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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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)
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DELAWARE 39-1715850
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
SUSAN D. LENCZEWSKI
LAKE SUPERIOR PLACE CORPORATE SECRETARY
21 WEST SUPERIOR STREET LAKE SUPERIOR PLACE
DULUTH, MINNESOTA 55802 21 WEST SUPERIOR STREET
(218) 725-0100 DULUTH, MINNESOTA 55802
(218) 725-0100
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including telephone number,
area code, of registrant's principal executive including area code, of agent for service)
offices)
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Copies to:
WILLIAM N. FINNEGAN, IV
ANDREWS & KURTH L.L.P.
4200 CHASE TOWER
600 TRAVIS
HOUSTON, TEXAS 77002
(713) 220-4200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement, as determined
in light of market conditions and other factors.
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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, 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
under the Securities Act, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Class A Common Units representing limited partner
interests................................................. $200,000,000 $55,600
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
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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 THIS 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 NOVEMBER 9, 1998
PROSPECTUS
$200,000,000
LAKEHEAD PIPE LINE PARTNERS, L.P.
Class A Common Units
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We may offer and sell up to $200,000,000 of our Class A Common Units in one or
more separate offerings with this prospectus. We will determine the prices and
terms of the sales at the time of each offering and will describe them in a
supplement to this prospectus.
This prospectus can only be used to offer or sell units if it is accompanied by
a prospectus supplement. The prospectus supplement will contain important
information about us and the units which is not included in this prospectus. You
should read this prospectus and the prospectus supplement carefully.
We may sell these units to underwriters or dealers, or we may sell them directly
to other purchasers. See "Plan of Distribution." The prospectus supplement will
list any underwriters and the compensation that they will receive. The
prospectus supplement will also show you the total amount of money that we will
receive from selling these units, after we pay certain expenses of the offering.
The Class A Common Units are listed on the New York Stock Exchange under the
symbol "LHP".
Our executive offices are located at Lake Superior Place, 21 West Superior
Street, Duluth, Minnesota 55802, and our telephone number is (218) 725-0100.
YOU SHOULD CAREFULLY READ AND CONSIDER THE RISK FACTORS BEGINNING ON PAGE 5 OF
THIS PROSPECTUS BEFORE BUYING UNITS.
THESE RISKS INCLUDE THE FOLLOWING:
- OUR PIPELINE SYSTEM DEPENDS ON ADEQUATE SUPPLIES OF AND DEMAND FOR WESTERN
CANADIAN CRUDE OIL.
- THE FEDERAL ENERGY REGULATORY COMMISSION REGULATES THE TARIFFS WE CHARGE OUR
CUSTOMERS. WE PLAN TO FILE TARIFF SURCHARGES IN LATE 1998 OR EARLY 1999 TO
REFLECT CHANGES IN OUR COSTS AND THROUGHPUT FROM OUR CURRENT SYSTEM
EXPANSION PROGRAM. ANY SUCCESSFUL CHALLENGES TO OUR TARIFF RATES COULD
ADVERSELY AFFECT US AND REDUCE CASH DISTRIBUTIONS TO OUR UNITHOLDERS.
- IN MAY 1997, THE ILLINOIS COMMERCE COMMISSION DENIED OUR APPLICATION FOR A
CERTIFICATE THAT WE NEED IN ORDER TO EXERCISE CONDEMNATION AUTHORITY IN
ILLINOIS FOR OUR CURRENT SYSTEM EXPANSION PROGRAM. ILLINOIS APPELLATE COURTS
HAVE REFUSED TO OVERTURN THE DENIAL. AS A RESULT, OBTAINING RIGHTS OF WAY
HAS BECOME MORE EXPENSIVE AND HAS TAKEN LONGER THAN IF WE HAD CONDEMNATION
AUTHORITY.
- OUR PARTNERSHIP AGREEMENT LIMITS THE LIABILITY AND MODIFIES THE FIDUCIARY
DUTIES OF THE GENERAL PARTNER TO US AND OUR UNITHOLDERS. 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. CONFLICTS OF INTEREST BETWEEN US AND AFFILIATES OF OUR GENERAL PARTNER
COULD ARISE DUE TO OUR GENERAL PARTNER'S RELATIONSHIP WITH US AND ITS
AFFILIATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November , 1998
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
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Who We Are.............................. 3
About this Prospectus................... 3
Where You Can Find More Information..... 3
Forward-Looking Statements.............. 4
Risk Factors............................ 5
Risks of Our Business................. 5
We Depend on the Supply of Western
Canadian Crude Oil and the
Enbridge Pipeline System......... 5
Our Pipeline System Might be Used
Less if Demand for Crude Oil and
Natural Gas Liquids Decreases.... 5
We Cannot Always Control the Rates
that We Charge................... 6
Possible SEP II Right of Way
Acquisition and Permitting
Problems......................... 7
Competition......................... 8
Risk of Environmental and Safety
Costs and Liabilities............ 8
Risks Arising From Our Partnership
Structure and Relationships with Our
General Partner..................... 9
Our General Partner May Have
Conflicts of Interest............ 9
Our Partnership Agreement Restricts
the General Partner's Fiduciary
Duties........................... 10
We May Sell Additional Units........ 10
Your Voting Rights are Limited...... 10
It is Difficult to Remove the
General Partner.................. 11
The General Partner Has a Limited
Call Right on the Class A
Units............................ 11
It is Difficult to Enforce Civil
Liabilities Against Our Officers,
Directors and Controlling
Persons.......................... 11
Risks Related to Our Debt and Our
Ability to Distribute Cash.......... 11
Risks Related to Taxes................ 12
We May be Taxed as a Corporation
Rather Than as a Partnership..... 12
Allocation of Taxable Income and
Loss............................. 12
Your Tax Liability Could Exceed Your
Cash Distributions or Proceeds
from Sales of Units.............. 13
Uniformity of Units May Not Be
Maintained....................... 13
The Partnership......................... 14
Use of Proceeds......................... 15
Cash Distributions...................... 16
Conflicts of Interest and Fiduciary
Responsibilities...................... 22
Tax Considerations...................... 27
Investment in the Partnership by
Employee Benefit Plans................ 45
Plan of Distribution.................... 46
Validity of Class A Units............... 47
Experts................................. 47
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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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WHO WE ARE
We are a publicly traded Delaware limited partnership that owns and operates a
regulated crude oil and natural gas liquids pipeline business in the United
States. Lakehead Pipe Line Company, Inc., a wholly owned subsidiary of Enbridge
Inc. ("Enbridge") of Canada, serves as our general partner. Enbridge is a
publicly traded company that is a North American leader in energy services and
delivery. We and Enbridge are engaged in the transportation of crude oil and
other liquid hydrocarbons through the world's longest liquid petroleum pipeline
system (the "System"). We own the United States portion of the System and
another subsidiary of Enbridge, Enbridge Pipelines, Inc., owns the Canadian
portion of the System (the "Enbridge Pipeline System"). The System is the
primary transporter of crude oil from Western Canada to the United States.
As used in this prospectus, "we," "us," "our," and the "Partnership" means
Lakehead Pipe Line Partners, L.P. and includes our subsidiary operating
partnership, Lakehead Pipe Line Company, Limited Partnership. Our Class A Common
Units ("Class A Units") represent limited partner interests in Lakehead Pipe
Line Partners, L.P. We also have limited partner interests that are represented
by Class B Common Units ("Class B Units"). All of our Class B Units are owned by
our general partner. The Class A and Class B Units are referred to in this
prospectus as "units."
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with the
Securities and Exchange Commission ("SEC") using a "shelf" registration process.
Under this shelf registration process, we may sell the Class A Units described
in this prospectus in one or more offerings up to a total dollar amount of
$200,000,000. This prospectus provides you with a general description of us and
the Class A Units. Each time we sell Class A Units with this prospectus, we will
provide a prospectus supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add to, update or
change information in this prospectus. The information in this prospectus is
accurate as of November , 1998. You should carefully read both this prospectus
and any prospectus supplement, together with additional information described
under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information with the SEC.
You may read and copy any document we file at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
located at Seven World Trade Center, New York, New York 10048, and at 500 West
Madison Street, Chicago, Illinois 60661. Please call the SEC at 1-800-733-0330
for further information on their public reference room. Our SEC filings are also
available at our website at http://www.lakehead.com or at the SEC's web site at
http://www.sec.gov. You can also obtain information about us at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
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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 Units offered by this prospectus.
- Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as
amended (the "Form 10-K");
- Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998;
- Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998,
as amended;
- Current Report on Form 8-K dated July 21, 1998, as amended; and
- Current Report on Form 8-K dated October 20, 1998.
You may request a copy of these filings, at no cost, by writing or calling us at
the following address:
R. R. Karlen
Investor Relations
Lakehead Pipe Line Partners, L.P.
Lake Superior Place
21 West Superior Street
Duluth, Minnesota 55802
(800) 525-3999
(218) 725-0100
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, any prospectus supplement
and the documents we have incorporated by reference contain forward-looking
statements. Such statements use forward-looking words such as "may," "will,"
"anticipate," "believe," "expect," "project" or other similar words. These
statements discuss goals, intentions and expectations as to future trends,
plans, events, results of operations or financial condition or state other
"forward-looking" information. These statements are based on current and
anticipated economic conditions, globally and in our markets, governmental
regulatory policies, competitive factors and other conditions. These factors and
conditions are subject to risks and uncertainties that may cause our actual
results to differ substantially from those expressed or implied by these
statements. When considering such forward-looking statements, you should keep in
mind the risk factors and other cautionary statements in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
will not update these statements unless the securities laws require us to do so.
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RISK FACTORS
Before you invest in our Class A Units, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in the
prospectus, any prospectus supplement and the documents we have incorporated by
reference before buying Class A Units.
If any of the following risks actually occurs, then our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of the Class A Units could decline, and you may
lose part of your investment.
RISKS OF OUR BUSINESS
WE DEPEND ON THE SUPPLY OF WESTERN CANADIAN CRUDE OIL AND THE ENBRIDGE
PIPELINE SYSTEM
Our pipeline system depends on the supply of crude oil and other liquid
petroleum products from western Canada. Enbridge has advised us that in 1997 the
Enbridge Pipeline System transported approximately 65% of all crude oil produced
in western Canada. Of this amount, approximately 90% was transported by our
pipeline system. If western Canadian crude oil production falls, we expect that
our pipeline system will transport less crude oil.
We depend on producers of western Canadian crude oil who use the Enbridge
Pipeline 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 will probably transport lower volumes of crude oil
through our pipeline system. In addition, if the Enbridge Pipeline 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 United States Federal Energy
Regulatory Commission ("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 be decreased 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
Our business depends in part on the level of demand for western Canadian crude
oil and natural gas liquids in the markets we serve. The volumes of crude oil
and refined products delivered from sources other than western Canada to markets
we serve affects the demand for western Canadian crude oil and natural gas
liquids and the demand for the use of our pipeline system. Levels of demand for
western Canadian crude oil and natural gas liquids also influence the ability
and willingness of shippers to use our pipeline system to meet demand.
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Excess pipeline capacity to the markets we serve can also reduce the level of
demand for our services. At the present time, the existing pipeline capacity for
the delivery of crude oil to the Midwest U.S., the primary market we serve,
exceeds current refining capacity.
Enbridge and a group of refiners have developed a project to reverse the flow of
a portion of the Enbridge Pipeline System from Sarnia, Ontario to Montreal,
Quebec to transport crude oil from Montreal to Sarnia. The reversal of this line
would result in Enbridge competing with our pipeline system in supplying crude
oil to the Ontario market. This would likely reduce our deliveries of western
Canadian crude oil into the eastern Canadian markets served by our pipeline
system. Reversal of Enbridge's Montreal line is expected to occur in 1999. At
that time, we expect to redirect quantities of crude oil from the Ontario market
to existing U.S. markets served by our pipeline system, although at reduced
tariffs due to shorter transportation distances.
A variety of factors could cause the demand for crude oil and natural gas
liquids to fall in the markets that we serve. These factors include:
- economic conditions
- fuel conservation measures
- alternative fuel requirements
- government regulation
- 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 is used less, we may have
lower revenues and less cash to distribute to our unitholders.
