**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**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 September 30, 2003**                                                                                                                                                     |
|                                                                                                                                                                                                           |
| **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**                                                                                                                                                                             |

 

**ENBRIDGEENERGY PARTNERS, L.P.**

(Exact name of registrant as specified in itscharter)

 

| **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 whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý    No o

 

Indicate by checkmark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act)

Yes ý    No o

 

The Registrant had 35,166,134 Class A Common Units outstanding as ofNovember 13, 2003.

 

 

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**TABLEOF CONTENTS**

 
| **PART I.  FINANCIAL INFORMATION** |
|------------------------------------|
|                               |
| **Item 1.**                        | Financial  Statements |
|                               | Consolidated Statements of Income  for the three and nine month periods ended September 30, 2003 and 2002 |
|                               |   |
|                               | Consolidated Statements of Comprehensive  Income  for the three and nine month periods ended September 30, 2003 and 2002 |
|                               |   |
|                               | Consolidated Statements of Cash Flows  for the nine month periods ended September 30, 2003 and 2002 |
|                               |   |
|                               | Consolidated Statements of Financial  Position  as of September 30, 2003 and December 31, 2002 |
|                               |   |
|                               | 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 |
|                               |   |
| **Signature**                      |
|                               |   |
| **Exhibits**                       |   |
|                                    |  |  |

 

*This Quarterly Report on Form 10-Qcontains forward-looking statements. These forward-looking statements areidentified as any statement that does not relate strictly to historical orcurrent facts. They use words such as “anticipate,” “believe,” “continue,”“estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,”“projection,” “strategy” or “will” or the negative of those terms or othervariations of them or by comparable terminology. In particular, statements, expressedor implied, concerning future actions, conditions or events or future operatingresults or the ability to generate sales, income or cash flow or to makedistributions are forward-looking statements. Forward-looking statements arenot guarantees of performance. They involve risks, uncertainties andassumptions. Future actions, conditions or events and future results ofoperations may differ materially from those expressed in these forward-lookingstatements. Many of the factors that will determine these results are beyondthe ability of Enbridge Energy Partners, L.P. (the “Partnership”) to control orpredict.  For additional discussion ofrisks, uncertainties and assumptions, see the Partnership’s Annual Report onForm 10-K for the fiscal year ended December 31, 2002.*

 

2

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***PARTI******- FINANCIAL INFORMATION***

 

***ITEM1******.  FINANCIAL STATEMENTS***

 

***ENBRIDGE ENERGY PARTNERS, L.P.CONSOLIDATED STATEMENTS OF INCOME***

 
|                                                          |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|---------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| **(unaudited; dollars in millions, except per unit amounts)** |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Operating revenue                                             |   | $                                           | 760.5  |                                       | $      | 237.6 |   | $ | 2,411.9 |   | $ | 642.5 |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Operating expenses                                            |   |                                        |   |                                       |   |   |   |   |   |
| Cost of natural gas                                           |   | 625.3                                       |   | 141.7                                      |   | 2,002.2 |   | 362.1 |   |
| Operating and administrative                                  |   | 52.6                                        |   | 32.4                                       |   | 157.5 |   | 91.1 |   |
| Power                                                         |   | 14.2                                        |   | 13.3                                       |   | 39.9 |   | 39.3 |   |
| Depreciation and amortization *(Note 8)*                      |   | 23.4                                        |   | 18.5                                       |   | 70.3 |   | 55.4 |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
|                                                          |   | 715.5                                       |   | 205.9                                      |   | 2,269.9 |   | 547.9 |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Operating income                                              |   | 45.0                                        |   | 31.7                                       |   | 142.0 |   | 94.6 |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Other income (expense)                                        |   | (0.1                                        | )      | (0.5                                       | )      | 1.7 |   | (0.3 | ) |
| Interest expense                                              |   | (21.4                                       | )      | (13.5                                      | )      | (64.3 | ) | (41.7 | ) |
| Minority interest                                             |   | —                                      |   | (0.1                                       | )      | — |   | (0.5 | ) |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Net income                                                    |   | $                                           | 23.5   |                                       | $      | 17.6 |   | $ | 79.4 |   | $ | 52.1 |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Net income per unit (*Note 2*)                                |   | $                                           | 0.38   |                                       | $      | 0.42 |   | $ | 1.39 |   | $ | 1.24 |   |
|                                                          |   |                                        |   |                                       |   |   |   |   |   |
| Weighted average units outstanding (millions)                 |   | 48.9                                        |   | 35.2                                       |   | 46.8 |   | 34.7 |   |

 

The accompanying notes to the Consolidated Financial Statements are anintegral part of these statements.

