PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. It does not contain all the information you should consider before investing in our Class A common units. You should carefully read the entire prospectus, including “Risk Factors” and the historical and unaudited pro forma consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes that the underwriters do not exercise their option to purchase additional common units.

Unless the context otherwise requires, references in this prospectus to “Midcoast Energy Partners,” “our partnership,” “we,” “our,” “us,” or like terms, when used in a historical context, refer to Midcoast Operating, L.P. (formerly known as Enbridge Midcoast Energy, L.P.), our predecessor for accounting purposes, which we sometimes refer to as “our Predecessor.” When used in the present tense or future tense, these terms refer to Midcoast Energy Partners, L.P. and its subsidiaries. References to “our general partner” refer to Midcoast Holdings, L.L.C. References to “Enbridge Energy Partners” or “EEP” refer collectively to Enbridge Energy Partners, L.P. and its subsidiaries, other than us, our subsidiaries and our general partner. References to “Enbridge” refer collectively to Enbridge Inc. and its subsidiaries other than us, our subsidiaries and our general partner and EEP, its subsidiaries and its general partner. References to “Midcoast Operating” refer to Midcoast Operating, L.P. and its subsidiaries. We own a 39% controlling interest in Midcoast Operating and EEP owns a 61% non-controlling interest in Midcoast Operating. Unless otherwise specifically noted, financial results and operating data are shown on a 100% basis and are not adjusted to reflect EEP’s 61% non-controlling interest in Midcoast Operating.

Unless otherwise specifically noted, references to “common units” refer to Class A common units representing limited partner interests in us. Our partnership agreement also provides for the issuance of Class B common units representing limited partner interests in us. For a description of the differences between our Class A common units and Class B common units, please read “Description of Our Common Units.” At the closing of this offering, there will be no Class B common units outstanding. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

Midcoast Energy Partners, L.P.

Overview

We are a growth-oriented Delaware limited partnership recently formed by Enbridge Energy Partners, L.P., or EEP, to serve as EEP’s primary vehicle for owning and growing its natural gas and natural gas liquids, or NGL, midstream business in the United States. As a pure-play U.S. natural gas and NGL midstream business, we will be able to pursue a more focused and flexible strategy, have direct access to the equity and debt capital markets, and have the opportunity to grow through organic growth opportunities and acquisitions, including drop-down transactions from EEP.

Our initial assets consist of a 39% controlling interest in Midcoast Operating, a Texas limited partnership that owns a network of natural gas and NGL gathering and transportation systems, natural gas processing and treating facilities and NGL fractionation facilities primarily located in Texas and Oklahoma. Midcoast Operating also owns and operates natural gas, condensate and NGL logistics and marketing assets that primarily support its gathering, processing and transportation business. Through our ownership of Midcoast Operating’s general partner, we control, manage and operate these systems. EEP has retained a 61% non-controlling interest in Midcoast Operating.

 

Our business primarily consists of gathering unprocessed and untreated natural gas from wellhead locations and other receipt points on our systems, processing the natural gas to remove NGLs and impurities at our processing and treating facilities and transporting the processed natural gas and NGLs to intrastate and interstate pipelines for transportation to various customers and market outlets. In addition, we also market natural gas and NGLs to wholesale customers.

We seek to provide our customers with best-in-class field-level service and responsiveness using our significant platform of natural gas and NGL infrastructure. We are able to provide our customers with integrated wellhead-to-market service from our systems to major energy market hubs in the Gulf Coast and Mid-Continent regions of the United States. From these market hubs, natural gas and NGLs are either consumed in local markets or transported to consumers in the midwest, northeast and southeast United States.

Midcoast Operating’s primary operating assets include:

 

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approximately 11,400 miles of natural gas gathering and transportation lines and approximately 222 miles of NGL gathering and transportation lines;

 

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a 35% interest in the Texas Express NGL system, which is comprised of two joint ventures with third parties that together are currently constructing a 580-mile, 20-inch NGL intrastate transportation pipeline extending from the Texas Panhandle to Mont Belvieu, Texas and a related NGL gathering system that is expected to initially consist of approximately 116 miles of gathering lines, all of which are expected to be in service during the fourth quarter of 2013;

 

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21 active natural gas processing plants, including two hydrocarbon dewpoint control facilities, or HCDP plants, with a combined capacity of approximately 2.1 billion cubic feet per day, or Bcf/d, including 350 million cubic feet per day, or MMcf/d, provided by our HCDP plants;

 

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10 active natural gas treating plants, including three that are leased from third parties, with a total combined capacity of approximately 1.3 Bcf/d;

 

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approximately 560 compressors with approximately 810,000 aggregate horsepower, the substantial majority of which are owned by Midcoast Operating and the remainder of which are leased from third parties;

 

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a liquids railcar loading facility near Pampa, Texas, which we refer to as our TexPan liquids railcar facility;

 

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an approximately 40-mile crude oil pipeline and associated crude oil storage facility near Mayersville, Mississippi, including a crude oil barge loading facility located on the Mississippi River; and

 

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approximately 250 transport trucks, 300 trailers and 305 railcars for transporting NGLs.

The following table sets forth Midcoast Operating’s net income and Adjusted EBITDA, on a 100% basis, for the periods indicated. We own a 39% controlling interest in Midcoast Operating.

 

		Six months ended June 30, 2013				Year ended December 31, 2012
		(in millions)
Net income		$	59.2			$	167.5
Adjusted EBITDA		$	117.2			$	305.1

 

Please read “Selected Historical and Pro Forma Consolidated Financial and Operating Data—Non-GAAP Financial Measures—Adjusted EBITDA” for our definition of Adjusted EBITDA and our reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.