WE CANNOT ALWAYS CONTROL THE RATES THAT WE CHARGE
Since we are an interstate common carrier, our pipeline operations are regulated
by the FERC under the Interstate Commerce Act. This Act allows the FERC and
certain other interested parties to challenge proposed or changed rates and our
current rates that are already effective. The FERC may suspend our proposed or
changed rates for up to seven months and may allow such rates to become
effective subject to investigation and potential refund. The FERC may also
reduce our current rates in the future and, upon an appropriate showing, order
that we pay reparations for damages caused by such rates during the two years
prior to the beginning of the FERC's investigation.
The FERC has used its current ratemaking methodology for liquids pipelines since
January 1, 1995. This methodology allows changes in the maximum rate we can
charge based on changes in a producer price index. The maximum rate is adjusted
up or down each year by the change in this price index minus 1%. The current
ratemaking methodology also allows pipelines or shippers to use cost-based or
market-based rates, instead of the index-based rates, in certain circumstances.
This method of determining rates may limit our ability to set rates based on our
true costs or may delay the implementation of rates that reflect increased
costs. If this occurs, it could adversely affect us. In addition, if the FERC
sets rates using the cost index, changes in this index might not be large enough
to fully reflect actual increases in our costs. It is also possible that the
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index will rise by less than 1% or fall, causing the maximum rates to fall. This
happened in July 1998. See "Items 1 and 2. Business and
Properties -- Regulation" in the Form 10-K.
Many of the ratemaking issues contested in prior rate cases before the FERC, in
particular the FERC's oil pipeline ratemaking methodology, have not been
reviewed by a federal appeals court. An appeals court review of a FERC rate case
could result in a different ratemaking methodology. If this happens, it could
adversely affect us and reduce cash distributions to our unitholders.
The FERC is currently involved in a proceeding with another publicly traded
partnership that transports petroleum products. In this proceeding, the FERC
might further limit the tax allowance that is permitted in rates charged by
publicly traded partnerships. The FERC might also change its application of its
oil pipeline ratemaking methodology. The administrative law judge in this
proceeding issued an initial decision on September 25, 1997. This decision
considered the tax allowance issue as it affects publicly traded partnerships
and the FERC oil pipeline ratemaking methodology. The FERC is now reviewing this
decision. In this review, the FERC could change its current rulings on the tax
allowance issue or the application of the FERC oil pipeline ratemaking
methodology in a way that might ultimately adversely affect us and reduce cash
distributions to our unitholders.
The level of tariffs established under the FERC's rules and regulations affects
our operating income and cash flow. We plan to file tariff surcharges in late
1998 or early 1999 to reflect changes in our costs and throughput from our
System Expansion Program II ("SEP II") and Terrace Expansion Program
("Terrace"). In 1996, we entered into a settlement agreement with the
representative of most of our customers on all then outstanding contested
tariffs. That agreement sets forth guidelines for the tariff surcharge for SEP
II. However, some implementation details of the surcharge are still subject to
interpretation and possible negotiations. We have also entered into an agreement
with the same customer representative on the tariff surcharge for Terrace. On
October 27, 1998, we filed the agreements with the FERC as a settlement, seeking
advance approval for the tariff surcharges for SEP II and Terrace. See "Items 1
and 2. Business and Properties's -- SEP II Expansion Program," "-- Terrace
Expansion Program" and "-- Tariffs" in the Form 10-K. However, the customers who
did not enter into these agreements may still challenge our tariff rate filings.
Any successful challenges to our tariff rates could adversely affect us and
reduce cash distributions to our unitholders.
POSSIBLE SEP II RIGHT OF WAY ACQUISITION AND PERMITTING PROBLEMS
In May 1997, the Illinois Commerce Commission denied our application for a
certificate that we need in order to exercise condemnation authority in Illinois
for our SEP II project. Illinois appellate courts have refused to overturn the
denial. As a result, obtaining rights of way has become more expensive and has
taken longer than if we had condemnation authority.
We are currently obtaining the environmental and construction permits that we
need to construct the new pipeline for SEP II. If it takes us longer than
anticipated to get these permits, it might take us longer to construct and begin
using this new pipeline.
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COMPETITION
Pipelines have historically been the least expensive way to transport crude oil
over land for intermediate and long distances. As a result, our most significant
competitors for transporting western Canadian crude oil are other pipelines. We
also face competition, however, when producers choose to sell their crude oil
for use in western Canada. Enbridge has advised us that in 1997, the Enbridge
Pipeline System transported approximately 65% of total western Canadian crude
oil production. Of this amount, approximately 90% was transported by our
pipeline system. The balance of western Canadian crude oil was refined in
Alberta or Saskatchewan or transported through other pipelines to British
Columbia, Washington, Montana and other states in the Northwest U.S. In the
United States, our pipeline system competes with other crude oil and refined
product pipelines and other methods of delivering crude oil and refined products
to the refining centers of Minneapolis-St. Paul, Minnesota; Chicago, Illinois;
Detroit, Michigan; Toledo, Ohio; and Buffalo, New York, and, through a
connecting pipeline, the refinery market and pipeline hub located in the
Patoka/Wood River area of southern Illinois. See "Items 1 and 2. Business and
Properties -- Competition" in the Form 10-K.
RISK OF ENVIRONMENTAL AND SAFETY COSTS AND LIABILITIES
Our operations are subject to federal and state laws and regulations relating to
environmental protection and operational safety. We believe that we are
currently in substantial compliance with these regulations. However, pipeline
operations always involve the risk of costs or liabilities related to
environmental protection and operational safety matters. As a result, we may
incur costs or liabilities of this type in the future. It is also possible that
we will have to pay amounts in the future because of changes in environmental
and safety laws or enforcement policies or claims for environmental-related
damage to persons or property. If we cannot recover these costs from insurance
or through higher tariffs, we could be adversely affected and cash distributions
to our unitholders could be reduced.
Federal, state and local laws and regulations impose strict controls on the
discharge of oil and certain other materials into navigable waters. These laws
and regulations can require us to pay civil and criminal penalties for
discharges. If there is a discharge, we also may have to pay for cleanup costs,
damage to natural resources and third party lawsuits. These laws require us to
use spill prevention control procedures, which include diking and similar
structures, to help prevent oil and other materials from getting into navigable
waters if there is a leak from our pipeline.
Contamination resulting from spills of crude oil and petroleum products is not
unusual within the petroleum pipeline industry. Spills of crude oil from our
pipelines have occurred in the past, and may occur in the future. In addition,
directional drilling of pipeline conduits when a pipeline is being constructed
can result in discharges of drilling related materials to the soil, groundwater,
surface waters or wetlands.
We have hydrostatically tested parts of our pipeline system in the past, which
means that we have tested the structural integrity of our pipelines by filling
them with water at high pressures. We may decide that we need to do additional
hydrostatic testing in the future, or a regulatory authority may require such
testing. If this testing occurs, it could result in significant expense arising
out of treatment and disposal of the test water and lost
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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.
RISKS ARISING FROM OUR PARTNERSHIP STRUCTURE AND RELATIONSHIPS WITH OUR GENERAL
PARTNER
OUR GENERAL PARTNER MAY HAVE CONFLICTS OF INTEREST
Since our general partner is related to both Enbridge and to us, conflicts of
interest between us and Enbridge may arise from time to time. The following
situations could give rise to conflicts of interest:
- the general partner determines the amount and timing of any capital
expenditures, borrowings and reserves, which can impact the amount of cash
that is distributed by us to our unitholders and to the general partner
- the general partner determines which expenditures are capital expenditures
that are necessary to maintain our pipeline system. (Those expenditures
reduce the cash from operations that is used to make distributions to our
unitholders.)
- the general partner determines whether to issue additional units or other
equity securities or whether to purchase outstanding units
- the general partner controls payments to Enbridge for any services rendered
for our benefit, subject to the limitations described in "Conflicts of
Interest and Fiduciary Responsibilities"
- the general partner determines which costs are reimbursable by us
- the general partner controls the enforcement of obligations owed to us by
the general partner
- the general partner decides whether to retain separate counsel, accountants
or others to perform services for us
There also may be conflicts of interest if Enbridge conducts businesses that
compete with our pipeline system. We have an agreement with Enbridge that
generally does not prevent Enbridge from pursuing its business interests, even
if these interests involve pipelines in the U.S. This agreement and our
partnership agreement do not restrict Enbridge from engaging in businesses that
it was engaged in at the time of our initial public offering in December 1991,
even if such business competes with ours. In addition, the current direction of
oil flow through part of the Enbridge Pipeline System from Sarnia to Montreal
may be reversed, as discussed in "-- Risks of Our Business -- Our Pipeline
System Might be Used Less if Demand for Crude Oil and Natural Gas Liquids
Falls." If the reversal of Enbridge's Montreal line occurs, Enbridge will
compete with us to supply crude oil to the Ontario market. Our agreement with
Enbridge expressly permits this reversal. See "Conflicts of Interest and
Fiduciary Responsibilities."
Our partnership agreement allows the general partner to resolve conflicts of
interest by considering the interests of all the parties to the conflict.
Therefore, the general partner can consider the interests of Enbridge if a
conflict of interest arises. This is very different from
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the more familiar legal duty of a trustee, who must act solely in the best
interests of the trust's beneficiary. See "Conflicts of Interest and Fiduciary
Responsibilities."
We are very dependent on Enbridge and the Enbridge Pipeline System. Nearly all
of the crude oil and natural gas liquids we ship comes from the Enbridge
Pipeline System in Canada, and shipments on our pipeline system are scheduled by
Enbridge in coordination with our general partner. In addition, neither we nor
the general partner has any employees. In operating our pipeline system, we and
the general partner rely solely on employees of Enbridge and its affiliates.
Because Enbridge and its affiliates are engaged in many other businesses and
activities that require the services of their employees, those employees may not
be available when we need them.
OUR PARTNERSHIP AGREEMENT RESTRICTS THE GENERAL PARTNER'S FIDUCIARY DUTIES
The general partner generally has a fiduciary duty to us and to our unitholders.
As a result, the general partner must exercise good faith and integrity in
handling our assets and affairs. However, Delaware law allows Delaware limited
partnerships to modify the fiduciary duties of their general partners. Our
partnership agreement does this and limits the fiduciary duties of the general
partner to us and to our unitholders. In addition, our unitholders have
effectively consented to certain actions and conflicts of interest that might
otherwise be deemed a breach of fiduciary or other duties under state law. These
modifications of the standards of fiduciary duty may make it much more difficult
for a unitholder to successfully challenge the actions of or failure to act by
the general partner as being in breach of a fiduciary duty. See "Conflicts of
Interest and Fiduciary Responsibilities."
WE MAY SELL ADDITIONAL UNITS
We can issue an unlimited number of additional units or other equity securities,
including equity securities with rights to distributions and allocations or in
liquidation superior to the Class A Units offered by this prospectus. If we
issue more units or other equity securities, your proportionate ownership
interest in the Partnership will be reduced. This could cause the market price
of your units to fall, reduce the cash distributions paid to you as a
unitholder, or both.
Our partnership agreement allows the general partner to cause us to register for
sale any units held by the general partner or its affiliates. The general
partner currently owns 3,912,750 Class B Units. These registration rights allow
the general partner and its affiliates holding any units to request registration
of such units and to include any such units in a registration of other units by
us. In addition, the general partner and its affiliates may sell their units in
private transactions at any time.
YOUR VOTING RIGHTS ARE LIMITED
You have limited voting rights as a unitholder. The general partner generally
manages the activities of the Partnership. Unitholders do not have the right to
elect the general partner on an annual basis. As a result, the unitholders have
only limited control over our management. However, if the general partner
withdraws or is removed, the unitholders can elect the new general partner by a
majority vote of the outstanding units.
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<PAGE> 12
IT IS DIFFICULT TO REMOVE THE GENERAL PARTNER
A vote of at least 66 2/3% of the outstanding units is required to remove the
general partner. Units held by the general partner and its affiliates are
excluded from this vote.
Our partnership agreement does not allow the general partner to withdraw
voluntarily as general partner before January 1, 2000 (subject to a few
exceptions). However, the general partner can withdraw before this date if such
withdrawal is approved by the holders of at least 66 2/3% of the outstanding
units (excluding units held by the general partner or its affiliates). If the
general partner withdraws or is removed as our general partner, it will
automatically be withdrawn as general partner of our subsidiary operating
partnership.
There is no agreement, however, that prevents Enbridge from selling all or part
of its ownership in the general partner.
