected.
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 2000,
the Enbridge 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
System was refined in Alberta or Saskatchewan or transported through other
pipelines. In the United States, the Lakehead 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
the refinery market and pipeline hub located in the Patoka/Wood River area of
southern Illinois. Please read "Items 1 and 2. Business and Properties --
Competition" in the Form 10-K and Form 10-K/A.
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 we could have less
cash to distribute to our unitholders.
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
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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.
Future acquisitions may present difficulties and challenges for us.
The acquisition of complementary businesses with risk profiles similar
to that our current crude oil and natural gas liquids transportation business is
a focus of our strategic plan. Although we have recently closed a transaction
involving 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 that our
assumptions will in fact be correct or that any acquisition will achieve the
desired financial objectives.
Any acquisition may present various risks and challenges, including:
o risk of failing to integrate the operations or management of an
acquired business or a significant delay in such integration; and
o diversion of management's attention.
In addition, we may be unable 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 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:
o 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.
o 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.)
o The general partner determines whether to issue additional
units or other equity securities or whether to purchase
outstanding units.
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o 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".
o The general partner determines which costs are reimbursable
by us.
o The general partner controls the enforcement of obligations
owed to us by the general partner.
o The general partner decides whether to retain separate
counsel, accountants or others to perform services for us.
There also may be conflicts of interest if Enbridge conducts businesses
that compete with our pipeline system. We have an agreement with Enbridge that
generally allows Enbridge to pursue its business interests, even if these
interests involve pipelines in the U.S. This agreement and our partnership
agreement do not restrict Enbridge from engaging in businesses that it was
engaged in at the time of our initial public offering in December 1991, even if
such business competes with ours. With the reversal of Line 9, Enbridge competes
with us to supply crude oil to the Ontario market. Our agreement with Enbridge
expressly permits this reversal. Please read "Conflicts of Interest and
Fiduciary Responsibilities".
Our partnership agreement allows the general partner to resolve
conflicts of interest by considering the interests of all the parties to the
conflict. Therefore, the general partner can consider the interests of Enbridge
if a conflict of interest arises. This is very different from the more familiar
legal duty of a trustee, who must act solely in the best interests of the
trust's beneficiary. Please read "Conflicts of Interest and Fiduciary
Responsibilities".
We are very dependent on Enbridge and the Enbridge System. Nearly all
of the crude oil and natural gas liquids we ship comes from the Enbridge System
in Canada, and shipments on our pipeline system are scheduled by Enbridge in
coordination with our general partner. In addition, neither we nor the general
partner has any employees. In operating our pipeline system, we and the general
partner rely solely on employees of Enbridge and its affiliates.
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. Please
read "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 Common 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 Common Units. These
registration rights allow the general partner and its affiliates holding any
units to request registration of such units
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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 or its officers 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. However, the general partner may voluntarily
withdraw as general partner and Enbridge is not prevented from selling all or
part of its ownership in the general partner. 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.
The general partner has a limited call right on the Class A Common 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 U.S. federal securities laws.
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 $799.3 million as of December 31, 2000.
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. The $799.3 million of long-term
debt as of December 31, 2000 consisted of:
o $310 million of first mortgage notes (the "First Mortgage
Notes"), which have no principal payments due until 2002;
o $190 million outstanding under a $350 million revolving bank
credit facility (the "Revolving Credit Facility");
o $100 million of 7.9% senior notes due 2012 (the "7.9% Notes");
o $100 million of 7% senior notes due 2018 (the "7% Notes");
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o $100 million of 7 1/8% senior notes due 2028 (the "7 1/8%
Notes" and, together with the 7.9% Notes 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.
The Senior Notes constitute unsecured senior indebtedness of our subsidiary
operating partnership and rank equally with all other unsecured and
unsubordinated indebtedness of the operating partnership.
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 the
operating partnership can issue and may restrict the operations of our operating
partnership; 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 you. In addition, the operating partnership will be prevented
from making distributions to us if there is a continuing default on any of its
debt.
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 be 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.
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). Lakehead's classification as a taxable entity
would result in a material reduction in the anticipated cash flow and after-tax
return to the unitholders, and this would likely result in a substantial
reduction in the value of a unitholder's Class A Common Units.
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. 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
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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 ("IRS") 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 or any accompanying
prospectus supplement.
We have made the election permitted by Section 754 of the Internal
Revenue Code, which generally permits a purchaser of Class A Common Units to
adjust his share of the tax basis of Lakehead's assets to fair market value. As
authorized by our partnership agreement, Lakehead intends to depreciate or
amortize that portion of the adjustment allocable to our depreciable property
under a method that maintains uniformity of the economic and tax characteristics
of the Class A Common Units, even though such method may arguably be
inconsistent with certain Treasury Regulations and our counsel is unable to
opine as to the validity of such method. If we determine that such approach
cannot be reasonably taken, we may adopt a different method which may result in
lower annual depreciation or amortization deductions than would otherwise be the
case under our current method.
Additionally, the Section 754 election is disadvantageous if a
purchaser's basis in a Class A Common Unit is lower than such unit's share of
our aggregate adjusted tax basis in our assets. Thus, in such a case, the price
that a unitholder will be able to obtain on the sale of a Class A Common Unit
could be adversely affect by the Section 754 election.
Your tax liability could exceed your cash distributions or proceeds from sales
of Class A Common Units.
You will be required to pay U.S. federal income tax and, in some cases,
state and local income taxes on your allocable share of our income, even if you
do not receive cash distributions from us. You will not necessarily receive cash
distributions equal to the tax on your allocable share of our taxable income.
Further, if we have a large amount of nonrecourse liabilities, you may incur a
tax liability that is greater than the money you receive when you sell your
Class A Common Units.
A unitholder may be required to file tax returns with and pay income taxes to
the states where we own property and conduct business.
In some cases, a unitholder may be required to file income tax returns
with and pay income taxes to the states in which we own property and conduct
business, which are currently Illinois, Indiana, Michigan, Minnesota, Montana,
New York, North Dakota and Wisconsin.
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Ownership of Class A Common Units raises issues for tax-exempt entities and
other investors.
An investment in our Class A Common Units by tax-exempt entities
(including employee benefit plans, individual retirement accounts, Keogh plans
and other retirement plans), regulated investment companies and foreign persons
raises issues unique to them. Virtually all of the income derived from our Class
A Common Units by a tax-exempt entity will be "unrelated business taxable
income" and will be taxable to the tax-exempt entity. Additionally, no
significant part of our gross income will be considered qualifying income for
purposes of determining whether a unitholder qualifies as a regulated investment
company. Further, a unitholder who is a nonresident alien, a foreign corporation
or other foreign person will be required to a file federal income tax return and
pay tax on his share of our taxable income because he will be regarded as being
engaged in a trade or business in the United States as a result of his ownership
of a Class A Common Unit.
We are registered with the Secretary of the Treasury as a "tax shelter."
Because we are a registered "tax shelter" with the Secretary of the
Treasury, a unitholder may face an increased risk of an IRS audit resulting in
taxes payable on our income as well as income not related to us. We cannot
assure unitholders that we will not be audited by the IRS or that adjustments to
our income or losses will not be made. Any unitholder owning less than a 1%
profit interest in us has very limited rights to participate in the income tax
and audit process. Further, any adjustments in our tax returns will lead to
adjustments in the unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to us. Each
unitholder is responsible for any tax owed as the result of an examination of
his personal tax return.
THE PARTNERSHIP
We are a publicly traded Delaware limited partnership that owns and
operates a regulated crude oil and natural gas liquids pipeline business in the
United States. Lakehead Pipe Line Company, Inc.,an indirect wholly owned
subsidiary of Enbridge, serves as our general partner. We and Enbridge transport
crude oil and other liquid hydrocarbons for our customers through the world's
longest liquid petroleum pipeline system, which we refer to as the "System." We
own the United States portion of the System, which we refer to as the "Lakehead
System", and a subsidiary of Enbridge, Enbridge Pipelines, 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.