Reasons for the Offering

EEP has indicated that it intends for us to serve as its primary vehicle for owning and growing its U.S. natural gas and NGL midstream business, while it retains 100% ownership of its crude oil and liquid petroleum midstream business. The reason for this restructuring of EEP’s business is to accomplish the following strategic objectives:

 

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Enhances Strategic Focus of Each Partnership. By separating its midstream businesses into two separate partnerships, we and EEP will each be able to pursue a more focused strategy, leaving us better able to pursue value creation strategies in the natural gas and NGL midstream business and leaving EEP better positioned to develop its crude oil and liquid petroleum midstream business.

 

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Increases Ability to Respond to Market Opportunities. The separation allows each partnership to focus its resources on its respective operations, customers and core businesses, with greater ability to anticipate, respond rapidly to and pursue opportunities that arise from changing market dynamics.

 

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Creates More Efficient Capital Structures. Both partnerships will have direct access to the equity and debt capital markets to fund their respective growth strategies and to establish the optimal capital structure for their specific business needs.

 

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Creates Drop-Down Opportunities. EEP has indicated that it intends, but is not obligated, to sell its remaining ownership interest in Midcoast Operating to us in a series of drop-down transactions over the next four to five years in order to raise capital to develop its crude oil and liquid petroleum midstream business.

 

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Creates Increased Investor Choice. By forming us, EEP is providing investors with two investment vehicles for its midstream assets, each with its own unique growth strategy, risk profile, capital structure and financial prospects.

Our Natural Gas and NGL Midstream Business

We conduct our business through two distinct reporting segments: gathering, processing and transportation and logistics and marketing.

Gathering, Processing and Transportation

Our gathering, processing and transportation business includes natural gas and NGL gathering and transportation pipeline systems, natural gas processing and treating facilities and NGL fractionation facilities. We gather natural gas from the wellhead and central receipt points on our systems, deliver it to our facilities for processing and treating and deliver the residue gas to intrastate or interstate pipelines for transmission to wholesale customers such as power plants, industrial customers and local distribution companies. We deliver the NGLs produced at our processing and fractionation facilities to intrastate and interstate pipelines for transportation to the NGL market hubs in Mont Belvieu, Texas and Conway, Kansas. In addition, when the Texas Express NGL system commences service, which is expected to occur during the fourth quarter of 2013, we will

 

gather NGLs from certain of our facilities for delivery on the Texas Express NGL mainline to Mont Belvieu, Texas. Our gathering, processing and transportation business comprised approximately 89% and 84% of our gross margin for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively.

Our gathering, processing and transportation business consists of the following four systems:

 

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Anadarko system: Approximately 2,950 miles of natural gas gathering and transportation pipelines, approximately 54 miles of NGL pipelines, nine active natural gas processing plants, three standby natural gas processing plants and one standby treating plant located in the Anadarko basin. For the six months ended June 30, 2013, this system had average daily volumes of approximately 968,000 MMBtu/d of natural gas.

 

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East Texas system: Approximately 3,850 miles of natural gas gathering and transportation pipelines, approximately 108 miles of NGL pipelines, six active natural gas processing plants, including two HCDP plants, 10 active natural gas treating plants, one standby natural gas treating plant and one fractionation facility located in the East Texas basin. For the six months ended June 30, 2013, this system had average daily volumes of approximately 1,231,000 MMBtu/d of natural gas.

 

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North Texas system: Approximately 4,600 miles of natural gas gathering and transportation pipelines, approximately 60 miles of NGL pipelines, six active natural gas processing plants and one standby natural gas processing plant located in the Fort Worth basin. For the six months ended June 30, 2013, this system had average daily volumes of approximately 338,000 MMBtu/d of natural gas.

 

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Texas Express NGL system: A 35% interest in an approximately 580-mile NGL intrastate transportation mainline and a related NGL gathering system that will initially consist of approximately 116 miles of gathering lines. Both the mainline and the gathering system are currently being constructed and are expected to commence service during the fourth quarter of 2013. The mainline is expected to have an initial capacity of approximately 280,000 Bpd and, upon completion, will serve as a link between growing supply sources of NGLs in the Anadarko and Permian basins and the Mid-Continent and Rockies regions of the United States and the primary demand markets on the U.S. Gulf Coast.

The following table sets forth certain operating information for the processing and treating facilities included in our gathering, processing and transportation business as of and for the six months ended June 30, 2013:

 

Asset		Average Daily Volumes (MMBtu/d)				Aggregate Processing Capacity (MMcf/d)				Aggregate Treating Capacity (MMcf/d)				Compression (Horsepower)				Wells Connected(1)
Anadarko system			968,000				965				150				442,000				3,600
East Texas system			1,231,000				735				1,335	(2)			198,000				5,600
North Texas system			338,000				275				—				170,000				3,400
Total			2,537,000				1,975				1,485				810,000				12,600

 

(1)	Represents the approximate number of wells directly connected to our systems and our estimate of the number of wells connected to central receipt points on our systems.

(2)	Includes three treating plants leased from third parties with a combined treating capacity of approximately 220 MMcf/d of natural gas.

For the six months ended June 30, 2013, we produced an average of approximately 89,900 Bpd of NGLs.

 

Logistics and Marketing

The primary role of our logistics and marketing business is to market natural gas, NGLs and condensate received from our gathering, processing and transportation business, thereby enhancing our competitive position. In addition, our logistics and marketing services provide our customers with the opportunity to receive enhanced economics by providing access to premium markets through the transportation capacity and other assets we control. Our logistics and marketing business purchases and receives natural gas, NGLs and other products from pipeline systems and processing plants and sells and delivers them to wholesale customers, such as distributors, refiners, fractionators, utilities, chemical facilities and power plants. Our logistics and marketing business comprised approximately 11% and 16% of our gross margin for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively.