THE GENERAL PARTNER HAS A LIMITED CALL RIGHT ON THE CLASS A UNITS
If at any time less than 15% of the outstanding units are held by persons other
than the general partner and its affiliates, the general partner has the right
to purchase all of the outstanding units.
IT IS DIFFICULT TO ENFORCE CIVIL LIABILITIES AGAINST OUR OFFICERS, DIRECTORS
AND CONTROLLING PERSONS
Some of the officers and directors of our general partner and some of our
controlling persons (as defined under U.S. federal securities laws) are not U.S.
residents and have most of their assets outside of the United States. As a
result, it might be difficult for you to serve process on these persons. You
might want to serve process on them if you are suing them for civil liabilities
under U.S. federal securities law. Our Canadian lawyers have told us that it may
not be possible to enforce U.S. judgments against these persons if the judgment
is based solely on the federal securities laws of the United States.
RISKS RELATED TO OUR DEBT AND OUR ABILITY TO DISTRIBUTE CASH
We had long-term debt of $685 million as of October 31, 1998. Substantially all
of our assets secured $485 million of this debt. In addition, we will probably
incur additional indebtedness to fund a portion of the remaining cost of SEP II
and the expected cost of phase one of Terrace and to fund a portion of our other
expansion programs and capital expenditures. The $685 million of long-term debt
as of October 31, 1998 consisted of:
- $310 million of first mortgage notes (the "First Mortgage Notes"), which
have no principal payments due until 2002
- $175 million outstanding under a $350 million revolving bank credit facility
(the "Revolving Credit Facility")
- $100 million of 7% senior notes due 2018 (the "7% Notes")
- $100 million of 7 1/8% senior notes due 2028 (the "7 1/8% Notes" and,
together with the 7% Notes, the "Senior Notes")
The Revolving Credit Facility currently matures on September 6, 2003. The
maturity date will be automatically extended each year by an additional year
unless the banks give us
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<PAGE> 13
notice that they will not extend the maturity date. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the 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.
The 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 and the Revolving Credit Facility restrict the amount
of new debt that the operating partnership can issue and restrict the operations
of the 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
Andrews & Kurth L.L.P., our law firm, has rendered its opinion that, under
current law, the Partnership will be classified as a partnership for federal
income tax purposes. They based their opinion on certain factual representations
made to them by the general partner. If any of such facts are incorrect,
particularly facts relating to the nature of our gross income, U.S. tax laws
could classify the Partnership as a corporation for federal income tax purposes.
See "Tax Considerations -- Partnership Status."
If the tax laws treat the Partnership as a corporation in any taxable year, our
income, gains, losses, deductions and credits would not be passed on to our
unitholders. In addition, we would have to pay taxes on our net income at
corporate rates. Distributions that we make to our unitholders would be treated
as dividend income (to the extent of current or accumulated earnings and
profits), and, in the absence of earnings and profits, as a nontaxable return of
capital (to the extent of the unitholder's tax basis in his units), or as
capital gain (after the unitholder's tax basis in his units is reduced to zero).
Furthermore, losses realized by us would not flow through to our unitholders.
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 contributed or deemed contributed to us. The Internal Revenue
Service (the "IRS") could challenge these allocations. Our lawyers believe that
if these allocations are challenged and allowed, they will prevent a shift of
precontribution gain from the general partner to the holders of Class A Units
that is attributable to assets contributed to us by the general
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<PAGE> 14
partner. Therefore, we believe that these allocations should be consistent with
the principles of Section 704(c) of the Internal Revenue Code of 1986, as
amended (the "Code"), and with the principles of the applicable regulations of
the United States Department of Treasury.
A successful IRS challenge to our curative allocations would shift the tax
consequences associated with the differences between the fair market value and
tax basis of assets contributed to us (including by the general partner) or
differences between the fair market value and book basis of our assets existing
at the time of any offering of Class A Units pursuant to this prospectus. This
result is contrary to the policy of Section 704(c). Because these curative
allocations are consistent with our lawyers' view of the purposes of Section
704(c) and the associated regulations, our lawyers believe that it is unlikely
the IRS will challenge the curative allocations. However, the application of the
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 lawyers
believe 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 Units that are materially higher than the estimates that may be set
forth in a prospectus supplement.
YOUR TAX LIABILITY COULD EXCEED YOUR CASH DISTRIBUTIONS OR PROCEEDS FROM SALES
OF UNITS
You will be required to pay federal income tax and, in certain cases, state and
local income taxes on your allocable share of Partnership 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 indebtedness, you may incur a
tax liability that is greater than the money you receive when you sell your
units.
UNIFORMITY OF UNITS MAY NOT BE MAINTAINED
Because we cannot match transferors and transferees of Class A Units, we must
attempt to maintain uniformity of the economic and tax characteristics of the
Class A Units. In order to so this, we have and will adopt certain depreciation
and amortization conventions that do not conform with all aspects of the
applicable Treasury regulations. If the IRS were successful in challenging our
conventions, uniformity would be affected and gain from the sale of units might
be increased.
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<PAGE> 15
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. The following chart shows our organization and ownership structure as of
the date of this prospectus before giving effect to this offering. Except in the
following chart, the ownership percentages referred to in this prospectus
reflect the approximate effective ownership interest in us and our subsidiary
operating partnership on a combined basis.
Organizational chart depicting the following organizational and ownership
information.
OWNERSHIP OF THE OPERATING PARTNERSHIP
Percentage/Type of Interest Held Interest Held By
-------------------------------- ----------------
98.9899% limited partner interest Partnership
1.0101% general partner interest General Partner
OWNERSHIP OF THE PARTNERSHIP
Percentage/Type of Interest Held Number/Type of Units Interest Held By
- -------------------------------- -------------------- ----------------
84.2% limited partner interest 22,290,000 Class A Units Public Unitholders
14.8% limited partner interest 3,912,750 Class B Units General Partner
1% general partner interest General Partner
OWNERSHIP OF THE GENERAL PARTNER
Percentage Held Interest Held By
--------------- ----------------
100% Enbridge
We and Enbridge are engaged in the transportation of crude oil and other liquid
hydrocarbons through the world's longest liquid petroleum pipeline system. We
own the United States portion of the System and Enbridge owns the Canadian
portion of the System. The System is the primary transporter of crude oil from
western Canada to the United States. It is the only pipeline system that
transports crude oil from western Canada to eastern Canada. The System serves
all the major refining centers in the Great Lakes region of the United States,
as well as the Province of Ontario, Canada and, through a connecting pipeline,
the Patoka/Wood River refinery market and pipeline hub in southern Illinois.
Crude oil delivered to the Enbridge Pipeline System originates in oil fields in
the western Canadian provinces of Alberta, Saskatchewan, Manitoba and British
Columbia and in the Northwest Territories of Canada and is delivered to the
Enbridge Pipeline System through facilities owned and operated by third parties
or affiliates of Enbridge. Deliveries from the Enbridge Pipeline System are
currently made in the prairie provinces of Canada and, through our pipeline
system, in the Great Lakes and Midwest regions of the United States
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and the Province of Ontario. These deliveries are made principally to refineries
either directly or through connecting pipelines of other companies.
Our pipeline system extends approximately 1,750 miles from the Canadian border
near Neche, North Dakota, to the Canadian border near Marysville, Michigan. Four
separate pipelines run from the Canadian border near Neche to Clearbrook,
Minnesota and three of these pipelines continue on from Clearbrook to Superior,
Wisconsin. At Superior, our pipeline system continues as two separate and
diverging pipelines. One pipeline runs through the upper Great Lakes region, and
the other runs through the lower Great Lakes region of the United States. Both
pipelines re-enter Canada at a point near Marysville. Our pipeline system also
includes a lateral pipeline from the Canadian border near Niagara Falls to the
Buffalo, New York area. Crude oil and natural gas liquids enter our pipeline
system at the Canadian border from the Enbridge Pipeline System and, to a lesser
extent, at a number of other points. Deliveries of these volumes are then
scheduled into our pipeline system in accordance with customer orders.
Enbridge handles all scheduling of shipments (including routes, storage, etc.)
in coordination with our general partner. Our pipeline system includes 16
connections to other pipelines and refineries at various locations in the United
States, including the refining centers of Minneapolis-St. Paul, Chicago,
Detroit, Toledo, and Buffalo, and, through a connecting pipeline, the
Patoka/Wood River refinery market and pipeline hub in southern Illinois. As of
September 30, 1998, our pipeline system had approximately nine million barrels
of tankage capacity at its three terminals at Clearbrook, Superior and Griffith,
Indiana. The tankage capacity is used both to gather crude oil prior to
injection into our pipeline system and to facilitate shipping different types of
petroleum. At Superior, we remove all petroleum from our pipeline system and
direct it into tankage. Then, when appropriate to meet the requirements of batch
movements, we reinject the petroleum into our pipeline system for delivery
through either the upper Great Lakes region or the lower Great Lakes region of
the United States.
USE OF PROCEEDS
Unless otherwise specified in a related prospectus supplement, the net proceeds
received by us from the sale of the Class A Units will be used for general
partnership purposes, including the expansion of our pipeline system.
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<PAGE> 17
CASH DISTRIBUTIONS
GENERAL
One of our principal objectives is to generate cash from our operations and to
distribute Available Cash to our unitholders and our general partner. "Available
Cash" means generally, with respect to any calendar quarter, the sum of all of
our cash receipts plus net reductions to cash reserves less the sum of all of
our cash disbursements and net additions to cash reserves. The full definition
of Available Cash is set forth in "-- Certain Defined Terms." The definition of
Available Cash permits our general partner to establish cash reserves that it
determines are necessary or appropriate to provide for the proper conduct of our
business (including cash reserves for future capital expenditures), to stabilize
distributions of cash to our unitholders and the general partner or as necessary
to comply with the terms of any of our agreements or obligations. The general
partner has broad discretion in establishing reserves, and its decisions
regarding reserves could have a significant impact on the amount of Available
Cash that is available for distribution to our unitholders and the general
partner. The timing of additions and reductions to reserves may impact the
amount of incentive distributions payable to the general partner and may result
in the realization of taxable income by unitholders in a year prior to that in
which funds related thereto are distributed.
We will distribute 100% of our Available Cash as of the end of each calendar
quarter on or about 45 days after the end of such calendar quarter to
unitholders of record on the record date and to the general partner. The record
date will generally be the last day of the month immediately following the close
of a calendar quarter.
Cash distributions will be characterized as either distributions of Cash from
Operations or Cash from Interim Capital Transactions. The distinction is
important because it affects the amount of cash that is distributed to the
unitholders relative to the general partner. See "-- Quarterly Distributions of
Available Cash -- Distributions of Cash from Operations" and "-- Quarterly
Distributions of Available Cash -- Distributions of Cash from Interim Capital
Transactions" below. Cash from Operations, which is determined on a cumulative
basis, generally means the $54 million cash balance we had on the date of our
initial public offering in 1991, plus all cash generated by our operations,
after deducting related cash expenditures, reserves and certain other items.
Cash from Interim Capital Transactions is generated by (i) borrowings and sales
of debt securities (other than for working capital purposes and other than for
items purchased on open account in the ordinary course of business), (ii) sales
of units or other equity interests for cash and (iii) sales or other
dispositions of any assets for cash (other than inventory, accounts receivable
and other current assets and assets disposed of in the ordinary course of
business). The full definitions of Cash from Operations, Interim Capital
Transactions and Cash from Interim Capital Transactions are set forth in
"-- Certain Defined Terms."
Cash distributions will be treated as distributions of Cash from Operations,
until the sum of all amounts distributed to the unitholders and to the general
partner (including any incentive distributions) equals the aggregate amount of
all Cash from Operations from December 27, 1991 (the date the Partnership
commenced operations) through the end of the calendar quarter prior to such
distribution. Any amount of cash distributed on such date in excess of the
aggregate amount of Cash from Operations will be deemed to constitute Cash from
Interim Capital Transactions and distributed accordingly. See
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"-- Quarterly Distributions of Available Cash -- Distributions of Cash from
Interim Capital Transactions" and "-- Adjustment of the Target Distributions."
If cash that is deemed to constitute Cash from Interim Capital Transactions is
distributed in an aggregate amount per unit equal to $21.50 (the offering price
of the Class A Units in our initial public offering in December 1991), the
distinction between Cash from Operations and Cash from Interim Capital
Transactions will cease, and all cash will, in general, be distributed as Cash
from Operations. See "-- Quarterly Distributions of Available
Cash -- Distributions of Cash from Interim Transactions." To date, we have not
distributed any cash that was deemed to constitute Cash from Interim Capital
Transactions. We do not anticipate that there will be significant amounts of
cash that are deemed to constitute Cash from Interim Capital Transactions
distributed to our unitholders in the future.