Crude oil shipments tendered to the System originate primarily in oil
fields in the western Canadian provinces of Alberta, Saskatchewan, Manitoba and
British Columbia and in the Northwest Territories of Canada. Shipments reach the
System through facilities owned and operated by third parties or affiliates of
Enbridge. Deliveries from the System are currently made in the prairie provinces
of Canada and, through the 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 or affiliates of Enbridge.
The System extends from Edmonton, Alberta, across the Canadian prairies
to the United States border near Neche, North Dakota. From Neche, the System
continues on to Superior, Wisconsin, where it splits into two branches with one
branch traveling through the upper Great Lakes region and the other through the
lower Great Lakes region of the United States. Both branches reenter Canada near
Marysville, Michigan. From Marysville, the System continues on to Toronto,
Ontario, with lateral lines to Nanticoke, Ontario and the Buffalo, New York
area. The System is approximately 3,100 miles long, including the Lakehead
System in the United States, which is approximately 1,880 miles long.
Enbridge handles all scheduling of shipments, including routes and
storage, in coordination with us. The Lakehead System includes 15 connections to
other pipelines and refineries at various locations in the United States,
including the refining areas in and around Minneapolis-St. Paul, Minnesota,
Chicago, Illinois, Detroit, Michigan,
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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.
USE OF PROCEEDS
Unless otherwise specified in a related prospectus supplement, the net
proceeds received by us from the sale of the Class A Common Units will be used
for general partnership purposes, including the operation and expansion of our
pipeline system, acquisitions and the repayment of debt incurred for these
purposes. As of the date of this prospectus, we have not definitively identified
any material acquisitions of businesses or assets for which we may use a portion
of the net proceeds of this offering. We anticipate that any businesses or
assets that we acquire in the future would be complementary to our existing
businesses and have comparable risk profiles.
CASH DISTRIBUTIONS
GENERAL
One of our principal objectives is to generate cash from our operations
and to distribute Available Cash to our unitholders and our general partner.
"Available Cash" means generally, with respect to any calendar quarter, the sum
of all of our cash receipts plus net reductions to cash reserves less the sum of
all of our cash disbursements and net additions to cash reserves. The full
definition of Available Cash is set forth in "-Certain Defined Terms." The
definition of Available Cash permits our general partner to establish cash
reserves that it determines are necessary or appropriate to provide for the
proper conduct of our business (including cash reserves for future capital
expenditures), to stabilize distributions of cash to our unitholders and the
general partner or as necessary to comply with the terms of any of our
agreements or obligations. The general partner has broad discretion in
establishing reserves, and its decisions regarding reserves could have a
significant impact on the amount of Available Cash distributed to our
unitholders and the general partner. The timing of additions and reductions to
reserves may impact the amount of incentive distributions payable to the general
partner and may result in the realization of taxable income by unitholders
before funds related to that income are distributed.
We will distribute 100% of our Available Cash as of the end of each
calendar quarter on or about 45 days after the end of such calendar quarter to
unitholders of record on the record date and to the general partner. The record
date will generally be the last day of the month immediately following the close
of a calendar quarter.
Cash distributions will be characterized as either distributions of
Cash from Operations or Cash from Interim Capital Transactions. The distinction
is important because it affects the amount of cash that is distributed to the
unitholders relative to the general partner. To the extent a distribution is
Cash from Interim Capital Transactions, the general partner may receive a
smaller share. Please read "-Quarterly Distributions of Available
Cash-Distributions of Cash from Operations" and "-Quarterly Distributions of
Available Cash-Distributions of Cash from Interim Capital Transactions" below.
Cash from Operations, which is determined on a cumulative basis,
generally means the $54 million cash balance we had on the date of our initial
public offering in 1991, plus all cash generated by our operations, after
deducting related cash expenditures, reserves and certain other items.
Cash from Interim Capital Transactions is generated by:
o 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);
o sales of units or other equity interests for cash; and
o 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).
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The full definitions of Cash from Operations, Interim Capital
Transactions and Cash from Interim Capital Transactions are set forth in
"-Certain Defined Terms."
Cash distributions will be treated as distributions of Cash from
Operations if the sum of all amounts distributed to the unitholders and to the
general partner (including any incentive distributions) does not exceed 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 cash distributed in excess of that amount will be deemed
to constitute Cash from Interim Capital Transactions and distributed
accordingly. Please read "-Quarterly Distributions of Available Cash" and
"Distributions of Cash from Interim Capital Transactions" and "-Adjustment of
the Target Distributions."
If we distribute cash that is Cash from Interim Capital Transactions in
an aggregate amount per unit equal to $21.50 (the offering price of the Class A
Common Units in our initial public offering in December 1991), the distinction
between Cash from Operations and Cash from Interim Capital Transactions will
cease, and all cash will, in general, be distributed as Cash from Operations.
Please read "-Quarterly Distributions of Available Cash" and "Distributions of
Cash from Interim Capital Transactions." To date, we have not distributed Cash
from Interim Capital Transactions. We do not anticipate distributing significant
amounts of Cash from Interim Capital Transactions in the future.
Capital expenditures that are necessary to maintain our pipeline system
(as opposed to expanding or improving it) will reduce the amount of Cash from
Operations. Therefore, if the general partner determines that a substantial
portion of our capital expenditures were necessary to maintain our pipeline
system, the amount of cash distributions that are deemed to constitute Cash from
Operations might decrease and the amount of cash distributions that are Cash
from Interim Capital Transactions might increase.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
We will distribute to our unitholders and our general partner 100% of
our Available Cash for each quarter. The amount of cash distributed will depend
on our future performance.
DISTRIBUTIONS OF CASH FROM OPERATIONS
Quarterly distributions of Cash from Operations will be divided as
follows:
First, 98% to all unitholders, pro rata, and 2% to the general partner,
until all unitholders have received distributions of $0.59 per unit for
such quarter (the "First Target Distribution");
Second, 85% to all unitholders, pro rata, and 15% to the general
partner, until all unitholders have received distributions of $0.70 per
unit for such quarter (the "Second Target Distribution");
Third, 75% to all unitholders, pro rata, and 25% to the general
partner, until all unitholders have received distributions of $0.99 per
unit for such quarter (the "Third Target Distribution"); and
Thereafter, 50% to all unitholders, pro rata, and 50% to the general
partner.
The following table illustrates the allocation of Cash from Operations
among the unitholders and the general partner for each quarter.
MARGINAL PERCENTAGE INTEREST IN DISTRIBUTION
------------------------------------------------
QUARTERLY
DISTRIBUTION UNITHOLDERS GENERAL PARTNER
----------------------- ------------------- --------------------------
First Target Distribution................ up to $0.59 98% 2%
Second Target Distribution............... over $0.59 and up to
$0.70 85% 15%
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MARGINAL PERCENTAGE INTEREST IN DISTRIBUTION
------------------------------------------------
QUARTERLY
DISTRIBUTION UNITHOLDERS GENERAL PARTNER
----------------------- ------------------- --------------------------
Third Target Distribution................ over $0.70 and up
to $0.99 75% 25%
Thereafter............................... over $0.99 50% 50%
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Cash from Interim Capital Transactions will be made
98% to all unitholders, pro rata, and 2% to the general partner until all
distributions of Cash from Interim Capital Transactions since our initial public
offering aggregate $21.50 per unit. Thereafter, all distributions will be
distributed as if they were Cash from Operations, and because the Target
Distributions will have been reduced to zero, as described under "-Adjustment of
the Target Distributions," the general partner's share of distributions of
Available Cash will increase, in general, to 50% of all distributions of
Available Cash. Notwithstanding the foregoing, if the Target Distributions have
been reduced to zero as a result of distributions of Cash from Interim Capital
Transactions and the holders of the Class A Common Units have ever failed to
receive the First Target Distribution, distributions will first be made 98% to
all holders of Class A Common Units and 2% to the general partner until there
has been distributed in respect of each Class A Unit then outstanding (taking
into account all prior distributions of Available Cash constituting Cash from
Operations) Available Cash constituting Cash from Operations since inception in
an amount equal to the First Target Distribution for all periods since
inception. To date, the holders of the Class A Common Units have always received
at least the First Target Distribution.