The following table sets forth the approximate average daily volumes of natural gas, NGLs and crude oil sold by our logistics and marketing business for the six months ended June 30, 2013:

 

Volumes of products sold		Six months ended June 30, 2013
Natural gas (MMBtu/d)			1,346,000
NGLs (Bpd)			158,000
Crude oil (Bpd)			28,000

The physical assets of our logistics and marketing business primarily consist of:

 

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approximately 250 transport trucks, 300 trailers and 305 railcars for transporting NGLs;

 

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our TexPan liquids railcar facility near Pampa, Texas; and

 

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an approximately 40-mile crude oil pipeline and associated crude oil storage facility near Mayersville, Mississippi, including a crude oil barge loading facility located on the Mississippi River.

We also enter into agreements with various third parties to obtain natural gas and NGL supply, transportation, gas balancing, fractionation and storage capacity in support of the logistics and marketing services we provide to our gathering, processing and transportation business and to third-party customers. These agreements provide our logistics and marketing business with the following:

 

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up to approximately 79,000 Bpd of firm NGL fractionation capacity;

 

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approximately 2.5 Bcf of firm natural gas storage capacity;

 

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up to approximately 120,000 Bpd of firm NGL transportation capacity on the Texas Express NGL system;

 

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up to approximately 89,000 Bpd of additional NGL transportation capacity, a significant portion of which is firm capacity, through transportation and exchange agreements with four NGL pipeline transportation companies; and

 

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approximately 5.0 MMBbls of firm NGL storage capacity.

The activities conducted by our logistics and marketing business are primarily conducted within the states of Texas, Louisiana, Oklahoma, Kansas and Mississippi. Our logistics and marketing business also allows us to deploy transportation assets to emerging resource plays to service our customers’ immediate transportation needs, as well as to attract new customers for our gathering, processing and transportation business.

 

Business Strategies

Our principal financial objective is to increase the amount of cash distributions we make to our unitholders over time while maintaining our focus on safety and stability in our business. Our plan for executing this objective includes the following key business strategies:

 

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Maintain safe and reliable operations. We are committed to maintaining and continually improving the safety, reliability and efficiency of our operations, which we believe is key to attracting new customers and maintaining relationships with our current customers, regulators and the communities in which we operate. We strive for operational excellence by utilizing robust programs to integrate environmental integrity, health and occupational safety and risk management principles throughout our business. We employ comprehensive integrity management, inspection, monitoring and audit initiatives in support of this strategy.

 

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Pursuing accretive acquisitions from EEP and third parties. We intend to pursue acquisitions of additional interests in Midcoast Operating from EEP, as well as accretive acquisitions of complementary assets from third parties. EEP has indicated that it intends to offer us the opportunity to purchase additional interests in Midcoast Operating from time to time, although EEP is not legally obligated to do so. We do not know when or if any such additional interests will be offered to us to purchase. In addition, in conjunction with EEP, we monitor the marketplace to identify and pursue acquisitions from third parties that complement or diversify our existing operations.

 

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Pursuing economically attractive organic growth opportunities. We seek out attractive organic expansion and asset enhancement opportunities that leverage our existing asset footprint, strategic relationships with our customers and our management team’s expertise in constructing, developing and optimizing midstream infrastructure assets. The organic development projects we pursue are designed to extend our geographic reach, diversify our customer base, expand our gathering systems and our processing and treating capacity, enhance end-market access and/or maximize throughput volumes.

 

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Enhancing the profitability of our existing assets. To address the increasing producer focus on the liquids portion of the midstream natural gas value chain, we expect to continue to increase our natural gas processing capacity, NGL takeaway capacity options, and our third party fractionation alternatives. We seek to capitalize on opportunities to attract new customers, increase volumes of natural gas and NGLs that we gather, transport, process or treat and otherwise enhance utilization and operating efficiencies, including increasing customer access to preferred natural gas and NGL markets. We believe our approach will provide our customers with greater value for their commodities and increase the utilization of our natural gas and NGL systems.

 

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Maintaining a conservative and flexible capital structure and targeting investment grade credit metrics in order to lower our overall cost of capital. We intend to maintain a balanced capital structure that should afford us access to the capital markets at a competitive cost of capital. Although we do not currently have a credit rating, we plan to target debt-to-EBITDA, EBITDA-to-interest and other key credit metrics that are consistent with investment grade businesses in our industry.

 

Competitive Strengths

We believe that the following competitive strengths position us to successfully execute our business strategies:

 

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Large-scale, strategically located assets in prolific natural gas-producing basins with unconventional resource plays and access to major market hubs. Our large-scale natural gas gathering, treating, processing and transportation system assets are primarily located in Texas and Oklahoma and are strategically positioned within core areas of established, proven and prolific natural gas-producing basins with multiple producing formations, including unconventional resource plays, and significant access to major market hubs for natural gas and NGLs. We believe that producers will continue their drilling and completion activities in these core areas even if natural gas prices do not increase significantly from current levels because the return economics associated with core-area wells remain favorable in lower pricing environments compared to more marginal areas of production.

 

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Balanced contract mix and hedging policy to optimize profitability. Approximately one-half of the segment gross margin of our gathering, processing and transportation business is generated from fee-based revenues, including demand charges. The remaining portion is generated from contracts with varying degrees of commodity price exposure, which will benefit us in increasing commodity price environments but reduce our profitability in decreasing commodity price environments. We seek to mitigate our downside to direct commodity exposure by employing a prudent hedging strategy. We believe that our contract mix, combined with our hedging strategy, allows us to optimize our profitability over time by allowing us to take advantage of higher commodity price environments and mitigating our downside exposure in lower commodity price environments.