 

3

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***ENBRIDGE ENERGY PARTNERS, L.P.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME***

 
|                                                                   |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| **(unaudited; dollars in millions)**                                   |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                                   |   |                                        |   |                                       |   |   |   |   |   |
| Net income                                                             |   | $                                           | 23.5   |                                       | $      | 17.6 |   | $ | 79.4 |   | $ | 52.1 |   |
|                                                                   |   |                                        |   |                                       |   |   |   |   |   |
| Unrealized gain (loss) on derivative  financial instruments *(Note 7)* |   | 20.2                                        |   | 4.3                                        |   | (42.9 | ) | (13.8 | ) |
|                                                                   |   |                                        |   |                                       |   |   |   |   |   |
| Comprehensive income                                                   |   | $                                           | 43.7   |                                       | $      | 21.9 |   | $ | 36.5 |   | $ | 38.3 |   |

 

The accompanying notes to the Consolidated Financial Statements are anintegral part of these statements.

 

4

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***ENBRIDGE ENERGY PARTNERS, L.P.CONSOLIDATED STATEMENTS OF CASH FLOWS***

 
|                                                                          |   | **Nine  months ended September 30,** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
| **(unaudited; dollars in millions)**                                          |   | **2003**                                  |   | **2002** |   |
|                                                                          |   |                                      |   |   |   |
| Cash provided by operating activities                                         |   |                                      |   |   |   |
| Net income                                                                    |   | $                                         | 79.4   |   | $ | 52.1 |   |
| Adjustments to reconcile net income to cash  provided by operating activities |   |                                      |   |   |   |
| Depreciation and amortization                                                 |   | 70.3                                      |   | 55.4 |   |
| Payments made upon settlement of derivative  *(Note  7)*                      |   | (6.1                                      | )      | — |   |
| Other                                                                         |   | (0.2                                      | )      | (6.1 | ) |
| Changes in operating assets and  liabilities, Receivables, trade and other    |   | (2.0                                      | )      | (33.8 | ) |
| Accrued gas sales                                                             |   | (62.9                                     | )      | — |   |
| Other current assets                                                          |   | (15.4                                     | )      | (1.9 | ) |
| General Partner and affiliates                                                |   | (6.2                                      | )      | 6.0 |   |
| Accounts payable and other                                                    |   | (7.1                                      | )      | 45.4 |   |
| Accrued gas purchases                                                         |   | 64.4                                      |   | — |   |
| Interest payable                                                              |   | 18.4                                      |   | 11.8 |   |
| Property and other taxes                                                      |   | 1.5                                       |   | (2.8 | ) |
|                                                                          |   |                                      |   |   |   |
| Cash provided by operating activities                                         |   | 134.1                                     |   | 126.1 |   |
|                                                                          |   |                                      |   |   |   |
| Investing activities                                                          |   |                                      |   |   |   |
| Repayments from affiliate                                                     |   | —                                    |   | 0.2 |   |
| Additions to property, plant and equipment                                    |   | (92.9                                     | )      | (177.8 | ) |
| Changes in construction payables                                              |   | (4.5                                      | )      | (0.1 | ) |
| Asset acquisitions                                                            |   | (0.5                                      | )      | (5.1 | ) |
|                                                                          |   |                                      |   |   |   |
| Cash used in investing activities                                             |   | (97.9                                     | )      | (182.8 | ) |
|                                                                          |   |                                      |   |   |   |
| Financing activities                                                          |   |                                      |   |   |   |
| 364-day facility                                                              |   | (102.0                                    | )      | 168.0 |   |
| Revolving credit facility                                                     |   | —                                    |   | (137.0 | ) |
| Three-year credit facility                                                    |   | (52.0                                     | )      | 185.0 |   |
| Issuance of senior unsecured notes *(Note 6)*                                 |   | 396.3                                     |   | — |   |
| Loans from Enbridge Energy Company, Inc.                                      |   | (313.2                                    | )      | (117.9 | ) |
| Proceeds from unit issuance *(Note 4)*                                        |   | 169.0                                     |   | 93.3 |   |
| Distributions to partners                                                     |   | (115.6                                    | )      | (102.2 | ) |
| Other                                                                         |   | (0.1                                      | )      | (0.7 | ) |
|                                                                          |   |                                      |   |   |   |
| Cash (used in) provided by financing  activities                              |   | (17.6                                     | )      | 88.5 |   |
|                                                                          |   |                                      |   |   |   |
| Net increase in cash and cash equivalents                                     |   | 18.6                                      |   | 31.8 |   |
|                                                                          |   |                                      |   |   |   |
| Cash and cash equivalents at beginning of  period                             |   | 60.3                                      |   | 40.2 |   |
|                                                                          |   |                                      |   |   |   |
| Cash and cash equivalents at end of period                                    |   | $                                         | 78.9   |   | $ | 72.0 |   |

 

The accompanying notes to the Consolidated Financial Statements are anintegral part of these statements.