Distributions of Cash from Interim Capital Transactions will not reduce
Target Distributions in the quarter in which they are distributed.
ADJUSTMENT OF THE TARGET DISTRIBUTIONS
The Target Distributions will be proportionately adjusted if any
combination or subdivision of units occurs (whether effected by a distribution
payable in units or otherwise). In addition, if a distribution is made of Cash
from Interim Capital Transactions, the Target Distributions will be adjusted
downward by multiplying each amount, as the same may have been previously
adjusted, by a fraction, the numerator of which is the Unrecovered Initial Unit
Price (as defined below) immediately after giving effect to such repayment and
the denominator of which is the Unrecovered Initial Unit Price immediately prior
to such repayment. The "Unrecovered Initial Unit Price" is the amount by which
$21.50 exceeds the aggregate per unit distributions of Cash from Interim Capital
Transactions on the Class A Common Units. If and when the Unrecovered Initial
Unit Price is zero, the Target Distributions each will have been reduced to
zero.
The Target Distributions may also be adjusted if legislation is enacted
that causes us to become taxable as a corporation or otherwise subjects us to
taxation as an entity for federal income tax purposes. In such event, the Target
Distributions for each quarter thereafter would be reduced to an amount equal to
the product of (i) each of the Target Distributions multiplied by (ii) one minus
the sum of (x) the effective federal income tax rate to which we are subject as
an entity (expressed as a fraction) plus (y) the effective overall state and
local income tax rate to which we are subject as an entity (expressed as a
fraction) for the taxable year in which such quarter occurs.
DISTRIBUTION OF CASH ON LIQUIDATION
When we dissolve or liquidate, our assets will be sold or otherwise
disposed of, and the capital account balances of the unitholders and the general
partner will be adjusted to reflect any resulting gain or loss. The proceeds of
liquidation will first be applied to the payment of our creditors in the order
of priority provided in our partnership agreement and by law and thereafter will
be distributed to the unitholders and the general partner in accordance with
their respective capital account balances, as adjusted.
Generally, the holders of Class A Common Units will have no preference
over the general partner or holders of Class B Units upon our dissolution and
liquidation and will instead be entitled to share with the general
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partner and the holders of Class B Units in the remainder of our assets in
proportion to their respective capital account balances as adjusted as provided
in our partnership agreement. Any gain (or unrealized gain attributable to
assets distributed in kind) will be allocated among the unitholders and the
general partner as follows:
First, to each unitholder and the general partner having a deficit
balance in its capital account to the extent of and in proportion to
such deficit balance;
Second, any remaining gain would be allocated 98% to all unitholders,
pro rata, and 2% to the general partner, until the capital account for
each Class A Unit is equal to the Unrecovered Capital (as defined
below) in respect of such Class A Unit;
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:
o the Unrecovered Capital in respect of such unit, plus
o any cumulative arrearages then existing in the First Target
Distribution in respect of such unit, plus
o the excess of the Second Target Distribution over the First Target
Distribution for each quarter since inception, less
o the amount of any distributions of Available Cash constituting
Cash from Operations in respect of such unit in excess of the
First Target Distribution that were distributed 85% to the
unitholders pro rata and 15% to the general partner for each
quarter since inception
(the sum of the second and third bullet points less the fourth bullet
point being the "Target Amount");
Sixth, any then remaining gain would be allocated 75% to all
unitholders, pro rata, and 25% to the general partner, until the
capital account for each unit is equal to the sum of:
o the Unrecovered Capital in respect of each unit, plus
o the Target Amount, plus
o the excess of the Third Target Distribution over the Second Target
Distribution for each quarter since inception, less
o 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.
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CERTAIN DEFINED TERMS
The following terms have the respective meanings set forth below:
"Available Cash" means, with respect to any calendar quarter, the sum
of:
(a) all cash receipts of 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 the sum of:
(aa) all cash disbursements of Lakehead during such quarter
(excluding cash distributions to unitholders and to the
general partner);
(bb) any cash reserves established in such quarter in such amounts
as the general partner shall determine to be necessary or
appropriate in its reasonable discretion
- to provide for the proper conduct of the business of
Lakehead (including cash reserves for possible rate
refunds or future capital expenditures) or
- to provide funds for distributions with respect to
any of the next four quarters; and
(cc) any other cash reserves established in such quarter in such
amounts as the general partner determines in its reasonable
discretion to be necessary because the distribution of such
amounts would be prohibited by applicable law or by any loan
agreement, security agreement, mortgage, debt instrument or
other agreement or obligation to which 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:
o all cash operating expenditures of Lakehead, including,
without limitation, taxes paid by Lakehead as an entity after
December 27, 1991;
o 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);
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o all cash capital expenditures of Lakehead during such period
necessary to maintain the service capability of our pipeline
system;
o 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;
o 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
o 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 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:
o 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;
o sales of equity interests by Lakehead; and
o sales or other voluntary or involuntary dispositions of any
assets of Lakehead (other than sales or other dispositions of
inventory in the ordinary course of business, sales or other
dispositions of other current assets including accounts
receivable or sales or other dispositions of assets as part of
normal retirements or replacements), in each case prior to the
commencement of the dissolution and liquidation of Lakehead.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Certain conflicts of interest could arise as a result of the
relationships among us, the general partner and Enbridge and its affiliates. The
general partner makes all decisions relating to us. The following officers of
the general partner who make such decisions are also officers of Enbridge and
its affiliates:
o D.C. Tutcher (President);
o L.H. DeBriyn (Vice President, Special Projects);
o G. L. Sevick (Vice President, Operations);
o M.A. Maki (Controller);
o J.K. Whelen (Treasurer);
o J.L. Balko (Chief Accountant); and
o S.M. Curwin (Corporate Secretary).
In addition, Enbridge indirectly owns all of the capital stock of the
general partner. The directors and officers of Enbridge have fiduciary duties to
manage Enbridge, including its investments in its affiliates (including the
general partner), in a manner beneficial to the shareholders of Enbridge. In
general, the general partner has a fiduciary duty to manage us in a manner
beneficial to the unitholders. However, our partnership agreement allows the
general partner to take into account the interests of parties in addition to us
and the unitholders in resolving conflicts of interest. Our partnership
agreement also may restrict the remedies available to unitholders for actions
taken that might otherwise constitute breaches of fiduciary duty. The duties of
the directors and officers of the
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general partner and Enbridge to their shareholders and affiliates may,
therefore, conflict with the duties of the general partner to the unitholders.
Potential conflicts of interest could arise in the situations described
below, among others:
(a) The amount of cash expenditures, borrowings and reserves in any
quarter may affect whether or the extent to which there is sufficient Cash from
Operations to make distributions to the unitholders. In addition, the general
partner's determination to make a capital expenditure to maintain our pipeline
system or its determination as to what portion of a capital expenditure was made
to maintain our pipeline system may have the same effect. Borrowings and
issuances of additional units also increase the amount of Available Cash and, in
the case of working capital borrowings, the amount of Cash from Operations. The
Partnership Agreement provides that any borrowings by us, or the approval
thereof by the general partner, will not constitute a breach of any duty by the
general partner to us or the unitholders, including borrowings that have the
purpose or effect of enabling the general partner to receive incentive
distributions. Further, any actions taken by the general partner consistent with
the standards of reasonable discretion set forth in the definitions of Available
Cash, Cash from Operations and Interim Capital Transactions will not breach any
duty of the general partner to us or the unitholders. Please read "Cash
Distributions."
