**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

| **ý****        QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                           |
| **For the quarterly period ended March 31, 2004**                                                                                                         |
|                                                                                                                                                           |
| **OR**                                                                                                                                                         |
|                                                                                                                                                           |
| **o****        TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**            |
|                                                                                                                                                           |
| **For the transition period from            to          ** |
|                                                                                                                                                           |
| **Commission file number 1-10934**                                                                                                                             |

 

**ENBRIDGE ENERGY PARTNERS, L.P.**(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **39-1715850**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |
| **1100  Louisiana  Suite 3300  Houston, TX  77002**        |
| (Address of principal executive offices and zip code)           |
|                                                            |
| **(713) 821-2000**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý   No o

 

Indicate by checkmark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes ý   No o

 

The Registrant had 40,616,134Class A common units outstanding as of May 4, 2004.

 

 

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**TABLE OF CONTENTS**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |
| **Item 1.**                       | Financial Statements |   |
|                              | Consolidated Statements of Income for the  three month periods ended March 31, 2004 and 2003 |   |
|                              |   |   |
|                              | Consolidated Statements of Comprehensive  Income for the three month periods ended March 31, 2004 and 2003 |   |
|                              |   |   |
|                              | Consolidated Statements of Cash Flows for  the three month periods ended March 31, 2004 and 2003 |   |
|                              |   |   |
|                              | Consolidated Statements of Financial  Position as of March 31, 2004 and December 31, 2003 |   |
|                              |   |   |
|                              | Notes to Consolidated Financial Statements |   |
|                              |   |   |
| **Item 2.**                       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                              |   |   |
| **Item 3.**                       | Quantitative and Qualitative Disclosures  About Market Risk |   |
|                              |   |   |
| **Item 4.**                       | Controls and Procedures |   |
|                              |   |   |
| **PART II. OTHER INFORMATION**    |   |
|                              |   |   |
| **Item 1.**                       | **Legal Proceedings** |   |
|                              |   |   |
| **Item 6.**                       | Exhibits and Reports on Form 8-K |   |
|                              |   |   |
| **Signatures**                    |   |   |
|                              |   |   |
| **Exhibits**                      |   |   |

 

*This Quarterly Report on Form 10-Q contains forward-lookingstatements. These forward-looking statements are identified as any statementthat does not relate strictly to historical or current facts. They use wordssuch as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “forecast,”“intend,” “may,” “plan,” “position,” “projection,” “strategy,” “could,”“would,” or “will” or the negative of those terms or other variations of themor by comparable terminology. In particular, statements, expressed or implied,concerning future actions, conditions or events or future operating results orthe ability to generate sales, income or cash flow or to make distributions areforward-looking statements. Forward-looking statements are not guarantees ofperformance. They involve risks, uncertainties and assumptions. Future actions,conditions or events and future results of operations may differ materiallyfrom those expressed in these forward-looking statements. Many of the factorsthat will determine these results are beyond the ability of Enbridge EnergyPartners, L.P. (the “Partnership”) to control or predict.  For additional discussion of risks,uncertainties and assumptions, see the Partnership’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2003.*

 

2

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***PART I - FINANCIAL INFORMATION***

 

***ITEM 1.****** FINANCIAL STATEMENTS***

 

***ENBRIDGE ENERGYPARTNERS, L.P.CONSOLIDATED STATEMENTS OF INCOME***

 
|                                       |   | **Three  months ended March 31,**                      |   |
|--------------------------------------------|--------|--------------------------------------------------------|--------|
|                                       |   | **2004**                                               |   | **2003** |   |
|                                       |   | **(unaudited;  in millions, except per unit amounts)** |   |
|                                       |   |                                                   |   |   |   |
| Operating revenue                          |   | $                                                      | 982.5  |   | $ | 896.1 |   |
|                                       |   |                                                   |   |   |   |
| Operating expenses                         |   |                                                   |   |   |   |
| Cost of natural gas                        |   | 821.8                                                  |   | 753.5 |   |
| Operating and administrative               |   | 62.3                                                   |   | 52.6 |   |
| Power                                      |   | 17.2                                                   |   | 12.7 |   |
| Depreciation and amortization              |   | 28.6                                                   |   | 23.4 |   |
|                                       |   |                                                   |   |   |   |
|                                       |   | 929.9                                                  |   | 842.2 |   |
|                                       |   |                                                   |   |   |   |
| Operating income                           |   | 52.6                                                   |   | 53.9 |   |
|                                       |   |                                                   |   |   |   |
| Interest expense                           |   | (21.6                                                  | )      | (21.3 | ) |
| Other income (Note 8)                      |   | 2.1                                                    |   | — |   |
|                                       |   |                                                   |   |   |   |
| Net income                                 |   | $                                                      | 33.1   |   | $ | 32.6 |   |
|                                       |   |                                                   |   |   |   |
| Net income allocable to common and i-units |   | $                                                      | 27.6   |   | $ | 27.7 |   |
|                                       |   |                                                   |   |   |   |
| Net income per common and i-unit (Note 3)  |   | $                                                      | 0.50   |   | $ | 0.62 |   |
|                                       |   |                                                   |   |   |   |
| Weighted average units outstanding         |   | 54.7                                                   |   | 44.6 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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***ENBRIDGEENERGY PARTNERS, L.P****.**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME***

 
|                                                 |   | **Three  months ended March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|
|                                                 |   | **2004**                          |   | **2003** |   |
|                                                 |   | **(unaudited;  in millions)**     |   |
|                                                 |   |                              |   |
| Net income                                           |   | $                                 | 33.1   |   | $ | 32.6 |   |
|                                                 |   |                              |   |   |   |
| Unrealized loss on derivative financial  instruments |   | (19.0                             | )      | (21.7 | ) |
|                                                 |   |                              |   |   |   |
| Comprehensive income                                 |   | $                                 | 14.1   |   | $ | 10.9 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

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***ENBRIDGE ENERGYPARTNERS, L.P.CONSOLIDATED STATEMENTS OF CASH FLOWS***

 
|                                                                               |   | **Three  months ended March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2004**                          |   | **2003** |   |
|                                                                               |   | **(unaudited;in  millions)**      |   |
| Cash provided by operating activities                                              |   |                              |   |   |   |
| Net income                                                                         |   | $                                 | 33.1   |   | $ | 32.6 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                      |   | 28.6                              |   | 23.4 |   |
| Other                                                                              |   | (2.0                              | )      | 3.7 |   |
| Changes in operating assets and  liabilities:                                      |   |                              |   |   |   |
| Receivables, trade and other                                                       |   | 15.2                              |   | (12.6 | ) |
| Due from General Partner and affiliate                                             |   | 6.3                               |   | (8.3 | ) |
| Accrued gas receivables                                                            |   | (24.7                             | )      | (131.8 | ) |
| Other current and noncurrent assets                                                |   | 17.6                              |   | (1.3 | ) |
| Due to General Partner and affiliates                                              |   | 5.6                               |   | (12.5 | ) |
| Accounts payable and other                                                         |   | 13.4                              |   | 6.8 |   |
| Accrued gas purchases                                                              |   | 18.6                              |   | 164.9 |   |
| Interest payable                                                                   |   | 19.8                              |   | 12.2 |   |
| Property and other taxes payable                                                   |   | 2.1                               |   | 1.3 |   |
|                                                                               |   |                              |   |   |   |
| Net cash provided by operating activities                                          |   | 133.6                             |   | 78.4 |   |
|                                                                               |   |                              |   |   |   |
| Cash used in investing activities                                                  |   |                              |   |   |   |
| Additions to property, plant and equipment                                         |   | (21.6                             | )      | (18.3 | ) |
| Changes in construction payables                                                   |   | 1.1                               |   | (5.0 | ) |
| Asset acquisitions, net of cash acquired  (Note 2)                                 |   | (130.0                            | )      | — |   |
|                                                                               |   |                              |   |   |   |
| Net cash used in investing activities                                              |   | (150.5                            | )      | (23.3 | ) |
|                                                                               |   |                              |   |   |   |
| Cash used in financing activities                                                  |   |                              |   |   |   |
| Proceeds from unit issuances, net (Note 7)                                         |   | 22.0                              |   | — |   |
| Distributions to partners (Note 6)                                                 |   | (46.8                             | )      | (37.2 | ) |
| Borrowings under debt agreements                                                   |   | 583.3                             |   | 897.0 |   |
| Repayments of debt                                                                 |   | (530.0                            | )      | (909.0 | ) |
| Borrowings from General Partner and  affiliates                                    |   | —                            |   | 48.2 |   |
| Repayments to the General Partner and affiliates                                   |   | —                            |   | (42.7 | ) |
| Other                                                                              |   | —                            |   | (1.2 | ) |
|                                                                               |   |                              |   |   |   |
| Net cash provided by (used in) financing  activities                               |   | 28.5                              |   | (44.9 | ) |
|                                                                               |   |                              |   |   |   |
| Net increase in cash and cash equivalents                                          |   | 11.6                              |   | 10.2 |   |
|                                                                               |   |                              |   |   |   |
| Cash and cash equivalents at beginning of  period                                  |   | 64.4                              |   | 60.3 |   |
|                                                                               |   |                              |   |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                 | 76.0   |   | $ | 70.5 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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***ENBRIDGE ENERGYPARTNERS, L.P.******CONSOLIDATED STATEMENTS OF FINANCIAL POSITION***