 

5

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***ENBRIDGE ENERGY PARTNERS, L.P.******CONSOLIDATED STATEMENTS OF FINANCIAL POSITION***

 
| **(unaudited; dollars in millions)**                                                                   |   | **September 30,  2003** |       | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
|                                                                                                   |   |                         | ** ** |                        | ** ** |
| ***ASSETS***                                                                                           |   |                         | ** ** |                        | ** ** |
|                                                                                                   |   |                         |       |                        |       |
| Current assets                                                                                         |   |                         |       |                        |       |
| Cash and cash equivalents *(Note 5)*                                                                   |   | $                            | 78.9       |                        | $          | 60.3 |   |
| Receivables, trade and other, net of  allowance for doubtful accounts of $3.4 in 2003 and $3.7 in 2002 |   | 34.6                         |       | 35.0                        |       |
| Accrued gas receivables                                                                                |   | 245.8                        |       | 182.9                       |       |
| Other current assets                                                                                   |   | 33.0                         |       | 19.3                        |       |
|                                                                                                   |   | 392.3                        |       | 297.5                       |       |
|                                                                                                   |   |                         |       |                        |       |
| Property, plant and equipment, net                                                                     |   | 2,277.4                      |       | 2,253.3                     |       |
| Goodwill                                                                                               |   | 239.3                        |       | 241.1                       |       |
| Other assets, net                                                                                      |   | 52.5                         |       | 43.0                        |       |
|                                                                                                   |   |                         |       |                        |       |
|                                                                                                   |   | $                            | 2,961.5    |                        | $          | 2,834.9 |   |
|                                                                                                   |   |                         |       |                        |       |
| ***LIABILITIES AND PARTNERS’ CAPITAL***                                                           |   |                         |       |                        |       |
|                                                                                                   |   |                         |       |                        |       |
| Current liabilities                                                                                    |   |                         |       |                        |       |
| Due to General Partner and affiliate                                                                   |   | $                            | 75.9       |                        | $          | 63.1 |   |
| Accounts payable and other                                                                             |   | 73.3                         |       | 99.1                        |       |
| Accrued gas purchases                                                                                  |   | 206.5                        |       | 142.1                       |       |
| Interest payable                                                                                       |   | 25.4                         |       | 7.0                         |       |
| Property and other taxes payable                                                                       |   | 17.8                         |       | 16.3                        |       |
| Current maturities and short-term debt *(Note 6)*                                                      |   | 141.0                        |       | 31.0                        |       |
|                                                                                                   |   | 539.9                        |       | 358.6                       |       |
|                                                                                                   |   |                         |       |                        |       |
| Long-term debt *(Note 6)*                                                                              |   | 1,146.8                      |       | 1,011.4                     |       |
| Loans from General Partner and affiliates                                                              |   | 130.9                        |       | 444.1                       |       |
| Environmental liabilities                                                                              |   | 5.4                          |       | 5.6                         |       |
| Deferred credits                                                                                       |   | 57.0                         |       | 23.2                        |       |
| Minority interest                                                                                      |   | —                       |       | 0.4                         |       |
|                                                                                                   |   | 1,880.0                      |       | 1,843.3                     |       |
|                                                                                                   |   |                         |       |                        |       |
| Commitments and contingencies *(Note 10)*                                                              |   | —                       |       | —                      |       |
|                                                                                                   |   |                         |       |                        |       |
| Partners’ capital                                                                                 |   |                         |       |                        |       |
| Class A common units (Units authorized and  issued – 35,166,134 in 2003 and 31,313,634 in 2002)   |   | 711.3                        |       | 604.8                       |       |
| Class B common units (Units authorized and  issued – 3,912,750 in 2003 and 2002)                  |   | 53.3                         |       | 48.7                        |       |
| i-units (Units authorized and issued –  9,865,753 in 2003 and 9,228,655 in 2002)                  |   | 353.8                        |       | 335.6                       |       |
| General Partner                                                                                        |   | 22.3                         |       | 18.8                        |       |
| Accumulated other comprehensive loss                                                                   |   | (59.2                        | )          | (16.3                       | )          |
|                                                                                                   |   | 1,081.5                      |       | 991.6                       |       |
|                                                                                                   |   |                         |       |                        |       |
|                                                                                                   |   | $                            | 2,961.5    |                        | $          | 2,834.9 |   |

 

The accompanying notes to the Consolidated Financial Statements are anintegral part of these statements.