(b) Under the terms of our partnership agreement and the partnership
agreement of the Operating Partnership, the general partner will exercise its
discretion in managing our business. As a result, the general partner is not
restricted from paying Enbridge or its affiliates for any services rendered on
terms that are fair and reasonable to us. The general partner will determine
which of its direct or indirect costs (including costs allocated to the general
partner by Enbridge and its affiliates) are reimbursable by us. Employees of
Enbridge and its affiliates currently provide services to the general partner
for our benefit pursuant to a Services Agreement between Enbridge (U.S.) Inc.,
an affiliate of Enbridge, and the general partner. Substantially all of the
shipments of crude oil and natural gas liquids delivered by the Lakehead System
originate from the Enbridge System, and Enbridge handles all scheduling of
shipments (including routes and storage) in coordination with us.
(c) The general partner has certain varying percentage interests and
priorities with respect to Available Cash. Please read "Cash Distributions." The
timing and amount of cash receipts may be affected by various determinations
made by the general partner under our partnership agreements (including, for
example, those relating to the timing of any capital transaction, the
establishment and maintenance of reserves, the timing of expenditures, the
incurrence of debt and other matters).
(d) Enbridge and its affiliates may from time to time offer to us the
opportunity to acquire selected mature assets held by U.S. subsidiaries of
Enbridge. The terms of any sales of assets from Enbridge or its affiliates to us
will involve a conflict of interest. The general partner intends that any
transactions will be subject to negotiation and approval by a special committee
of independent members of our general partner's board of directors.
(e) Neither of our partnership agreements nor any of the other
contemporaneous agreements, contracts and arrangements between us, on the one
hand, and the general partner, Enbridge and its affiliates, on the other hand,
were or will be the result of arm's-length negotiations. The interests of the
unitholders have not been represented by separate legal counsel in connection
with the preparation of such agreements, contracts or arrangements.
(f) The decision whether we or the general partner should purchase
outstanding units at any time may involve the general partner or Enbridge in a
conflict of interest.
(g) Enbridge and its affiliates (other than the general partner) are
expressly permitted by the terms of our partnership agreement to engage in any
businesses and activities, including in certain instances, those in direct
competition with us, except as described below under "-Restrictions on General
Partner Activity."
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(h) As a matter of practice and whenever possible, the general partner
limits the liability under our contractual arrangements to all assets, with the
other party to have no recourse against the general partner or its assets other
than its interest in us. In some circumstances, that may result in the terms of
the transaction being less favorable to us than would otherwise be the case. Our
partnership agreement provides that such action does not constitute a breach of
the general partner's fiduciary obligations.
(i) We are, and may in the future be, a party to various agreements to
which the general partner and its affiliates, including Enbridge, are also
parties and that provide certain benefits to us. However, unitholders do not
have the right under these agreements to enforce directly the obligations of the
general partner or of those affiliates in our favor. Therefore, the unitholders
must depend on the general partner to enforce those obligations, including
obligations that it or its affiliates may owe to Lakehead.
RESTRICTIONS ON GENERAL PARTNER ACTIVITY
The general partner's activities are restricted. The sole business of
the general partner is to act as general partner of us and our Operating
Partnership, to manage certain subsidiaries and to undertake ancillary
activities. Further, our partnership agreement provides that no subsidiary of
the general partner will engage in or acquire any business that is in direct
material competition with the business as conducted at the time of our formation
in 1991, subject to the exceptions set forth below. None of the instruments to
which we or the Operating Partnership is a party imposes any restriction on the
ability of Enbridge and its affiliates, other than the general partner, to
engage in any business. Enbridge agreed, however, in a separate agreement (the
"Distribution Support Agreement") that for so long as an affiliate of Enbridge
is the general partner of us and our Operating Partnership, Enbridge and its
other subsidiaries will not engage in or acquire any business that is in direct
material competition with our business as conducted at the time of our formation
in 1991, subject to the following important exceptions:
First, there is no restriction on the ability of Enbridge and its other
subsidiaries to continue to engage in businesses, including the normal
development of those businesses in the future, in which they were
engaged as of December 1991 and that are or may be in the future in
competition with us;
Second, the scope of the competition restriction is limited
geographically to those routes and products in respect of which we
provided transportation as of December 1991. For example, Enbridge and
its other subsidiaries would be permitted to acquire a pipeline
business in which transportation is made over routes not served by us
or involving products not transported by us as of December 1991;
Third, Enbridge and its other subsidiaries may acquire any competitive
business as part of a larger acquisition so long as the majority of the
value of the business or assets acquired, in Enbridge's judgement, is
not attributable to the competitive business; and
Fourth, Enbridge and its other subsidiaries may acquire any competitive
business if it is first offered for acquisition to us and we fail to
approve, after submission to a unitholder vote, the making of such
acquisition. The approval of the holders of a majority of the
outstanding units (excluding any units held by the general partner and
its affiliates) is required for us to exercise our right to accept such
an offer.
Except as specified above, Enbridge and its affiliates are not
restricted by the terms of the Distribution Support Agreement or our partnership
agreements from engaging in businesses that may be in competition with us. In
addition, our partnership agreement specifically states that it will not
constitute a breach of the general partner's fiduciary duty for Enbridge or its
other subsidiaries to take advantage of any business opportunity in preference
to or to the exclusion of us, except as specifically limited by the restrictions
described above.
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER
The general partner is generally accountable to us and the unitholders
as a fiduciary. Consequently, the general partner must exercise good faith and
integrity in handling our assets and affairs. In contrast to the relatively
well-developed state of the law concerning fiduciary duties owed by officers and
directors to the
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shareholders of a corporation, the law concerning the duties owed by general
partners to the other partners and to their partnerships is relatively
undeveloped. The Delaware Revised Uniform Limited Partnership Act (the "Delaware
Act") provides that Delaware limited partnerships may, in their partnership
agreements, restrict or expand the fiduciary duties that might otherwise be
applied by a court in analyzing the standard of duty owed by general partners to
limited partners. Our partnership agreement, as permitted by the Delaware Act,
contains various provisions that have the effect of restricting the fiduciary
duties that might otherwise be owed by the general partner to us and our
partners. In addition, holders of Class A Common Units are deemed to have
consented to certain actions and conflicts of interest that might otherwise be
deemed a breach of fiduciary or other duties under state law.
Our partnership agreement provides that whenever a conflict of interest
arises between the general partner or its affiliates, on the one hand, and us or
any unitholder, on the other hand, the general partner will be authorized, in
resolving such conflict or determining such action, to consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices, if applicable, generally accepted
accounting or engineering practices or principles and such additional factors as
the general partner determines in its sole discretion to be relevant, reasonable
or appropriate under the circumstances. The same considerations will apply
whenever our partnership agreement requires the general partner to act in a
manner that is fair and reasonable to us or the unitholders. Thus, unlike the
strict duty of a trustee who must act solely in the best interests of his
beneficiary, our partnership agreement permits the general partner to consider
the interests of all parties to a conflict of interest, including the interests
of the general partner and its affiliates, including Enbridge. Our partnership
agreement also provides that in certain circumstances the general partner will
act in its sole discretion, in good faith or pursuant to other appropriate
standards.
Our partnership agreement also provides that any standard of care and
duty imposed on the general partner will be modified, waived or limited as
required to permit the general partner to act under our partnership agreement
and to make any decision pursuant to the authority prescribed in our partnership
agreement so long as such action is reasonably believed by the general partner
to be in our best interests. Further, our partnership agreement provides that
the general partner will not be liable for monetary damages to us or the
unitholders for errors of judgement or for any other acts or omissions if the
general partner acted in good faith. We are required, under the terms of our
partnership agreement, to indemnify the general partner and its officers,
directors, employees and agents against liabilities, costs and expenses, if the
general partner or such persons acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, our best interests and, with
respect to any criminal proceeding, had no reasonable cause to believe their
conduct was unlawful. This indemnification provision could include
indemnification of the general partner for its negligent acts.