Capital expenditures that are necessary to maintain our pipeline system will
reduce the amount of Cash from Operations. Therefore, if the general partner
were to decide that a substantial portion of our capital expenditures was
necessary to maintain our pipeline system, the amount of cash distributions that
are deemed to constitute Cash from Operations might decrease and the amount of
cash distributions that are deemed to constitute Cash from Interim Capital
Transactions might increase.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
We will make quarterly cash distributions to our unitholders and our general
partner with respect to each calendar quarter prior to liquidation in an amount
equal to 100% of our Available Cash for each quarter. The amount of cash
distributed will depend on our future performance.
DISTRIBUTIONS OF CASH FROM OPERATIONS
Quarterly distributions of Available Cash constituting Cash from Operations will
be made in the following manner:
first, 98% to all unitholders, pro rata, and 2% to the general partner, until
all unitholders have received distributions of $0.59 per unit for such quarter
(the "First Target Distribution");
second, 85% to all unitholders, pro rata, and 15% to the general partner, until
all unitholders have received distributions of $0.70 per unit for such quarter
(the "Second Target Distribution");
third, 75% to all unitholders, pro rata, and 25% to the general partner, until
all unitholders have received distributions of $0.99 per unit for such quarter
(the "Third Target Distribution"); and
thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
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The following table illustrates the percentage allocation of Available Cash
among the unitholders and the general partner up to the various target
distribution levels.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN DISTRIBUTION
-------------------------
QUARTERLY DISTRIBUTION GENERAL
AMOUNT UP TO UNITHOLDERS PARTNER
---------------------- ------------- ---------
<S> <C> <C> <C>
First Target Distribution............... $0.59 98% 2%
Second Target Distribution.............. $0.70 85% 15%
Third Target Distribution............... $0.99 75% 25%
Thereafter.............................. -- 50% 50%
</TABLE>
The Target Distributions are each subject to adjustment as described below under
"-- Distributions of Cash from Interim Capital Transactions" and "-- Adjustment
of the Target Distributions." Notwithstanding the foregoing, if the Target
Distributions have been reduced to zero as a result of distributions of
Available Cash constituting Cash from Interim Capital Transactions and the
holders of the Class A Units have ever failed to receive the First Target
Distribution, distributions will first be made 98% to all holders of Class A
Units, pro rata, and 2% to the general partner until there has been distributed
in respect of each Class A Unit then outstanding (taking into account all prior
distributions of Available Cash constituting Cash from Operations) Available
Cash constituting Cash from Operations since inception, in an amount equal to
the First Target Distribution for all periods since inception. To date, the
holders of the Class A Units have always received at least the First Target
Distribution.
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Available Cash constituting Cash from Interim Capital
Transactions will be made 98% to all unitholders, pro rata, and 2% to the
general partner until a hypothetical holder of a Class A Unit acquired in our
initial public offering has received with respect to such Class A Unit
distributions of Available Cash constituting Cash from Interim Capital
Transactions in an amount per Class A Common Unit equal to $21.50. Thereafter,
all distributions of Available Cash constituting Cash from Interim Capital
Transactions will be distributed as if they were Cash from Operations, and
because the Target Distributions will have been reduced to zero, as described
under "-- Adjustment of the Target Distributions," the general partner's share
of distributions of Available Cash will increase, in general, to 50% of all
distributions of Available Cash. Notwithstanding the foregoing, if the Target
Distributions have been reduced to zero as a result of distributions of
Available Cash constituting Cash from Interim Capital Transactions and the
holders of the Class A Units have ever failed to receive the First Target
Distribution, distributions will first be made 98% to all holders of Class A
Units and 2% to the general partner until there has been distributed in respect
of each Class A Unit then outstanding (taking into account all prior
distributions of Available Cash constituting Cash from Operations) Available
Cash constituting Cash from Operations since inception in an amount equal to the
First Target Distribution for all periods since inception. To date, the holders
of the Class A Units have always received at least the First Target
Distribution.
Distributions of Cash from Interim Capital Transactions will not reduce Target
Distributions in the quarter in which they are distributed.
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<PAGE> 20
ADJUSTMENT OF THE TARGET DISTRIBUTIONS
The Target Distributions will be proportionately adjusted if any combination or
subdivision of units occurs (whether effected by a distribution payable in units
or otherwise) other than by reason of the issuance of additional units for cash.
In addition, if a distribution is made of Available Cash constituting Cash from
Interim Capital Transactions, the Target Distributions will be adjusted downward
by multiplying each amount, as the same may have been previously adjusted, by a
fraction, the numerator of which is the Unrecovered Initial Unit Price (as
defined below) immediately after giving effect to such repayment and the
denominator of which is the Unrecovered Initial Unit Price immediately prior to
such repayment. The "Unrecovered Initial Unit Price" is the amount by which
$21.50 exceeds the aggregate per unit distributions of Cash from Interim Capital
Transactions on the Class A Units. If and when the Unrecovered Initial Unit
Price is zero, the Target Distributions each will have been reduced to zero.
The Target Distributions may also be adjusted if legislation is enacted that
causes us to become taxable as a corporation or otherwise subjects us to
taxation as an entity for federal income tax purposes. In such event, the Target
Distributions for each quarter thereafter would be reduced to an amount equal to
the product of (i) each of the Target Distributions multiplied by (ii) one minus
the sum of (x) the effective federal income tax rate to which we are subject as
an entity (expressed as a fraction) plus (y) the effective overall state and
local income tax rate to which we are subject as an entity (expressed as a
fraction) for the taxable year in which such quarter occurs.
DISTRIBUTION OF CASH UPON LIQUIDATION
Following the commencement of dissolution and liquidation proceedings, our
assets will be sold or otherwise disposed of, and the capital account balances
of the unitholders and the general partner will be adjusted to reflect any
resulting gain or loss. The proceeds of such liquidation will first be applied
to the payment of our creditors in the order of priority provided in our
partnership agreement and by law and thereafter will be distributed to the
unitholders and the general partner in accordance with their respective capital
account balances, as so adjusted.
Generally, the holders of Class A Units will have no preference over the general
partner or holders of Class B Units upon our dissolution and liquidation and
will instead be entitled to share with the general partner and the holders of
Class B Units in the remainder of our assets in proportion to their respective
capital account balances as so adjusted. The manner of such adjustment is as
provided in our partnership agreement. Any gain (or unrealized gain attributable
to assets distributed in kind) will be allocated among the unitholders and the
general partner as follows:
first, to each unitholder and the general partner having a deficit balance in
its capital account to the extent of and in proportion to such deficit balance;
second, any remaining gain would be allocated 98% to all unitholders, pro rata,
and 2% to the general partner, until the capital account for each Class A Unit
is equal to the Unrecovered Capital (as defined below) in respect of such Class
A Unit;
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third, any then remaining gain would be allocated 98% to the holders of Class B
Units, pro rata, and 2% to the general partner until the capital account for
each Class B Unit is equal to the Unrecovered Capital in respect of such Class B
Unit;
fourth, any then remaining gain would be allocated 98% to all unitholders, pro
rata, and 2% to the general partner until the capital account for each unit is
equal to the sum of the Unrecovered Capital in respect of such unit plus any
cumulative arrearages then existing in the First Target Distribution in respect
of such unit for each quarter since inception;
fifth, any then remaining gain would be allocated 85% to all unitholders, pro
rata, and 15% to the general partner until the capital account for each unit is
equal to the sum of (a) the Unrecovered Capital in respect of such unit, plus
(b) any cumulative arrearages then existing in the First Target Distribution in
respect of such unit, plus (c) the excess of the Second Target Distribution over
the First Target Distribution for each quarter since inception, less (d) the
amount of any distributions of Available Cash constituting Cash from Operations
in respect of such unit in excess of the First Target Distribution that were
distributed 85% to the unitholders pro rata and 15% to the general partner for
each quarter since inception ((b) plus (c) less (d) being the "Target Amount");
sixth, any then remaining gain would be allocated 75% to all unitholders, pro
rata, and 25% to the general partner, until the capital account for each unit is
equal to the sum of (a) the Unrecovered Capital in respect of each unit, plus
(b) the Target Amount, plus (c) the excess of the Third Target Distribution over
the Second Target Distribution for each quarter since inception, less (d) the
amount of any distributions of Available Cash constituting Cash from Operations
in respect of such unit in excess of the Second Target Distribution that were
distributed 75% to the unitholders pro rata and 25% to the general partner for
each quarter since inception; and
thereafter, any then remaining gain would be allocated 50% to all unitholders,
pro rata, and 50% to the general partner.
Unrecovered Capital with respect to a unit means, in general, the amount equal
to the excess of (i) $21.50 over (ii) the aggregate per unit distributions of
Cash from Interim Capital Transactions in respect of such unit. Any loss or
unrealized loss will be allocated to the unitholders and the general partner
first in proportion to the positive balances in the unitholders' and general
partner's capital accounts until all such balances are reduced to zero, and,
thereafter, to the general partner.
CERTAIN DEFINED TERMS
The following terms have the respective meanings set forth below:
"Available Cash" means, with respect to any calendar quarter, (i) the sum of (a)
all cash receipts of the Partnership during such quarter from all sources
(including distributions of cash received from the Operating Partnership) and
(b) any reduction in cash reserves established in prior quarters (either by
reversal or utilization), less (ii) the sum of (aa) all cash disbursements of
the Partnership during such quarter (excluding cash distributions to unitholders
and to the general partner) and (bb) any cash reserves established in such
quarter in such amounts as the general partner shall determine to be necessary
or appropriate in its reasonable discretion (x) to provide for the proper
conduct of the business of the Partnership (including cash reserves for possible
rate refunds or future
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capital expenditures) or (y) to provide funds for distributions with respect to
any of the next four quarters and (cc) any other cash reserves established in
such quarter in such amounts as the general partner determines in its reasonable
discretion to be necessary because the distribution of such amounts would be
prohibited by applicable law or by any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which the
Partnership is a party or by which it is bound or its assets are subject. Taxes
paid by the Partnership on behalf of, or amounts withheld with respect to, all
or less than all of the unitholders shall not be considered cash disbursements
of the Partnership 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
the Partnership 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 the Partnership.
"Cash from Interim Capital Transactions" means cash distributed by the
Partnership 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 the Partnership, on a cumulative basis, the cash
balance of the Partnership at December 27, 1991 (excluding any cash on hand from
the exercise of the Underwriters' over-allotment option), plus all cash receipts
of the Partnership from its operations (excluding any cash proceeds from Interim
Capital Transactions) during the period since December 27, 1991 through such
date less the sum of (a) all cash operating expenditures of the Partnership,
including, without limitation, taxes paid by the Partnership as an entity after
December 27, 1991, (b) all cash debt service payments of the Partnership 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 the Partnership simultaneously with or within 180 days prior
to or after such payment or prepayment to the extent of the principal amount of
such indebtedness so incurred), (c) all cash capital expenditures of the
Partnership during such period necessary to maintain the service capability of
our system, (d) an amount equal to the incremental revenues collected pursuant
to a rate increase that are, at such date, subject to possible refund and for
which the general partner has established a cash reserve, (e) any cash reserves
outstanding as of such date that the general partner determines in its
reasonable discretion to be necessary or appropriate to provide for the future
cash payment of items of the type referred to in (a) through (c) above, and (f)
any cash reserves outstanding as of such date that the general partner
determines to be necessary or appropriate in its reasonable discretion to
provide funds for distributions with respect to any one or more of the next four
quarters, all as determined on a consolidated basis after elimination of
intercompany items and the Partnership's general partner interest in the
Operating Partnership. Taxes paid by the Partnership on
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behalf of, or amounts withheld with respect to, all or less than all of the
unitholders shall not be considered cash operating expenditures of the
Partnership 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
the Partnership 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 the Partnership, which are defined in the
Partnership Agreement to be (a) borrowings and sales of debt securities (other
than for working capital purposes and other than for items purchased on open
account in the ordinary course of business) by the Partnership, (b) sales of
equity interests by the Partnership and (c) sales or other voluntary or
involuntary dispositions of any assets of the Partnership (other than (x) sales
or other dispositions of inventory in the ordinary course of business, (y) sales
or other dispositions of other current assets including accounts receivable or
(z) sales or other dispositions of assets as part of normal retirements or
replacements), in each case prior to the commencement of the dissolution and
liquidation of the Partnership.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Certain conflicts of interest could arise as a result of the relationships among
Enbridge and its affiliates, the general partner and the Partnership. The
general partner makes all decisions relating to the Partnership. Some of the
officers of the general partner who make such decisions may also be officers of
Enbridge and its affiliates. In addition, Enbridge indirectly owns all of the
capital stock of the general partner. The directors and officers of Enbridge
have fiduciary duties to manage Enbridge, including its investments in its
affiliates (including the general partner), in a manner beneficial to the
shareholders of Enbridge. In general, the general partner has a fiduciary duty
to manage the Partnership in a manner beneficial to the unitholders. However,
the partnership agreement of the Partnership (the "Partnership Agreement")
contains provisions that allow the general partner to take into account the
interests of parties in addition to the Partnership and the unitholders in
resolving conflicts of interest. The Partnership Agreement also contains
provisions that may restrict the remedies available to unitholders for actions
taken that might otherwise constitute breaches of fiduciary duty. The duty of
the directors and officers of the general partner and Enbridge to their
shareholders and affiliates may, therefore, conflict with the duties of the
general partner to the unitholders.