 
|                                                                                                |   | **March 31,  2004**           |    | **December  31, 2003** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|------------------------|--------|
|                                                                                                |   | **(unaudited;  in millions)** |    |
| ***ASSETS***                                                                                        |   |                          |    |                   |   |
|                                                                                                |   |                          |    |                   |   |
| Current assets                                                                                      |   |                          |    |                   |   |
| Cash and cash equivalents (Note 4)                                                                  |   | $                             | 76.0    |                   | $      | 64.4 |   |
| Receivables, trade and other, net of  allowance for doubtful accounts of $3.5 in 2004; $2.9 in 2003 |   | 31.1                          |    | 46.3                   |   |
| Due from General Partner and affiliates                                                             |   | 0.9                           |    | 7.2                    |   |
| Accrued gas receivables                                                                             |   | 274.4                         |    | 249.7                  |   |
| Other current assets                                                                                |   | 23.9                          |    | 41.2                   |   |
|                                                                                                |   | 406.3                         |    | 408.8                  |   |
|                                                                                                |   |                          |    |                   |   |
| Property, plant and equipment, net                                                                  |   | 2,590.0                       |    | 2,465.6                |   |
| Other assets, net                                                                                   |   | 29.4                          |    | 22.9                   |   |
| Goodwill                                                                                            |   | 257.3                         |    | 257.3                  |   |
| Intangibles, net                                                                                    |   | 76.4                          |    | 77.2                   |   |
|                                                                                                |   | $                             | 3,359.4 |                   | $      | 3,231.8 |   |
|                                                                                                |   |                          |    |                   |   |
| ***LIABILITIES AND  PARTNERS’ CAPITAL***                                                       |   |                          |    |                   |   |
|                                                                                                |   |                          |    |                   |   |
| Current liabilities                                                                                 |   |                          |    |                   |   |
| Due to General Partner and affiliates                                                               |   | $                             | 7.4     |                   | $      | 1.8 |   |
| Accounts payable and other (Note 4)                                                                 |   | 85.9                          |    | 85.1                   |   |
| Accrued gas purchases                                                                               |   | 249.2                         |    | 230.6                  |   |
| Interest payable                                                                                    |   | 24.4                          |    | 6.8                    |   |
| Property and other taxes payable                                                                    |   | 20.6                          |    | 18.3                   |   |
| Current maturities and short-term debt  (Note 5)                                                    |   | 81.0                          |    | 246.0                  |   |
|                                                                                                |   | 468.5                         |    | 588.6                  |   |
|                                                                                                |   |                          |    |                   |   |
| Long-term debt (Note 5)                                                                             |   | 1,375.7                       |    | 1,155.8                |   |
| Loans from General Partner and affiliates                                                           |   | 135.3                         |    | 133.1                  |   |
| Commitments, contingencies and  environmental liabilities  (Note 8)                            |   | 5.8                           |    | 7.9                    |   |
| Deferred credits                                                                                    |   | 71.5                          |    | 33.1                   |   |
|                                                                                                |   | 2,056.8                       |    | 1,918.5                |   |
|                                                                                                |   |                          |    |                   |   |
| Partners’ capital                                                                              |   |                          |    |                   |   |
| Class A common units (Units issued –  40,616,134 in 2004 and 40,166,134 in 2003)               |   | 917.4                         |    | 914.9                  |   |
| Class B common units (Units issued –  3,912,750 in 2004 and 2003)                              |   | 63.7                          |    | 64.2                   |   |
| i-units (Units issued – 10,251,168 in 2004  and 10,062,170 in 2003)                            |   | 376.7                         |    | 370.7                  |   |
| General Partner                                                                                     |   | 27.8                          |    | 27.5                   |   |
| Accumulated other comprehensive loss                                                                |   | (83.0                         | )       | (64.0                  | )      |
|                                                                                                |   | 1,302.6                       |    | 1,313.3                |   |
|                                                                                                |   | $                             | 3,359.4 |                   | $      | 3,231.8 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

6

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**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS****(unaudited)**

 

1.**               BASISOF PRESENTATION**

 

The accompanying unaudited interim consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim consolidated financial informationand with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete consolidated financial statements.In the opinion of management, they contain all adjustments, consisting only ofnormal recurring adjustments, which management considers necessary to presentfairly the financial position as of March 31, 2004 and December 31, 2003;the results of operations for the three month periods ended March 31, 2004 and2003; and cash flows for the three month periods ended March 31, 2004 and2003.  The results of operations for thethree months ended March 31, 2004 should not be taken as indicative of theresults to be expected for the full year, due to seasonality of portions of thenatural gas business and maintenance activities.  The interim consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto ofEnbridge Energy Partners, L.P. (the “Partnership”), presented in thePartnership’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003.

 

*2.*               **ACQUISITIONS**

 

***Mid-ContinentSystem***

 

On December 22, 2003, the Partnership entered into a definitiveagreement to acquire crude oil pipeline and storage assets for $116.9 million,including transaction costs of $2.0 million. The asset purchase closed on March 1, 2004 and the results of operationsare included in the Partnership as of this date.  The assets acquired serve refineries in the U.S. Mid-Continentfrom Cushing, Oklahoma and include:

 

*•*                  The 433-mile Ozark pipelinefrom Cushing to Wood River, Illinois;

*•*                  A 1.2 million barrelstorage terminal located in El Dorado, Kansas;

*•*                  The 47-mile West Tulsapipeline in Oklahoma; and

*•*                  A storage terminal atCushing, with 8.3 million barrels of storage capacity.

 

These systems were acquired to provide cash flows primarily from tollor fee-based revenues from a combination of regulated assets and contractedunregulated assets. The assets and results of operations are included in thePartnership’s Liquids Transportation segment.

 

The purchase price and the allocation to assets acquired andliabilities assumed was as follows:

 
|                                                               |   | **(in  millions)** |   |
|--------------------------------------------------------------------|--------|--------------------|--------|
| Purchase Price:                                                    |   |               |   |
| Cash paid, including transaction costs                             |   | $                  | 116.9  |   |
|                                                               |   |               |   |
| Allocation of purchase price:                                      |   |               |   |
| Property, plant and equipment, including  construction in progress |   | 117.5              |   |
| Current assets                                                     |   | $                  | 0.1    |   |
| Current liabilities                                                |   | (0.2               | )      |
| Environmental liabilities                                          |   | (0.5               | )      |
| Total                                                              |   | $                  | 116.9  |   |

 

7

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**Palo Duro System**

 

On March 1, 2004, the Partnership purchased natural gas transmissionand gathering pipeline assets for $13.1 million.  The assets, referred to as the “Palo Duro” system, are located inTexas between the Partnership’s existing Anadarko system and the recentlyacquired North Texas system, and are expected to increase natural gas deliveryflexibility to the Partnership’s customers. The assets purchased include approximately 400 miles of natural gastransmission and gathering pipelines, together with 5,200 horsepower ofcompression.  The Palo Duro system’sresults of operations are included in the Natural Gas Transportation segmentfrom the date of acquisition.