The Delaware Act provides that a limited partner may institute legal
action on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The fiduciary obligations of general partners is a developing area of
the law. The general partner has not obtained an opinion of counsel covering the
provisions set forth in our partnership agreement that purport to waive or
restrict fiduciary duties of the general partner.
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TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax
counsel ("Counsel"), and discloses all material U.S. federal income tax
consequences to individuals who are citizens or residents of the United States.
Unless otherwise noted, this section is Counsel's opinion with respect to the
matters set forth except for statements of fact and the representations and
estimates of the results of future operations of the general partner included in
such discussion as to which no opinion is expressed. Counsel bases its opinions
on its interpretation of the Internal Revenue Code of 1986, as amended (the
"Code") and Treasury Regulations issued thereunder, judicial decisions, the
facts set forth in this prospectus and factual representations made by the
general partner. Counsel's opinions are subject to both the accuracy of such
facts and the continued applicability of such legislative, administrative and
judicial authorities, all of which authorities are subject to changes and
interpretations that may or may not be retroactively applied.
We have not requested a ruling from the Internal Revenue Service
("IRS") with respect to our classification as a partnership for federal income
tax purposes or any other matter affecting us. Accordingly, the IRS may adopt
positions that differ from Counsel's conclusions expressed herein. We may need
to resort to administrative or court proceedings to sustain some or all of
Counsel's conclusions, and some or all of these conclusions ultimately may not
be sustained. The costs of any contest with the IRS will be borne directly or
indirectly by some or all of the unitholders and the general partner.
Furthermore, neither we nor Counsel can assure you that the tax consequences of
investing in units will not be significantly modified by future legislation or
administrative changes or court decisions. Any such modifications may or may not
be retroactively applied.
It is impractical to comment on all aspects of federal, state, local
and foreign laws that may affect the tax consequences of the transactions
contemplated by the sale of units made by this prospectus and of an investment
in such units. Moreover, taxpayers such as tax-exempt entities, regulated
investment companies and insurance companies may be subject to rules and
regulations unique to their status or form of organization in addition to those
rules and regulations described herein. A prospective unitholder is encouraged
to consult his own tax advisor about the tax consequences peculiar to his
circumstances. Unless the context otherwise requires, references in this section
to "Lakehead", "we" or "us" are references to both Lakehead and the Operating
Partnership.
PARTNERSHIP STATUS
An organization that is classified for U.S. federal income tax purposes
as a partnership is not a taxable entity and incurs no U.S. federal income tax
liability. Instead, each partner of a partnership is required to take into
account in computing his U.S. federal income tax liability his allocable share
of income, gains, losses, deductions and credits of the partnership, regardless
of whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of cash distributed is in
excess of the partner's adjusted tax basis in his partnership interest.
Counsel is of the opinion that, under current law, 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
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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 Section 7701
of the Code and Section 7704 of the Code, and upon the continuing accuracy of
the representations made by the general partner described above.
Section 7704 of the Code provides that publicly traded partnerships
will, generally, be taxed as corporations. Section 7704 of the Code provides an
exception to its general rule (the "Natural Resource Exception") in the case of
a publicly traded partnership if 90% or more of its gross income for every
taxable year consists of "qualifying income." Whether 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 Partners in liquidation of their interests in Lakehead. This
contribution and liquidation should be tax-free to unitholders and Lakehead, so
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 units are held in street name or by another nominee
will be treated as partners for U.S. federal income tax purposes. As there is no
direct authority addressing assignees of units who are entitled to execute and
deliver transfer applications and thereby become entitled to direct the exercise
of attendant rights, but who fail to execute and deliver such transfer
applications, Counsel's opinion does not extend to such persons. Furthermore, a
purchaser or other transferee of units who does not execute and deliver a
transfer application may not receive certain tax information or reports
furnished to
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unitholders unless the units are held in a nominee or street name account and
the nominee or broker has executed and delivered a transfer application with
respect to such units.
A beneficial owner of units whose units have been transferred to a
"short seller" to complete a short sale would appear to lose his status as a
partner with respect to such units for U.S. federal income tax purposes. Please
read "-Tax Treatment of Operations-Treatment of Units Loaned to Cover Short
Sales."
Income, gain, losses, deductions and credits would not appear to be
reportable by a unitholder who is not a partner for U.S. federal income tax
purposes, and any cash distributions received by such a unitholder would be
fully taxable as ordinary income. These holders are encouraged to consult their
own tax advisors with respect to their status as partners in Lakehead for U.S.
federal income tax purposes.
TAX CONSEQUENCES OF 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, 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, gain, losses, deductions and credits for our
taxable year ending with or within the taxable year of the unitholder.
Treatment of Lakehead 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 units immediately before the distribution. Cash distributions
in excess of a unitholder's adjusted tax basis generally will be considered to
be a gain from the sale or exchange of the units, taxable in accordance with the
rules described under "Disposition of Class A Common Units " below. Any
reduction in a unitholder's share of 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. To the extent that 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. Please read
"-Limitations on Deductibility of Lakehead Losses."
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 money or property may result in ordinary
income to a unitholder, regardless of his basis in his units, if such
distribution reduces the unitholder's share of 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"). Our partnership agreement provides
that recapture income will be allocated, to the extent possible, to the
unitholders who were allocated the deductions giving rise to the treatment of
gain as recapture income. Such allocations, along with allocations in accordance
with principles under Section 704(c) of the Code, should minimize the risk to a
holder of Class A Common Units of recognition of ordinary income under Section
751(b) of the Code upon a non-pro rata distribution of cash or property. The IRS
may contend, however, that such a deemed exchange of Section 751 Assets has
occurred and therefore, ordinary income must be recognized under Section 751(b)
of the Code by unitholders on such a non-pro rata distribution of cash or other
property.
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Special Allocation of Gross Income
As provided in our partnership agreement, the holders of Class A Common
Units may be allocated amounts of gross income that would otherwise be allocated
to the holders of Class B Units (the "Special Allocation"). With respect to
taxable years 1999 and 2000, the amounts of the Special Allocations were $11
million and $13 million, respectively. Thereafter, the Special Allocation to be
made each year will increase by $2 million every two years until the taxable
year beginning with 2012, for which the Special Allocation will be $25 million
for that year and for each taxable year thereafter. Notwithstanding the above,
the Special Allocation will not be made (or will be reduced) in any taxable year
to the extent that a purchaser of a Class A Common Unit in 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 distributions, the
general partner anticipates that the Special 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 Units
A unitholder's initial tax basis in his units will be the amount paid
for the 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.
Please read "-Disposition of Class A Common Units-Recognition of Gain or Loss."
Limitations on Deductibility of Lakehead Losses
The deduction by a unitholder of his share of Lakehead's losses will be
limited to the adjusted tax basis in his units (the "basis limitation") and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of its stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount for which the
unitholder is considered to be "at risk" under Section 465 of the Code (the ""at
risk" limitation") with respect to 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 unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the "at risk" limitation but may not be
offset by losses suspended by the basis limitation. Any excess loss above that
gain previously suspended by the "at risk" limitation or basis limitation is no
longer utilizable.
Under Section 465 of the Code, a unitholder will generally be "at risk"
to the extent of his adjusted tax basis in his units, excluding any portion of
the basis attributable to his share of Lakehead's nonrecourse liabilities,
reduced by any amount of money the unitholder borrowed to purchase his units if
the lender of such borrowed funds owns an interest in Lakehead, is related to
such unitholder or can look only to the purchased units for repayment. A
unitholder's "at risk" amount will increase or decrease as the adjusted tax
basis of the unitholder's units increases or decreases (other than tax basis
increases or decreases attributable to increases or decreases in his share of
Lakehead 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
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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 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:
o interest on indebtedness properly allocable to property held
for investment;
o a partnership's interest expense attributed to portfolio
income; and
o the portion of interest expense incurred to purchase or carry
an interest in a passive activity to the extent attributable
to portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income pursuant to
the passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
ALLOCATION OF LAKEHEAD'S INCOME, GAIN, LOSSES, DEDUCTIONS AND CREDITS
In general, if Lakehead has a net profit, items of income, gain,
losses, deductions and credits will be allocated among the general partner and
the unitholders in accordance with their respective percentage interests in
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 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 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, to eliminate a deficit in any unitholder's
capital account and to produce capital accounts that, when followed on
liquidation, will result in each unitholder recovering the Unrecovered Capital,
and his distributive share of any additional value.