Potential conflicts of interest could arise in the situations described below,
among others:
(a) The amount of cash expenditures, borrowings and reserves in any quarter
may affect whether or the extent to which there is sufficient Available
Cash constituting Cash from Operations to make distributions to the
unitholders. In addition, the general partner's determination to make a
capital expenditure for the purpose of maintaining our pipeline system or
its determination as to what portion of a capital expenditure was made for
the purpose of maintaining our pipeline system may have the same effect.
Borrowings and issuances of additional units also increase the amount of
Available Cash and, in the case of working capital borrowings, the amount
of Cash from Operations. The Partnership Agreement provides that any
borrowings by the
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Partnership, or the approval thereof by the general partner, will not
constitute a breach of any duty by the general partner to the Partnership
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 the Partnership or the unitholders. See "Cash
Distributions."
(b) Under the terms of the Partnership Agreement and the partnership
agreement of the Operating Partnership (the "Operating Partnership
Agreement" and, together with the Partnership Agreement, the "Partnership
Agreements"), the general partner will exercise its discretion in managing
the business of the Partnership. 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 the Partnership. 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 the Partnership. Employees of Enbridge and its affiliates
currently provide services to the general partner for the benefit of the
Partnership pursuant to a Services Agreement among Enbridge, an affiliate
of Enbridge and the general partner. Substantially all of the shipments of
crude oil and natural gas liquids delivered by our pipeline system
originate from the Enbridge Pipeline System, and Enbridge handles all
scheduling of shipments (including routes and storage) in coordination with
the general partner.
(c) The general partner has certain varying percentage interests and
priorities with respect to Available Cash. See "Cash Distributions." The
timing and amount of cash receipts may be affected by various
determinations made by the general partner under the Partnership Agreements
(including, for example, those relating to the timing of any capital
transaction, the establishment and maintenance of reserves, the timing of
expenditures, the incurrence of debt and other matters).
(d) Neither of the Partnership Agreements nor any of the other agreements,
contracts and arrangements between the Partnership, on the one hand, and
the general partner, Enbridge and its affiliates, on the other hand, were
or will be the result of arm's-length negotiations. The interests of the
unitholders have not been represented by separate legal counsel in
connection with the preparation of such agreements, contracts or
arrangements.
(e) The decision whether the Partnership or the general partner should
purchase outstanding units at any time may involve the general partner or
Enbridge in a conflict of interest.
(f) Enbridge and its affiliates (other than the general partner) are
expressly permitted by the terms of the Partnership Agreement to engage in
any businesses and activities, including in certain instances, those in
direct competition with the Partnership, except as described below under
"-- Restrictions on General Partner Activity." For example, Enbridge and a
group of refiners have developed a project to reverse the flow of a portion
of the Enbridge Pipeline System from Sarnia to Montreal, to transport crude
oil from Montreal to Sarnia. The reversal of this line would result in
Enbridge
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becoming a competitor of the Partnership for supplying crude oil to the
Ontario market.
(g) The Partnership and the general partner do not have any employees and
rely solely on employees of Enbridge and its affiliates. Although the
general partner conducts no business other than acting as general partner
of the Partnership and the Operating Partnership and managing certain
subsidiaries and ancillary activities, Enbridge and its affiliates conduct
business and activities of their own in which the Partnership has no
economic interest. As a result, employees who provide services to the
general partner may not be available when needed.
(h) As a matter of practice and whenever possible, the general partner
limits the liability under contractual arrangements of the Partnership to
all or particular assets of the Partnership, with the other party to have
no recourse against the general partner or its assets other than its
interest in the Partnership. In some circumstances, such action of the
general partner may result in the terms of the transaction being less
favorable to the Partnership than would otherwise be the case. The
Partnership Agreement provides that such action does not constitute a
breach of the general partner's fiduciary obligations.
(i) The Partnership is, and may in the future be, a party to various
agreements to which the general partner and its affiliates, including
Enbridge, are also parties and that provide certain benefits to the
Partnership. However, unitholders do not have the right under these
agreements to enforce directly the obligations of the general partner or of
such affiliates in favor of the Partnership. Therefore, the unitholders
must depend upon the general partner to enforce such obligations, including
obligations that it or such affiliates may owe to the Partnership.
RESTRICTIONS ON GENERAL PARTNER ACTIVITY
The general partner is subject to certain restrictions on its activities. The
sole business of the general partner is to act as general partner of the
Partnership and the Operating Partnership, to manage certain subsidiaries and to
undertake ancillary activities. Further, the Partnership Agreement provides that
no subsidiary of the general partner will engage in or acquire any business that
is in direct material competition with the business of the Partnership as
conducted at the time of its formation in 1991, subject to the exceptions set
forth below. None of the instruments to which the Partnership 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 the Partnership and the Operating Partnership, Enbridge and its other
subsidiaries will not engage in or acquire any business that is in direct
material competition with the business of the Partnership as conducted at the
time of its formation in 1991, subject to the following important exceptions:
first, there is no restriction on the ability of Enbridge and its other
subsidiaries to continue to engage in businesses, including the normal
development of those businesses in the future, in which they were engaged as of
December 1991 and that are or may be in the future in competition with the
Partnership, including the potential reversal of the Montreal extension to
transport crude oil from Montreal to Sarnia;
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second, the scope of the competition restriction is limited geographically to
those routes and products in respect of which the Partnership 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 the Partnership or involving
products not transported by the Partnership as of December 1991;
third, Enbridge and its other subsidiaries may acquire any competitive business
as part of a larger acquisition so long as the majority of the value of the
business or assets acquired, in Enbridge's judgement, is not attributable to
such competitive business; and
fourth, Enbridge and its other subsidiaries may acquire any competitive business
if it is first offered for acquisition to the Partnership and the Partnership
fails to approve, after submission to a unitholder vote, the making of such
acquisition. The approval of the holders of a majority of the outstanding units
(excluding any units held by the general partner and its affiliates) is required
for the Partnership to exercise its right to accept such an offer.
Except as specified above, Enbridge and its affiliates are not restricted by the
terms of the Distribution Support Agreement or the Partnership Agreements from
engaging in businesses that may be in competition with the Partnership. In
addition, the Partnership Agreement specifically states that it will not
constitute a breach of the general partner's fiduciary duty for Enbridge or its
other subsidiaries to take advantage of any business opportunity in preference
to or to the exclusion of the Partnership, except as specifically limited by the
restrictions described above.
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER
The general partner is generally accountable to the Partnership and the
unitholders as a fiduciary. Consequently, the general partner must exercise good
faith and integrity in handling the assets and affairs of the Partnership. In
contrast to the relatively well-developed state of the law concerning fiduciary
duties owed by officers and directors to the shareholders of a corporation, the
law concerning the duties owed by general partners to the other partners and to
their partnerships is relatively undeveloped. The Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") provides that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties that might otherwise be applied by a court in analyzing the
standard of duty owed by general partners to limited partners. The Partnership
Agreement, as permitted by the Delaware Act, contains various provisions that
have the effect of restricting the fiduciary duties that might otherwise be owed
by the general partner to the Partnership and its partners. In addition, holders
of Class A Units are deemed to have consented to certain actions and conflicts
of interest that might otherwise be deemed a breach of fiduciary or other duties
under state law.
The Partnership Agreement provides that whenever a conflict of interest arises
between the general partner or its affiliates, on the one hand, and the
Partnership 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,
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reasonable or appropriate under the circumstances. The same considerations will
apply whenever the Partnership Agreement requires the general partner to act in
a manner that is fair and reasonable to the Partnership or the unitholders.
Thus, unlike the strict duty of a trustee who must act solely in the best
interests of his beneficiary, the Partnership Agreement permits the general
partner to consider the interests of all parties to a conflict of interest,
including the interests of the general partner and its affiliates, including
Enbridge. The Partnership Agreement also provides that in certain circumstances
the general partner will act in its sole discretion, in good faith or pursuant
to other appropriate standards.
The Partnership Agreement also provides that any standard of care and duty
imposed on the general partner will be modified, waived or limited as required
to permit the general partner to act under the Partnership Agreement and to make
any decision pursuant to the authority prescribed in the Partnership Agreement
so long as such action is reasonably believed by the general partner to be in
the best interests of the Partnership. Further, the Partnership Agreement
provides that the general partner will not be liable for monetary damages to the
Partnership or the unitholders for errors of judgement or for any other acts or
omissions if the general partner acted in good faith. The Partnership is
required, under the terms of the Partnership Agreement, to indemnify the general
partner and its officers, directors, employees and agents against liabilities,
costs and expenses, if the general partner or such persons acted in good faith
and in a manner they reasonably believed to be in, or not opposed to, the best
interests of the Partnership and, with respect to any criminal proceeding, had
no reasonable cause to believe their conduct was unlawful. This indemnification
provision could include indemnification of the general partner for its negligent
acts.
The Delaware Act provides that a limited partner may institute legal action on
behalf of the partnership (a partnership derivative action) to recover damages
from a third party where the general partner has refused to institute the action
or where an effort to cause the general partner to do so is not likely to
succeed. In addition, the statutory or case law of certain jurisdictions may
permit a limited partner to institute legal action on behalf of himself or all
other similarly situated limited partners (a class action) to recover damages
from a general partner for violations of its fiduciary duties to the limited
partners.
The fiduciary obligations of general partners is a developing area of the law.
The general partner has not obtained an opinion of counsel covering the
provisions set forth in the Partnership Agreement that purport to waive or
restrict fiduciary duties of the general partner. Unitholders should consult
their own legal counsel concerning the fiduciary responsibilities of the general
partner and its officers and directors and the remedies available to
unitholders.
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TAX CONSIDERATIONS
This section is a summary of certain federal income tax considerations that may
be relevant to prospective unitholders and, to the extent set forth below under
"-- Legal Opinions and Advice," represents the opinion of Andrews & Kurth
L.L.P., our counsel ("Counsel"), insofar as it relates to matters of law and
legal conclusions. This section is based upon current provisions of the Internal
Revenue Code of 1986, as amended ("Code"), existing and (to the extent noted)
proposed regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Subsequent changes may cause the
tax consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to
"Partnership" are references to both the Partnership and the Operating
Partnership.
No attempt has been made in the following discussion to comment on all federal
income tax matters affecting the Partnership or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited applications to corporations, estates,
trusts or non-resident aliens. Accordingly, each prospective unitholder should
consult, and should depend on, his own tax advisor in analyzing the federal,
state, local and foreign tax consequences to him of the purchase, ownership or
disposition of units.
LEGAL OPINIONS AND ADVICE
Counsel has expressed its opinion that, based on the representations and subject
to the qualifications set forth in the detailed discussion that follows, for
federal income tax purposes, (i) the Partnership will be treated as a
partnership, and (ii) owners of units (with certain exceptions, as described in
"-- Limited Partner Status" below) will be treated as partners of the
Partnership (but not the Operating Partnership). In addition, all statements as
to matters of law and legal conclusions contained in this section, unless
otherwise noted, reflect the opinion of Counsel. Counsel has also advised the
general partner that, based on current law, the following addresses all material
tax consequences to unitholders who are individual citizens or residents of the
United States from the purchase, ownership and disposition of units.