 

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Affiliation with EEP and Enbridge, leaders in midstream energy infrastructure. We believe that we will benefit from EEP’s and Enbridge’s operational expertise and extensive industry knowledge, as well as their expertise in project development, asset acquisition and asset integration. As a result of its significant ownership interest in us and Midcoast Operating, EEP will have a vested interest in our success and we expect that EEP will be incentivized to support our growth and development to enhance the value of our business, including by offering us the ability to purchase additional interests in Midcoast Operating. However, we do not know when or if any such additional interests will be offered to us to purchase.

 

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Integrated solutions across the midstream value chain. We provide our customers with services at multiple stages in the midstream value chain, including gathering, compression, treating, dehydration, processing, stabilization, transportation, fractionation, logistics and marketing services. We believe our ability to provide our natural gas customers with a single source that satisfies their needs from the wellhead to market, combined with our commitment to superior customer service, will allow us to continue to cultivate valuable and stable customer relationships over the long term. Additionally, we believe that actively participating in these midstream segments affords us greater market insight and the ability to quickly respond to and take advantage of changing market dynamics.

 

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Experienced operational and management team. Our engineering, construction, commercial, logistics and operations teams have significant experience in designing, constructing and operating large-scale midstream energy assets. In addition, our executive management team has an average of approximately 25 years of energy industry experience and a proven track record of operating natural gas and NGL assets, as well as identifying and executing both organic growth projects and

 

third-party acquisitions. Because of our relationship with EEP and Enbridge, we also will have access to a significant pool of management talent and technical expertise and strong commercial relationships throughout the energy industry.

Recent Developments

The following discussion addresses the estimated financial results of our predecessor, Midcoast Operating, for the three months ended September 30, 2013. While final financial information for the three months ended September 30, 2013 is not yet available, based on the financial information and operating data currently available, management estimates, on a preliminary basis, that Midcoast Operating will record a net loss of between $7.9 million and $17.9 million for the three months ended September 30, 2013 as compared with net income of approximately $28.7 million for the three months ended September 30, 2012. Adjusted EBITDA for the three months ended September 30, 2013 is expected to be between $51.0 million and $61.0 million as compared with $88.9 million for the three months ended September 30, 2012.

The decrease in net income and Adjusted EBITDA for the three months ended September 30, 2013 from the three months ended September 30, 2012 is attributable to several factors. First, the prevailing price for NGLs at the Mont Belvieu hub, where we sell a significant amount of NGLs, slightly increased in the three months ended September 30, 2013 as compared with the three months ended September 30, 2012, while the prevailing price for NGLs at the Conway Hub, where we purchase a significant amount of NGLs, substantially increased, thereby decreasing our gross margin. Furthermore, due to lower prices for ethane, some of the processing plants within our Anadarko system were periodically rejecting ethane during the three months ended September 30, 2013, resulting in these molecules being sold as natural gas, which is currently selling at near historically low prices. In addition to the above factors, average daily gas volumes on our systems for the three months ended September 30, 2013 are expected to decrease by approximately 236,000 MMbtu/d, or 9.0%, as compared with the three months ended September 30, 2012 due to the anticipated loss of a large customer on our Anadarko system, and the decline in dry natural gas drilling on our systems. Management expects that volume growth on the Anadarko system from other, and potentially new, customers will replace the volume associated with this customer. We also recognized $32.5 million of unrealized non-cash, mark-to-market net losses for the three months ended September 30, 2013 as compared with $24.6 million of unrealized non-cash, mark-to-market net losses recognized for the three months ended September 30, 2012. In addition to the foregoing, depreciation expense is expected to be higher in the three months ended September 30, 2013 due to the placing into service after September 30, 2012 of additional assets, including the Ajax processing plant and related facilities.

During the three months ended September 30, 2013 we completed construction and commenced operations at our 150 MMcf/d Ajax processing plant, condensate stabilizer and related facilities in anticipation of expected volume growth within our Anadarko gathering system. While the Ajax plant is currently operational, we expect that the full potential benefits of the new plant will be realized in the near future when the Texas Express NGL mainline is completed and greater NGL takeaway capacity is available. The Texas Express NGL mainline is in process of being line-filled and is expected to be operational during the fourth quarter of 2013. We initiated construction activities at our Beckville plant and the related facilities in our East Texas system during the three months ended September 30, 2013, to accommodate the additional liquids-rich natural gas being developed within this geographical area in which our East Texas system operates.

 

We have included in the table below management’s preliminary estimates, based on the information and data currently available, of the expected range of Adjusted EBITDA for the three months ended September 30, 2013 as compared with Adjusted EBITDA for the three months ended September 30, 2012, in each case reconciled to net income for the respective period. The line items in the table for the three months ended September 30, 2013 are estimates and are subject to the qualifications set forth below.

 

		Three months ended September 30, 2013 Range of Expected Results								Three months ended September 30, 2012
		(unaudited; $ in millions)
		Low				High
Financial Data:
Net income (loss)		$	(17.9	)		$	(7.9	)		$	28.7
Add (deduct):
Derivative fair value net losses (gains)			32.5				32.5				24.6
Depreciation and amortization			35.8				35.8				34.3
Income tax expense			0.6				0.6				1.3
Adjusted EBITDA		$	51.0			$	61.0			$	88.9
Operating Statistics:
Total throughput (MMBtu/d)			2,360,000				2,440,000				2,627,000
NGL Production (Bpd)			87,000				91,000				98,528