 

*3.*               **NET INCOME PER COMMON AND i-UNIT**

 

Net income per common and i-unit is computed by dividing net income,after deduction of Enbridge Energy Company, Inc’s. (the “General Partner”)allocation, by the weighted average number of Class A and Class B common unitsand i-units outstanding.  The GeneralPartner’s allocation is equal to an amount based upon its general partnerinterest, adjusted to reflect an amount equal to incentive distributions and anamount required to reflect depreciation on the General Partner’s historicalcost basis for assets contributed on formation of the Partnership.  There are no dilutive securities.  Net income per common and i-unit wasdetermined as follows:

 
|                                                                   |   | **Three  months ended March 31,**           |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                   |   | **2004**                                    |   | **2003** |   |
|                                                                   |   | **(in  millions, except per unit amounts)** |   |
|                                                                   |   |                                        |   |   |   |
| Net income                                                             |   | $                                           | 33.1   |   | $ | 32.6 |   |
|                                                                   |   |                                        |   |   |   |
| Net income allocated to General Partner                                |   | (0.7                                        | )      | (0.7 | ) |
| Incentive distributions to General Partner                             |   | (4.7                                        | )      | (4.1 | ) |
| Historical cost depreciation adjustments  allocated to General Partner |   | (0.1                                        | )      | (0.1 | ) |
|                                                                   |   | (5.5                                        | )      | (4.9 | ) |
|                                                                   |   |                                        |   |   |   |
| Net income allocable to common and i-units                             |   | $                                           | 27.6   |   | $ | 27.7 |   |
|                                                                   |   |                                        |   |   |   |
| Weighted average units outstanding                                     |   | 54.7                                        |   | 44.6 |   |
|                                                                   |   |                                        |   |   |   |
| Net income per common and i-unit                                       |   | $                                           | 0.50   |   | $ | 0.62 |   |

 

4.               **CASH AND CASH EQUIVALENTS**

 

The Partnership extinguishes liabilities when a creditor has relievedthe Partnership of the obligation, which occurs when the Partnership’sfinancial institution honors a check that the creditor has presented forpayment.  As such, included in AccountsPayable and other are obligations for which the Partnership has issued checkpayments that have not yet been presented to the financial institution ofapproximately $13.4 million at March 31, 2004 and $11.9 million at December 31,2003.

 

8

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5.**               DEBT**

* *

On January 9, 2004, the Partnership issued $200.0 million in aggregateprincipal amount of its 4.0% Senior Notes due 2009.  The Partnership used the proceeds of approximately $198.3million, net of expenses of approximately $1.6 million, to repay a portion ofits outstanding debt under bank credit facilities.  The Partnership recorded a discount of $0.1 million in connectionwith the issuance of the Senior Notes.

 

*6.*               **DISTRIBUTIONS TO PARTNERS**

 

On January 22, 2004, Enbridge Energy Managment, L.L.C.’s("Enbridge Management") Board of Directors declared a distributionpayable on February 13, 2004, to unitholders of record as of February 2, 2004,of its available cash of $55.8 million at December 31, 2003, or $0.925 percommon unit.  Of this distribution, $9.3million was distributed in i-units to i-unit holders and $0.2 million wasretained from the General Partner in respect of this i-unit distribution.  Due to the exercise of the over-allotmentoption on January 2, 2004, 450,000 Class A common units were outstanding at February13, 2004, thus resulting in an additional $0.5 million distribution paid to theClass A common unit holders.

 

*7.*              **EQUITY UNIT ISSUANCE**

 

On January 2, 2004, the Partnership issued an additional 450,000 ClassA common units pursuant to the exercise of the over-allotment option as part ofthe December 2003 Class A common unit issuance, resulting in additionalproceeds to the Partnership, net of underwriters’ fees and discounts,commissions and issuance expense, of approximately $21.6 million.  In addition to the proceeds generated fromthe unit issuance, the General Partner contributed $0.4 million to thePartnership to maintain its 2% general partner interest in the Partnership.

 

*8.*               **COMMITMENTS,CONTINGENCIES AND ENVIRONMENTAL LIABILITIES**

 

In March 2004, the Partnership reduced its long-term environmentalliabilities by $2.0 million related to certain of its Gathering and Processingassets, that were originally recorded upon acquisition of these assets.  During the time that these assets have beenowned by the Partnership, since October 2002, management has completed a reviewof the affected sites and determined that suspected contamination is lesssignificant than originally estimated. This assessment was based upon information gathered during the ownershipperiod, existing technology, presently enacted laws and regulations and priorexperience in remediating contaminated sites for similar assets.

 

9.               **SEGMENT INFORMATION**

 

The Partnership’s business is divided into operating segments, definedas components of the enterprise about which financial information is availableand evaluated regularly by the Partnership in deciding how to allocateresources to an individual segment and in assessing performance of the segment.

 

9

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The following tables present certain financial information relating tothe Partnership’s business segments (in millions):

 
|                                           |   | **As of and  for the three months ended March 31, 2004** |    |
|------------------------------------------------|--------|----------------------------------------------------------|---------|
|                                           |   | **Liquids  Transportation**                              |    | **Gathering  and Processing** |   | **Natural  Gas Transportation** |   | **Marketing** |   | **Corporate** |   | **Total** |   |
| Total revenue                                  |   | $                                                        | 91.7    |   | $ | 790.8 |   | $ | 31.0 |   | $ | 596.9 |   | $ | — |   | $ | 1,510.4 |   |
| Less:   Intersegment revenue              |   | —                                                   |    | 196.9 |   | 1.2 |   | 329.8 |   | — |   | 527.9 |   |
| Operating revenue                              |   | 91.7                                                     |    | 593.9 |   | 29.8 |   | 267.1 |   | — |   | 982.5 |   |
|                                           |   |                                                     |    |   |   |   |   |   |   |   |   |   |   |
| Cost of natural gas                            |   | —                                                   |    | 541.0 |   | 16.7 |   | 264.1 |   | — |   | 821.8 |   |
| Operating and administrative                   |   | 27.8                                                     |    | 27.4 |   | 5.0 |   | 0.8 |   | 1.3 |   | 62.3 |   |
| Power                                          |   | 17.2                                                     |    | — |   | — |   | — |   | — |   | 17.2 |   |
| Depreciation and amortization                  |   | 16.1                                                     |    | 8.9 |   | 3.6 |   | — |   | — |   | 28.6 |   |
| Operating income                               |   | 30.6                                                     |    | 16.6 |   | 4.5 |   | 2.2 |   | (1.3 | ) | 52.6 |   |
| Interest expense                               |   | —                                                   |    | — |   | — |   | — |   | (21.6 | ) | (21.6 | ) |
| Other income                                   |   | —                                                   |    | — |   | — |   | — |   | 2.1 |   | 2.1 |   |
| Net income                                     |   | $                                                        | 30.6    |   | $ | 16.6 |   | $ | 4.5 |   | $ | 2.2 |   | $ | (20.8 | ) | $ | 33.1 |   |
|                                           |   |                                                     |    |   |   |   |   |   |   |   |   |   |   |
| Total assets                                   |   | $                                                        | 1,622.6 |   | $ | 1,065.6 |   | $ | 414.1 |   | $ | 199.1 |   | $ | 58.0 |   | $ | 3,359.4 |   |
| Goodwill                                       |   | $                                                        | —  |   | $ | 171.9 |   | $ | 65.0 |   | $ | 20.4 |   | $ | — |   | $ | 257.3 |   |
| Capital expenditures (excluding  acquisitions) |   | $                                                        | 7.9     |   | $ | 12.0 |   | $ | 1.3 |   | $ | — |   | $ | 0.4 |   | $ | 21.6 |   |

