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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1998
REGISTRATION NO. 333-67005
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 1
To
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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LAKEHEAD PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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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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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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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 OUR GENERAL PARTNER TO US AND OUR UNITHOLDERS. UNITHOLDERS HAVE
EFFECTIVELY CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT
MIGHT OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER
STATE LAW. CONFLICTS OF INTEREST BETWEEN US AND AFFILIATES OF OUR GENERAL
PARTNER COULD ARISE DUE TO OUR GENERAL PARTNER'S RELATIONSHIP WITH US AND
ITS AFFILIATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November 25, 1998
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
Our Business May Be Interrupted Due To
Year 2000 Problems.................
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
Lakehead.................................. 14
Use of Proceeds........................... 15
Cash Distributions........................ 16
Conflicts of Interest and Fiduciary
Responsibilities........................ 22
Tax Considerations........................ 27
Investment in Lakehead 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 a
subsidiary of Enbridge, Enbridge Pipelines, Inc., owns the Canadian portion of
the System (the "Enbridge Pipeline System"). The System is the primary
transporter of crude oil from Western Canada to the United States.
As used in this prospectus, "we," "us," "our," the "Partnership" and
"Lakehead" mean Lakehead Pipe Line Partners, L.P. and include our subsidiary
operating partnership, Lakehead Pipe Line Company, Limited Partnership. Our
Class A Common Units ("Class A Units") represent limited partner interests in
Lakehead Pipe Line Partners, L.P. We also have limited partner interests that
are represented by Class B Common Units ("Class B Units"). All of our Class B
Units are owned by our general partner. The Class A and Class B Units are
referred to in this prospectus as "units."
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission ("SEC") using a "shelf" registration
process. Under this shelf registration process, we may sell the Class A Units
described in this prospectus in one or more offerings up to a total dollar
amount of $200,000,000. This prospectus provides you with a general description
of us and the Class A Units. Each time we sell Class A Units with this
prospectus, we will provide a prospectus supplement that will contain specific
information about the terms of that offering. The prospectus supplement may also
add to, update or change information in this prospectus. The information in this
prospectus is accurate as of November 25, 1998. You should carefully read both
this prospectus and any prospectus supplement, together with additional
information described under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information with the
SEC. You may read and copy any document we file at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices located at Seven World Trade Center, New York, New York 10048, and at
500 West Madison Street, Chicago, Illinois 60661. Please call the SEC at
1-800-733-0330 for further information on their public reference room. Our SEC
filings are also available at our website at http://www.lakehead.com or at the
SEC's web site at http://www.sec.gov. You can also obtain information about us
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
The SEC allows us to "incorporate by reference" the information we have
filed with the SEC, which means that we can disclose important information to
you without actually
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including the specific information in this prospectus by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. Information that we file later with the SEC will automatically
update and may replace information in this prospectus and information previously
filed with the SEC. The documents listed below and any future filings made with
the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act
of 1934 are incorporated by reference in this prospectus until we sell all of
the Class A Units offered by this prospectus.
- Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as
amended (the "Form 10-K");
- Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998;
- Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998,
as amended;
- Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998;
- Current Report on Form 8-K dated July 21, 1998, as amended; and
- Current Report on Form 8-K dated October 20, 1998.
You may request a copy of these filings, at no cost, by writing or calling
us at the following address:
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 decrease and we could have less cash to distribute to our
unitholders.
OUR PIPELINE SYSTEM MIGHT BE USED LESS IF DEMAND FOR CRUDE OIL AND NATURAL GAS
LIQUIDS DECREASES
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 transports lower
volumes of crude oil and natural gas liquids, our revenues could decrease and we
could have less cash to distribute to our unitholders.
WE CANNOT ALWAYS CONTROL THE RATES THAT WE CHARGE
Since 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 -- 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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WE COMPETE WITH OTHER PIPELINES AND REFINERIES
Pipelines have historically been the least expensive way to transport crude
oil over land for intermediate and long distances. As a result, our most
significant competitors for transporting western Canadian crude oil are other
pipelines. We also face competition, however, when producers choose to sell
their crude oil for use in western Canada. Enbridge has advised us that in 1997,
the Enbridge Pipeline System transported approximately 65% of total western
Canadian crude oil production of which approximately 90% was transported by our
pipeline system. The 35% of western Canadian crude oil not transported by the
Enbridge Pipeline System was refined in Alberta or Saskatchewan or transported
through other pipelines to British Columbia, Washington, Montana and other
states in the Northwest U.S. In the United States, our pipeline system competes
with other crude oil and refined product pipelines and other methods of
delivering crude oil and refined products to the refining centers of
Minneapolis-St. Paul, Minnesota; Chicago, Illinois; Detroit, Michigan; Toledo,
Ohio; and Buffalo, New York, and, through a connecting pipeline, the refinery
market and pipeline hub located in the Patoka/Wood River area of southern
Illinois. See "Items 1 and 2. Business and Properties -- Competition" in the
Form 10-K.
WE MAY HAVE SIGNIFICANT ENVIRONMENTAL AND SAFETY COSTS AND LIABILITIES
Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety. We believe that we
are currently in substantial compliance with these regulations. However,
pipeline operations always involve the risk of costs or liabilities related to
environmental protection and operational safety matters. As a result, we may
incur costs or liabilities of this type in the future. It is also possible that
we will have to pay amounts in the future because of changes in environmental
and safety laws or enforcement policies or claims for environmental-related
damage to persons or property. If we cannot recover these costs from insurance
or through higher tariffs, we could be adversely affected and cash distributions
to our unitholders could be reduced.
Federal, state and local laws and regulations impose strict controls on the
discharge of oil and certain other materials into navigable waters. These laws
and regulations can require us to pay civil and criminal penalties for
discharges. If there is a discharge, we also may have to pay for cleanup costs,
damage to natural resources and third party lawsuits. These laws require us to
use spill prevention control procedures, which include diking and similar
structures, to help prevent oil and other materials from getting into navigable
waters if there is a leak from our pipeline.
Contamination resulting from spills of crude oil and petroleum products is
not unusual within the petroleum pipeline industry. Spills of crude oil from our
pipelines have occurred in the past, and may occur in the future. In addition,
directional drilling of pipeline conduits when a pipeline is being constructed
can result in discharges of drilling related materials to the soil, groundwater,
surface waters or wetlands.
We have hydrostatically tested parts of our pipeline system in the past,
which means that we have tested the structural integrity of our pipelines by
filling them with water at high pressures. We may decide that we need to do
additional hydrostatic testing in the future, or a regulatory authority may
require such testing. If this testing occurs, it could
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result in significant expense arising out of treatment and disposal of the test
water and lost transportation revenues while the pipelines are being tested. We
believe that there are suitable alternatives to hydrostatic testing, but such
testing may nevertheless be necessary or required in the future. In addition, if
Enbridge performs hydrostatic testing on its pipelines in Canada, this could
reduce deliveries into our pipeline system because lower volumes would be
received from western Canada.
OUR BUSINESS MAY BE INTERRUPTED DUE TO YEAR 2000 PROBLEMS
The Year 2000 or Y2K issue is a world-wide concern resulting from many
existing computer hardware systems and software applications being initially
designed to ignore the first two digits of the year. When these systems and
applications must process dates both before and after January 1, 2000, the
shortened year descriptions could cause system failures or erroneous results. In
addition, equipment that is controlled by microcontrollers may also experience
similar problems. The interdependence of our computerized systems with those of
our customers and suppliers as well as government agencies will play a
significant role in our ability to conduct business and exacerbates the risk of
business interruptions due to Year 2000 problems.
Despite our best efforts there can be no assurance that all systems and
applications will continue without interruption through January 1, 2000 and
beyond. Limited testing ability on commercial software packages and the
complexity of identifying all embedded microprocessors that may be used in a
great variety of hardware used for process or flow control, environmental,
transportation, security, communication and other systems may result in missed
systems. Additionally, despite ongoing dialogue with interdependent third
parties there can be no assurance that their systems will be fully compliant. In
the event of an embedded microprocessor failure, pipeline deliveries could be
temporarily delayed until control procedures are re-established. Failures that
result in substantial disruptions of business activities could have an adverse
effect on us.
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.