The preliminary estimates have been prepared by, and are the responsibility of, Midcoast Energy Partners, L.P. management. These estimates should not be viewed as a substitute for full interim financial statements prepared in accordance with generally accepted accounting principles, or GAAP. Our consolidated financial statements and related notes as of and for the three months ended September 30, 2013 are not expected to be filed with the SEC until after this offering is completed. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to these preliminary estimates. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. We have prepared the preliminary financial estimates on a materially consistent basis with the financial data presented in “Selected Historical and Pro Forma Consolidated Financial and Operating Data” and in good faith based upon our internal reporting as of and for the three months ended September 30, 2013. These estimated ranges are preliminary and unaudited and are inherently uncertain and subject to change as we complete our financial results for the three months ended September 30, 2013. Given the timing of these estimates, we have not completed our customary quarterly close and review procedures as of and for the three months ended September 30, 2013, and there can be no assurance that our final results for this period will not differ from these estimates. However, our final results are not expected to differ materially from the preliminary financial estimates presented herein. Important factors that could cause actual results to differ from our preliminary estimates are set forth under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

Our Relationship with EEP and Enbridge

We believe one of our primary strengths is our affiliation with EEP and Enbridge. We were formed to be EEP’s primary vehicle for owning and growing its natural gas and NGL midstream business in the United States. EEP has expressed its intent to focus its efforts on its crude oil and liquid petroleum midstream business and intends for us to be a pure-play natural gas and NGL midstream partnership.

Following the completion of this offering, EEP will continue to own crude oil and liquid petroleum assets and a 61% non-controlling interest in Midcoast Operating. EEP will also retain a significant interest in us through its ownership of our general partner, a 58% limited partner interest in us and all of our incentive

 

distribution rights. Given EEP’s significant ownership interest in us following this offering and its intent to use us to own and grow its natural gas and NGL midstream business in the United States, we believe EEP will promote and support the successful execution of our business strategies and that EEP will be incentivized to offer us the opportunity to purchase additional interests in Midcoast Operating. However, EEP is under no obligation to offer to sell us additional interests in Midcoast Operating, and we are under no obligation to buy any such additional interests. EEP’s common units trade on the New York Stock Exchange, or NYSE, under the ticker symbol “EEP.” EEP is a Fortune 500 company and had a total market capitalization of $9.6 billion as of June 30, 2013.

The general partner of EEP is owned by Enbridge. Enbridge and its predecessors have been a transporter of energy since the late 1940s. Enbridge’s common stock trades on the NYSE in the United States and the Toronto Stock Exchange in Canada under the ticker symbol “ENB.” As of June 30, 2013, Enbridge had a total market capitalization of $37.0 billion. Through our affiliation with EEP and its affiliation with Enbridge, we expect to have access to a significant pool of management talent and technical expertise and strong commercial relationships throughout the energy industry. Enbridge employs over 10,000 people in the United States and Canada.

In connection with the closing of this offering, Midcoast Operating will enter into a financial support agreement with EEP pursuant to which, during the term of the agreement, EEP will provide letters of credit and guarantees in support of Midcoast Operating’s financial obligations under derivative agreements and natural gas and NGL purchase agreements. Midcoast Operating will also enter into a working capital credit facility, with EEP as the lender, with a borrowing capacity of $250.0 million. Additionally, we will enter into an intercorporate services agreement with EEP pursuant to which we will agree upon certain aspects of our relationship with EEP, including the provision by EEP or its affiliates to us of certain administrative services and employees, our agreement to reimburse EEP or its affiliates for the cost of such services and employees and certain other matters. We will also enter into an omnibus agreement with EEP, Enbridge and our general partner under which EEP will indemnify us for certain matters, including environmental, right-of-way and permit matters, and Enbridge will grant us a license to use the “Enbridge” logo and certain other trademarks and tradenames. Please read “Certain Relationships and Related Party Transactions.” While we believe our affiliation with EEP and Enbridge is a positive attribute, it can also be a source of conflicts. For example, neither EEP nor Enbridge is restricted in its ability to compete with us and, in certain instances, may decide to favor its own interests over ours. Please read “Conflicts of Interest and Duties.”

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. You should carefully consider the following risk factors, the risks described in “Risk Factors” and the other information in this prospectus before investing in our common units. Please also read “Forward-Looking Statements.”

 

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We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution, or any distribution, to our unitholders.

 

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Our financial performance could be adversely affected if our assets are used less. Any decrease in the volumes of natural gas or NGLs that we gather or transport or in the volumes of natural gas that we process and treat, or NGLs that we fractionate, could adversely affect our financial condition, results of operations and cash flow.

 

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Natural gas and liquid hydrocarbon prices are volatile, and a change in these prices in absolute terms, or an adverse change in the prices of natural gas and liquid hydrocarbons relative to one another, could adversely affect our total segment margin and cash flow and our ability to make cash distributions to our unitholders.

 

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Commodity price volatility and risks associated with our hedging activities could adversely affect our cash flow and our ability to make cash distributions to our unitholders.

 

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EEP owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations and has limited duties to us and our unitholders. EEP and our general partner have conflicts of interest with us and they may favor their own interests to the detriment of us and our other unitholders.

 

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Our partnership agreement replaces our general partner’s fiduciary duties to our limited partners with contractual standards governing its duties.

 

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There is no existing market for our Class A common units, and a trading market that will provide you with adequate liquidity may not develop. Following this offering, the market price of our Class A common units may fluctuate significantly, and you could lose all or part of your investment.

 

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Unitholders have very limited voting rights and even if they are dissatisfied they currently cannot remove our general partner without its consent.

 

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Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

 

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Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

The Transactions

We were formed in May 2013 by EEP to serve as EEP’s primary vehicle for owning and growing its natural gas and NGL midstream business in the United States. Based on the expected size of this offering, EEP has determined to initially contribute to us an aggregate 39% interest in Midcoast Operating. Accordingly, in connection with this offering, EEP will contribute to us a 38.999% limited partner interest in Midcoast Operating and a 100% interest in Midcoast OLP GP, L.L.C. (formerly known as Enbridge Midcoast Holdings, L.L.C.), the general partner of Midcoast Operating, which owns a 0.001% general partner interest in Midcoast Operating.