Notwithstanding the above, as required by Section 704(c) of the Code,
certain items of 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 treatment of such gain as
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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 properties, a successful challenge by the IRS of the
curative allocation would result in ratios of taxable income to cash
distributions received by holders of Class A Common Units that are materially
higher than the estimates that may be set forth in any accompanying prospectus
supplement.
Counsel is of the opinion that, with the exception of the curative
allocations, the Special Allocation and the allocation of recapture income
discussed above will be respected for U.S. federal income tax purposes in
determining each unitholder's allocable share of 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 Units.
TAX TREATMENT OF OPERATIONS
Income and Deductions in General
Each unitholder will be required to report on his U.S. income tax
return his allocable share of 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 units at any time during a quarter and who
disposes of such units prior to the record date set for a distribution with
respect to such quarter will be allocated items of 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.
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.
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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. Please read
"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 unit price). The
743(b) adjustment is attributed solely to a purchaser of Class A Common Units
and is not added to the basis of 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 units even if that convention
is not consistent with certain Treasury Regulations. Please read "Uniformity of
Class A Common Units" below.
Although Counsel is unable to opine as to the validity of such an
approach, 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 Regulation under Section 743 but is
arguably inconsistent with Treasury Regulations Section 1.167(c)(1)(a)(6). To
the extent such Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Section 704(c) built in gain, 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 or amortization convention under which all purchasers
acquiring units in the same month would receive depreciation or amortization,
whether attributable to Common Basis or Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in
Lakehead's assets. Such an aggregate approach may result in lower annual
depreciation or amortization deductions than would otherwise be allowable to
certain unitholders. Please read "Uniformity of Class A Common Units" below.
The allocation of the Section 743(b) adjustment must be made in
accordance with the principles of Section 1060 of the Code. Based on these
principles, the IRS may seek to reallocate some or all of any Section
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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
units is higher than such 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 units is lower than such 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 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 are encouraged to consult with
their tax advisors as to the impact of an investment in Class A Common Units on
their liability for the alternative minimum tax.
Valuation and Tax Basis of Lakehead Property
The U.S. federal income tax consequences of the ownership and
disposition of units will depend in part on estimates by the general partner of
the relative fair market values, and determinations of the initial tax bases of
the assets of 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 general
partner. These estimates and determinations of basis are subject to challenge
and will not be binding on the IRS or the courts. If the estimates of fair
market value or determinations of basis are subsequently found to be incorrect,
the character and amount of items of income, gain, loss, deductions and credits
previously reported by unitholders might change, and unitholders might be
required to adjust their tax liability for prior years.
Treatment of Units Loaned to Cover Short Sales
A unitholder whose units are loaned to a "short seller" to cover a
short sale of units may be considered as having disposed of ownership of such
units. If so, he would no longer be a partner with respect to those units during
the period of such loan. As a result, during such period, any income, gain,
deductions, losses and credits of Lakehead with respect to those units would
appear not to be reportable by such unitholder, any cash distributions received
by the unitholder with respect to those units would be fully taxable and all of
such distributions would appear to be treated as ordinary income. Counsel has
not rendered an opinion regarding the treatment of a unitholder whose units are
loaned to a short seller to cover a short sale of units; therefore, unitholders
desiring to assure their status as partners should modify their brokerage
account agreements, if any, to prohibit their brokers from borrowing their
units. The IRS has announced that it is actively studying issues
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relating to the tax treatment of short sales of partnership interests.
Other provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a taxpayer
as having sold an "appreciated" partnership interest (in other words, one in
which gain would be recognized if it were sold, assigned or otherwise terminated
at its fair market value) if the taxpayer or related persons enter into a short
sale, an offsetting notional principal contract, or a futures or forward
contract with respect to the partnership interest or substantially identical
property. Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to a partnership interest, the taxpayer will be treated as having sold
such position if the taxpayer or a related party then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue Treasury Regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
DISPOSITION OF CLASS A COMMON UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of units equal to the
difference between the amount realized and the unitholder's adjusted tax basis
in the units sold. A unitholder's amount realized will be measured by the sum of
the cash and the fair market value of other property received plus his share of
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 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 Unit is sold at a price greater than the unitholder's
adjusted tax basis in such unit, even if the price is less than his original
cost.
Except as noted below and provided the unit is held as a "capital
asset" within the meaning of Section 1221 of the Code, gain or loss recognized
by a unitholder (other than a "dealer" in units) on the sale or exchange of a
unit will generally be taxable as capital gain or loss, and the gain or loss
will generally be a long term capital gain or loss if the unit is held for more
than one year. A substantial portion of this gain or loss, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" owned by
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 unit and may be recognized even if
there is a net taxable capital loss realized on the sale of the unit. Thus, a
unitholder may recognize both ordinary income and a capital loss upon
disposition of units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of a corporation.
The IRS has ruled that a partner acquiring interests in a partnership
in separate transactions at different prices must combine those interests and
maintain a single adjusted tax basis. Upon a sale or other disposition of some
of the interests, a portion of that tax basis must be allocated to the interests
sold using an equitable apportionment method. Although the ruling is unclear as
to how the holding period of these interests is determined once they are
combined, recently finalized Treasury Regulations allow a selling partner who
can identify the partnership interest transferred with an ascertainable holding
period to elect to use the actual holding period of the transferred interest.
Thus, according to the ruling, a unitholder will be unable to select high or low
basis units to sell as would be the case with corporate stock, but, according to
the Treasury Regulations, may designate the specific units sold for purposes of
determining the holding period of the units transferred. A unitholder electing
to use the actual holding period of units transferred must consistently use that
identification method for all subsequent sales or exchanges of units. A
unitholder considering the purchase of additional units or a sale of units
purchased in separate transactions is encouraged to consult his tax advisor as
to the possible
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consequences of the ruling and application of the final Treasury Regulations.
Allocations Between Transferors and Transferees
In general, Lakehead's income, gain, losses, deductions and credits
will be determined annually and will be prorated on a monthly basis and
subsequently apportioned among the unitholders in proportion to the number of
units owned by them as of the opening of the first business day of the month to
which they relate. However, gain or loss realized on a sale or other disposition
of 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 units in the open market
may be allocated income, gain, losses, deductions and credits accrued after the
transfer.
The use of the monthly conventions discussed above may not be permitted
by existing Treasury Regulations and accordingly, Counsel does not opine on the
validity of the method of allocating income, gain, losses, deductions and
credits between the transferors and the transferees of Class A Common Units. If
a monthly convention is not allowed by the Treasury Regulations (or only applies
to transfers of less than all of the unitholder's units), income, gain, losses,
deductions and credits of Lakehead 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 units at any time during a quarter and who
disposes of such units prior to the record date set for a distribution with
respect to such quarter will be allocated items of Lakehead's income, gain,
losses, deductions and credits attributable to such quarter during which such
units were owned, but will not be entitled to receive such cash distribution.
Notification Requirements
A unitholder who sells or exchanges units is required to notify
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 unit will be required to furnish statements to the IRS, filed
with their U.S. federal income tax returns for the taxable year in which the
sale or exchange occurred, which set forth the amount of the consideration
received for such unit that is allocated to goodwill or going concern value of
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.