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- The general partner controls payments to Enbridge for any services rendered
for our benefit, subject to the limitations described in "Conflicts of
Interest and Fiduciary Responsibilities."
- The general partner determines which costs are reimbursable by us.
- The general partner controls the enforcement of obligations owed to us by
the general partner.
- The general partner decides whether to retain separate counsel, accountants
or others to perform services for us.
There also may be conflicts of interest if Enbridge conducts businesses
that compete with our pipeline system. We have an agreement with Enbridge that
generally does not prevent Enbridge from pursuing its business interests, even
if these interests involve pipelines in the U.S. This agreement and our
partnership agreement do not restrict Enbridge from engaging in businesses that
it was engaged in at the time of our initial public offering in December 1991,
even if such business competes with ours. In addition, the current direction of
oil flow through part of the Enbridge Pipeline System from Sarnia to Montreal
may be reversed, as discussed in "-- Risks of Our Business -- Our Pipeline
System Might be Used Less if Demand for Crude Oil and Natural Gas Liquids
Falls." If the reversal of Enbridge's Montreal line occurs, Enbridge will
compete with us to supply crude oil to the Ontario market. Our agreement with
Enbridge expressly permits this reversal. See "Conflicts of Interest and
Fiduciary Responsibilities."
Our partnership agreement allows the general partner to resolve conflicts
of interest by considering the interests of all the parties to the conflict.
Therefore, the general partner can consider the interests of Enbridge if a
conflict of interest arises. This is very different from the more familiar legal
duty of a trustee, who must act solely in the best interests of the trust's
beneficiary. See "Conflicts of Interest and Fiduciary Responsibilities."
We are very dependent on Enbridge and the Enbridge Pipeline System. Nearly
all of the crude oil and natural gas liquids we ship comes from the Enbridge
Pipeline System in Canada, and shipments on our pipeline system are scheduled by
Enbridge in coordination with our general partner. In addition, neither we nor
the general partner has any 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
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<PAGE> 12
as being in breach of a fiduciary duty. See "Conflicts of Interest and Fiduciary
Responsibilities."
WE MAY SELL ADDITIONAL UNITS
We can issue an unlimited number of additional units or other equity
securities, including equity securities with rights to distributions and
allocations or in liquidation superior to the Class A Units offered by this
prospectus. If we issue more units or other equity securities, your
proportionate ownership interest in Lakehead will be reduced. This could cause
the market price of your units to fall, reduce the cash distributions paid to
you as a unitholder, or both.
Our partnership agreement allows the general partner to cause us to
register for sale any units held by the general partner or its affiliates. The
general partner currently owns 3,912,750 Class B Units. These registration
rights allow the general partner and its affiliates holding any units to request
registration of such units and to include any such units in a registration of
other units by us. In addition, the general partner and its affiliates may sell
their units in private transactions at any time.
YOUR VOTING RIGHTS ARE LIMITED
You have limited voting rights as a unitholder. The general partner
generally manages the activities of Lakehead. Unitholders do not have the right
to elect the general partner on an annual basis. As a result, the unitholders
have only limited control over our management. However, if the general partner
withdraws or is removed, the unitholders can elect the new general partner by a
majority vote of the outstanding units.
IT IS DIFFICULT TO REMOVE THE GENERAL PARTNER
A vote of at least 66 2/3% of the outstanding units is required to remove
the general partner. Units held by the general partner and its affiliates are
excluded from this vote.
Our partnership agreement does not allow the general partner to withdraw
voluntarily as general partner before January 1, 2000 (subject to a few
exceptions). However, the 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.
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<PAGE> 13
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 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.
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<PAGE> 14
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, Lakehead 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
Lakehead as a corporation for federal income tax purposes. See "Tax
Considerations -- Partnership Status."
If the tax laws treat Lakehead 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 at the time the property is contributed or deemed
contributed to Lakehead and to account for differences between the fair market
value and book basis of our assets existing at the time of issuance of any Class
A Units issued in this offering. For example, pre-contribution gain exists with
respect to assets that have been contributed to Lakehead by the general partner.
Our lawyers believe that the curative allocations will prevent a shift of the
income tax liability with respect to this gain from the general partner to the
holders of Class A Units and that these allocations are therefore 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.
However, the Internal Revenue Service (the "IRS") could challenge these
allocations. A successful IRS challenge to the curative allocations would shift
the tax consequences associated with the differences between the fair market
value and tax basis of Lakehead's assets in a manner that, in the view of our
lawyers, would be 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
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<PAGE> 15
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 our income, even if you do not
receive cash distributions from us. You will not necessarily receive cash
distributions equal to the tax on your allocable share of our taxable income.
Further, if we have a large amount of nonrecourse 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 adopted and will continue to
adopt certain depreciation and amortization conventions that do not conform with
all aspects of the applicable Treasury regulations. If the IRS were successful
in challenging our conventions, uniformity would be affected and gain from the
sale of units might be increased.
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<PAGE> 16
LAKEHEAD
We are a publicly traded Delaware limited partnership that owns and
operates a regulated crude oil and natural gas liquids pipeline business in the
United States. The following chart shows our organization and ownership
structure as of the date of this prospectus before giving effect to this
offering. Except in the following chart, the ownership percentages referred to
in this prospectus reflect the approximate effective ownership interest in us
and our subsidiary operating partnership on a combined basis.
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
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<PAGE> 17
States and the Province of Ontario. These deliveries are made principally to
refineries either directly or through connecting pipelines of other companies.
Our pipeline system extends approximately 1,750 miles from the Canadian
border near Neche, North Dakota, to the Canadian border near Marysville,
Michigan. Four separate pipelines run from the Canadian border near Neche to
Clearbrook, Minnesota and three of these pipelines continue on from Clearbrook
to Superior, Wisconsin. At Superior, our pipeline system continues as two
separate and diverging pipelines. One pipeline runs through the upper Great
Lakes region, and the other runs through the lower Great Lakes region of the
United States. Both pipelines re-enter Canada at a point near Marysville. Our
pipeline system also includes a lateral pipeline from the Canadian border near
Niagara Falls to the Buffalo, New York area. Crude oil and natural gas liquids
enter our pipeline system at the Canadian border from the Enbridge Pipeline
System and, to a lesser extent, at a number of other points. Deliveries of these
volumes are then scheduled into our pipeline system in accordance with customer
orders.
Enbridge handles all scheduling of shipments (including routes, storage,
etc.) in coordination with our general partner. Our pipeline system includes 16
connections to other pipelines and refineries at various locations in the United
States, including the refining centers of Minneapolis-St. Paul, Chicago,
Detroit, Toledo, and Buffalo, and, through a connecting pipeline, the
Patoka/Wood River refinery market and pipeline hub in southern Illinois. As of
September 30, 1998, our pipeline system had approximately nine million barrels
of tankage capacity at its three terminals at Clearbrook, Superior and Griffith,
Indiana. The tankage capacity is used both to gather crude oil prior to
injection into our pipeline system and to facilitate shipping different types of
petroleum. At Superior, we remove all petroleum from our pipeline system and
direct it into tankage. Then, when appropriate to meet the requirements of batch
movements, we reinject the petroleum into our pipeline system for delivery
through either the upper Great Lakes region or the lower Great Lakes region of
the United States.
USE OF PROCEEDS
Unless otherwise specified in a related prospectus supplement, the net
proceeds received by us from the sale of the Class A Units will be used for
general partnership purposes, including the expansion of our pipeline system.
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<PAGE> 18
CASH DISTRIBUTIONS
GENERAL
One of our principal objectives is to generate cash from our operations and
to distribute Available Cash to our unitholders and our general partner.
"Available Cash" means generally, with respect to any calendar quarter, the sum
of all of our cash receipts plus net reductions to cash reserves less the sum of
all of our cash disbursements and net additions to cash reserves. The full
definition of Available Cash is set forth in "-- Certain Defined Terms." The
definition of Available Cash permits our general partner to establish cash
reserves that it determines are necessary or appropriate to provide for the
proper conduct of our business (including cash reserves for future capital
expenditures), to stabilize distributions of cash to our unitholders and the
general partner or as necessary to comply with the terms of any of our
agreements or obligations. The general partner has broad discretion in
establishing reserves, and its decisions regarding reserves could have a
significant impact on the amount of Available Cash that is available for
distribution to our unitholders and the general partner. The timing of additions
and reductions to reserves may impact the amount of incentive distributions
payable to the general partner and may result in the realization of taxable
income by unitholders in a year prior to that in which funds related thereto are
distributed.