 

6

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***NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS (unaudited)***

 

*1.*              **Basis of Presentation**

* *

*The accompanying unaudited interimconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim consolidated financial information and with the instructions to Form10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete consolidated financial statements. In the opinion ofmanagement, they contain all adjustments, consisting only of normal recurringadjustments, which management considers necessary to present fairly thefinancial position as at September 30, 2003 and December 31, 2002;the results of operations for the three and nine month periods endedSeptember 30, 2003 and 2002; and cash flows for the nine month periodsended September 30, 2003 and 2002. The results of operations for the three and nine month periods endedSeptember 30, 2003 should not be taken as indicative of the results to beexpected for the full year, due to seasonality of portions of the natural gasbusiness and maintenance activities. The interim consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto of EnbridgeEnergy Partners, L.P. (the “Partnership”), presented in the Partnership’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2002.*

* *

*2.*              **Net Income per Unit**

* *

Net income per unit is computed by dividing net income, after deductionof the Enbridge Energy Company, Inc. (the “General Partner”) allocation, by theweighted average number of Class A and Class B common units and i-unitsoutstanding.  The General Partner’sallocation is equal to an amount based upon its general partner interest, adjustedto reflect an amount equal to incentive distributions and an amount required toreflect depreciation on the General Partner’s historical cost basis for assetscontributed upon formation of the Partnership. Net income per unit was determined as follows:

 
|                                                                  |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-----------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| **(in millions, except per unit amounts)**                            |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                                  |   |                                        |   |                                       |   |   |   |   |   |
| Net income                                                            |   | $                                           | 23.5   |                                       | $      | 17.6 |   | $ | 79.4 |   | $ | 52.1 |   |
|                                                                  |   |                                        |   |                                       |   |   |   |   |   |
| Net income allocated to General Partner                               |   | (0.5                                        | )      | (0.1                                       | )      | (1.6 | ) | (0.5 | ) |
| Incentive distributions and historical cost  depreciation adjustments |   | (4.2                                        | )      | (2.8                                       | )      | (12.7 | ) | (8.6 | ) |
|                                                                  |   | (4.7                                        | )      | (2.9                                       | )      | (14.3 | ) | (9.1 | ) |
|                                                                  |   |                                        |   |                                       |   |   |   |   |   |
| Net income allocable to common units and  i-units                     |   | $                                           | 18.8   |                                       | $      | 14.7 |   | $ | 65.1 |   | $ | 43.0 |   |
|                                                                  |   |                                        |   |                                       |   |   |   |   |   |
| Weighted average units outstanding                                    |   | 48.9                                        |   | 35.2                                       |   | 46.8 |   | 34.7 |   |
|                                                                  |   |                                        |   |                                       |   |   |   |   |   |
| Net income per unit                                                   |   | $                                           | 0.38   |                                       | $      | 0.42 |   | $ | 1.39 |   | $ | 1.24 |   |

* *

*3.*              **Distributions toUnitholders**

* *

*On October 22, 2003, thePartnership’s Board of Directors declared a distribution payable on November 14,2003, to unitholders of record as of October 31, 2003, of its availablecash of $50.4 million at September 30, 2003, or $0.925 per commonunit.  Of this distribution, $9.1million was distributed in i-units to i-unit holders and $0.2 million was retainedfrom the General Partner in respect of this i-unit distribution.*

 

7

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The followingtable sets forth the distributions, as approved by the Board of Directors foreach period in 2003 (dollars in millions, except per unit amounts).

* *
| **Distribution  Declaration Date** |   | **Distribution  Payment Date** |   | **Ex-Distribution  Date** |   | **Distribution  per Unit** |   | **Cash  available for  distribution** |   | **Amount of  Distribution  of i-units to i-  unit holders** |   | **Retained  from  General  Partner** |   | **Distribution  of Cash** |   |
|------------------------------------|--------|--------------------------------|--------|---------------------------|--------|----------------------------|--------|---------------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------|--------|---------------------------|--------|
| July 23, 2003                 |   | August 14,  2003          |   | July 31,  2003       |   | $                          | 0.925  |                                  | $      | 50.3                                                        |   | $                                    | 8.9    |                      | $      | 0.2 |   | $ | 41.2 |   |
| April 24, 2003                |   | May 15,  2003             |   | April 30,  2003      |   | $                          | 0.925  |                                  | 46.1   |                                                        | 8.7    |                                 | 0.2    |                      | 37.2   |   |
| January 23, 2003              |   | February 14,  2003        |   | January 31,  2003    |   | $                          | 0.925  |                                  | 45.9   |                                                        | 8.5    |                                 | 0.2    |                      | 37.2   |   |
| **Total**                          |   |                           |   |                      |   |                       |   | $                                     | 142.3  |                                                        | $      | 26.1                                 |   | $                         | 0.6    |   | $ | 115.6 |   |

* *

*4.*              **Equity Unit Issuance**

* *

*In May 2003, the Partnershipissued 3.85 million Class A Common Units at $44.79 per unit, which generatedproceeds, net of underwriters’ fees and discounts, commissions and issuanceexpenses, of approximately $165.5 million. Proceeds from this offering were used to reduce borrowings under thePartnership’s credit facility and an affiliate loan from Enbridge (U.S.)Inc.  In addition to the proceeds generatedfrom the unit issuances, the General Partner contributed $3.5 million to thePartnership to maintain its 2% general partner interest in the Partnership.*