 

 
|                                           |   | **As of and  for the three months ended March 31, 2003** |    |
|------------------------------------------------|--------|----------------------------------------------------------|---------|
|                                           |   | **Liquids  Transportation**                              |    | **Gathering  and Processing** |   | **Natural  Gas Transportation** |   | **Marketing** |   | **Corporate** |   | **Total** |   |
| Total revenue                                  |   | $                                                        | 85.4    |   | $ | 573.9 |   | $ | 31.3 |   | $ | 567.7 |   | $ | — |   | $ | 1,258.3 |   |
| Less:   Intersegment revenue              |   | —                                                   |    | 71.6 |   | 1.8 |   | 288.8 |   | — |   | 362.2 |   |
| Operating revenue                              |   | 85.4                                                     |    | 502.3 |   | 29.5 |   | 278.9 |   | — |   | 896.1 |   |
|                                           |   |                                                     |    |   |   |   |   |   |   |   |   |   |   |
| Cost of natural gas                            |   | —                                                   |    | 465.0 |   | 15.4 |   | 273.1 |   | — |   | 753.5 |   |
| Operating and administrative                   |   | 26.4                                                     |    | 19.0 |   | 5.7 |   | 0.4 |   | 1.1 |   | 52.6 |   |
| Power                                          |   | 12.7                                                     |    | — |   | — |   | — |   | — |   | 12.7 |   |
| Depreciation and amortization                  |   | 14.4                                                     |    | 5.6 |   | 3.4 |   | — |   | — |   | 23.4 |   |
| Operating income                               |   | 31.9                                                     |    | 12.7 |   | 5.0 |   | 5.4 |   | (1.1 | ) | 53.9 |   |
| Interest expense                               |   | —                                                   |    | — |   | — |   | — |   | (21.3 | ) | (21.3 | ) |
| Other income                                   |   | —                                                   |    | — |   | — |   | — |   | — |   | — |   |
| Net income                                     |   | $                                                        | 31.9    |   | $ | 12.7 |   | $ | 5.0 |   | $ | 5.4 |   | $ | (22.4 | ) | $ | 32.6 |   |
|                                           |   |                                                     |    |   |   |   |   |   |   |   |   |   |   |
| Total assets                                   |   | $                                                        | 1,496.2 |   | $ | 750.7 |   | $ | 421.9 |   | $ | 269.0 |   | $ | 55.1 |   | $ | 2,992.9 |   |
| Goodwill                                       |   | $                                                        | —  |   | $ | 146.1 |   | $ | 72.9 |   | $ | 20.3 |   | $ | — |   | $ | 239.3 |   |
| Capital expenditures (excluding  acquisitions) |   | $                                                        | 4.9     |   | $ | 11.2 |   | $ | 1.3 |   | — |   | $ | 0.9 |   | $ | 18.3 |   |

 

10

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10.  **SUBSEQUENT EVENTS**

 

**Refinancingof Credit Facilities**

 

On April 26, 2004, the Partnership amended its unsecured multi-yearrevolving credit facility and terminated its existing 364-day revolving creditfacility, each of which was originally entered into in January 2003. Theamended facility consists of a $600.0 million three-year term senior creditfacility (the “Senior Credit Facility”), which matures in 2007. Interest ischarged on amounts drawn under this facility at a variable rate equal to theBase Rate or a Eurodollar rate as defined in the facility agreement. In thecase of Eurodollar rate loans, an additional margin is charged which variesdepending on the Partnership’s credit rating and the amounts drawn under thefacility. A facility fee is payable on the entire amount of the facilitywhether or not drawn. The facility fee varies depending on the Partnership’scredit rating. As of April 26, 2004, the facility fee was 0.175%. The SeniorCredit Facility contains restrictive covenants that require the Partnership tomaintain a minimum interest coverage ratio of 2.75 times and a maximum leverageratio of 5.25 times for eighteen months, decreasing to 5.00 times thereafter,as described in the Senior Credit Facility. The Senior Credit Facility alsoplaces limitations on the amount of debt that may be incurred directly by thePartnership’s subsidiaries. Accordingly, it is expected that the Partnershipwill provide debt financing to its subsidiaries as required.

 

***Distribution to Partners***

 

On April 26, 2004, Enbridge Management's Board of Directors declared adistribution payable on May 14, 2004. The distribution will be paid to unitholders of record as of May 5,2004, of its available cash of $56.5 million at March 31, 2004, or $0.925 percommon unit of this distribution, $9.5 million will be distributed in i-unitsto its i-unit holder and $0.2 million will be retained from the General Partnerin respect of this i-unit distribution.

* *

*11.  **COMPARATIVE AMOUNTS***

* *

Certain reclassifications have been made to the prior period’s reportedamounts to conform to the classifications used in the 2004 consolidatedfinancial statements.  Thesereclassifications have no impact on net income.

 

***ITEM2*****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations – Overview**

 

The Partnership provides services to itscustomers and creates value for its unitholders primarily through the followingactivities:

 

•              Interstate transportation of crudeoil and liquid petroleum;

 

•               Gathering,treating, processing and transmission of raw natural gas;

 

•               Interstate andintrastate transmission of natural gas; and

 

•               Providing supply,transmission and sales service, including purchasing and selling natural gas.

 

The Partnership primarily provides fee-basedservices to customers, which minimizes commodity price risks to thePartnership. However, in the Partnership’s natural gas businesses, a portion ofits earnings and cash flows are exposed to movements in the prices of naturalgas and natural gas liquids (“NGLs”). To substantially mitigate this exposure,the Partnership enters into derivative financial instruments to hedgeforecasted transactions.

 

11

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The Partnership conducts its business throughfour business segments: Liquids Transportation, Gathering and Processing,Natural Gas Transportation and Marketing. These segments are strategic businessunits established by senior management to facilitate the achievement of thePartnership’s long-term objectives, to aid in resource allocation decisions andto assess operational performance.

 

The following table reflects operating incomeby business segment and corporate charges for each of the periods presented.

 
|                                    |   | **Three  months ended March 31,** |   |
|-----------------------------------------|--------|-----------------------------------|--------|
|                                    |   | **2004**                          |   | **2003** |   |
|                                    |   | **(unaudited;  in millions)**     |   |
| **Operating Income**                    |   |                              |   |   |   |
| Liquids Transportation                  |   | $                                 | 30.6   |   | $ | 31.9 |   |
| Gathering and Processing                |   | 16.6                              |   | 12.7 |   |
| Natural Gas Transportation              |   | 4.5                               |   | 5.0 |   |
| Marketing                               |   | 2.2                               |   | 5.4 |   |
| Corporate, operating and administrative |   | (1.3                              | )      | (1.1 | ) |
| **Total Operating Income**              |   | $                                 | 52.6   |   | $ | 53.9 |   |
| Interest expense                        |   | (21.6                             | )      | (21.3 | ) |
| Other income                            |   | 2.1                               |   | — |   |
| **Net Income**                          |   | $                                 | 33.1   |   | $ | 32.6 |   |

 

 

Effective December 31, 2003, the Partnershipacquired natural gas gathering and processing assets in north Texas for $249.7million.  The gathering system, referredto as the North Texas system, primarily serves the Fort Worth Basin, includingthe Barnett Shale producing zone, and is complementary to the Partnership’sexisting natural gas systems in the area. The North Texas system’s results of operations are included in theGathering and Processing segment from the date of acquisition.

 

Effective March 1, 2004, the Partnershipacquired crude oil pipeline and storage systems for $116.9 million, includingtransaction costs of $2.0 million.  Theassets, referred to as the Mid-Continent system, serve refineries in the U.S.Mid-Continent from Cushing, Oklahoma, and consist of over 480 miles of crudeoil pipelines and 9.5 million barrels of storage capacity.  The Mid-Continent system’s results ofoperations are included in the Liquids Transportation segment from the date ofacquisition.

 

EffectiveMarch 1, 2004, the Partnership acquired natural gas transmission and gatheringpipeline assets for $13.1 million.  Theassets, referred to as the Palo Duro system, are located in Texas and arecomplementary to the Partnership’s existing natural gas systems in the area.  The Palo Duro system’s results of operationsare included in the Natural Gas Transportation segment from the date ofacquisition.