We will distribute 100% of our Available Cash as of the end of each
calendar quarter on or about 45 days after the end of such calendar quarter to
unitholders of record on the record date and to the general partner. The record
date will generally be the last day of the month immediately following the close
of a calendar quarter.
Cash distributions will be characterized as either distributions of Cash
from Operations or Cash from Interim Capital Transactions. The distinction is
important because it affects the amount of cash that is distributed to the
unitholders relative to the general partner. See "-- Quarterly Distributions of
Available Cash -- Distributions of Cash from Operations" and "-- Quarterly
Distributions of Available Cash -- Distributions of Cash from Interim Capital
Transactions" below. Cash from Operations, which is determined on a cumulative
basis, generally means the $54 million cash balance we had on the date of our
initial public offering in 1991, plus all cash generated by our operations,
after deducting related cash expenditures, reserves and certain other items.
Cash from Interim Capital Transactions is generated by (i) borrowings and sales
of debt securities (other than for working capital purposes and other than for
items purchased on open account in the ordinary course of business), (ii) sales
of units or other equity interests for cash and (iii) sales or other
dispositions of any assets for cash (other than inventory, accounts receivable
and other current assets and assets disposed of in the ordinary course of
business). The full definitions of Cash from Operations, Interim Capital
Transactions and Cash from Interim Capital Transactions are set forth in
"-- Certain Defined Terms."
Cash distributions will be treated as distributions of Cash from
Operations, until the sum of all amounts distributed to the unitholders and to
the general partner (including any incentive distributions) equals the aggregate
amount of all Cash from Operations from December 27, 1991 (the date Lakehead
commenced operations) through the end of the calendar quarter prior to such
distribution. Any amount of cash distributed on such date in excess of the
aggregate amount of Cash from Operations will be deemed to constitute Cash from
Interim Capital Transactions and distributed accordingly. See
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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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<PAGE> 20
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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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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<PAGE> 22
THIRD, any then remaining gain would be allocated 98% to the holders
of Class B Units, pro rata, and 2% to the general partner until the capital
account for each Class B Unit is equal to the Unrecovered Capital in
respect of such Class B Unit;
FOURTH, any then remaining gain would be allocated 98% to all
unitholders, pro rata, and 2% to the general partner until the capital
account for each unit is equal to the sum of the Unrecovered Capital in
respect of such unit plus any cumulative arrearages then existing in the
First Target Distribution in respect of such unit for each quarter since
inception;
FIFTH, any then remaining gain would be allocated 85% to all
unitholders, pro rata, and 15% to the general partner until the capital
account for each unit is equal to the sum of (a) the Unrecovered Capital in
respect of such unit, plus (b) any cumulative arrearages then existing in
the First Target Distribution in respect of such unit, plus (c) the excess
of the Second Target Distribution over the First Target Distribution for
each quarter since inception, less (d) the amount of any distributions of
Available Cash constituting Cash from Operations in respect of such unit in
excess of the First Target Distribution that were distributed 85% to the
unitholders pro rata and 15% to the general partner for each quarter since
inception ((b) plus (c) less (d) being the "Target Amount");
SIXTH, any then remaining gain would be allocated 75% to all
unitholders, pro rata, and 25% to the general partner, until the capital
account for each unit is equal to the sum of (a) the Unrecovered Capital in
respect of each unit, plus (b) the Target Amount, plus (c) the excess of
the Third Target Distribution over the Second Target Distribution for each
quarter since inception, less (d) the amount of any distributions of
Available Cash constituting Cash from Operations in respect of such unit in
excess of the Second Target Distribution that were distributed 75% to the
unitholders pro rata and 25% to the general partner for each quarter since
inception; and
THEREAFTER, any then remaining gain would be allocated 50% to all
unitholders, pro rata, and 50% to the general partner.
Unrecovered Capital with respect to a unit means, in general, the amount
equal to the excess of (i) $21.50 over (ii) the aggregate per unit distributions
of Cash from Interim Capital Transactions in respect of such unit. Any loss or
unrealized loss will be allocated to the unitholders and the general partner
first in proportion to the positive balances in the unitholders' and general
partner's capital accounts until all such balances are reduced to zero, and,
thereafter, to the general partner.
CERTAIN DEFINED TERMS
The following terms have the respective meanings set forth below:
"Available Cash" means, with respect to any calendar quarter, (i) the sum
of (a) all cash receipts of Lakehead during such quarter from all sources
(including distributions of cash received from the Operating Partnership) and
(b) any reduction in cash reserves established in prior quarters (either by
reversal or utilization), less (ii) the sum of (aa) all cash disbursements of
Lakehead during such quarter (excluding cash distributions to unitholders and to
the general partner) and (bb) any cash reserves established in such quarter in
such amounts as the general partner shall determine to be necessary or
appropriate in its reasonable discretion (x) to provide for the proper conduct
of the business of Lakehead (including cash reserves for possible rate refunds
or future capital
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expenditures) or (y) to provide funds for distributions with respect to any of
the next four quarters and (cc) any other cash reserves established in such
quarter in such amounts as the general partner determines in its reasonable
discretion to be necessary because the distribution of such amounts would be
prohibited by applicable law or by any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which Lakehead is
a party or by which it is bound or its assets are subject. Taxes paid by
Lakehead on behalf of, or amounts withheld with respect to, all or less than all
of the unitholders shall not be considered cash disbursements of Lakehead that
reduce "Available Cash," but the payment or withholding thereof shall be deemed
to be a distribution of Available Cash to such unitholders. Alternatively, in
the discretion of the general partner, such taxes (if pertaining to all
unitholders) may be considered to be cash disbursements of Lakehead that reduce
"Available Cash," but the payment or withholding thereof shall not be deemed to
be a distribution of Available Cash to unitholders. Notwithstanding the
foregoing, "Available Cash" shall not include any cash receipts or reductions in
reserves or take into account any disbursements made or reserves established
after commencement of the dissolution and liquidation of Lakehead.
"Cash from Interim Capital Transactions" means cash distributed by Lakehead
in excess of the cumulative amount that is Cash from Operations.
"Cash from Operations" means, at any date but prior to the commencement of
the dissolution and liquidation of Lakehead, on a cumulative basis, the cash
balance of Lakehead at December 27, 1991 (excluding any cash on hand from the
exercise of the Underwriters' over-allotment option), plus all cash receipts of
Lakehead from its operations (excluding any cash proceeds from Interim Capital
Transactions) during the period since December 27, 1991 through such date less
the sum of (a) all cash operating expenditures of Lakehead, including, without
limitation, taxes paid by Lakehead as an entity after December 27, 1991, (b) all
cash debt service payments of Lakehead during such period (other than payments
or prepayments of principal and premium required by reason of loan agreements
(including covenants and default provisions therein) or by lenders, in each case
in connection with sales or other dispositions of assets or made in connection
with refinancing or refunding of indebtedness, provided that any payment or
prepayment of principal, whether or not then due, shall be determined at the
election and in the discretion of the general partner to be refunded or
refinanced by any indebtedness incurred or to be incurred by Lakehead
simultaneously with or within 180 days prior to or after such payment or
prepayment to the extent of the principal amount of such indebtedness so
incurred), (c) all cash capital expenditures of Lakehead during such period
necessary to maintain the service capability of our pipeline system, (d) an
amount equal to the incremental revenues collected pursuant to a rate increase
that are, at such date, subject to possible refund and for which the general
partner has established a cash reserve, (e) any cash reserves outstanding as of
such date that the general partner determines in its reasonable discretion to be
necessary or appropriate to provide for the future cash payment of items of the
type referred to in (a) through (c) above, and (f) any cash reserves outstanding
as of such date that the general partner determines to be necessary or
appropriate in its reasonable discretion to provide funds for distributions with
respect to any one or more of the next four quarters, all as determined on a
consolidated basis after elimination of intercompany items and the general
partner interest of the general partner in the Operating Partnership. Taxes paid
by Lakehead on behalf of, or amounts withheld with respect to, all or less than
all of the unitholders shall not be
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considered cash operating expenditures of Lakehead that reduce "Cash from
Operations," but the payment or withholding thereof shall be deemed to be a
distribution of Available Cash to such unitholders. Alternatively, in the
discretion of the general partner, such taxes (if pertaining to all unitholders)
may be considered to be cash disbursements of Lakehead that reduces "Cash from
Operations," but the payment or withholding thereof shall not be deemed to be a
distribution to unitholders.