* *

*5.**    *****Reclassification ofoutstanding checks**

 

*The Partnership utilizes a cash management systemthat includes zero balance accounts. When outstanding checks result in negative cash balances for suchaccounts, these balances are reclassified to liabilities for presentationpurposes in the consolidated statement of financial position.  As of September 30, 2003 andDecember 31, 2002, $10.8 million and $2.9 million, respectively, ofoutstanding checks were classified to liabilities.*

* *

*6.***             ****Debt**

* *

OnMay 27, 2003, the Partnership issued $200.0 million in aggregate principalamount of its 4.75% Notes due 2013 and $200.0 million in aggregate principalamount of its 5.95% Notes due 2033 (the “Notes”) in a private placement.  The Partnership used the proceeds ofapproximately $396.3 million, net of expenses of approximately $3.0 million, torepay loans from affiliates of the Partnership and other bank debt.  The Partnership recorded a discount of $0.7million in connection with the issuance of the Notes.  On June 30, 2003, the Partnership completed a Form S-4 withthe Securities and Exchange Commission (the “SEC”), which registered theexchange of the unregistered Notes for publicly registered Notes.

 

OnJanuary 24, 2003, the Partnership amended and restated the terms of itstwo unsecured revolving credit facilities. The new facilities consist of the amended and restated $300.0 millionthree-year facility, which matures in 2006, subject to extension as provided inthe facilities, and the amended and restated $300.0 million 364-day facility,which matures in 2004, subject to a one-year term out option and extension asprovided in the facility.  ThePartnership is the sole borrower under the new facilities and there are noguarantees of the obligations under either facility.  The amended and restated terms of the facilities aresubstantially similar to the original facilities with the exception of certainamendments to the covenants.  Among thechanges to the facilities, the Partnership must maintain a minimum interestcoverage ratio of 2.75 to 1.00 as of the end of each fiscal quarter and amaximum leverage ratio of 4.75 to 1.00 as defined in the facilities.  The Partnership is no longer required tomaintain a particular credit rating. Although subsidiaries may incur debt subject to certain restrictions andlimitations under the new facilities, the Partnership expects to providefunding to its subsidiaries.  As ofSeptember 30, 2003, $110.0 million and $200.0 million were outstandingunder the 364-day and three-year facilities, respectively.

 

*7.*              **Derivative Instrumentsand Hedging Activities**

 

*Effective September 29, 2003,the Partnership entered into two floating-to-fixed interest rate swap contracts with a notional amount of$100.0 million maturing on October 6 and 7, 2004, for the purpose oflocking in LIBOR interest rates on existing floating rate debt borrowings.  As of September 30, 2003, the fairvalue of the swaps was insignificant. The swaps are fully effective cash flow hedges under the guidelines setforth in FASB Statement 133.  Allchanges to the fair value of the derivative instrument are recorded in accumulatedother comprehensive income.*

 

8

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*Effective August 15, 2003, thePartnership entered into three fixed-to-floating interest rate swap contractswith a notional amount of $125.0 million maturing June 1, 2013, to hedgethe fair value of an existing term debt issuance.  This hedge effectively converts the fixed rate debt instrumentinto a LIBOR based floating rate debt instrument.  As of September 30, 2003, the fair value of the swapstotaled $4.5 million.  The hedges arefully effective fair value hedges under the guidelines set forth in FASBStatement 133.  All changes to the fairvalue of both the derivative instrument and the hedged debt are recorded toincome.*

 

*In May 2003, the Partnershipentered into a notional $104.0 million treasury lock contract for the purposeof locking in the U.S. Treasury bond interest rate on an anticipated fixed rateterm debt offering.  The hedge has beenamended to mature on December 1, 2003. As of September 30, 2003, the fair value of the hedge totaled $0.6million and is deemed to be an effective cash flow hedge under the guidelinesset forth in FASB Statement 133.  Allchanges to the fair value of the derivative instrument are recorded inaccumulated other comprehensive income.*

* *

*The changes in the market value ofnatural gas hedging instruments that are attributable to hedge ineffectiveness,measured on a quarterly basis, are included in cost of natural gas expense inthe period in which they occur.  Duringthe second and third quarters of 2003, the Partnership recorded, insignificantgains and losses related to the ineffective portions of certain hedgetransactions.*

* *

*8.*              **Depreciation**

 

Based on a third-party study commissioned by management, reviseddepreciation rates for the Lakehead System were implemented effectiveJanuary 1, 2003, which represent the expected remaining service life ofthe pipeline system.  The third-partystudy will be filed with the Federal Energy Regulatory Commission (“FERC”) toconform regulatory and financial accounting depreciation rates of the LakeheadSystem.  The annual composite rate wasreduced from 3.9% to 3.1%.  Depreciationexpense for the nine months ended September 30, 2003 was $43.3 million forthe Liquids Transportation segment. Using the revised rates, depreciation expense was $10.5 million lowerthan it would have been had the Partnership used previous depreciationrates.  Compared to the same period in2002, this reduction was offset by $5.8 million additional depreciation as aresult of facilities placed into service during the fourth quarter 2002.