 

Total consolidated net income for the firstquarter of 2004 was $33.1 million, compared with $32.6 million for the firstquarter of 2003. The increase in net income is primarily due to the inclusionof the results of operations from the newly acquired North Texas andMid-Continent systems, which, combined, contributed approximately $6.3 millionto operating income.  The increase inoperating income from new acquisitions was partially offset by lowerperformance in the Marketing and Liquids Transportation segments and higheroperating and administrative expenses.

 

Earnings per unit for the first quarter of2004 was $0.50 per unit, compared with $0.62 per unit for the first quarter of2003.  The positive impact of higher netincome on first quarter 2004 earnings per unit was offset by a greater numberof units outstanding during the first quarter of 2004.  Since the first quarter of 2003, thePartnership has issued 9,302,500 Class A common units, which increased theweighted average number of common units outstanding from 44.6 million in thefirst quarter of 2003 to 54.7 million in the first quarter of 2004.

 

12

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**Results of Operations – by Segment**

 

***LiquidsTransportation***

 

Operating income for the LiquidsTransportation segment decreased by approximately $1.3 million to $30.6 millionfor the three months ended March 31, 2004, compared with $31.9 million for thesame period in 2003.  Operating incomewas lower in 2004 as higher operating revenue was more than offset by higherpower costs, operating and administrative expenses and depreciation expense.

 

Operating revenue for the first quarter of2004 was $91.7 million, compared with $85.4 million for the first quarter of2003.  The increase of $6.3 million wasprimarily due to increased volumes transported on the Lakehead system and theone-month contribution from the newly acquired Mid-Continent assets.

 

Volumes on the Lakehead system increased 6%,from 1.326 million barrels per day (“bpd”) during the first quarter of 2003 to1.406 million bpd during the same period in 2004, which resulted in higheroperating revenue of approximately $5.6 million.  Production of western Canadian crude oil increased over 2003 primarilydue to the start up of the Athabasca Oil Sands Project (“AOSP”) in June2003.  The AOSP is owned by Shell CanadaLimited, Chevron Canada Limited and Western Oil Sands L.P., and consists of oilsands mining and bitumen extraction operations.  During the first quarter of 2004, operating revenue on theLakehead system was also higher due to the additional pumping day associatedwith leap year, which increased operating revenue by approximately $0.9million.  These increases in firstquarter 2004 Lakehead system operating revenue were partially offset by adecrease from lower System Expansion Program II (“SEP II”) tariffs, effectiveMay 1, 2003, of approximately $3.0 million.

* *

Thefollowing table sets forth the Lakehead system’s average deliveries per day,barrel miles and average haul for the periods presented.  Delivery patterns on the Lakehead system arecomparable between the first quarter of 2004 and the first quarter of 2003,with slightly lower heavy crude oil volumes transported during the firstquarter of 2004.

 
|                             |   | **Three  months ended March 31,** |       |
|----------------------------------|--------|-----------------------------------|------------|
|                             |   | **2004**                          |       | **2003** |   |
| Average BBls/day                 |   |                              |       |   |   |
| United States                    |   | 1,014                             |       | 951 |   |
| Province of Ontario              |   | 392                               |       | 375 |   |
| **Total deliveries (thousands)** |   | **1,406**                         | ** ** | **1,326** |   |
|                             |   |                              | ** ** |   |   |
| **Barrel miles (billions)**      |   | **90**                            | ** ** | **85** |   |
| **Average haul (miles)**         |   | **710**                           | ** ** | **709** |   |

 

ThePartnership’s newly acquired Mid-Continent system contributed approximately$3.0 million to operating revenue of the Liquids Transportation segment for themonth of March 2004, primarily from transportation services.  Volumes for the month of March 2004 wereapproximately 243,000 bpd.  Operatingrevenue from transportation services is derived from charging shippers a perbarrel tariff rate to transport crude oil and liquid petroleum on its Ozark andWest Tulsa pipeline systems.  Operatingrevenue related to storage services was less than $0.1 million for the month ofMarch 2004.  The Partnership has enteredinto term agreements for a portion of the storage capacity at the Cushingstorage terminal, which are effective starting April 1, 2004.

 

13

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Power costsincreased by $4.5 million, from $12.7 million in the first quarter of 2003 to$17.2 million in the first quarter of 2004. The increase was primarily related to the growth in volumes on theLakehead system and higher mill-rates attributable to higher demand costs, aswell as escalating fuel costs.  Powercosts associated with the Mid-Continent system were $0.5 million in the firstquarter of 2004.

 

Operating andadministrative expenses were higher by $1.4 million, at $27.8 million for thefirst quarter of 2004, compared with $26.4 million for the same period in2003.  Operating and administrativeexpenses related to the newly acquired Mid-Continent assets were approximately$1.2 million in 2004. Related to the Lakehead and North Dakota systems,workforce-related costs were higher in the first quarter of 2004 byapproximately $3.4 million, compared with the same period in 2003, primarilydue to higher medical, dental and other benefit costs.  Business development costs were higher byapproximately $1.1 million during the first quarter of 2004.  These costs were incurred to advance thePartnership’s broader strategy of providing greater access to new U.S. marketsfor growing Canadian crude oil supplies. Oil measurement losses were higher in the first quarter of 2004 byapproximately $1.0 million.  Theseincreases in operating and administrative expenses were partially offset bylower leak remediation and repair costs of approximately $3.9 million, as thefirst quarter of 2003 included expenses associated with a Lakehead system leakthat occurred in January 2003. Repairs and maintenance costs were also lower on the Lakehead system byapproximately $1.4 million in the first quarter of 2004 due to timing ofexpenditures.

 

Depreciationexpense was $16.1 million for the first quarter of 2004, compared with $14.4million for the first quarter of 2003. The increase was primarily due to new facilities placed into serviceduring 2003.

 

***Gatheringand Processing***

 

Operatingincome for the Gathering and Processing segment increased by approximately $3.9million to $16.6 million for the three months ended March 31, 2004, comparedwith $12.7 million for the same period in 2003.

 

The followingtable indicates the average daily volume for each of the major systems in thePartnership’s Gathering and Processing segment during the periods presented, inmillion British thermal units per day (“MMBtu/d”).

 

|                   |   | **Three  months ended March 31,** |   |
|------------------------|--------|-----------------------------------|--------|
|                   |   | **2004**                          |   | **2003** |   |
| **Gathering Systems:** |   |                              |   |   |   |
| East Texas*            |   | 583,000                           |   | 563,000 |   |
| Anadarko               |   | 276,000                           |   | 235,000 |   |
| North Texas            |   | 192,000                           |   | — |   |
| South Texas            |   | 44,000                            |   | 36,000 |   |
| **Total**              |   | 1,095,000                         |   | 834,000 |   |

----

***Note:**  East Texas now includes the combined systemspreviously referred to as East Texas and Northeast Texas.

 

Compared with 2003, natural gas volumes onthe Partnership’s major Gathering and Processing assets increased approximately31% from 834,000 MMBtu/d to 1,095,000 MMBtu/d in 2004.  The most significant reason for the increasewas the contribution of the North Texas results in the first quarter of 2004,from the date of acquisition by the Partnership on December 31, 2003.  The North Texas system contributed $5.4million to operating income during this period.  The North Texas system derives the majority of its revenues fromthe sharing of sales proceeds net of costs, of natural gas and natural gasliquids under contracts with natural gas producers. The direct commodity priceexposure inherent in such contracts has been mitigated through a hedgingstrategy. The remainder of the revenue is derived from fees charged forgathering and treating of natural gas volumes and other related services.

 

14

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The East Texassystem includes the combined results of the systems previously referred to asEast Texas and Northeast Texas.  ThePartnership has completed projects that allow for integration of these assetsas one integrated system, now referred to as “East Texas”.  Comparative results have been reclassifiedto conform with this presentation.