"Interim Capital Transactions" means in general, extraordinary transactions
that have an impact on the capital of Lakehead, which are defined in the
Partnership Agreement to be (a) borrowings and sales of debt securities (other
than for working capital purposes and other than for items purchased on open
account in the ordinary course of business) by Lakehead, (b) sales of equity
interests by Lakehead and (c) sales or other voluntary or involuntary
dispositions of any assets of Lakehead (other than (x) sales or other
dispositions of inventory in the ordinary course of business, (y) sales or other
dispositions of other current assets including accounts receivable or (z) sales
or other dispositions of assets as part of normal retirements or replacements),
in each case prior to the commencement of the dissolution and liquidation of
Lakehead.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Certain conflicts of interest could arise as a result of the relationships
among Enbridge and its affiliates, the general partner and Lakehead. The general
partner makes all decisions relating to Lakehead. Some of the officers of the
general partner who make such decisions may also be officers of Enbridge and its
affiliates. In addition, Enbridge indirectly owns all of the capital stock of
the general partner. The directors and officers of Enbridge have fiduciary
duties to manage Enbridge, including its investments in its affiliates
(including the general partner), in a manner beneficial to the shareholders of
Enbridge. In general, the general partner has a fiduciary duty to manage
Lakehead in a manner beneficial to the unitholders. However, the partnership
agreement of Lakehead (the "Partnership Agreement") contains provisions that
allow the general partner to take into account the interests of parties in
addition to Lakehead and the unitholders in resolving conflicts of interest. The
Partnership Agreement also contains provisions that may restrict the remedies
available to unitholders for actions taken that might otherwise constitute
breaches of fiduciary duty. The duty of the directors and officers of the
general partner and Enbridge to their shareholders and affiliates may,
therefore, conflict with the duties of the general partner to the unitholders.
Potential conflicts of interest could arise in the situations described
below, among others:
(a) The amount of cash expenditures, borrowings and reserves in any
quarter may affect whether or the extent to which there is sufficient
Available Cash constituting Cash from Operations to make distributions to
the unitholders. In addition, the general partner's determination to make a
capital expenditure for the purpose of maintaining our pipeline system or
its determination as to what portion of a capital expenditure was made for
the purpose of maintaining our pipeline system may have the same effect.
Borrowings and issuances of additional units also increase the amount of
Available Cash and, in the case of working capital borrowings, the amount
of Cash from Operations. The Partnership Agreement provides that any
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borrowings by Lakehead, or the approval thereof by the general partner, will not
constitute a breach of any duty by the general partner to Lakehead or the
unitholders, including borrowings that have the purpose or effect of enabling
the general partner to receive incentive distributions. Further, any actions
taken by the general partner consistent with the standards of reasonable
discretion set forth in the definitions of Available Cash, Cash from Operations
and Interim Capital Transactions will not breach any duty of the general partner
to Lakehead or the unitholders. See "Cash Distributions."
(b) Under the terms of the Partnership Agreement and the partnership
agreement of the Operating Partnership (the "Operating Partnership
Agreement" and, together with the Partnership Agreement, the "Partnership
Agreements"), the general partner will exercise its discretion in managing
the business of Lakehead. As a result, the general partner is not
restricted from paying Enbridge or its affiliates for any services rendered
on terms that are fair and reasonable to Lakehead. The general partner will
determine which of its direct or indirect costs (including costs allocated
to the general partner by Enbridge and its affiliates) are reimbursable by
Lakehead. Employees of Enbridge and its affiliates currently provide
services to the general partner for the benefit of Lakehead pursuant to a
Services Agreement among Enbridge, an affiliate of Enbridge and the general
partner. Substantially all of the shipments of crude oil and natural gas
liquids delivered by our pipeline system originate from the Enbridge
Pipeline System, and Enbridge handles all scheduling of shipments
(including routes and storage) in coordination with the general partner.
(c) The general partner has certain varying percentage interests and
priorities with respect to Available Cash. See "Cash Distributions." The
timing and amount of cash receipts may be affected by various
determinations made by the general partner under the Partnership Agreements
(including, for example, those relating to the timing of any capital
transaction, the establishment and maintenance of reserves, the timing of
expenditures, the incurrence of debt and other matters).
(d) Neither of the Partnership Agreements nor any of the other
agreements, contracts and arrangements between Lakehead, on the one hand,
and the general partner, Enbridge and its affiliates, on the other hand,
were or will be the result of arm's-length negotiations. The interests of
the unitholders have not been represented by separate legal counsel in
connection with the preparation of such agreements, contracts or
arrangements.
(e) The decision whether Lakehead or the general partner should
purchase outstanding units at any time may involve the general partner or
Enbridge in a conflict of interest.
(f) Enbridge and its affiliates (other than the general partner) are
expressly permitted by the terms of the Partnership Agreement to engage in
any businesses and activities, including in certain instances, those in
direct competition with Lakehead, except as described below under
"-- Restrictions on General Partner Activity." For example, Enbridge and a
group of refiners have developed a project to reverse the flow of a portion
of the Enbridge Pipeline System from Sarnia to Montreal, to transport crude
oil from Montreal to Sarnia. The reversal of this line would result in
Enbridge becoming a competitor of Lakehead for supplying crude oil to the
Ontario market.
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(g) Lakehead and the general partner do not have any employees and
rely solely on employees of Enbridge and its affiliates. Although the
general partner conducts no business other than acting as general partner
of Lakehead and the Operating Partnership and managing certain subsidiaries
and ancillary activities, Enbridge and its affiliates conduct business and
activities of their own in which Lakehead has no economic interest. As a
result, employees who provide services to the general partner may not be
available when needed.
(h) As a matter of practice and whenever possible, the general partner
limits the liability under contractual arrangements of Lakehead to all or
particular assets of Lakehead, with the other party to have no recourse
against the general partner or its assets other than its interest in
Lakehead. In some circumstances, such action of the general partner may
result in the terms of the transaction being less favorable to Lakehead
than would otherwise be the case. The Partnership Agreement provides that
such action does not constitute a breach of the general partner's fiduciary
obligations.
(i) Lakehead is, and may in the future be, a party to various
agreements to which the general partner and its affiliates, including
Enbridge, are also parties and that provide certain benefits to Lakehead.
However, unitholders do not have the right under these agreements to
enforce directly the obligations of the general partner or of such
affiliates in favor of Lakehead. Therefore, the unitholders must depend
upon the general partner to enforce such obligations, including obligations
that it or such affiliates may owe to Lakehead.
RESTRICTIONS ON GENERAL PARTNER ACTIVITY
The general partner is subject to certain restrictions on its activities.
The sole business of the general partner is to act as general partner of
Lakehead and the Operating Partnership, to manage certain subsidiaries and to
undertake ancillary activities. Further, the Partnership Agreement provides that
no subsidiary of the general partner will engage in or acquire any business that
is in direct material competition with the business of Lakehead as conducted at
the time of its formation in 1991, subject to the exceptions set forth below.