PARTNERSHIP STATUS
An organization that is classified for federal income tax purposes as a
partnership is not a taxable entity and incurs no federal income tax liability.
Each partner is required to take into account in computing his 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 the distribution is in excess of the partner's adjusted tax basis in
his partnership interest.
Counsel is of the opinion that, under current law and regulations, the
Partnership and the Operating Partnership will each be classified as a
partnership for federal income tax purposes. Counsel's opinion with respect to
periods before 1997 depended on different factual matters, which the general
partner believes are true. Counsel has rendered its
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opinion as to taxable years beginning after 1996 in reliance upon the accuracy
of the following representations made by the general partner:
1. Neither the Partnership nor the Operating Partnership will elect to be
treated as an association or corporation.
2. The Partnership and the Operating Partnership will be operated in
accordance with applicable state partnership statutes and the applicable
Partnership Agreements.
3. For each taxable year, more than 90% of the gross income of the
Partnership will be income that Counsel has opined or may opine is
"qualifying income" within the meaning of Section 7704(d) of the Code.
Counsel's opinion as to the classification of the Partnership is based on the
assumption that if the general partner ceases to be a general partner, any
successor general partner (or general partners) will make and satisfy such
representations. In this regard, if the general partner were to withdraw as a
general partner at a time when there is no successor general partner, or if the
successor general partner could not satisfy the above representations, then the
IRS might attempt to classify the Partnership as an association taxable as a
corporation.
Counsel's opinion as to the partnership status of the Partnership 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 as described above.
Section 7704 of the Code provides that publicly traded partnerships will, as a
general rule, 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 the Partnership will
continue to meet the Natural Resource Exception is a matter to be determined by
the Partnership's operations and the facts existing at the time of
determination. However, the general partner will use its best efforts to cause
the Partnership to operate in such fashion as is necessary for the Partnership
to continue to meet the Natural Resource Exception.
If the Partnership fails to meet the Natural Resource Exception (other than a
failure determined by the IRS to be inadvertent that is cured within a
reasonable time after discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year 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 interest in the
Partnership. This contribution and liquidation should be tax-free to unitholders
and the Partnership, so long as the Partnership, at such time, does not have
liabilities in excess of the basis of its assets. Thereafter, the Partnership
will be treated as a corporation.
If the Partnership is treated as a corporation, the Partnership will be a
separate taxpayer, and its income, gains, losses, deductions and credits will be
reported on its own return instead of being passed through to unitholders. The
Partnership's net income will be subject to federal income tax, under current
law, at rates up to 35%. Distributions made to unitholders generally will be
treated as either a taxable dividend of current and
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accumulated earnings and profits or, in the absence of earnings and profits, as
a nontaxable return of capital (to the extent of the unitholder's basis in his
units) or as taxable capital gain (after the unitholder's basis in his units is
reduced to zero, and assuming that the units are held as capital assets).
Accordingly, treatment of the Partnership as a corporation would result in a
material reduction in a unitholder's cash flow and after-tax return.
Counsel's opinion is based upon currently applicable law and regulations, and it
may be made inapplicable by new legislation or changes in Treasury Regulations.
The discussion below is based on the assumption that the Partnership and the
Operating Partnership will each be classified as a partnership for 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 the
Partnership Agreement will be treated as partners of the Partnership for 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 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 federal income tax information or
reports furnished to holders of units 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 federal income tax purposes. See "-- Tax
Treatment of Operation -- Treatment of Units Loaned to Cover Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Partnership for federal income tax
purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by the Partnership. Instead, each unitholder
will be required to report on his income tax return his allocable share of the
income, gains, losses and deductions of the Partnership without regard to
whether he receives cash distributions.
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TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Partnership distributions generally will not be taxable to a unitholder for
federal income tax purposes to the extent of his basis in his Units immediately
before the distribution. Cash distributions in excess of a unitholder's basis
generally will be considered to be gain from the sale or exchange of the units,
taxable in accordance with the rules described under "Disposition of Class A
Units" below. Any reduction in a unitholder's share of the Partnership'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. It is not expected that the Partnership
will incur any material amounts of nonrecourse liabilities. To the extent that
Partnership distributions cause a unitholder's "at risk" amount to be less than
zero at the end of any taxable year, he must recapture as income in the year of
such distributions any losses deducted in previous years. See "-- Limitations on
Deductibility of Partnership Losses."
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 the Partnership'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"). The 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 Section 704(c)
principles, should minimize the risk to a holder of Class A Units of recognition
of ordinary income under Section 751(b) of the Code upon a non-pro rata
distribution of money or property. The IRS may contend, however, that such a
deemed exchange of Section 751 Assets has occurred and that therefore ordinary
income must be realized under Section 751(b) of the Code by unitholders on such
a non-pro rata distribution of money or property.
SPECIAL ALLOCATION OF GROSS INCOME
As provided in the Partnership Agreement, the holders of Class A 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 1998 and 1999, the amount of the Special Allocation could be up to $11
million in each year. Thereafter, the Special Allocation to be made each year
could increase by up to $2 million every two years until the taxable year
beginning with 2012, for which the Special Allocation could be up to $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 Unit in the Partnership's initial
public offering would be allocated an amount of federal 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 is 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 years 1998 through 2000. To the extent
that the Special Allocation is not made in any year, it cannot be carried
forward.
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BASIS OF UNITS
A unitholder's initial tax basis for his unit will be the amount paid for the
unit. The initial tax basis will be increased by the unitholder's share of
Partnership income. The basis will be decreased (but not below zero) by
distributions from the Partnership, by the unitholder's share of Partnership
losses and by the unitholder's share of expenditures of the Partnership that are
not deductible in computing its taxable income and are not required to be
capitalized.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The passive loss limitations generally provide 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) that are not in excess of the
taxpayer's income from such passive activities. The passive loss limitations are
to be applied separately with respect to each publicly traded partnership.
Consequently, losses generated by the Partnership, if any, will only be
available to offset future income generated by the Partnership 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 income generated by the Partnership may be deducted in full when
the unitholder disposes of his entire investment in the Partnership 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
rules and the basis limitation.
A unitholder's share of net income from the Partnership may be offset by any
suspended passive losses from the Partnership, but it may not be offset by any
other current or carryover losses from other passive activities, including those
attributable to other publicly-traded partnerships. 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.
To the extent losses are incurred by the Partnership, a unitholder's share of
deductions for losses will be limited to the tax basis of the unitholder's units
or, in the case of an individual unitholder or a corporate unitholder if more
than 50% in the value of its stock is owned directly or indirectly by five or
fewer individuals or certain tax-exempt organizations, to the amount that the
unitholder is considered to be "at risk" with respect to the Partnership's
activities, if that is less than the unitholder's basis. A unitholder must
recapture as income in the year of such distributions losses deducted in
previous years to the extent that Partnership distributions cause the
unitholder's 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 the unitholder's
basis or at risk amount (whichever is the limiting factor) is increased.
In general, a unitholder will be at risk to the extent of the tax basis of his
units, excluding any portion of the basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
unitholder borrows to acquire or hold his units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to units for repayment. A unitholder's at risk amount will increase
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or decrease as the 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 Partnership nonrecourse liabilities).
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." As
noted, a unitholder's net passive income from the Partnership will be treated as
investment income for this purpose. In addition, the unitholder's share of the
Partnership's portfolio income will be treated as investment income. Investment
interest expense includes (i) interest on indebtedness properly allocable to
property held for investment, (ii) a partnership's interest expense attributed
to portfolio income and (iii) the portion of interest expense incurred to
purchase or carry an interest in a passive activity to the extent attributable
to portfolio income. The computation of a unitholder's investment interest
expense will take into account interest on any margin account borrowing or other
loan incurred to purchase or carry a 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 PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Partnership has a net profit, items of income, gain, loss and
deduction will be allocated among the general partner and the unitholders in
accordance with their respective percentage interests in the Partnership. If the
Partnership has a net loss, items of income, gain, loss and deduction 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 the
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," the holders of Class A Units
could be allocated amounts of gross income with respect to taxable years of the
Partnership that would otherwise be allocated to the holders of Class B Units.
Although the Partnership does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts nevertheless
result, items of Partnership 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, the Partnership Agreement provides separate gain and
loss allocations designed, to the extent possible, (i) to eliminate a deficit in
any unitholder's capital account and (ii) to produce capital accounts that, when
followed on liquidation, 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 Partnership income, deduction, gain and loss will be specially
allocated for tax purposes to account for the difference between the tax basis
and fair market value of property contributed to the Partnership by the general
partner ("Contributed Property"), and to account for the difference between the
fair market value of the Partnership's assets and
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their carrying value on the Partnership's books at the time of any offering made
pursuant to this prospectus. In addition, certain items of recapture income will
be allocated to the extent possible to the unitholder allocated the deduction or
curative allocation (discussed below) giving rise to the treatment of such gain
as recapture income in order to minimize the recognition of ordinary income by
some unitholders, but these allocations may not be 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 the Partnership Agreement. However, the application of those 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
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 the Partnership's tax reporting position, and that
no penalties would be applicable if the IRS were to litigate successfully
against the curative allocations. Because the Partnership 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 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,
allocations under the Partnership Agreement will be respected for federal income
tax purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction. There are, however, uncertainties in the Treasury
Regulations relating to allocations of partnership income, and investors should
be aware that some of the allocations in the Partnership Agreement may be
successfully challenged by the IRS.
If an allocation contained in the Partnership Agreement is not respected for
federal income tax purposes, notwithstanding the opinion of Counsel, items of
income, gain, loss, deduction or 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 or credit allocated under the 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 income tax return his
allocable share of income, gains, losses, deductions and credits of the
Partnership for the taxable year of the Partnership ending within or with the
taxable year of a unitholder. Such items must be included on the unitholder's
federal income tax return without regard to whether the Partnership makes a
distribution of cash to the unitholder.
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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 Partnership 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
The Partnership uses the calendar year as its taxable year and the accrual
method of accounting for federal income tax purposes.
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis established for the various assets of the Partnership 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 the Partnership by the general
partner was initially equal to the tax basis of the general partner in such
assets immediately before their contribution to the Partnership. See
"-- Allocation of Partnership Income, Gain, Loss and Deduction."
The Partnership 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 the Partnership. 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 the Partnership
would be increased accordingly. Any such increase could be material.
SECTION 754 ELECTION
The Partnership 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 Units to adjust his share of the basis
in the Partnership'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 Units and is not added
to the bases of the Partnership's assets. (For purposes of this discussion, a
unitholder's inside basis in the Partnership's assets will be considered to have
two components: (i) his share of the Partnership's actual basis in such assets
("Common Basis"); and (ii) his Section 743(b) adjustment allocated to each such
asset.)
Proposed Treasury Regulations under Section 743 of the Code generally require
the Section 743(b) adjustment attributable to recovery property to be
depreciated as if it were newly purchased recovery property placed in service
when the transfer occurs. The proposed regulations under Section 197 also
indicate that the Section 743(b) adjustment attributable to an amortizable
Section 197 intangible should be treated as a newly-acquired asset placed in
service in the month when the purchaser acquires the unit. Under Treasury
Regulation 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
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straight-line method or the 150% declining balance method. The depreciation and
amortization methods and useful lives associated with the Section 743(b)
adjustment, therefore, may differ from the methods and useful lives generally
used to depreciate the Common Bases in such properties. Pursuant to the
Partnership Agreement, the general partner is authorized to adopt a convention
to preserve the uniformity of units even if such convention is not consistent
with certain Treasury regulations. See "-- Uniformity of Class A Units" below.
Although Counsel is unable to opine as to the validity of such an approach, the
Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized Book-Tax Disparity) 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 amortizable despite its inconsistency with Treasury Regulation Section
1.167(c)(1)(a)(6), Proposed Treasury Regulation Section 1.743-1(j)(4)(i)(B)(1)
and Proposed Treasury Regulation 1.197-2(g)(3). To the extent such Section
743(b) adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, the Partnership will apply the rules described
in the Regulations and legislative history. If the Partnership determines that
such position cannot reasonably be taken, the Partnership 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) basis, based upon the same
applicable rate as if they had purchased a direct interest in the Partnership's
property. Such an aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to certain
unitholders. See "-- Uniformity of Class A Units" below.