 

Volumesincreased on the East Texas system in the first quarter of 2004 byapproximately 19,000 MMBtu/d, as a result of increased drilling by producers ofgas wells in the areas served by this system. In addition, processing results improved on the East Texas system in thefirst quarter of 2004 compared with the same period in 2003.  During the first three months of 2003,historically high natural gas prices made keep-whole processing contracts non-economicfor the East Texas system.  During thefirst three months of 2004, first of the month natural gas prices fluctuatedbetween $5.15 and $6.15 per MMBtu, compared with $4.96 and $9.11 per MMBtu forthe same period in 2003.  However,similar to the Liquids Transportation segment, operating and administrativeexpenses increased in 2004 due to higher workforce related costs that more thanoffset any positive gains from the improved volumes and processingresults.  As a result, operating incomeon the East Texas system decreased by approximately $1.6 million, from $7.6million during the first three months of 2003, to $6.0 million in the firstquarter of 2004.

 

Volumes on theAnadarko system increased approximately 17% in the first quarter of 2004compared with the same period in 2003. The growth is a result of strong drilling activity in the Texaspanhandle and western Oklahoma regions. Similar to the East Texas system, processing results improved on theAnadarko system during the first quarter of 2004 due to a more favorablenatural gas and NGL pricing environment. During the first three months of 2003, volatile natural gas pricesadversely affected processing results on the Anadarko system.  As a result of the more stable natural gaspricing environment in 2004, processing operating income improved by $1.8million, compared with 2003.  Theseimprovements were partially offset by higher operating and administrativeexpenses related to workforce related benefit costs and variable costsassociated with the increased volumes on the system.  As a result, operating income on the Anadarko system increased byapproximately $2.9 million, from $0.8 million in the first quarter of 2003 to$3.7 million in the first quarter of 2004.

 

Also includedin the Partnership’s Gathering and Processing segment are its truckingoperations.  Trucking operations includethe transportation of NGLs, crude oil and carbon dioxide by truck and railcarfrom wellheads to treating, processing and fractionation facilities and towholesale customers.  During the firstquarter of 2004, volumes transported were lower than for the same period of2003, due to the timing of refinery maintenance, which impacted demand for NGLsin the markets served by the trucking operations.  Operating and administrative expenses also increased in 2004primarily due to higher benefits costs as previously noted, as well asincreased workforce related costs due to new Department of Transportationregulations decreasing the number of hours a driver can work.  As a result, operating income decreased by$1.5 million, from $2.2 million in 2003 to $0.7 million in 2004.

 

***NaturalGas Transportation***

 

Natural Gas Transportation systemscontributed $4.5 million to operating income for the three month period endedMarch 31, 2004, compared with $5.0 million for the same period in 2003.  Operating income was lower in 2004 primarilydue to lower fuel retainage and measurement losses on the Kansas pipelinesystem.

 

Performance of the Natural Gas Transportationsegment depends largely upon revenues derived from reserved pipeline capacity,rather than average daily volumes on the systems.  Natural gas transportation revenue is typically higher in thewinter months from increased pipeline rates and greater pipeline reservations;thus, the first and fourth quarter operating income is typically higher ascompared to the second and third quarter operating income.

 

15

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The table below indicates the average dailyvolumes in MMBtu/d for each of the major systems in the Partnership’s NaturalGas Transportation segment during the periods presented.

 
|                                          |   | **Capacity  Reserved at** |   | **Three  months ended March 31,** |   |
|-----------------------------------------------|--------|---------------------------|--------|-----------------------------------|--------|
|                                          |   | **March 31,  2004**       |   | **2004**                          |   | **2003** |   |
|                                          |   |                      |   | **(average  MMBtu/d)**            |   |
| **Major Natural Gas Transportation Systems:** |   |                      |   |                              |   |   |   |
| UTOS                                          |   | 0                         | %      | 206,000                           |   | 248,000 |   |
| MidLa                                         |   | 88                        | %      | 117,000                           |   | 120,000 |   |
| AlaTenn                                       |   | 49                        | %      | 80,000                            |   | 82,000 |   |
| Kansas                                        |   | 94                        | %      | 89,000                            |   | 75,000 |   |
| Bamagas                                       |   | 61                        | %      | 9,000                             |   | 11,000 |   |
| **Other Major Intrastates**                   |   | up to 43                  | %      | 192,000                           |   | 184,000 |   |
| **Total**                                     |   |                      |   | 693,000                           |   | 720,000 |   |

 

Volumes on the UTOS system decreased 17% inthe first quarter of 2004, compared with the first quarter of 2003.  This decrease is attributable to bothgeneral declines associated with volumes received into the UTOS system andstricter enforcement of gas quality specifications by pipelines downstream ofthe UTOS system.  The full quarterimpact to revenue in 2004 was less than $0.1 million if these 2004 volumes hadremained consistent with the 2003 volumes.

 

The Natural Gas Transportation segment includesthe results of the Palo Duro assets that were acquired on March 1, 2004, for$13.1 million.  This system contributedless than $0.1 million in operating income to this segment since its date ofacquisition.

 

***Marketing***

 

Operating income for the Marketing segmentwas $2.2 million for the first quarter of 2004, compared with $5.4 million forthe first quarter of March 31, 2003. Stronger first quarter results in 2003 were due to the Partnership’sability to optimize natural gas supply to areas of strongest demand and profitwithin its operational area.  Operatingrevenue less cost of natural gas was greater due to the unusual volatility innatural gas prices during the first quarter of 2003.  This volatility was due to unusually cold weather, lower volumesof natural gas in storage and, generally, a tighter supply of natural gas inNorth America.  During the first quarterof 2004, natural gas prices were less volatile due to more stable marketconditions and, therefore, negatively impacted operating income byapproximately $0.9 million compared with the first quarter of 2003.  Operating results for the first quarter of2004 are also lower as the comparable period in 2003 included a non-recurringgain of approximately $1.5 million due to the settlement of a disputed amount.

 

Typically, the first and fourth quarters willresult in higher operating income for the Marketing segment due to colderweather in the market areas served by this segment. Colder weather generatessignificant incremental sales to the Partnership’s wholesale customers,creating the opportunity to optimize transportation and storage agreements.

 

16

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***Corporate***

 

Interest expense was $21.6 million for thethree months ended March 31, 2004, compared with $21.3 million for the sameperiod in 2003.  The impact on interestexpense of higher debt balances was partially offset by a lower weightedaverage interest rate of approximately 5.8% during the first quarter of 2004,compared with approximately 6.4% during the same period in 2003.

 

Other income was $2.1 million in 2004,compared with $NIL in 2003.  In March2004, the Partnership reduced its long-term environmental liabilities by $2.0million related to certain of its Gathering and Processing assets.  During the time that these assets have beenowned by the Partnership, since October 2002, management has completed a reviewof the affected sites and determined that suspected contamination is lesssignificant than originally estimated. This assessment was based upon information gathered during the ownershipperiod, existing technology, presently enacted laws and regulations and priorexperience in remediating contaminated sites for similar assets.

 

**Liquidity and Capital Resources**

 

The Partnership believes that it willcontinue to have adequate liquidity to fund future recurring operating andinvesting activities.  The Partnership’sprimary cash requirements consist of normal operating expenses, maintenance andexpansion capital expenditures, debt service payments, distributions topartners and acquisitions of new assets or businesses.  Short-term cash requirements, such asoperating expenses, maintenance capital expenditures and quarterlydistributions to partners, are expected to be funded by operating cashflows.  Long-term cash requirements forexpansion projects and acquisitions are expected to be funded by severalsources, including cash flows from operating activities, borrowings undercredit facilities and the issuance of additional equity and debt securities,including common units and i-units.  ThePartnership’s ability to complete future debt and equity offerings and thetiming of any such offerings will depend on various factors, includingprevailing market conditions, interest rates and the financial condition of thePartnership and its credit rating at the time.

 

On January 2,2004, the Partnership issued an additional 450,000 Class A common unitspursuant to the exercise of the over-allotment option as part of the December2003 Class A common unit issuance, resulting in additional proceeds to thePartnership, net of underwriters’ fees and discounts, commissions and issuanceexpenses, of approximately $21.6 million. In addition to the proceeds generated from the unit issuance, theGeneral Partner contributed $0.4 million to the Partnership to maintain its 2%general partner interest in the Partnership.