None of the instruments to which Lakehead or the Operating Partnership is a
party imposes any restriction on the ability of Enbridge and its affiliates,
other than the general partner, to engage in any business. Enbridge agreed,
however, in a separate agreement (the "Distribution Support Agreement"), that
for so long as an affiliate of Enbridge is the general partner of Lakehead and
the Operating Partnership, Enbridge and its other subsidiaries will not engage
in or acquire any business that is in direct material competition with the
business of Lakehead as conducted at the time of its formation in 1991, subject
to the following important exceptions:
FIRST, there is no restriction on the ability of Enbridge and its
other subsidiaries to continue to engage in businesses, including the
normal development of those businesses in the future, in which they were
engaged as of December 1991 and that are or may be in the future in
competition with Lakehead, including the potential reversal of the Montreal
extension to transport crude oil from Montreal to Sarnia;
SECOND, the scope of the competition restriction is limited
geographically to those routes and products in respect of which Lakehead
provided transportation as of December 1991. For example, Enbridge and its
other subsidiaries would be permitted
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to acquire a pipeline business in which transportation is made over routes not
served by Lakehead or involving products not transported by Lakehead as of
December 1991;
THIRD, Enbridge and its other subsidiaries may acquire any competitive
business as part of a larger acquisition so long as the majority of the
value of the business or assets acquired, in Enbridge's judgement, is not
attributable to such competitive business; and
FOURTH, Enbridge and its other subsidiaries may acquire any
competitive business if it is first offered for acquisition to Lakehead and
Lakehead fails to approve, after submission to a unitholder vote, the
making of such acquisition. The approval of the holders of a majority of
the outstanding units (excluding any units held by the general partner and
its affiliates) is required for Lakehead to exercise its right to accept
such an offer.
Except as specified above, Enbridge and its affiliates are not restricted
by the terms of the Distribution Support Agreement or the Partnership Agreements
from engaging in businesses that may be in competition with Lakehead. In
addition, the Partnership Agreement specifically states that it will not
constitute a breach of the general partner's fiduciary duty for Enbridge or its
other subsidiaries to take advantage of any business opportunity in preference
to or to the exclusion of Lakehead, except as specifically limited by the
restrictions described above.
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER
The general partner is generally accountable to Lakehead and the
unitholders as a fiduciary. Consequently, the general partner must exercise good
faith and integrity in handling the assets and affairs of Lakehead. In contrast
to the relatively well-developed state of the law concerning fiduciary duties
owed by officers and directors to the shareholders of a corporation, the law
concerning the duties owed by general partners to the other partners and to
their partnerships is relatively undeveloped. The Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") provides that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties that might otherwise be applied by a court in analyzing the
standard of duty owed by general partners to limited partners. The Partnership
Agreement, as permitted by the Delaware Act, contains various provisions that
have the effect of restricting the fiduciary duties that might otherwise be owed
by the general partner to Lakehead and its partners. In addition, holders of
Class A Units are deemed to have consented to certain actions and conflicts of
interest that might otherwise be deemed a breach of fiduciary or other duties
under state law.
The Partnership Agreement provides that whenever a conflict of interest
arises between the general partner or its affiliates, on the one hand, and
Lakehead or any unitholder, on the other hand, the general partner will be
authorized, in resolving such conflict or determining such action, to consider
the relative interests of the parties involved in such conflict or affected by
such action, any customary or accepted industry practices, if applicable,
generally accepted accounting or engineering practices or principles and such
additional factors as the general partner determines in its sole discretion to
be relevant, reasonable or appropriate under the circumstances. The same
considerations will apply whenever the Partnership Agreement requires the
general partner to act in a manner that
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is fair and reasonable to Lakehead or the unitholders. Thus, unlike the strict
duty of a trustee who must act solely in the best interests of his beneficiary,
the Partnership Agreement permits the general partner to consider the interests
of all parties to a conflict of interest, including the interests of the general
partner and its affiliates, including Enbridge. The Partnership Agreement also
provides that in certain circumstances the general partner will act in its sole
discretion, in good faith or pursuant to other appropriate standards.
The Partnership Agreement also provides that any standard of care and duty
imposed on the general partner will be modified, waived or limited as required
to permit the general partner to act under the Partnership Agreement and to make
any decision pursuant to the authority prescribed in the Partnership Agreement
so long as such action is reasonably believed by the general partner to be in
the best interests of Lakehead. Further, the Partnership Agreement provides that
the general partner will not be liable for monetary damages to Lakehead or the
unitholders for errors of judgement or for any other acts or omissions if the
general partner acted in good faith. Lakehead is required, under the terms of
the Partnership Agreement, to indemnify the general partner and its officers,
directors, employees and agents against liabilities, costs and expenses, if the
general partner or such persons acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of Lakehead
and, with respect to any criminal proceeding, had no reasonable cause to believe
their conduct was unlawful. This indemnification provision could include
indemnification of the general partner for its negligent acts.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The fiduciary obligations of general partners is a developing area of the
law. The general partner has not obtained an opinion of counsel covering the
provisions set forth in the Partnership Agreement that purport to waive or
restrict fiduciary duties of the general partner. Unitholders should consult
their own legal counsel concerning the fiduciary responsibilities of the general
partner and its officers and directors and the remedies available to
unitholders.
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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 "Lakehead"
are references to both Lakehead and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting Lakehead 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) Lakehead 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 Lakehead (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 Lakehead, 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, Lakehead
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 Lakehead nor the Operating Partnership has elected nor will
elect to be treated as an association or corporation.
2. Lakehead and the Operating Partnership have been operated and 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
Lakehead has been and 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 Lakehead is based on the
assumption that if the general partner ceases to be a general partner, any
successor general partner (or general partners) will make and satisfy such
representations. In this regard, if the general partner were to withdraw as a
general partner at a time when there is no successor general partner, or if the
successor general partner could not satisfy the above representations, then the
IRS might attempt to classify Lakehead as an association taxable as a
corporation.
Counsel's opinion as to the partnership status of Lakehead is based
principally upon its interpretation of Treasury Regulations under 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 Lakehead will continue to
meet the Natural Resource Exception is a matter to be determined by Lakehead's
operations and the facts existing at the time of determination. However, the
general partner will use its best efforts to cause Lakehead to operate in such
fashion as is necessary for Lakehead to continue to meet the Natural Resource
Exception.
If Lakehead fails to meet the Natural Resource Exception (other than a
failure determined by the IRS to be inadvertent that is cured within a
reasonable time after discovery), Lakehead will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day 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
Lakehead. This contribution and liquidation should be tax-free to unitholders
and Lakehead, so long as Lakehead, at such time, does not have liabilities in
excess of the basis of its assets. Thereafter, Lakehead will be treated as a
corporation.
If Lakehead is treated as a corporation, Lakehead 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. Lakehead'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 accumulated earnings
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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
Lakehead 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 Lakehead 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 Lakehead 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 Lakehead for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by Lakehead. Instead, each unitholder
will be required to report on his income tax return his allocable share of the
income, gains, losses and deductions of Lakehead without regard to whether he
receives cash distributions.
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TREATMENT OF LAKEHEAD DISTRIBUTIONS
Distributions by Lakehead 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 Lakehead's liabilities
for which no Partner, including the general partner, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of cash to
such unitholder. It is not expected that Lakehead will incur any material
amounts of nonrecourse liabilities. To the extent that distributions by Lakehead
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
Lakehead 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 Lakehead's "unrealized
receivables" (including depreciation recapture) and/or "substantially
appreciated inventory items", as such terms are defined in Section 751 of the
Code (collectively, "Section 751 Assets"). 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 Lakehead'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
Lakehead income. The basis will be decreased (but not below zero) by
distributions from Lakehead, by the unitholder's share of Lakehead losses and by
the unitholder's share of expenditures of Lakehead that are not deductible in
computing its taxable income and are not required to be capitalized.
LIMITATIONS ON DEDUCTIBILITY OF LAKEHEAD 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 Lakehead, if any, will only be available to
offset future income generated by Lakehead and will not be available to offset
income from other passive activities or investments (including other publicly
traded partnerships) or salary or active business income. Passive losses that
are not deductible because they exceed the unitholder's income generated by
Lakehead may be deducted in full when the unitholder disposes of his entire
investment in Lakehead in a fully taxable transaction to an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions, such as the at risk rules and the basis limitation.
A unitholder's share of net income from Lakehead may be offset by any
suspended passive losses from Lakehead, 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 Lakehead, 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 Lakehead'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 distributions by Lakehead 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
Lakehead's 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 Lakehead, is related to such a person or can look only
to units for repayment. A unitholder's at risk amount will increase or decrease
as the basis of the unitholder's units increases or decreases (other
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than tax basis increases or decreases attributable to increases or decreases in
his share of Lakehead's 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 Lakehead will be
treated as investment income for this purpose. In addition, the unitholder's
share of Lakehead's portfolio income will be treated as investment income.