Additionally, at or prior to the closing of this offering, the following transactions will occur:

 

•

we will issue 4,110,056 Class A common units and 22,610,056 subordinated units to EEP, representing an aggregate 58% limited partner interest in us, and 922,859 general partner units, representing a 2% general partner interest in us, and all of our incentive distribution rights to our general partner;

 

•

we will issue 18,500,000 Class A common units to the public in this offering, representing a 40% limited partner interest in us;

 

•

we will distribute approximately $304.5 million of the net proceeds from the offering to EEP and will apply the remaining net proceeds as described in “Use of Proceeds”;

 

•

we and Midcoast Operating will enter into a new $850.0 million revolving credit facility;

 

•

we will borrow $323.4 million under our revolving credit facility to distribute to EEP in partial consideration of its contribution of assets to us;

 

•

we and Midcoast Operating will enter into an intercorporate services agreement with EEP;

 

•

Midcoast Operating will enter into a working capital credit facility, with EEP as the lender, with a borrowing capacity of $250.0 million;

 

•

Midcoast Operating will enter into a financial support agreement with EEP under which, during the term of the agreement, EEP will provide letters of credit and guarantees in support of Midcoast Operating’s financial obligations under derivative agreements and natural gas and NGL purchase agreements to which Midcoast Operating is a party; and

 

•

we will enter into an omnibus agreement with EEP, Enbridge and our general partner.

 

Organizational Structure After the Transactions

The following simplified diagram depicts our organizational structure after giving effect to the transactions described above under “—The Transactions,” assuming the underwriters’ option to purchase additional common units from us is not exercised.

 

 

After giving effect to the transactions described above under “—The Transactions,” assuming the underwriters’ option to purchase additional common units from us is not exercised, our units will be held as follows:

 

Public Class A common units			40	%
EEP-owned Class A common units			9	%
EEP-owned subordinated units			49	%
General partner units			2	%
Total			100	%

Management of Midcoast Energy Partners, L.P.

We are managed and operated by the board of directors and executive officers of Midcoast Holdings, L.L.C., our general partner. EEP is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the NYSE. Through a delegation of control agreement, EEP’s general partner has delegated to Enbridge Energy Management, L.L.C., or Enbridge Management, the authority to manage and control EEP’s business and affairs. Through its indirect ownership of Enbridge Management’s voting shares, Enbridge controls Enbridge Management and appoints all of its directors. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers of Enbridge Management and of EEP’s general partner. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of Midcoast Holdings, L.L.C.”

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, Midcoast Operating, which will conduct its operations through various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner is responsible for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by affiliates of EEP. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us. Please read “Management.”

Principal Executive Offices and Internet Address

Our principal executive offices are located at 1100 Louisiana Street, Suite 3300, Houston, Texas 77002, and our telephone number is (713) 821-2000. Following the completion of this offering, our website will be located at www.midcoastpartners.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Duties

Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is in the best interests of our partnership. However, because our general partner is a wholly owned subsidiary of EEP, the officers and directors of our general partner also have a duty to manage the business of our general partner in a manner that they believe is in the best interests of EEP. As a result of this relationship, conflicts of

 

interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including EEP, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of our common units, which in turn has an effect on whether our general partner receives incentive cash distributions. In addition, our general partner may determine to manage our business in a way that directly benefits EEP’s businesses, rather than indirectly benefitting EEP solely through its ownership interests in us. All of these actions are permitted under our partnership agreement and will not be a breach of any duty (fiduciary or otherwise) of our general partner. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, please read “Conflicts of Interest and Duties.”

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership, provided that partnership agreements may not eliminate the implied contractual covenant of good faith and fair dealing. This implied covenant is a judicial doctrine utilized by Delaware courts in connection with interpreting ambiguities in partnership agreements and other contracts, and does not form the basis of any separate or independent fiduciary duty in addition to the express contractual duties set forth in our partnership agreement. Under the implied contractual covenant of good faith and fair dealing, a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action.

As permitted by Delaware law, our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including EEP and Enbridge, are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and pursuant to the terms of our partnership agreement each holder of common units consents to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Duties—Duties of the General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the replacement of those duties with contractual standards under our partnership agreement and certain legal rights and remedies available to holders of our common units and subordinated units. For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

THE OFFERING

 

Common units offered to the public

18,500,000 Class A common units.

 

21,275,000 Class A common units if the underwriters exercise in full their option to purchase additional common units from us.

 

Units outstanding after this offering

22,610,056 Class A common units and 22,610,056 subordinated units, each representing a 49.0% limited partner interest in us. The general partner will own 922,859 general partner units, representing a 2% general partner interest in us.

 

Use of proceeds

We expect to receive net proceeds of approximately $307.9 million from the sale of Class A common units offered by this prospectus based on the initial public offering price of $18.00 per Class A common unit, after deducting underwriting discounts, the structuring fee and estimated offering expenses. We intend to use the net proceeds as follows:

 

•

approximately $304.5 million will be distributed to EEP; and

 

•

$3.4 million will be used to pay revolving credit facility origination and commitment fees.

 

At the closing of this offering, we will borrow $323.4 million under our revolving credit facility, all of which will be used to fund an additional cash distribution to EEP. The cash distributions to EEP from the proceeds of this offering and the borrowing under our revolving credit facility will be made in consideration of EEP’s contribution of assets to us and to reimburse EEP for certain capital expenditures incurred with respect to those assets. We are funding these distributions through a combination of net proceeds from this offering and borrowings under our revolving credit facility in order to optimize our capital structure.

 

If the underwriters exercise in full their option to purchase additional Class A common units from us, we expect to receive additional net proceeds of approximately $46.8 million. The net proceeds from any exercise by the underwriters of their option to purchase additional Class A common units from us will be used to redeem from EEP a number of Class A common units equal to the number of Class A common units issued upon exercise of the option at a price per unit equal to the net proceeds per unit in this offering before expenses but after deducting underwriting discounts and the structuring fee. Please read “Underwriting.”