 

On January 9,2004, the Partnership issued an additional $200.0 million in aggregateprincipal amount of its 4.0% Senior Unsecured Notes due in 2009 in a publicoffering, from which it received net proceeds of $198.3 million.  The Partnership used the proceeds to repay aportion of its outstanding debt under bank credit facilities.

 

Working capital, defined as current assetsless current liabilities, improved by $117.6 million to a deficit of $62.2million at March 31, 2004, compared with a deficit of $179.8 million atDecember 31, 2003.  Thisimprovement was primarily due to the reduction in current maturities andshort-term debt related to the 364-day credit facility.  As noted above, the Partnership used aportion of the net proceeds from its issuance of Senior Unsecured Notes inJanuary 2004 to repay a portion of its outstanding debt under bank creditfacilities.

 

At March 31, 2004, cash and cash equivalents totaled $76.0 million,compared with $64.4 million at December 31, 2003.  Of the cash balance, $56.5 million ($0.925per unit) will be used for the distribution payable on May 14, 2004, including$9.5 million relating to the i-units and $0.2 million retained from the GeneralPartner to maintain its 2% interest in respect of the i-unit distribution,which will both be retained by the Partnership for use in its business.  The remaining $19.5 million is available forfuture cash distributions, capital expenditures or other business needs.

 

17

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***Operating Activities***

 

Net cashprovided by operating activities for the three months ended March 31, 2004 was$133.6 million, compared with $78.4 million for the same period in 2003.  The increase in 2004 was primarily due tothe positive impact of the net increase in operating assets andliabilities.  Compared with the firstquarter of 2003, the Partnership had an increase in the amounts due to theGeneral Partner and affiliates during the first quarter of 2004, as a result oftiming differences in the collection on and payment of related partyaccounts.  .  The remaining changes in operating assets and liabilities wereprimarily due to decreased natural gas prices in the first quarter of 2004 andgeneral timing differences in the collection on and payment of thePartnership’s current accounts.

 

***Investing Activitie***s

 

Net cash used in investing activities duringthe three months ended March 31, 2004 was $150.5 million, compared with $23.3million for the same period in 2003. The increase of $127.2 million was primarily attributable to higher cashoutflows made for strategic acquisitions. On March 1, 2004, the Partnership acquired the Mid-Continent system forcash paid of $116.9 million, and the Palo Duro system for cash paid of $13.1million.

 

***Financing Activities***

 

Net cash provided by financing activitiesduring the three months ended March 31, 2004 was $28.5 million, compared withnet cash used in financing activities of $44.9 million for the same period in2003.  The increase of $73.4 million incash flow is primarily due to net borrowings under debt agreements and proceedsfrom the additional Class A common units issued in January 2004, pursuant tothe exercise of the over-allotment option as part of the December 2003 Class Acommon unit issuance, offset by an increase in distributions to partners.  Distributions to partners were higher in2004 due to an increase in the number of units outstanding, as well as a relatedincrease in the general partner incentive distributions.

 

**CAPITALEXPENDITURES**

 

Capital expenditures are categorized by the Partnership as either coremaintenance or enhancement expenditures. Core maintenance expenditures arethose expenditures that are necessary to maintain the service capability of theexisting assets and includes the replacement of system components and equipmentwhich is worn, obsolete or completing its useful life. Enhancement expendituresimprove the service capability of the existing assets, extend asset usefullives, increase capacities from existing levels, reduce costs or enhancerevenues and enable the Partnership to respond to governmental regulations anddeveloping industry standards.  In 2004,the Partnership anticipates capital expenditure spending to approximate:

 
|                               |   | **(in  millions)** |   |
|------------------------------------|--------|--------------------|--------|
| System enhancements                |   | $                  | 126.0  |   |
| Core maintenance activities        |   | 33.0               |   |
| Lakehead System expansion projects |   | 40.0               |   |
| East Texas expansion               |   | 105.0              |   |
|                               |   | $                  | 304.0  |   |

 

Excluding major expansion projects and acquisitions, ongoing capitalexpenditures are expected to average approximately $98.0 million annually(approximately 35% for core maintenance and 65% for system enhancements).

 

The Partnership anticipates funding the expenditures temporarilythrough its bank credit facilities, with permanent debt and equity fundingbeing provided when appropriate.

 

18

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The Partnership expects to incur continuing annual capital andoperating expenditures for pipeline integrity measures to ensure bothregulatory compliance and to maintain the overall integrity of the pipelinesystems. Expenditure levels have continued to increase as pipelines age andrequire higher levels of inspection or maintenance; however, these are viewedto be consistent with industry trends.

 

Included in the anticipated capital expenditures spending for systemenhancements in 2004 is approximately $25.0 million of capitalexpenditures to ensure regulatory compliance on the Lakehead system. This spendingis for pressure testing of the Lakehead system to establish operating pressuresin excess of operating limits that would otherwise be allowed under currentcircumstances.

 

**OFFBALANCE SHEET ARRANGEMENTS**

 

The Partnership has no off-balance sheetarrangements.

 

**SUBSEQUENTEVENTS**

 

**DistributionDeclaration**

 

On April 26, 2004, Enbridge Management’sBoard of Directors declared a distribution payable on May 14, 2004, tounitholders of record as of May 5, 2004, of its available cash of $56.5 millionat March 31, 2004, or $0.925 per common unit. Of this distribution, $9.5 million will be distributed in i-units toi-unit holders and $0.2 million will be retained from the General Partner inrespect of this i-unit distribution.

 

**BankCredit Facilities**

 

On April 26, 2004, the Partnership amended its unsecuredmulti-year revolving credit facility and terminated its existing 364-dayrevolving credit facility, each of which was originally entered into inJanuary 2003.  The amended facilityconsists of a $600.0 million three-year term senior credit facility (the“Senior Credit Facility”), which matures in 2007. Interest is charged onamounts drawn under this facility at a variable rate equal to the Base Rate ora Eurodollar rate as defined in the facility agreement. In the case ofEurodollar rate loans, an additional margin is charged which varies dependingon the Partnership’s credit rating and the amounts drawn under the facility. Afacility fee is payable on the entire amount of the facility whether or notdrawn. The facility fee varies depending on the Partnership’s credit rating. Asof April 26, 2004, the facility fee was 0.175%. The Senior Credit Facilitycontains restrictive covenants that require the Partnership to maintain aminimum interest coverage ratio of 2.75 times and a maximum leverage ratio of5.25 times for eighteen months, decreasing to 5.00 times thereafter, asdescribed in the Senior Credit Facility. The Senior Credit Facility also placeslimitations on the amount of debt that may be incurred directly by thePartnership’s subsidiaries. Accordingly, it is expected that the Partnershipwill provide debt financing to its subsidiaries as required.

 

**REGULATORYMATTERS**

 

***Lakehead System***

 

On March 17,2004, Enbridge Energy, Limited Partnership (“Lakehead Partnership”), asubsidiary of the Partnership, filed a new tariff with the Federal EnergyRegulatory Commission (“FERC”) that became effective April 1, 2004.  This new tariff reflects the annualcalculation of the SEP II surcharge, as well as an adjustment to the Terracefixed toll allocation.

 

The change in the SEP IIsurcharge is made pursuant to the 1998 Settlement Agreement between thePartnership and the Canadian Association of Petroleum Producers (“CAPP”), whichwas approved by the FERC on December 21, 1998. The 1998 Settlement Agreement requires the Lakehead Partnership toadjust the SEP II surcharge annually to reflect the latest estimates for theupcoming year and to true-up differences between estimates and actual cost andthroughput data in the prior year.  The2004 SEP II surcharge is approximately

 

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$0.11/bbl for light crude oilmovements from the Canadian border to Chicago, Illinois, which is approximately$0.016/bbl higher than the 2003 SEP II surcharge, and reflects 2003 actual and2004 projected SEP II costs and throughput.