The allocation of the Section 743(b) adjustment must be made in accordance with
the principles of Section 1060 of the Code. Based on these principles, the IRS
may seek to reallocate some or all of any Section 743(b) adjustment not so
allocated by the Partnership to goodwill. As an intangible asset, goodwill would
be amortizable over a longer period of time than the Partnership's tangible
assets.
A Section 754 election is advantageous if the transferee's basis in his units is
higher than such units' share of the aggregate basis to the Partnership of the
Partnership's 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 the Partnership's assets for purposes of calculating, among other items, his
depreciation deductions and his share of any gain or loss on a sale of the
Partnership's assets. Conversely, a Section 754 election is disadvantageous if
the transferee's basis in such units is lower than such units' share of the
aggregate basis of the Partnership's assets immediately prior to the transfer.
Thus, the amount that a unitholder will be able to obtain upon the sale of his
units may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will be
made by the Partnership on the basis of certain assumptions as to the value of
Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership 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
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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 for the Partnership. If such
permission is granted, a purchaser of units subsequent to such revocation
probably will incur increased tax liability.
ALTERNATIVE MINIMUM TAX
Each unitholder will be required to take into account his distributive share of
items of Partnership income, gain or loss for purposes of the alternative
minimum tax. A portion of the Partnership's depreciation deductions may be
treated as an item of tax preference for this purpose.
A unitholder's alternative minimum taxable income derived from the Partnership
may be higher than his share of Partnership net income because the Partnership
may use accelerated methods of depreciation for purposes of computing federal
taxable income or loss. Prospective unitholders should consult with their tax
advisors as to the impact of an investment in Class A Units on their liability
for the alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the acquisition, 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 the Partnership. 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
or 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 transferred beneficial 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 Partnership
income, gain, deductions, losses or credits 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. Unitholders
desiring to assure their status as partners should modify their brokerage
account agreements, if any, to prohibit their brokers from borrowing their
units. The IRS has announced that it is actively studying issues relating to the
tax treatment of short sales of partnership interests.
Other provisions of the Code affect the taxation of certain financial products
and securities, including partnership interests, by treating a taxpayer as
having sold an "appreciated" partnership interest (in other words, one in which
gain would be recognized if it were sold, assigned or otherwise terminated at
its fair market value) if the taxpayer or related persons enter into a short
sale, an offsetting notional principal contract, or a futures or forward
contract with respect to the partnership interest or substantially identical
property.
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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 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 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 tax basis for the units sold. A
unitholder's amount realized will be measured by the sum of the cash or the fair
market value of other property received plus his share of Partnership
nonrecourse liabilities. Since the amount realized includes a unitholder's share
of Partnership 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 Partnership distributions in excess of cumulative net taxable income in
respect of a Class A Unit that decreased a unitholder's tax basis in such Class
A Unit will, in effect, become taxable income if the Class A Unit is sold at a
price greater than the unitholder's tax basis in such unit, even if the price is
less than his original cost.
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
gain on sale or exchange of a unit held for more than twelve months will
generally be subject to a maximum rate of 20%. 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 the Partnership. 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 maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, a portion of such aggregate tax basis must
be allocated to the interests sold on the basis of some equitable apportionment
method. The ruling is unclear as to how the holding period is affected by this
aggregation concept. If this ruling is applicable to the holders of Class A
Units, the aggregation of tax bases of a holder of Class A Units effectively
prohibits him from choosing among Class A Units with varying amounts of
unrealized gain or loss as would be possible in a stock transaction. Thus, the
ruling may result in an acceleration of gain or deferral of loss on a sale of a
portion of a unitholder's Class A Units. It is not clear whether the ruling
applies to publicly traded partnerships, such as the Partnership, the
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interests in which are evidenced by separate interests, and accordingly, Counsel
does not opine as to the effect such ruling will have on the unitholders. A
unitholder considering the purchase of additional units or a sale of units
purchased at differing prices should consult his tax advisor as to the possible
consequences of that ruling.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses 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 Partnership
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, loss, or deduction and credit accrued after the transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and accordingly, Counsel does not opine on the
validity of the method of allocating income and deductions between the
transferors and the transferees of Class A 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 interest), taxable income or losses of the Partnership
might be reallocated among the unitholders. The general partner is authorized to
revise the Partnership'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 Partnership income and gain 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 the Partnership
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. The Partnership 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 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 the Partnership. Failure to satisfy such
reporting obligations may lead to the imposition of substantial penalties.
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CONSTRUCTIVE TERMINATION
The Partnership 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 Partnership capital and profits within a 12-month period. A termination of
the Partnership will cause a termination of the Operating Partnership. A
termination of the Partnership will result in the closing of the Partnership'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 the
Partnership's taxable year may result in more than 12 months' taxable income or
loss of the Partnership being includable in his taxable income for the year of
termination. New tax elections required to be made by the Partnership, 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 Partnership
deductions for depreciation. A termination could also result in penalties if the
Partnership were unable to determine that the termination had occurred.
Moreover, a termination might either accelerate the application of, or subject
the Partnership to, any tax legislation enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership 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 Partnership
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 the 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 the Partnership
Agreement is maintained as nearly as is practicable. Payments by the Partnership
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 UNITS
Since the Partnership cannot match transferors and transferees of Class A Units,
uniformity of the economic and tax characteristics of the Class A Units to a
purchaser of such Class A Units must be maintained. In the absence of
uniformity, compliance with a number of federal income tax requirements, both
statutory and regulatory, could be substantially diminished. A lack of
uniformity can result from a literal application of Treasury Regulation Section
1.167(c)-1(a)(6), Proposed Treasury Regulation Section 1.743-1(j)(4)(i)(B)(1)
and Proposed Treasury Regulation Section 1.197-2(g)(3). Any such non-uniformity
could have a negative impact on the value of a unitholder's interest in the
Partnership.
The Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property or
Adjusted Property (to the extent of any unamortized Book-Tax Disparity) 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, despite its
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inconsistency with Treasury Regulation Section 1.167(c)-1(a)(6), Proposed
Treasury Regulation Section 1.743-1(j)(4)(i)(B)(1) and Proposed Treasury
Regulation Section 1.197-2(g)(3). See "-- Tax Treatment of Operations -- Section
754 Election" above. If the Partnership determines that such position cannot
reasonably be taken, the Partnership may adopt a depreciation convention under
which all purchasers acquiring Class A 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 the Partnership'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 the
Partnership determines that the loss of such depreciation and amortization
deductions will have a material adverse effect on the unitholders. If the
Partnership chooses not to utilize this aggregate method, the Partnership may
use any other reasonable depreciation and amortization convention to preserve
the uniformity of the intrinsic tax characteristics of any Class A 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 Units may be affected, and gain from the sale of units might be
increased without the benefit of additional deductions.
Because of the Special Allocation of gross income to the Class A Units, the
capital accounts underlying the Class A Units will likely differ, perhaps
materially, from the capital accounts underlying the Class B Units. The
Partnership Agreement contains a method by which the general partner may cause
the capital accounts underlying the Class A 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 Units share
the same intrinsic economic and federal income tax characteristics, in all
material respects, before the Class A Units and the Class B Units will be
treated as one class of units.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt organizations,
nonresident aliens, foreign corporations, other foreign persons and regulated
investment companies raises issues unique to such persons and, as described
below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal income
tax (including individual retirement accounts and other retirement plans) are
subject to 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 the Partnership's gross income will qualify as
such income.
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Nonresident aliens and foreign corporations, trusts or estates that acquire
units will be considered to be engaged in business in the United States on
account of ownership of units and will be required to file federal tax returns
in respect of their distributive shares of Partnership income, gain, loss,
deduction or credit and pay federal income tax at regular rates on such income.
Under rules applicable to publicly traded partnerships, the Partnership 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 the Transfer Agent
of the Partnership on a Form W-8 in order to obtain credit for the taxes
withheld. Subsequent adoption of Treasury Regulations or the issuance of other
administrative pronouncements may require the Partnership to change these
procedures.
Because a foreign corporation that owns units will be treated as engaged in a
United States trade or business, such a unitholder may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
unitholder is a "qualified resident." In addition, such a 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 federal income tax on gain realized on the
disposition of such unit to the extent that such gain is effectively connected
with a United States trade or business of the foreign unitholder. Apart from the
ruling, a foreign unitholder will not be taxed upon the disposition of a unit if
that foreign unitholder has held 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
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership 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 the Partnership's income,
gain, loss, deduction and credit for the preceding Partnership taxable year. If
the Partnership elects large partnership treatment under the Code, this tax
information will be provided to unitholders by March 15th for the preceding
Partnership taxable year 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 credits. See "Allocation of Partnership
Income, Gain, Loss and Deduction," "Tax Treatment of Operations -- Initial Tax
Basis, Depreciation and Amortization" and "Section 754 Election" and
"Disposition of Class A 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, 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
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<PAGE> 43
reporting conventions are impermissible. Any such challenge by the IRS could
negatively affect the value of the units.
The federal income tax information returns filed by the Partnership 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 the Partnership 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 or 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, the Partnership 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 Partnership but also non-Partnership items.
Partnerships generally are treated as separate entities for purposes of 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. The Partnership Agreement appoints the general partner as
the Tax Matters Partner.
The Tax Matters Partner will make certain elections on behalf of the Partnership
and unitholders and can extend the statute of limitations for assessment of tax
deficiencies against unitholders with respect to Partnership items. The Tax
Matters Partner may bind any unitholder with less than a 1% profits interest in
the Partnership 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 1% interest in the profits of the Partnership
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 its federal income tax return that is not consistent with the treatment
of the item on the Partnership'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 would be required to treat all partnership items in a manner
consistent with the partnership return.
If the Partnership elects to be treated as a large partnership, each partner
would take into account separately his share of the following items, determined
at the partnership level: (i) taxable income or loss from passive loss
limitation activities; (ii) taxable income or loss from other activities (such
as portfolio income or loss); (iii) net capital gains (or net
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<PAGE> 44
capital loss) to the extent allocable to passive loss limitation activities and
other activities; (iv) a net alternative minimum tax adjustment separately
computed for passive loss limitation activities and other activities; (v)
general credits; (vi) low-income housing credit; (vii) rehabilitation credit;
(viii) tax-exempt interest; (ix) for certain partnerships, foreign taxes paid
and foreign source partnership items; and (x) any other items designated by the
IRS to be separately treated.
A number of other changes to the tax compliance and administrative rules
relating to partnerships that elect large partnership treatment have been made.
As stated above, one provision would require 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 the Partnership will elect to have these provisions apply because
of the cost of their application.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another person
are required to furnish to the Partnership: (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, (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 Partnership 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 the
Partnership. The nominee is required to supply the beneficial owner of the units
with the information furnished to the Partnership.
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 the
Partnership 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 the Partnership, has registered the Partnership as a tax
shelter with the IRS in the absence of assurance that the Partnership 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. The IRS
has issued the following shelter registration number to the Partnership:
92008000124. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX
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<PAGE> 45
BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. The Partnership
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 the Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss, credit or other benefit generated by the Partnership is claimed
or income of the Partnership is included. A unitholder who fails to disclose the
tax shelter registration number on his 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 federal income tax purposes.
ACCURACY -- RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an underpayment
of tax that is attributable to one or more of certain listed causes, including
negligence or disregard of rules or regulations, substantial understatements of
income tax and substantial valuation misstatements, is imposed by the Code. No
penalty will be imposed, however, with respect to any portion of an underpayment
if it is shown that there was a reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion.
A substantial understatement of 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 the Partnership. If any Partnership 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, the Partnership must disclose the pertinent facts on its
return. In addition, the Partnership will make a reasonable effort to furnish
sufficient information for unitholders to make adequate disclosure on their
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 the Partnership. The Partnership anticipates owning property or
doing 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
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<PAGE> 46
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 prospective unitholder to investigate the legal
and tax consequences, under the laws of pertinent states or localities, of his
investment in the Partnership. Further, it is the responsibility of each
unitholder to file all state and local, as well as federal, tax returns that may
be required of such unitholder. Counsel has not rendered an opinion on the state
and local tax consequences of an investment in the Partnership.