 

Cash distributions

We intend to make a minimum quarterly distribution of $0.3125 per unit ($1.25 per unit on an annualized basis) to the extent we have sufficient cash at the end of each quarter after establishment of cash

 

reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash.” Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”

 

For the quarter in which this offering closes, we will make a prorated distribution on our units covering the period from the completion of this offering through December 31, 2013 based on the actual length of that period.

 

In general, we will pay any cash distributions we make each quarter in the following manner:

 

•

first, 98% to the holders of our common units and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $0.3125 plus any arrearages from prior quarters;

 

•

second, 98% to the holders of our subordinated units and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.3125; and

 

•

third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.359375.

 

If cash distributions to our unitholders exceed $0.359375 per unit in any quarter, our general partner will receive, in addition to distributions on its 2% general partner interest, increasing percentages, up to 48%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

If we do not have sufficient available cash at the end of each quarter, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

 

Pro forma distributable cash flow that was generated during the year ended December 31, 2012 and the twelve months ended June 30, 2013, was approximately $86.5 million and $75.0 million, respectively. The amount of distributable cash flow we must generate to support the payment of the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering and the corresponding distributions on our general partner’s 2% interest is approximately

 

$57.7 million (or an average of approximately $14.4 million per quarter). As a result, for the year ended December 31, 2012 and the twelve months ended June 30, 2013, on a pro forma basis, we would have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% interest during those periods. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2012 and the Twelve Months Ended June 30, 2013.”

 

We believe that, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2014,” we will generate sufficient distributable cash flow to support the payment of the aggregate minimum quarterly distribution of $57.7 million on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% interest for the twelve months ending September 30, 2014. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Risk Factors” and “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

EEP will initially own all of our subordinated units. The principal differences between our Class A common units and subordinated units are that:

 

•

for any quarter during the subordination period, holders of the subordinated units will not be entitled to receive any distribution until holders of the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters during the subordination period. Subordinated units will not accrue arrearages; and

 

•

holders of Class A common units will receive a special allocation of gross income for each taxable year during which subordinated units are outstanding that would otherwise be allocable to holders of subordinated units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period” and “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

 

Conversion of subordinated units

The subordination period will begin on the closing date of this offering and will extend until the first business day following the date

 

that we have earned and paid distributions of at least (1) $1.25 (the annualized minimum quarterly distribution) on each of the outstanding common units, subordinated units and general partner units for each of three consecutive, non-overlapping four quarter periods ending on or after December 31, 2016, or (2) $1.875 (150% of the annualized minimum quarterly distribution) on each of the outstanding common units, subordinated units and general partner units and the related distributions on the incentive distribution rights for any four-quarter period ending on or after December 31, 2014, in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time.

 

The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of our subordinated units or their affiliates are voted in favor of that removal.

 

When the subordination period ends, the outstanding subordinated units will convert into a new class of common units, which we refer to as Class B common units, on a one-for-one basis, and all Class A common units will no longer be entitled to arrearages. The relative rights and preferences of the Class A common units and Class B common units are identical in all respects, except for a special allocation of gross income to the holders of Class A common units for each taxable year during which Class B common units are outstanding that would otherwise be allocable to holders of Class B common units. This special allocation also applies to any taxable year during which subordinated units are outstanding. Subject to certain conditions related to fungibility, the Class B common units will be convertible at the option of the holders into Class A common units at any time. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period” and “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units, including units senior to the common units, without the approval of our unitholders. Holders of our Class A common units, Class B common units and subordinated units will not have preemptive or participation rights to purchase their pro rata share of any additional units issued. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed

 

except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, EEP will own 59.1% of our total outstanding Class A common units and subordinated units on an aggregate basis (or 53.0% of our total outstanding Class A common units and subordinated units on an aggregate basis if the underwriters exercise their option to purchase additional common units in full). This will initially give EEP the ability to prevent the removal of our general partner. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the then-issued and outstanding limited partner interests of any class, our general partner has the right, but not the obligation, to purchase all of the limited partner interests of such class held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of our common units over the 20 trading days preceding the date that is three business days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read “Our Partnership Agreement—Limited Call Right.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2016, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 20.0% or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.25 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.25 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. For each taxable year during which the subordinated units or Class B common units are outstanding, a specified amount of gross income, which would otherwise be allocated to the holders of our subordinated units or Class B common units, will be specially allocated to the holders of the Class A common units. However, the amount of the special allocation will not exceed the amount that would result in a purchaser of Class A common units in this offering being allocated an amount of federal taxable income for any year that exceeds 20% of the cash distributed with respect to such year. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” for the basis of this estimate and a discussion of this special gross income allocation.

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Federal Income Tax Consequences.”

 

Directed unit program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the Class A common units offered by this prospectus for sale to some of the directors, officers, employees, business associates and related persons of our general partner and its affiliates. If these persons purchase reserved Class A common units, the purchased units will be subject to the lock-up restrictions described in “Underwriting—No Sale of Similar Securities” and the purchased units will reduce the number of Class A common units available for sale to the general public. Any reserved Class A common units that are not so purchased will be offered by the underwriters to the general public on the same terms as the other Class A common units offered by this prospectus. Please read “Underwriting—Directed Unit Program.”

 

Exchange listing

We have been approved to list our Class A common units on the New York Stock Exchange under the symbol “MEP.”