Investment interest expense includes (i) interest on indebtedness properly
allocable to property held for investment, (ii) a partnership's interest expense
attributed to portfolio income and (iii) the portion of interest expense
incurred to purchase or carry an interest in a passive activity to the extent
attributable to portfolio income. The computation of a unitholder's investment
interest expense will take into account interest on any margin account borrowing
or other loan incurred to purchase or carry a unit. Net investment income
includes gross income from property held for investment and amounts treated as
portfolio income pursuant to the passive loss rules less deductible expenses
(other than interest) directly connected with the production of investment
income, but generally does not include gains attributable to the disposition of
property held for investment.
ALLOCATION OF LAKEHEAD INCOME, GAIN, LOSS AND DEDUCTION
In general, if Lakehead 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 Lakehead. If Lakehead
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
Lakehead that would otherwise be allocated to the holders of Class B Units.
Although Lakehead does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts nevertheless
result, items of Lakehead income and gain will be allocated in an amount and
manner sufficient to eliminate the negative balance as quickly as possible. On a
liquidating sale of assets, 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 Lakehead's 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 Lakehead by the general partner
("Contributed Property"), and to account for the difference between the fair
market value of Lakehead's assets and their carrying value on Lakehead's books
at the time of any offering made pursuant to this prospectus. In
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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 Lakehead's tax reporting position, and that no
penalties would be applicable if the IRS were to litigate successfully against
the curative allocations. Because Lakehead has a relatively low tax basis in its
properties, a successful challenge by the IRS of the curative allocation would
result in ratios of taxable income to cash distributions received by holders of
Class A 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 Lakehead for
the taxable year of Lakehead 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 Lakehead 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 Lakehead's income and gain attributable
to the months in such quarter during which such units were owned but will not be
entitled to receive such cash distribution.
ACCOUNTING METHOD AND TAXABLE YEAR
Lakehead uses the calendar year as its taxable year and the accrual method
of accounting for federal income tax purposes.
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis established for the various assets of Lakehead will be used
for purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of such assets. The aggregate tax
basis established for the assets contributed to Lakehead by the general partner
was initially equal to the tax basis of the general partner in such assets
immediately before their contribution to Lakehead. See "-- Allocation of
Lakehead Income, Gain, Loss and Deduction."
Lakehead has both tangible assets of substantial value (including the
pipeline and related equipment) and rights of way of substantial value.
Amortization deductions in respect of such assets are based on determinations as
to their relative fair market values and useful lives by Lakehead. The IRS may
(i) challenge either the fair market values or the useful lives assigned to such
assets or (ii) seek to characterize intangible assets as nonamortizable
goodwill. If any such challenge or characterization were successful, the
deductions allocated to a unitholder in respect of such assets would be reduced
or eliminated and a unitholder's share of taxable income from Lakehead would be
increased accordingly. Any such increase could be material.
SECTION 754 ELECTION
Lakehead has made the election permitted by Section 754 of the Code. Such
an election is irrevocable without the consent of the IRS. The election
generally permits a purchaser of Class A Units to adjust his share of the basis
in Lakehead's properties ("inside basis") pursuant to Section 743(b) of the Code
to fair market value (as reflected by his unit price). The 743(b) adjustment is
attributed solely to a purchaser of Class A Units and is not added to the bases
of Lakehead's assets. (For purposes of this discussion, a unitholder's inside
basis in Lakehead's assets will be considered to have two components: (i) his
share of Lakehead's actual basis in such assets ("Common Basis"); and (ii) his
Section 743(b) adjustment allocated to each such asset.)
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
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deductions under Section 168 is generally required to be depreciated using
either the 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,
Lakehead 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, Lakehead will apply the rules described in the
Regulations and legislative history. If Lakehead determines that such position
cannot reasonably be taken, Lakehead may adopt a depreciation or amortization
convention under which all purchasers acquiring units in the same month would
receive depreciation or amortization, whether attributable to Common Basis or
Section 743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in Lakehead'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 Lakehead to goodwill. As an intangible asset, goodwill would be
amortizable over a longer period of time than Lakehead's tangible assets.
A Section 754 election is advantageous if the transferee's basis in his
units is higher than such units' share of the aggregate basis to Lakehead of
Lakehead'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
Lakehead's assets for purposes of calculating, among other items, his
depreciation deductions and his share of any gain or loss on a sale of
Lakehead's assets. Conversely, a Section 754 election is disadvantageous if the
transferee's basis in such units is lower than such units' share of the
aggregate basis of Lakehead'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 Lakehead on the basis of certain assumptions as to the value of
Lakehead's assets and other matters. There is no assurance that the
determinations made by Lakehead will not be successfully challenged by the IRS
and that the deductions attributable to them will
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not be disallowed or reduced. If the IRS requires a different basis adjustment
to be made, and if, in the general partner's opinion, the expense of compliance
exceeds the benefit of the election, the general partner may seek permission
from the IRS to revoke the Section 754 election for Lakehead. 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 Lakehead's income, gain or loss for purposes of the
alternative minimum tax. A portion of Lakehead's depreciation deductions may be
treated as an item of tax preference for this purpose.
A unitholder's alternative minimum taxable income derived from Lakehead may
be higher than his share of Lakehead's net income because Lakehead may use
accelerated methods of depreciation for purposes of computing 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 LAKEHEAD 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 Lakehead. Although the general partner may from time to time
consult with professional appraisers with respect to valuation matters, many of
the relative fair market value estimates will be made solely by the general
partner. These estimates and determinations of basis are subject to challenge
and will not be binding on the IRS or the courts. If the estimates of fair
market value or determinations of basis are subsequently found to be incorrect,
the character and amount of items of income, gain, loss, deductions 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 income,
gain, deductions, losses or credits of Lakehead with respect to those units
would appear not to be reportable by such unitholder, any cash distributions
received by the unitholder with respect to those units would be fully taxable
and all of such distributions would appear to be treated as ordinary income.
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
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related persons enter into a short sale, an offsetting notional principal
contract, or a futures or forward contract with respect to the partnership
interest or substantially identical property. Moreover, if a taxpayer has
previously entered into a short sale, an offsetting notional principal contract
or a futures or forward contract with respect to a partnership interest, the
taxpayer will be treated as having sold such position if the taxpayer or a
related party then acquires the partnership interest or substantially identical
property. The Secretary of Treasury is also authorized to issue 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 Lakehead's nonrecourse
liabilities. Since the amount realized includes a unitholder's share of
Lakehead's nonrecourse liabilities, the gain recognized on the sale of units may
result in a tax liability in excess of any cash received from such sale.
Prior distributions by Lakehead in excess of cumulative net taxable income
in respect of a Class A 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 Lakehead. The term "unrealized receivables" includes
potential recapture items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, inventory items and depreciation
recapture may exceed net taxable gain realized upon the sale of the unit and may
be recognized even if there is a net taxable capital loss realized on the sale
of the unit. Thus a unitholder may recognize both ordinary income and a capital
loss upon disposition of units. Net capital loss may offset no more than $3,000
of ordinary income in the case of individuals and may only be used to offset
capital gain in the case of a corporation.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must 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
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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 Lakehead, the 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, Lakehead'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 Lakehead's
assets other than in the ordinary course of business will be allocated among the
unitholders as of the opening of the NYSE on the first business day of the month
in which such gain or loss is recognized. As a result of this monthly
allocation, a unitholder transferring units in the open market may be allocated
income, gain, 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 Lakehead might be
reallocated among the unitholders. The general partner is authorized to revise
Lakehead's method of allocation between the transferors and transferees (as well
as among partners whose interests otherwise vary during a taxable period) to
conform to a method permitted by Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes
of such units prior to the record date set for a distribution with respect to
such quarter will be allocated items of Lakehead's income 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 Lakehead in
writing of such sale or exchange within 30 days of the sale or exchange and in
any event no later than January 15 of the year following the calendar year in
which the sale or exchange occurred. Lakehead is required to notify the IRS of
such transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to a
sale by an individual who is a citizen of the United States and who effects such
sale through a broker. Additionally, a transferor and a transferee of a unit
will be required to furnish statements to the IRS, filed with their income tax
returns for the taxable year in which the sale or exchange occurred, which set
forth the amount of the consideration received for such unit that is allocated
to goodwill or going concern value of Lakehead. Failure to satisfy such
reporting obligations may lead to the imposition of substantial penalties.