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Entity-level Collections
If Lakehead is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any unitholder or former
unitholder, the general partner is authorized to pay such taxes from Lakehead
funds. Such payments, if made, will be deemed current distributions of cash to
the unitholders and the general partner. The general partner is authorized to
amend our partnership agreement in the manner necessary to maintain uniformity
of intrinsic tax characteristics of units and to adjust subsequent distributions
so that after giving effect to such deemed distributions, the priority and
characterization of distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. Payments by 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)-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). Please read "-Tax Treatment of Operations-Section 754
Election" above. To the extent that the Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized Section
704(c) built-in gain, 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. Please read "-Disposition of Class
A Common Units - Recognition of Gain or Loss."
Because of the Special Allocation of gross income to the Class A Common
Units, the capital accounts underlying the Class A Common Units will likely
differ, perhaps materially, from the capital accounts underlying the Class B
Units. Our partnership agreement contains a method by which the general partner
may cause the capital accounts underlying the Class A Common Units to equal the
capital accounts underlying the Class B Units. The general partner must be
reasonably assured, based on advice of counsel, that the Class B Units and the
Class A Common Units share the same intrinsic economic and U.S. federal income
tax characteristics, in all material respects, before the Class A Common Units
and the Class B Units will be treated as one class of units.
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TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from U.S.
federal income tax (including individual retirement accounts and other
retirement plans) are subject to U.S. federal income tax on unrelated business
taxable income.
Virtually all of the taxable income derived by such an organization
from the ownership of a unit will be unrelated business taxable income and thus
will be taxable to such a unitholder.
A regulated investment company or mutual fund is required to derive 90%
or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of Lakehead's gross income will qualify
as such income.
Non-resident aliens and foreign corporations, trusts or estates that
own units will be considered to be engaged in business in the United States on
account of ownership of units. As a consequence, they will be required to file
U.S. federal income tax returns for their shares of 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 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 unit will be subject to U.S. federal income tax on gain realized
on the disposition of such unit to the extent that such gain is effectively
connected with a U.S. trade or business of the foreign unitholder. Apart from
the ruling, a foreign unitholder will not be taxed or subject to withholding
upon the disposition of a unit if that foreign unitholder has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
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
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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. Please read "Allocation of Lakehead's
Income, Gain, Losses, Deductions and Credits," "Tax Treatment of
Operations-Initial Tax Basis, Depreciation and Amortization" and "Section 754
Election" and "Disposition of Class A Common Units-Allocations Between
Transferors and Transferees." There is no assurance that any such conventions
will yield a result that conforms to the requirements of the Code, Treasury
Regulations or administrative interpretations of the IRS. The general partner
cannot assure prospective unitholders that the IRS will not successfully contend
in court that such accounting and reporting conventions are impermissible. Any
such challenge by the IRS could negatively affect the value of the units.
The U.S. federal income tax information returns filed by 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 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. Our 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
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:
o taxable income or loss from passive loss limitation
activities;
o taxable income or loss from other activities (such as
portfolio income or loss);
o net capital gains (or net capital loss) to the extent
allocable to passive loss limitation activities and other
activities;
o a net alternative minimum tax adjustment separately computed
for passive loss limitation
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activities and other activities;
o general credits;
o low-income housing credit;
o rehabilitation credit;
o tax-exempt interest;
o for certain partnerships, foreign taxes paid and foreign
source partnership items; and
o any other items designated by the IRS to be separately
treated.
A number of other changes to the tax compliance and administrative
rules relating to partnerships that elect large partnership treatment have been
made. As stated above, one provision requires that each partner in an electing
large partnership take into account his share of any adjustments to partnership
items in the year such adjustments are made. Under current law, adjustments
relating to partnership items for a previous taxable year are taken into account
by those persons who were partners in the previous taxable year. Alternatively,
a partnership could elect to or, in some circumstances, could be required to,
pay directly the tax resulting from any such adjustments. In either case,
therefore, unitholders could bear significant economic burdens associated with
tax adjustments relating to periods predating their acquisition of units. It is
unlikely that Lakehead will elect to have these provisions apply because of the
cost of their application.
Nominee Reporting
Persons who hold 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 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 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 shelter
registration number: 92008000124. ISSUANCE OF THE 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 the
registration number to the unitholders, and a unitholder who sells or otherwise
transfers a unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the transferor of a unit to
furnish such registration number to the transferee is $100 for each such
failure. The unitholders must disclose the tax shelter registration number of
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 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.
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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 Lakehead. 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 AN LOCALITIES, OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER IS ENCOURAGED TO
CONSULT, AND MUST DEPEND UPON, HIS OR HER OWN TAX COUNSEL OR OTHER ADVISOR WITH
REGARD TO THOSE MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO
FILE ALL STATE AND LOCAL, AS WELL AS UNITED STATES FEDERAL, INCOME TAX RETURNS
THAT MAY BE REQUIRED. COUNSEL HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL
TAX CONSEQUENCES OF AN INVESTMENT IN US.
INVESTMENT IN 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")
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established or maintained by an employer or employee organization. Among other
things, consideration should be given to (i) whether such investment is prudent
under Section 404(a)(1)(B) of ERISA, (ii) whether in making such investment such
plan will satisfy the diversification requirement of Section 404(a)(1)(C) of
ERISA, and (iii) whether such investment will result in recognition of unrelated
business taxable income by such plan. Please read "Tax Considerations-Tax-Exempt
Organizations and Certain Other Investors." Fiduciaries should determine whether
an investment in 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).
PLAN OF DISTRIBUTION
We may sell the Class A Common Units to one or more underwriters for
public offering and sale, or we may sell the Class A Common Units to investors
directly or through agents. The applicable prospectus supplement will name any
underwriter or agent involved in the offer and sale of the Class A Common Units.
Underwriters may offer and sell the Class A Common Units at fixed
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. We also may authorize underwriters
acting as our agents to offer and sell the Class A Common Units upon the terms
and conditions as are set forth in the applicable prospectus supplement. In
connection with the sale of Class A Common Units, underwriters may be deemed to
have received compensation from us in the form of underwriting discounts or
commissions and also may receive commissions from purchasers of the Class A
Common Units for whom they may act as agent. Underwriters may sell the Class A
Common Units to or through dealers. Dealers may receive compensation in the form
of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
The applicable prospectus supplement will disclose any underwriting
compensation we pay to underwriters or agents in connection with the offering of
the Class A Common Units, and any discounts, concessions or commissions allowed
by underwriters to participating dealers. Underwriters, dealers and agents
participating in the distribution of the Class A Common Units may be deemed to
be underwriters, and any discounts and commissions they receive and any profit
they realize on resale of the Class A Common Units may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with us, to
indemnification against the contribution toward certain civil liabilities,
including liabilities under the Securities Act.
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If a prospectus supplement so indicates, we will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase the Class A Common Units to which such prospectus supplement relates,
providing for payment and delivery on a future date specified in such prospectus
supplement. There may be limitations on the minimum amount that may be purchased
by any such institutional investor or on the number of the Class A Common Units
that may be sold pursuant to such arrangements. Institutional investors include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and such other institutions
as we may approve. The obligations of the purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions except
that (i) the purchase by an institution of the Class A Common Units shall not be
prohibited under the applicable laws of any jurisdiction in the United States
and (ii) if the Class A Common Units are being sold to underwriters, we shall
have sold to such underwriters the total number of such Class A Common Units
less the number thereof covered by such arrangements. Underwriters will not have
any responsibility in respect of the validity of such arrangements or our
performance or such institutional investors thereunder.