 

SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL

AND OPERATING DATA

The following table shows summary historical consolidated financial and operating data of Midcoast Operating, L.P., our predecessor for accounting purposes, or our Predecessor, and summary pro forma consolidated financial data of Midcoast Energy Partners, L.P. for the periods and as of the dates indicated. The following summary historical consolidated financial and operating data of our Predecessor consists of all of the assets and operations of Midcoast Operating on a 100% basis. In connection with the closing of this offering, EEP will contribute to us a 39% controlling interest in Midcoast Operating. However, as required by U.S. GAAP, we will continue to consolidate 100% of the assets and operations of Midcoast Operating in our financial statements.

The summary historical consolidated financial data of our Predecessor as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 are derived from the audited consolidated financial statements of our Predecessor appearing elsewhere in this prospectus. The summary historical interim consolidated financial data of our Predecessor as of June 30, 2013 and for the six months ended June 30, 2013 and 2012 are derived from the unaudited interim consolidated financial statements of our Predecessor appearing elsewhere in this prospectus. The following tables should be read together with, and are qualified in their entirety by reference to, the historical and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The summary pro forma consolidated financial data presented in the following table for the year ended December 31, 2012 and as of and for the six months ended June 30, 2013 are derived from the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma consolidated statement of financial position assumes the offering and the related transactions occurred as of June 30, 2013, and the unaudited pro forma consolidated statements of operations for the year ended December 31, 2012 and the six months ended June 30, 2013 assumes the offering and the related transactions occurred as of January 1, 2012.

The unaudited pro forma consolidated financial statements give effect to the following:

 

•

EEP’s contribution to us of a 38.999% limited partner interest in Midcoast Operating and a 100% member interest in Midcoast OLP GP, L.L.C., which owns a 0.001% general partner interest in Midcoast Operating;

 

•

our issuance of 4,110,056 Class A common units and 22,610,056 subordinated units, representing an aggregate 58% limited partner interest in us, to EEP;

 

•

our issuance of 922,859 general partner units, representing a 2% general partner interest in us, and all of our incentive distribution rights to our general partner;

 

•

our issuance of 18,500,000 Class A common units, representing a 40% limited partner interest in us, to the public in connection with this offering, and our receipt of $307.9 million in net proceeds from this offering;

 

•

our entry into a new $850.0 million revolving credit facility and the borrowing of $323.4 million thereunder;

 

•

the application of the proceeds of this offering, together with the proceeds from the borrowings under our revolving credit facility, as described in “Use of Proceeds”; and

 

•

our entry into an intercorporate services agreement with EEP, which includes an annual reduction of $25.0 million in amounts payable for general and administrative expenses that otherwise would have been fully allocable to Midcoast Operating by EEP and its affiliates.

 

The unaudited pro forma consolidated financial statements do not give effect to an estimated $4.0 million of incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership. In addition, the unaudited pro forma consolidated financial statements do not give effect to Midcoast Operating’s entry into a financial support agreement with EEP under which, during the term of the agreement, EEP will provide letters of credit and guarantees in support of Midcoast Operating’s obligations under derivative agreements and natural gas and NGL purchase agreements to which Midcoast Operating is a party. Under the financial support agreement, EEP’s support of Midcoast Operating’s obligations will terminate as of the earlier to occur of (1) the fourth anniversary of the closing of this offering and (2) the date on which EEP no longer owns at least a 20% limited partner interest in Midcoast Operating. The annual costs Midcoast Operating will incur under the financial support agreement, which we estimate will initially range from approximately $4.0 million to $5.0 million, will be based on the cumulative average amount of letters of credit and guarantees that EEP will provide on Midcoast Operating’s behalf multiplied by a 2.5% annual fee. Based on our 39% controlling interest in Midcoast Operating, we estimate that our proportionate share of these annual expenses will initially range from approximately $1.6 million to $2.0 million. For more information regarding our financial support agreement and the calculation of this annual fee, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Financial Support Agreement.”

The following table presents the non-GAAP financial measure of Adjusted EBITDA, which we use in evaluating the performance of our business. For a definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, please read “Selected Historical and Pro Forma Consolidated Financial and Operating Data—Non-GAAP Financial Measures.”

 

		Midcoast Operating, L.P. Predecessor Historical																				Midcoast Energy Partners, L.P. Pro Forma
		Year ended December 31,												Six months ended June 30,								Year ended December 31,				Six months ended June  30,
		2012				2011				2010				2013				2012				2012				2013
		(in millions, except per unit data)
Income Statement Data(1):
Operating revenues		$	5,357.9			$	7,828.2			$	6,654.3			$	2,669.4			$	2,696.6			$	5,357.9			$	2,669.4
Operating expenses			5,186.5				7,608.9				6,497.3				2,602.1				2,582.2				5,186.5				2,602.1
Operating income			171.4				219.3				157.0				67.3				114.4				171.4				67.3
Interest expense			—				—				—				—				—				10.7				5.4
Other income (expense)			(0.1	)			2.8				3.0				0.2				(0.1	)			(0.1	)			0.2
Income tax expense			3.8				2.9				2.6				8.3				0.8				3.8				8.3
Net income		$	167.5			$	219.2			$	157.4			$	59.2			$	113.5			$	156.8			$	53.8
Net income attributable to Midcoast Energy Partners, L.P																						$	54.6			$	17.7
General partner interest in net income attributable to Midcoast Energy Partners, L.P.																						$	1.0			$	0.3
Limited partner interest in net income attributable to Midcoast Energy Partners, L.P.:
Class A common units																						$	26.8			$	8.7
Subordinated units																						$	26.8			$	8.7
Net income per limited partner unit (basic and diluted):
Class A common units																						$	1.18			$	0.38
Subordinated units																						$	1.18			$	0.38
Financial Position Data (at period end)(1):
Property, plant and equipment, net		$	3,963.0			$	3,651.3			$	3,320.6			$	4,020.3											$	4,020.3
Total assets			5,667.4				5,134.6				4,802.6				5,557.4												5,560.8
Long-term debt(2)			—				—				—				—												323.4

 

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