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CONSTRUCTIVE TERMINATION
Lakehead and the Operating Partnership will be considered to have been
terminated if there is a sale or exchange of 50% or more of the total interests
in Lakehead capital and profits within a 12-month period. A termination of
Lakehead will cause a termination of the Operating Partnership. A termination of
Lakehead will result in the closing of Lakehead's taxable year for all
unitholders. In the case of a unitholder reporting on a taxable year other than
a fiscal year ending December 31, the closing of Lakehead's taxable year may
result in more than 12 months' taxable income or loss of Lakehead being
includable in his taxable income for the year of termination. New tax elections
required to be made by Lakehead, including a new election under Section 754 of
the Code, must be made subsequent to a termination, and a termination could
result in a deferral of Lakehead deductions for depreciation. A termination
could also result in penalties if Lakehead were unable to determine that the
termination had occurred. Moreover, a termination might either accelerate the
application of, or subject Lakehead to, any tax legislation enacted prior to the
termination.
ENTITY-LEVEL COLLECTIONS
If Lakehead is required or elects under applicable law to pay any federal,
state or local income tax on behalf of any unitholder or former unitholder, the
general partner is authorized to pay such taxes from Lakehead funds. Such
payments, if made, will be deemed current distributions of cash to the
unitholders and the general partner. The general partner is authorized to amend
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 Lakehead as
described above could give rise to an overpayment of tax on behalf of an
individual unitholder, in which event the unitholder could file a claim for
credit or refund.
UNIFORMITY OF CLASS A UNITS
Since Lakehead 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
Lakehead.
Lakehead intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property or
Adjusted Property (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 Lakehead determines that such position cannot reasonably
be taken, Lakehead 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 Lakehead's property. If such an aggregate approach is
adopted, annual depreciation and amortization deductions might be lower than
would otherwise be allowable to certain unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. Such convention will not be adopted if
Lakehead determines that the loss of such depreciation and amortization
deductions will have a material adverse effect on the unitholders. If Lakehead
chooses not to utilize this aggregate method, Lakehead may use any other
reasonable depreciation and amortization convention to preserve the uniformity
of the intrinsic tax characteristics of any Class A 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 Lakehead'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 Lakehead's income, gain, loss,
deduction or credit and pay federal income tax at regular rates on such income.
Under rules applicable to publicly traded partnerships, Lakehead will withhold
(currently at the rate of 39.6%) on actual cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to the Transfer Agent
of Lakehead 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 Lakehead 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 Lakehead'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
LAKEHEAD INFORMATION RETURNS AND AUDIT PROCEDURES
Lakehead intends to furnish each unitholder, within 90 days after the close
of each calendar year, certain tax information, including a Schedule K-1, that
sets forth each unitholder's allocable share of Lakehead's income, gain, loss,
deduction and credit for the preceding taxable year of Lakehead. If Lakehead
elects large partnership treatment under the Code, this tax information will be
provided to unitholders by March 15th for the preceding taxable year of Lakehead
as required. In preparing this information, which will generally not be reviewed
by Counsel, the general partner will use various accounting and reporting
conventions, some of which have been mentioned in the previous discussion, to
determine the respective unitholder's allocable share of income, gain, loss,
deduction and credits. See "Allocation of Lakehead 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 reporting conventions are
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<PAGE> 44
impermissible. Any such challenge by the IRS could negatively affect the value
of the units.
The federal income tax information returns filed by Lakehead may be audited
by the IRS. Adjustments resulting from such audit may require each unitholder to
file an amended tax return, and possibly may result in an audit of the
unitholder's return. If Lakehead elects large partnership treatment, partnership
adjustments would not result in unitholders having to file amended returns.
Instead, these adjustments generally would flow through to the unitholders for
the year in which the adjustment takes effect. Thus, the current year
unitholders' share of current year partnership items of income, gains, losses,
deductions 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, Lakehead may elect to pay an imputed underpayment.
In either case, unitholders could bear significant economic burdens associated
with tax adjustments relating to periods predating their acquisition of units.
Any audit of a unitholder's return could result in adjustments of not only
Lakehead but also non-partnership items.
Partnerships generally are treated as separate entities for purposes of
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 Lakehead
and unitholders and can extend the statute of limitations for assessment of tax
deficiencies against unitholders with respect to Lakehead items. The Tax Matters
Partner may bind any unitholder with less than a 1% profits interest in Lakehead
to a settlement with the IRS unless the unitholder elects, by filing a statement
with the IRS, not to give such authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review (to which all the unitholders are
bound) of a final partnership administrative adjustment and, if the Tax Matters
Partner fails to seek judicial review, such review may be sought by any
unitholder having at least 1% interest in the profits of Lakehead and by
unitholders having, in the aggregate, at least a 5% profits interest. However,
only one action for judicial review will go forward, and each unitholder with an
interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment
of any item on its federal income tax return that is not consistent with the
treatment of the item on Lakehead's return to avoid the requirement that all
items be treated consistently on both returns. Intentional or negligent
disregard of the consistency requirement may subject a unitholder to substantial
penalties. Under the Code, partners in a partnership electing to be treated as a
large partnership would be required to treat all partnership items in a manner
consistent with the partnership return.
If Lakehead elects to be treated as a large partnership, each partner would
take into account separately his share of the following items, determined at the
partnership level: (i) taxable income or loss from passive loss limitation
activities; (ii) taxable income or loss from other activities (such as portfolio
income or loss); (iii) net capital gains (or net
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<PAGE> 45
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 Lakehead will elect to have these provisions apply because of the
cost of their application.
NOMINEE REPORTING
Persons who hold an interest in Lakehead as a nominee for another person
are required to furnish to Lakehead: (i) the name, address and taxpayer
identification number of the beneficial owners and the nominee; (ii) whether the
beneficial owner is (a) a person that is not a United States person, (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 Lakehead units they acquire, hold or transfer for their own
account. A penalty of $50 per failure (up to a maximum of $100,000 per calendar
year) is imposed by the Code for failure to report such information to Lakehead.
The nominee is required to supply the beneficial owner of the units with the
information furnished to Lakehead.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
Lakehead will not be subject to the registration requirement on the basis that
it will not constitute a tax shelter. However, the general partner, as principal
organizer of Lakehead, has registered Lakehead as a tax shelter with the IRS in
the absence of assurance that Lakehead will not be subject to tax shelter
registration and in light of the substantial penalties that might be imposed if
registration is required and not undertaken. The IRS has issued the following
shelter registration number to Lakehead: 92008000124. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN LAKEHEAD OR THE
CLAIMED TAX BENEFITS HAVE
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<PAGE> 46
BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. Lakehead must furnish the
registration number to the unitholders, and a unitholder who sells or otherwise
transfers a unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the transferor of a unit to
furnish such registration number to the transferee is $100 for each such
failure. The unitholders must disclose the tax shelter registration number of
Lakehead on Form 8271 to be attached to the tax return on which any deduction,
loss, credit or other benefit generated by Lakehead is claimed or income of
Lakehead is included. A unitholder who fails to disclose the tax shelter
registration number on his 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 Lakehead. If any Lakehead item of income, gain, loss, deduction or
credit included in the distributive shares of the unitholders might result in
such an "understatement" of income for which no "substantial authority" exists,
Lakehead must disclose the pertinent facts on its return. In addition, Lakehead
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 Lakehead. Lakehead 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> 47
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 Lakehead. 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 Lakehead.
INVESTMENT IN LAKEHEAD BY EMPLOYEE BENEFIT PLANS
An investment in Lakehead by an employee benefit plan is subject to certain
additional considerations because persons with discretionary control of assets
of such plans (a "fiduciary") are subject to the fiduciary responsibility
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and transactions are subject to restrictions imposed by Section 4975
of the Code. As used herein, the term "employee benefit plan" includes, but is
not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh
plans, Simplified Employee Pension Plans, and tax deferred annuities or
Individual Retirement Accounts ("IRAs") established or maintained by an employer
or employee organization. Among other things, consideration should be given to
(i) whether such investment is prudent under Section 404(a)(1)(B) of ERISA, (ii)
whether in making such investment such plan will satisfy the diversification
requirement of Section 404(a)(1)(C) of ERISA, and (iii) whether such investment
will result in recognition of unrelated business taxable income by such plan.