 

*9.*              **SegmentInformation**

 

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

----

 

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

 
|                                           |   | **As of and  for the three months ended September 30, 2003** |    |
|------------------------------------------------|--------|-------------------------------------------------------------------|---------|
|                                           |   | **Liquids  Transportation**                                       |    | **Gathering  and  Processing** |   | **Natural  Gas  Transportation** |   | **Marketing** |   | **Corporate** |   | **Total** |   |
| Total revenues                                 |   | $                                                                 | 83.8    |   | $ | 510.2 |   | $ | 27.1 |   | $ | 499.4 |   | $ | — |   | $ | 1,120.5 |   |
| Less:   Intersegment revenues             |   | —                                                            |    | 80.3 |   | 0.6 |   | 279.1 |   | — |   | 360.0 |   |
| Operating revenues                             |   | 83.8                                                              |    | 429.9 |   | 26.5 |   | 220.3 |   | — |   | 760.5 |   |
| Cost of natural gas                            |   | —                                                            |    | 391.3 |   | 15.8 |   | 218.2 |   | — |   | 625.3 |   |
| Operating  and administrative                  |   | 26.5                                                              |    | 20.4 |   | 4.5 |   | 0.5 |   | 0.7 |   | 52.6 |   |
| Power                                          |   | 14.2                                                              |    | — |   | — |   | — |   | — |   | 14.2 |   |
| Depreciation  and amortization                 |   | 14.4                                                              |    | 5.8 |   | 3.2 |   | — |   | — |   | 23.4 |   |
| Operating  income                              |   | 28.7                                                              |    | 12.4 |   | 3.0 |   | 1.6 |   | (0.7 | ) | 45.0 |   |
| Other income  (expense)                        |   | —                                                            |    | — |   | — |   | — |   | (0.1 | ) | (0.1 | ) |
| Interest  expense                              |   | —                                                            |    | — |   | — |   | — |   | (21.4 | ) | (21.4 | ) |
| Net income                                     |   | $                                                                 | 28.7    |   | $ | 12.4 |   | $ | 3.0 |   | $ | 1.6 |   | $ | (22.2 | ) | $ | 23.5 |   |
|                                           |   |                                                              |    |   |   |   |   |   |   |   |   |   |   |
| Total assets                                   |   | $                                                                 | 1,535.8 |   | $ | 762.8 |   | $ | 418.5 |   | $ | 203.6 |   | $ | 40.8 |   | $ | 2,961.5 |   |
| Goodwill                                       |   | $                                                                 | —  |   | $ | 146.1 |   | $ | 72.9 |   | $ | 20.3 |   | $ | — |   | $ | 239.3 |   |
| Capital expenditures (excluding  acquisitions) |   | $                                                                 | 33.1    |   | $ | 12.6 |   | $ | 1.0 |   | $ | — |   | $ | 0.6 |   | $ | 47.3 |   |

 
|                                           |   | **As of and for the three months ended September 30,  2002** |    |
|------------------------------------------------|--------|-------------------------------------------------------------------|---------|
|                                           |   | **Liquids  Transportation**                                       |    | **Gathering and  Processing** |   | **Natural Gas  Transportation** |   | **Marketing** |   | **Corporate** |   | **Total** |   |
| Total revenues                                 |   | $                                                                 | 82.5    |   | $ | 155.1 |   | $ | — |   | $ | — |   | $ | — |   | $ | 237.6 |   |
| Less:   Intersegment revenues             |   | —                                                            |    | — |   | — |   | — |   | — |   | — |   |
| Operating revenues                             |   | 82.5                                                              |    | 155.1 |   | — |   | — |   | — |   | 237.6 |   |
| Cost of  natural gas                           |   | —                                                            |    | 141.7 |   | — |   | — |   | — |   | 141.7 |   |
| Operating  and administrative                  |   | 27.9                                                              |    | 5.9 |   | — |   | — |   | (1.4 | ) | 32.4 |   |
| Power                                          |   | 13.3                                                              |    | — |   | — |   | — |   | — |   | 13.3 |   |
| Depreciation  and amortization                 |   | 16.0                                                              |    | 2.5 |   | — |   | — |   | — |   | 18.5 |   |
| Operating  income                              |   | 25.3                                                              |    | 5.0 |   | — |   | — |   | 1.4 |   | 31.7 |   |
| Other income  (expense)                        |   | —                                                            |    | — |   | — |   | — |   | (0.5 | ) | (0.5 | ) |
| Interest  expense                              |   | —                                                            |    | — |   | — |   | — |   | (13.5 | ) | (13.5 | ) |
| Minority  interest                             |   | —                                                            |    | — |   | — |   | — |   | (0.1 | ) | (0.1 | ) |
| Net income                                     |   | $                                                                 | 25.3    |   | $ | 5.0 |   | $ | — |   | $ | — |   | $ | (12.7 | ) | $ | 17.6 |   |
|                                           |   |                                                              |    |   |   |   |   |   |   |   |   |   |   |
| Total assets                                   |   | $                                                                 | 1,511.9 |   | $ | 272.7 |   | $ | — |   | $ | — |   | $ | 48.8 |   | $ | 1,833.4 |   |
| Goodwill                                       |   | $                                                                 | —  |   | $ | 15.0 |   | $ | — |   | $ | — |   | $ | — |   | $ | 15.0 |   |
| Capital  expenditures (excluding acquisitions) |   | $                                                                 | 75.2    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 75.2 |   |