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because persons with discretionary control of
assets of such plans (a "fiduciary") are subject to the fiduciary responsibility
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and transactions are subject to restrictions imposed by Section 4975
of the Code. As used herein, the term "employee benefit plan" includes, but is
not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh
plans, Simplified Employee Pension Plans, and tax deferred annuities or
Individual Retirement Accounts ("IRAs") established or maintained by an employer
or employee organization. Among other things, consideration should be given to
(i) whether such investment is prudent under Section 404(a)(1)(B) of ERISA, (ii)
whether in making such investment such plan will satisfy the diversification
requirement of Section 404(a)(1)(C) of ERISA, and (iii) whether such investment
will result in recognition of unrelated business taxable income by such plan.
See "Tax Considerations -- Tax-Exempt Organizations and Certain Other
Investors." Fiduciaries should determine whether an investment in the
Partnership 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 the Partnership, be deemed to own an undivided
interest in the assets of the Partnership, with the result that the general
partner would also be a fiduciary of such plan and the Partnership 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
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<PAGE> 47
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). The
Partnership'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 Units to one or more underwriters for public offering
and sale, or we may sell the Class A Units to investors directly or through
agents. Any underwriter or agent involved in the offer and sale of the Class A
Units will be named in the applicable prospectus supplement.
Underwriters may offer and sell the Class A Units at fixed prices, which may be
changed, at prices related to the prevailing market prices at the time of sale
or at negotiated prices. We also may authorize underwriters acting as our agents
to offer and sell the Class A Units upon the terms and conditions as are set
forth in the applicable prospectus supplement. In connection with the sale of
Class A Units, underwriters may be deemed to have received compensation from us
in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of the Class A Units for whom they may act as agent.
Underwriters may sell the Class A Units to or through dealers. Dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agent.
Any underwriting compensation paid by us to underwriters or agents in connection
with the offering of the Class A Units, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the Class A Units may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Class A Units may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with us, to
indemnification against the contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If a prospectus supplement so indicates, we will authorize agents, underwriters
or dealers to solicit offers by certain institutional investors to purchase the
Class A Units to which such prospectus supplement relates, providing for payment
and delivery on a future date specified in such prospectus supplement. There may
be limitations on the minimum amount that may be purchased by any such
institutional investor or on the number of the Class A Units that may be sold
pursuant to such arrangements. Institutional investors include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and such other institutions as we may
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<PAGE> 48
approve. The obligations of the purchasers pursuant to such delayed delivery and
payment arrangements will not be subject to any conditions except that (i) the
purchase by an institution of the Class A Units shall not be prohibited under
the applicable laws of any jurisdiction in the United States and (ii) if the
Class A Units are being sold to underwriters, we shall have sold to such
underwriters the total number of such Class A Units less the number thereof
covered by such arrangements. Underwriters will not have any responsibility in
respect of the validity of such arrangements or our performance or such
institutional investors thereunder.
If a prospectus supplement so indicates, the underwriters engaged in an offering
of Class A Units may engage in transactions that stabilize, maintain or
otherwise affect the market price of the Class A Units at levels above those
that might otherwise prevail in the open market. Specifically, the underwriters
may over-allot in connection with the offering creating a short position in the
Class A Units for their own account. For the purposes of covering a syndicate
short position or pegging, fixing or maintaining the price of the Class A Units,
the underwriters may place bids for the Class A Units or effect purchases of the
Class A Units in the open market. A syndicate short position may also be covered
by exercise of an over-allotment option, if one is granted to the underwriters.
Finally, the underwriters may impose a penalty bid on certain underwriters and
dealers. This means that the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing Class A Units
in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. The underwriters will not be required to engage in
any of these activities and any such activities, if commenced, may be
discontinued at any time.
Certain of the underwriters and their affiliates may be customers of, engage in
transactions with and perform services for us in the ordinary course of
business.
VALIDITY OF CLASS A UNITS
The validity of the Class A Units is being passed upon by Andrews & Kurth
L.L.P., as counsel for the Partnership. If the Class A 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.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K of Lakehead Pipe Line Partners, L.P.
for the year ended December 31, 1997, as amended, and the audited balance sheet
of Lakehead Pipe Line Company, Inc. as of December 31, 1997 and 1996,
incorporated in this prospectus by reference to the Current Report on Form 8-K
of Lakehead Pipe Line Partners, L.P. dated July 21, 1998, as amended, have been
so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE> 49
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, to be incurred by the Partnership 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. All such costs will be borne by the Partnership.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 55,600
New York Stock Exchange Listing Fee......................... 7,000
Accounting fees and expenses................................ 40,000
Legal fees and expenses..................................... 250,000
Printing and engraving expenses............................. 125,000
Transfer Agent's Fee........................................ 2,500
Miscellaneous............................................... 19,900
--------
Total............................................. $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Partnership Agreements of the Partnership and the Operating Partnership
provide that the Partnership 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 the Partnership or the Partnership Agreement of the Operating Partnership or
the property, business, affairs or management of the Partnership 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 the Partnership 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 the Partnership 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
II-1
<PAGE> 50
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.
The Partnership will, to the extent commercially reasonable, purchase and
maintain insurance on behalf of the Indemnitees, whether or not the Partnership
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 the Partnership 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.
Reference is made to Exhibit 1.1 hereto, which will contain provisions for
indemnification of the Partnership, 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
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of the Partnership
(incorporated herein by reference to Exhibit 3.1 to the
Partnership'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
Partnership'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 Partnership, dated April 15, 1997 (incorporated
herein by reference to Exhibit 2 to the Partnership's
Form 8-A/A (Amendment No. 2), dated May 2, 1997 (File No.
1-10934))
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities
8.1 -- Opinion of Andrews & Kurth L.L.P. as to certain federal
income tax matters
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
5.1)
24.1 -- Powers of Attorney (included on signature page)
27.1 -- Financial Data Schedule (incorporated herein by reference
to Exhibit 27.1 to the Partnership's Quarterly report on
Form 10-Q for the period ended September 30, 1998)
</TABLE>
- -------------------------
* To be filed as an exhibit to a Current Report on Form 8-K.
II-2
<PAGE> 51
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
- 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 the
Partnership'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 advised 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
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<PAGE> 52
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 are 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.
II-4
<PAGE> 53
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 November 9,
1998.
Lakehead Pipe Line Partners, L.P.
By: Lakehead Pipe Line Company, Inc., as
general partner
By: /s/ S.J. WUORI
--------------------------------------
S.J. Wuori
President
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned directors and
officers of Lakehead Pipe Line Company, Inc., the general partner of Lakehead
Pipe Line Partners, L. P., a Delaware limited partnership, which is filing a
Registration Statement on Form S-3 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended (the "Securities
Act"), hereby constitutes and appoints P.D. Daniel, R.C. Sandahl and M.A. Maki,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, and in any and all capacities, to sign and file (i) any and all
amendments (including post-effective amendments) to this Registration Statement,
with all exhibits thereto, and other documents in connection therewith, and (ii)
a registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act,
with the Securities and Exchange Commission, it being understood that said
attorney-in-fact and agents, and each of them, shall have full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person and that each of the undersigned hereby ratifies and
confirms all that said attorney-in-fact as agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE> 54
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates as indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ S.J. WUORI President and Director November 9, 1998
- --------------------------------------------- (Principal Executive
S.J. Wuori Officer)
/s/ E.C. HAMBROOK Chairman and Director November 9, 1998
- ---------------------------------------------
E.C. Hambrook
/s/ R.C. SANDAHL Vice President and November 9, 1998
- --------------------------------------------- Director
R.C. Sandahl
/s/ M.A. MAKI Chief Accountant (Chief November 9, 1998
- --------------------------------------------- Financial and
M.A. Maki Accounting Officer)
/s/ P.D. DANIEL Director November 9, 1998
- ---------------------------------------------
P.D. Daniel
/s/ F.W. FITZPATRICK Director November 9, 1998
- ---------------------------------------------
F.W. Fitzpatrick
/s/ C.A. RUSSELL Director November 9, 1998
- ---------------------------------------------
C.A. Russell
/s/ D.P. TRUSWELL Director November 9, 1998
- ---------------------------------------------
D.P. Truswell
</TABLE>
II-6
<PAGE> 55
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of the Partnership
(incorporated herein by reference to Exhibit 3.1 to the
Partnership'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
Partnership'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 Partnership, dated April 15, 1997 (incorporated
herein by reference to Exhibit 2 to the Partnership's
Form 8-A/A (Amendment No. 2), dated May 2, 1997 (File No.
1-10934))
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities
8.1 -- Opinion of Andrews & Kurth L.L.P. as to certain federal
income tax matters
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
5.1)
24.1 -- Powers of Attorney (included on signature page)
27.1 -- Financial Data Schedule (incorporated herein by reference
to Exhibit 27.1 to the Partnership's Quarterly report on
Form 10-Q for the period ended September 30, 1998)
</TABLE>
- -------------------------
* To be filed as an exhibit to a Current Report on Form 8-K.
<PAGE> 1
EXHIBIT 5.1
[ANDREWS & KURTH L.L.P. LETTERHEAD]
November 9, 1998
Lakehead Pipe Line Company, Inc.
Lake Superior Place
21 West Superior Street
Duluth, Minnesota 55802
Gentlemen:
We have acted as counsel to Lakehead Pipe Line Partners, L.P., a
Delaware limited partnership (the "Partnership"), and Lakehead Pipe Line
Company, Inc., a Delaware corporation and the general partner of the
Partnership, in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of the offering and sale of up to an aggregate of
$200,000,000 of Class A Common Units representing Class A limited partner
interests in the Partnership (the "Class A Common Units").
As the basis for the opinion hereinafter expressed, we have examined
such statutes, regulations, corporate records and documents, certificates of
corporate and public officials, and other instruments as we have deemed
necessary or advisable for the purposes of this opinion. In such examination we
have assumed the authenticity of all documents submitted to us as originals and
the conformity with the original documents of all documents submitted to us as
copies.
Based on the foregoing and on such legal considerations as we deem
relevant, we are of the opinion that:
1. The Partnership has been duly formed and is an existing limited
partnership under the Delaware Revised Uniform Limited Partnership Act.
2. The Class A Common Units will, when issued and paid for as described
in the Partnership's Registration Statement on Form S-3 relating to the Class A
Common Units (the "Registration Statement"), be duly authorized, validly issued,
fully paid and nonassessable, except as such nonassessability may be affected by
the matters described in the Partnership's Form 8-A, as amended, under the
caption "Item 1. Description of Registrant's Securities to be Registered," which
is incorporated by reference in the Prospectus included in the Registration
Statement.
<PAGE> 2
Lakehead Pipe Line Company, Inc.
November 9, 1998
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Validity of
Class A Units" in the Prospectus. This opinion may be incorporated by reference
in a registration statement of the Partnership relating to the registration of
additional Class A Common Units pursuant to Rule 462(b) under the Securities
Act, in which case the opinions expressed herein will apply to the additional
units registered thereunder.
Very truly yours,
Andrews & Kurth L.L.P.
<PAGE> 1
EXHIBIT 8.1
[ANDREWS & KURTH LETTERHEAD]
November 9, 1998
Lakehead Pipe Line Partners, L.P.
Lake Superior Place
21 West Superior Street
Duluth, Minnesota 55802
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel in connection with the Registration Statement
on Form S-3 (the "Registration Statement") of Lakehead Pipe Line Partners, L.P.
(the "Partnership"), relating to the registration of the offering and sale (the
"Offering") of up to $200,000,000 of Class A Common Units representing Class A
limited partner interests of the Partnership (the "Class A Common Units"). In
connection therewith, we have participated in the preparation of the discussion
set forth under the caption "Tax Considerations" (the "Discussion") in the
Registration Statement. Capitalized terms used and not otherwise defined herein
are used as defined in the Registration Statement.
The Discussion, subject to the qualifications stated therein,
constitutes our opinion as to the material United States federal income tax
consequences for purchasers of Class A Common Units pursuant to the Offering.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Discussion. The
issuance of such consent does not concede that we are an "expert" for the
purposes of the Securities Act of 1933.
Very truly yours,
Andrews & Kurth L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
January 12, 1998, appearing on page F-2 of Lakehead Pipe Line Partners, L.P.
Annual Report on Form 10-K for the year ended December 31, 1997, as amended on
Form 10-K/A for the year ended December 31, 1997. We also consent to the
incorporation by reference in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report on the balance sheet of
Lakehead Pipe Line Company, Inc. dated January 12, 1998, which appears on page
F-1 of the Lakehead Pipe Line Partners, L.P. Current Report on Form 8-K dated
July 21, 1998, as amended on Form 8-K/A dated September 14, 1998. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 9, 1998