See "Tax Considerations -- Tax-Exempt Organizations and Certain Other
Investors." Fiduciaries should determine whether an investment in Lakehead is
authorized by the appropriate governing instrument and is an appropriate
investment for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in Lakehead, be deemed to own an undivided
interest in the assets of Lakehead, with the result that the general partner
would also be a fiduciary of such plan and Lakehead would be subject to the
regulatory restrictions of ERISA, including its prohibited transaction rules, as
well as the prohibited transaction rules of the Code.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan; i.e., IRAs
established or maintained by individuals rather than an employer or employee
organization) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties who are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
Under Department of Labor regulations the assets of an entity in which employee
benefit plans acquire equity interests would not be deemed "plan assets" if,
among other things, (i) the equity interests acquired by employee benefit plans
are publicly offered securities -- i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered
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pursuant to certain provisions of the federal securities law, (ii) the entity is
an "operating company" -- i.e., it is primarily engaged in the production or
sale of a product or service other than the investment of capital, or (iii)
there is no significant investment by benefit plan investors, which is defined
to mean that less than 25% of the value of each class of equity interest is held
by the employee benefit plans referred to above, IRAs and other employee benefit
plans not subject to ERISA (such as government plans). Lakehead's assets are not
expected to be considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (i) above, and may
also satisfy the requirements in (ii) and (iii).
PLAN OF DISTRIBUTION
We may sell the Class A Units to one or more underwriters for public
offering and sale, or we may sell the Class A Units to investors directly or
through agents. Any underwriter or agent involved in the offer and sale of the
Class A Units will be named in the applicable prospectus supplement.
Underwriters may offer and sell the Class A Units at fixed prices, which
may be changed, at prices related to the prevailing market prices at the time of
sale or at negotiated prices. We also may authorize underwriters acting as our
agents to offer and sell the Class A Units upon the terms and conditions as are
set forth in the applicable prospectus supplement. In connection with the sale
of Class A Units, underwriters may be deemed to have received compensation from
us in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of the Class A Units for whom they may act as agent.
Underwriters may sell the Class A Units to or through dealers. Dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agent.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of the Class A Units, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Underwriters, dealers
and agents participating in the distribution of the Class A Units may be deemed
to be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Class A Units may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with us, to
indemnification against the contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If a prospectus supplement so indicates, we will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase the Class A Units to which such prospectus supplement relates,
providing for payment and delivery on a future date specified in such prospectus
supplement. There may be limitations on the minimum amount that may be purchased
by any such institutional investor or on the number of the Class A Units that
may be sold pursuant to such arrangements. Institutional investors include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and such other institutions
as we may approve. The obligations of the purchasers pursuant to such delayed
delivery and payment
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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 Lakehead. 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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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 Lakehead 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 Lakehead.
<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 Lakehead and the Operating Partnership
provide that Lakehead or the Operating Partnership, as the case may be, will
indemnify (to the fullest extent permitted by applicable law) certain persons
(each, an "Indemnitee") from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgements, fines and amounts paid in settlement actually
and reasonably incurred by such Indemnitee in connection with any claim, demand,
action, suit or proceeding to which the Indemnitee is or was an actual or
threatened party and which relates to the Partnership Agreement of Lakehead or
the Partnership Agreement of the Operating Partnership or the property,
business, affairs or management of Lakehead and the Operating Partnership. This
indemnity is available only if the Indemnitee acted in good faith, in a manner
in which such Indemnitee believed to be in, or not opposed to, the best
interests of Lakehead and the Operating Partnership and, with respect to any
criminal proceeding, had no reasonable cause to believe its conduct was
unlawful. Indemnitees include the general partner, any Departing Partner (as
defined in the Partnership Agreement of Lakehead or the Partnership Agreement of
the Operating Partnership), any affiliate of the general partner or any
Departing Partner, any person who is or was a director, officer, employee or
agent of the general partner or any Departing Partner or any affiliate of
either, or any person who is or was serving at the request of the general
partner, any Departing Partner, or any such affiliate as a director, officer,
partner, trustee, employee or agent of another person. Expenses subject to
indemnity will be paid by the applicable partnership to the Indemnitee in
advance, subject to receipt of an undertaking by or on behalf of the Indemnitee
to repay such amount if it is ultimately determined by a court of competent
jurisdiction that the Indemnitee is not entitled to indemnification.
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Lakehead will, to the extent commercially reasonable, purchase and maintain
insurance on behalf of the Indemnitees, whether or not Lakehead would have the
power to indemnify such Indemnitees against liability under the applicable
partnership agreement.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreement of Lakehead or the Partnership Agreement of the Operating
Partnership, Section 17-108 of the Delaware Revised Limited Partnership Act
empowers a Delaware limited partnership to indemnify and hold harmless any
partner or other person from and against all claims and demands whatsoever.
Reference is made to Exhibit 1.1 hereto, which will contain provisions for
indemnification of Lakehead, the general partner and its directors, officers,
and any controlling persons, against certain liabilities for information
furnished by the underwriters and/or agents, as applicable, expressly for use in
a Prospectus Supplement.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of Lakehead Pipe Line
Partners, L.P. (incorporated herein by reference to
Exhibit 3.1 to Lakehead Pipe Line Partners, L.P.'s
Registration Statement on Form S-1 (File No. 33-43425))
4.1 -- Form of Certificate representing Class A Common Units
(incorporated herein by reference to Exhibit 1 to the
Lakehead Pipe Line Partners, L.P.'s Form 8-A/A (Amendment
No. 2), dated May 2, 1997 (File No. 1-10934))
4.2 -- Amended and Restated Agreement of Limited Partnership of
the Lakehead Pipe Line Partners, L.P., dated April 15,
1997 (incorporated herein by reference to Exhibit 2 to
the Lakehead Pipe Line Partners, L.P.'s Form 8-A/A
(Amendment No. 2), dated May 2, 1997 (File No. 1-10934))
**5.1 -- Opinion of 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 Lakehead Pipe Line Partners,
L.P.'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.
** Previously filed.
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<PAGE> 52
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 Lakehead's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been 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> 53
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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the 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 25, 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
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<PAGE> 55
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 25, 1998
- --------------------------------------------- (Principal Executive
S.J. Wuori Officer)
* Chairman and Director November 25, 1998
- ---------------------------------------------
E.C. Hambrook
* Vice President and November 25, 1998
- --------------------------------------------- Director
R.C. Sandahl
* Chief Accountant (Chief November 25, 1998
- --------------------------------------------- Financial and
M.A. Maki Accounting Officer)
* Director November 25, 1998
- ---------------------------------------------
P.D. Daniel
* Director November 25, 1998
- ---------------------------------------------
F.W. Fitzpatrick
* Director November 25, 1998
- ---------------------------------------------
C.A. Russell
* Director November 25, 1998
- ---------------------------------------------
D.P. Truswell
*By: /s/ S.J. WUORI
- ---------------------------------------------
S.J. Wuori, Attorney-in-Fact
</TABLE>
II-6
<PAGE> 56
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of Lakehead Pipe Line
Partners, L.P. (incorporated herein by reference to
Exhibit 3.1 to Lakehead Pipe Line Partners, L.P.'s
Registration Statement on Form S-1 (File No. 33-43425))
4.1 -- Form of Certificate representing Class A Common Units
(incorporated herein by reference to Exhibit 1 to the
Lakehead Pipe Line Partners, L.P.'s Form 8-A/A (Amendment
No. 2), dated May 2, 1997 (File No. 1-10934))
4.2 -- Amended and Restated Agreement of Limited Partnership of
the Lakehead Pipe Line Partners, L.P., dated April 15,
1997 (incorporated herein by reference to Exhibit 2 to
the Lakehead Pipe Line Partners, L.P.'s Form 8-A/A
(Amendment No. 2), dated May 2, 1997 (File No. 1-10934))
**5.1 -- Opinion of 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 Lakehead Pipe Line Partners,
L.P.'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.
** Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 1 to the 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 Amendment No. 1 to the 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 23, 1998