 

10

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|                                           |   | **As of and  for the nine months ended September 30, 2003** | ** ** |
|------------------------------------------------|--------|------------------------------------------------------------------|------------|
|                                           |   | **Liquids  Transportation**                                      |       | **Gathering  and  Processing** | ** ** | **Natural  Gas  Transportation** | ** ** | **Marketing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Total revenues                                 |   | $                                                                | 251.0      |   | $ | 1,585.0 |   | $ | 94.5 |   | $ | 1,551.9 |   | $ | — |   | $ | 3,482.4 |   |
| Less:   Intersegment revenues             |   | —                                                           |       | 211.1 |   | 3.5 |   | 855.9 |   | — |   | 1,070.5 |   |
| Operating revenues                             |   | 251.0                                                            |       | 1,373.9 |   | 91.0 |   | 696.0 |   | — |   | 2,411.9 |   |
| Cost of  natural gas                           |   | —                                                           |       | 1,261.9 |   | 54.5 |   | 685.8 |   | — |   | 2,002.2 |   |
| Operating  and administrative                  |   | 79.8                                                             |       | 58.5 |   | 15.5 |   | 1.3 |   | 2.4 |   | 157.5 |   |
| Power                                          |   | 39.9                                                             |       | — |   | — |   | — |   | — |   | 39.9 |   |
| Depreciation  and amortization                 |   | 43.3                                                             |       | 16.9 |   | 10.0 |   | 0.1 |   | — |   | 70.3 |   |
| Operating  income                              |   | 88.0                                                             |       | 36.6 |   | 11.0 |   | 8.8 |   | (2.4 | ) | 142.0 |   |
| Other income  (expense)                        |   | —                                                           |       | — |   | — |   | — |   | 1.7 |   | 1.7 |   |
| Interest  expense                              |   | —                                                           |       | — |   | — |   | — |   | (64.3 | ) | (64.3 | ) |
| Net income                                     |   | $                                                                | 88.0       |   | $ | 36.6 |   | $ | 11.0 |   | $ | 8.8 |   | $ | (65.0 | ) | $ | 79.4 |   |
| Total assets                                   |   | $                                                                | 1,535.8    |   | $ | 762.8 |   | $ | 418.5 |   | $ | 203.6 |   | $ | 40.8 |   | $ | 2,961.5 |   |
| Goodwill                                       |   | $                                                                | —     |   | $ | 146.1 |   | $ | 72.9 |   | $ | 20.3 |   | $ | — |   | $ | 239.3 |   |
| Capital  expenditures (excluding acquisitions) |   | $                                                                | 53.1       |   | $ | 33.9 |   | $ | 3.4 |   | $ | 0.1 |   | $ | 2.4 |   | $ | 92.9 |   |