 

Under a tariffagreement approved by the FERC in 1998, the Partnership implemented a tariffsurcharge for the Terrace expansion program of approximately $0.013 per barrelfor light crude oil from the Canadian border to Chicago.  On April 1, 2001, pursuant to an agreementbetween the Partnership and Enbridge Pipelines Inc., the Partnership’s share ofthe surcharge was increased to $0.026 per barrel.  Effective April 1, 2004, the surcharge was adjusted to $0.007 perbarrel for light crude oil from the Canadian border to Chicago.  This new tariff is expected to be in effectfor the next six years, after which time it will return to $0.013 per barrelfor the Partnership through 2013, the term of the agreement.

 

***Energy Affiliate Rules***

 

On April 14, 2004 the FERCclarified its Energy Affiliates Standards of Conduct rule making (“Standards ofConduct Rule”) that govern the relationship between Transmission Providers andtheir Energy Affiliates.  In response topetitions for rehearing and clarification of its November 2003 Standards ofConduct Rule, the FERC reaffirmed the need for the rule, noting that itprotects customers in an environment where robust competition provides theeconomic incentives that may tempt a transmission provider to give itsaffiliates unduly preferential treatment—behavior that harms customers. TheFERC also extended until September 2004, the date for full implementation ofthe Standards of Conduct Rule. Furthermore, the Standards of Conduct Rule willnow expressly state that corporate governance information may be shared withpermissibly-shared employees, such as officers and directors, between theTransmission Provider and the Energy Affiliate, as long as these employees donot act as a conduit for sharing information.

 

ThePartnership does not believe that the effect on the operations of itsinterstate natural gas pipelines or its other operations, which indirectly areaffected by the extent and nature of the Standards of Conduct Rule, will beaffected materially differently than other companies with whom it competes.

 

***ITEM3******.******                         QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK***

 

ThePartnership’s earnings and cash flows associated with its Liquids Transportationsystems are not significantly impacted by changes in commodity prices, as thePartnership does not own the crude oil and NGLs it transports.  However, the Partnership has commodity riskrelated to degradation losses associated with the fluctuating differentialsbetween the price of heavy crude oil relative to light crude oil.  Commodity prices have a significant impacton the underlying supply of, and demand for, crude oil and NGLs that thePartnership transports.

 

The total change in value of the financialderivatives over the quarter was predominantly driven by the significant risein near and long term natural gas forward prices.  As the Partnership’s natural gas hedge portfolio is largelycomprised of long term fixed price forward sale agreements, an increase in theforward market prices will cause the unrealized hedge loss to increase.

 

A portion of the Partnership’s earnings andcash flows are exposed to movements in the prices of natural gas and NGLs.  The Partnership has entered into hedgetransactions to mitigate exposure to movements in these prices.  Pursuant to policies approved by the Boardof Directors of its General Partner, the Partnership may not enter intoderivative instruments for speculative purposes.  All financial derivative transactions must be undertaken withcreditworthy counter parties.

 

There have been no material changes in market risk exposures that wouldaffect the quantitative and qualitative disclosures presented as of December31, 2003, in Item 7A of our 2003 Form 10-K report.

 

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***ITEM4******.******                         CONTROLSAND PROCEDURES***

 

ThePartnership and Enbridge Inc. maintain systems of disclosure controls andprocedures designed to provide reasonable assurance that the Partnership isable to record, process, summarize and report the information required in thePartnership’s annual and quarterly reports under the Securities Exchange Act of1934.  Management of the Partnership hasevaluated the effectiveness of its disclosure controls and procedures as ofMarch 31, 2004.  Based upon thatevaluation, the Partnership’s principal executive officer and principalfinancial officer concluded that its disclosure controls and procedures areeffective to accomplish their purpose. In conducting this assessment, management of the Partnership relied onsimilar evaluations conducted by employees of Enbridge Inc. affiliates whoprovide certain treasury, accounting and other services on behalf of thePartnership.  No significant changeswere made to the Partnership’s internal controls or other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,nor were any corrective actions with respect to significant deficiencies andmaterial weaknesses necessary subsequent to that date.

 

***PART II - OTHERINFORMATION***

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

ThePartnership is a participant in various legal proceedings arising in theordinary course of business.  Some ofthese proceedings are covered, in whole or in part, by insurance.  The Partnership believes that the outcome ofall these proceedings will not, individually or in the aggregate, have amaterial adverse effect on the financial condition of the Partnership.

 

For information regarding other legalproceedings arising in 2003 or with regard to which material developments werereported during 2003, see “Part I. Item 3. Legal Proceedings,” in thePartnership’s Annual Report on Form 10-K for the year ended December 31,2003.

 

***ITEM 6******. EXHIBITS AND REPORTS ON FORM 8-K***

 

a)             Exhibits

 
| 3.1  |   | Certificate  of Limited Partnership of the Partnership (incorporated by reference to  Exhibit 3.1 to the Partnership’s Registration Statement No. 33-43425)                                                                   |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Certificate  of Amendment to Certificate of Limited Partnership of the Partnership  (incorporated by reference to Exhibit 3.2 to the Partnership’s 2000 Form  10-K/A dated October 9, 2001)                                   |
| 3.3  |   | Third  Amended and Restated Agreement of Limited Partnership of the Partnership  (incorporated by reference to Exhibit 3.1 to the Partnership’s Quarterly  Report on Form 10-Q filed November 14, 2002)                       |
| 4.1  |   | Form of  Certificate representing Class A Common Units (incorporated by reference to  Exhibit 4.1 to the Partnership’s 2000 Form 10-K/A dated October 9, 2001)                                                                |
| 10.1 |   | First  Amendment, dated January 12, 2004, to Amended and Restated Credit Agreement,  dated January 24, 2003, among Enbridge Energy Partners, L.P., Bank of  America, N.A., as administrative agent, and the lenders party thereto. |
| 10.2 |   | Second  Amendment, dated April 26, 2004, to Amended and Restated Credit Agreement,  dated January 24, 2004, among Enbridge Energy Partners, L.P., Bank of  America, N.A., as administrative agent, and the lenders party thereto.  |
| 31.1 |   | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                               |
| 31.2 |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                               |
| 32.1 |   | Certification  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002                                                                                                                               |
| 32.2 |   | Certification  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002                                                                                                                               |

 

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b)            Reports on Form 8-K

 

ThePartnership filed the following current reports on Form 8-K during thefirst quarter of 2004:

 

A currentreport on Form 8-K was filed on January 6, 2004 containing theConsolidated Statements of Financial Position of Enbridge EnergyCompany, Inc., at September 30, 2003 and December 31, 2002.  Enbridge Energy Company, Inc., is theGeneral Partner of the Partnership.

 

A currentreport on Form 8-K was filed on January 6, 2004, attaching a press releasedated December 31, 2003 announcing the closing of the $247.0 millionacquisition of the North Texas System that was originally announced on November19, 2003.

 

A currentreport on Form 8-K was filed on January 9, 2004, containing the underwritingagreement with respect to the issue and sale by the Partnership of $200.0million aggregate principal amount of 4% Notes due 2009 in an underwrittenpublic offering.

 

A currentreport on form 8-K was filed on January 28, 2004, attaching a press releasedated January 22, 2004, regarding comparative financial results for the threemonths and year ended December 31, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | **ENBRIDGE ENERGY PARTNERS, L.P.** |
|--------|------------------------------------|
|   |                               | (Registrant) |
|   |                               |   |   |   |
|   | By:                                | Enbridge Energy  Management, L.L.C.  as delegate of  Enbridge Energy Company, Inc.  as General Partner |
|   |                               |   |   |   |
|   |                               |   |   |   |
|   |                               |   | /s/ *DAN C. TUTCHER* |   |
|   |                               |   |   | *Dan C. Tutcher* |
|   |                               |   |   | *President and Director  (Principal Executive Officer)* |
|   |                               |   |   |   |
|   |                               |   |   |   |
|   |                               |   | */s/ MARK A. MAKI* |   |
|   |                               |   |   | *Mark A. Maki* |
|   |                               |   |   | *Vice President, Finance  (Duly Authorized Officer)* |
|   |                               |   |   |   |
|   |                               |   |   |   |
|   |                               |   |   |   | Date:  May 4, 2004 |
|        |                                    |  |  |  |  |  |  |

 

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