If a prospectus supplement so indicates, the underwriters engaged in an
offering of Class A Common Units may purchase and sell Class A Common Units in
the open market. These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number of Class A Common
Units than they are required to purchase in the offering. "Covered" short sales
are sales made in an amount not greater than the underwriters' option to
purchase additional Class A Common Units from us in the offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional Class A Common Units or purchasing Class A Common
Units in the open market. In determining the source of Class A Common Units to
close out the covered short position, the underwriters will consider, among
other things, the price of Class A Common Units available for purchase in the
open market as compared to the price at which they may purchase Class A Common
Units through the overallotment option. "Naked" short sales are any sales in
excess of such option. The underwriters must close out any naked short position
by purchasing Class A Common Units in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the Class A Common Units in the open market
after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
Class A Common Units made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives of the underwriters have
repurchased Class A Common Units sold by or for the account of such underwriter
in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions may
have the effect of preventing or retarding a decline in the market price of the
Class A Common Units, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the Class A Common
Units. As a result, the price of the Class A Common Units may be higher than the
price that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued at any time. These transactions may be
effected on the NYSE, in the over-the-counter market or otherwise.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for us in the ordinary course
of business.
LEGAL MATTERS
The validity of the Class A Common Units is being passed upon by
Fulbright & Jaworski L.L.P., as counsel for Lakehead. If the Class A Common
Units are being distributed in an underwritten offering, certain legal matters
will be passed upon for the Underwriters by counsel identified in the related
prospectus supplement.
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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, 2000 and the audited consolidated statement
of financial position of Lakehead Pipe Line Company, Inc. as of December 31,
2000 and 1999, incorporated in this prospectus by reference to the Current
Report on Form 8-K of Lakehead Pipe Line Partners, L.P. filed on May 7, 2001
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
selling or underwriting discounts and commissions, we expect to incur in
connection with the issuance and distribution of the Class A Common Units being
registered. All amounts shown are estimated except the Securities and Exchange
Commission registration fee. Lakehead will bear all such costs.
Securities and Exchange Commission registration fee............................. $ 125,000
New York Stock Exchange Listing Fee............................................. 38,500
Accounting fees and expenses.................................................... 25,000
Legal fees and expenses......................................................... 150,000
Printing and engraving expenses................................................. 50,000
Transfer Agent's Fee............................................................ 2,500
Miscellaneous................................................................... 4,000
---------
Total.................................................................. $ 395,000
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Partnership agreements of Lakehead and the Operating Partnership
provide that Lakehead or the Operating Partnership, as the case may be, will
indemnify (to the fullest extent permitted by applicable law) certain persons
(each, an "Indemnitee") from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgements, fines and amounts paid in settlement actually
and reasonably incurred by such Indemnitee in connection with any claim, demand,
action, suit or proceeding to which the Indemnitee is or was an actual or
threatened party and which relates to the Partnership agreement of Lakehead or
the Partnership agreement of the Operating Partnership or the property,
business, affairs or management of Lakehead and the Operating Partnership. This
indemnity is available only if the Indemnitee acted in good faith, in a manner
in which such Indemnitee believed to be in, or not opposed to, the best
interests of Lakehead and the Operating Partnership and, with respect to any
criminal proceeding, had no reasonable cause to believe its conduct was
unlawful. Indemnitees include the general partner, any Departing Partner (as
defined in the Partnership agreement of Lakehead or the Partnership agreement of
the Operating Partnership), any affiliate of the general partner or any
Departing Partner, any person who is or was a director, officer, employee or
agent of the general partner or any Departing Partner or any affiliate of
either, or any person who is or was serving at the request of the general
partner, any Departing Partner, or any such affiliate as a director, officer,
partner, trustee, employee or agent of another person. Expenses subject to
indemnity will be paid by the applicable partnership to the Indemnitee in
advance, subject to receipt of an undertaking by or on behalf of the Indemnitee
to repay such amount if it is ultimately determined by a court of competent
jurisdiction that the Indemnitee is not entitled to indemnification.
Lakehead will, to the extent commercially reasonable, purchase and
maintain insurance on behalf of the Indemnitees, whether or not Lakehead would
have the power to indemnify such Indemnitees against liability under the
applicable partnership agreement.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreement of Lakehead or the Partnership agreement of the Operating
Partnership, Section 17-108 of the Delaware Revised Limited Partnership Act
empowers a Delaware limited partnership to indemnify and hold harmless any
partner or other person from and against all claims and demands whatsoever.
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Reference is made to Exhibit 1.1 hereto, which will contain provisions
for indemnification of Lakehead, the general partner and its directors,
officers, and any controlling persons, against certain liabilities for
information furnished by the underwriters and/or agents, as applicable,
expressly for use in a prospectus supplement.
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
1.1* -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of Lakehead Pipe Line
Partners, L.P. (incorporated herein by reference to Exhibit
3.1 to Lakehead Pipe Line Partners, L.P.'s Registration
Statement on Form S-1 (File No. 33-43425))
4.1 -- Form of Certificate representing Class A Common Units
(incorporated herein by reference to Exhibit 1 to the Lakehead
Pipe Line Partners, L.P.'s Form 8-A/A (Amendment No. 2), dated
May 2, 1997 (File No. 1-10934))
4.2 -- Amended and Restated Agreement of Limited Partnership of the
Lakehead Pipe Line Partners, L.P., dated April 15, 1997
(incorporated herein by reference to Exhibit 2 to the Lakehead
Pipe Line Partners, L.P.'s Form 8-A/A (Amendment No. 2), dated
May 2, 1997 (File No. 1-10934))
5.1 -- Opinion of Fulbright & Jaworski L.L.P. as to the legality of
the securities
8.1 -- Opinion of Fulbright & Jaworski L.L.P. as to certain federal
income tax matters
23.1** -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit
5.1)
24.1** -- Powers of Attorney
-----------
* To be filed as an exhibit to a Current Report on Form 8-K.
** Previously filed.
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
- To include any prospectus required by Section 10(a)(3) of the
Securities Act;
- To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
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- To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that the first two items of paragraphs A(l) above do
not apply if the information required to be included in a post-effective
amendment by those items is contained in periodic reports filed by the
Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of Lakehead's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
D. The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Duluth, in the State of Minnesota, on August 9,
2001.
Lakehead Pipe Line Partners, L.P.
By: Lakehead Pipe Line Company, Inc., as
general partner
By: /s/ J.L. BALKO
----------------------------------------------
J.L. Balko
(Chief Accountant)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates as indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ D.C. TUTCHER President and Director
-------------------------------- (Principal Executive Officer) August 9, 2001
Dan Tutcher
/s/ J.L. BALKO Chief Accountant
-------------------------------- (Principal Financial and Accounting August 9, 2001
J.L. Balko Officer)
* Director August 9, 2001
--------------------------------
E.C. Hambrook
* Director August 9, 2001
--------------------------------
G.K. Petty
* Director August 9, 2001
--------------------------------
P.D. Daniel
* Director August 9, 2001
--------------------------------
C.A. Russell
* Director August 9, 2001
--------------------------------
D.P. Truswell
*By: /s/ J.L. BALKO
----------------------------
J.L. Balko, Attorney-in Fact
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of Lakehead Pipe Line
Partners, L.P. (incorporated herein by reference to Exhibit
3.1 to Lakehead Pipe Line Partners, L.P.'s Registration
Statement on Form S-1 (File No. 33-43425))
4.1 -- Form of Certificate representing Class A Common Units
(incorporated herein by reference to Exhibit 1 to the Lakehead
Pipe Line Partners, L.P.'s Form 8-A/A (Amendment No. 2), dated
May 2, 1997 (File No. 1-10934))
4.2 -- Amended and Restated Agreement of Limited Partnership of the
Lakehead Pipe Line Partners, L.P., dated April 15, 1997
(incorporated herein by reference to Exhibit 2 to the Lakehead
Pipe Line Partners, L.P.'s Form 8-A/A (Amendment No. 2), dated
May 2, 1997 (File No. 1-10934))
5.1 -- Opinion of Fulbright & Jaworski L.L.P. as to the legality of
the securities
8.1 -- Opinion of Fulbright & Jaworski L.L.P. as to certain federal
income tax matters
23.1** -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit
5.1)
24.1** -- Powers of Attorney
-------------
* To be filed as an exhibit to a Current Report on Form 8-K.
** Previously filed.
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