 
|                                           |   | **As of and  for the nine months ended September 30, 2002** | ** ** |
|------------------------------------------------|--------|------------------------------------------------------------------|------------|
|                                           |   | **Liquids  Transportation**                                      |       | **Gathering  and  Processing** | ** ** | **Natural  Gas  Transportation** | ** ** | **Marketing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Total revenues                                 |   | $                                                                | 246.1      |   | $ | 396.4 |   | $ | — |   | $ | — |   | $ | — |   | $ | 642.5 |   |
| Less:   Intersegment revenues             |   | —                                                           |       | — |   | — |   | — |   | — |   | — |   |
| Operating revenues                             |   | 246.1                                                            |       | 396.4 |   | — |   | — |   | — |   | 642.5 |   |
| Cost of  natural gas                           |   | —                                                           |       | 362.1 |   | — |   | — |   | — |   | 362.1 |   |
| Operating  and administrative                  |   | 74.6                                                             |       | 16.5 |   | — |   | — |   | — |   | 91.1 |   |
| Power                                          |   | 39.3                                                             |       | — |   | — |   | — |   | — |   | 39.3 |   |
| Depreciation  and amortization                 |   | 48.0                                                             |       | 7.4 |   | — |   | — |   | — |   | 55.4 |   |
| Operating  income                              |   | 84.2                                                             |       | 10.4 |   | — |   | — |   | — |   | 94.6 |   |
| Other income  (expense)                        |   | —                                                           |       | — |   | — |   | — |   | (0.3 | ) | (0.3 | ) |
| Interest  expense                              |   | —                                                           |       | — |   | — |   | — |   | (41.7 | ) | (41.7 | ) |
| Minority  interest                             |   | —                                                           |       | — |   | — |   | — |   | (0.5 | ) | (0.5 | ) |
| Net income                                     |   | $                                                                | 84.2       |   | $ | 10.4 |   | $ | — |   | $ | — |   | $ | (42.5 | ) | $ | 52.1 |   |
| Total assets                                   |   | $                                                                | 1,511.9    |   | $ | 272.7 |   | $ | — |   | $ | — |   | $ | 48.8 |   | $ | 1,833.4 |   |
| Goodwill                                       |   | $                                                                | —     |   | $ | 15.0 |   | $ | — |   | $ | — |   | $ | — |   | $ | 15.0 |   |
| Capital  expenditures (excluding acquisitions) |   | $                                                                | 172.3      |   | $ | 5.5 |   | $ | — |   | $ | — |   | $ | — |   | $ | 177.8 |   |

 

*10. ***Commitmentsand contingencies**

 

From 1998, when the Kansas Pipeline system (“KPC”) became subject tothe FERC jurisdiction, until November 9, 2002, at which time KPC’s ratecase became effective, the FERC established initial rates based upon an annualcost of service of approximately $31 million. Since that time, these initial rates have been the subject of variousongoing challenges that remain unresolved.

 

The United States Court of Appeals for the D.C. Circuit issued an orderon August 12, 2003 vacating the FERC’s 2001 remand order and 2002rehearing order and remanded the issue of KPC’s initial rates back to the FERCwith directions

 

11

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that the FERC address the question of an appropriate rate refund.  In prior KPC orders in this proceeding, theFERC determined that it had no authority to impose a refund condition oninitial rates.  On October 3, 2003,KPC filed a pleading at FERC requesting the issuance of an order finding thatit had no refund obligation and requesting termination of the proceedings onremand.  There are other actions andadministrative proceedings that may be undertaken in connection with theCourt’s determination.  The outcome ofKPC’s motion or any other proceedings, including the amount of any refunds thatmay be ordered, is uncertain.  If theFERC determines refunds are required, after all administrative options andcourt appeals are exhausted, the amount of the refunds effecting thePartnership's earnings may range from $Nil to $9.0 million.

 

*11. ***NewAccounting Pronouncements**

 

In June 2001, the FASB issued SFAS No. 143,  *Accounting for Asset Retirement Obligations*,which must be adopted in years beginning after June 15, 2002.  This standard requires legal obligationsassociated with the retirement of long-lived tangible assets to be recognizedat fair value.  When the liability isinitially recorded, the cost is capitalized by increasing the assets carryingvalue, which is subsequently depreciated over its useful life.  The new standard was adopted January 1,2003 and did not have a material impact on the Partnership’s financialposition, results of operations, or cash flows.

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.*  Thisstatement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*.  In particular, this statement:  (1) clarifies under what circumstances a contractwith an initial net investment meets the characteristic of a derivativediscussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivativecontains a financing component, (3) amends the definition of an underlying toconform it to language used in FASB Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*,and (4) amends certain other existing pronouncements.  Those changes will result in more consistent reporting ofcontracts as either derivatives or hybrid instruments.  The new standard was adopted July 1,2003 and did not have a significant impact on the Partnership’s financialposition, results of operations, or cash flows.

 

*12. ***ComparativeAmounts**

 

Certain reclassifications have been made to the prior period’s reportedamounts to conform to the classifications used in the 2003 consolidatedfinancial statements.  Thesereclassifications have no impact on net income.

 

12

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***ITEM2******.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

 

**Results of Operations- Overview**

 

Net income for the third quarter of 2003 improved by$5.9 million, or 34%, to $23.5 million compared with $17.6 million for thethird quarter of 2002.  Net income forthe nine months ended September 30, 2003 improved $27.3 million, or 52%,to $79.4 million compared with $52.1 million for the nine months ended September 30,2002.  The increase in net income inboth periods in 2003 was primarily due to the inclusion of the Midcoast Systemresults.  The comparable numbers for2002 did not include earnings from the Midcoast System, as these assets werepurchased in the fourth quarter of 2002.

 

Earnings per unit for the third quarter of2003 was $0.38 per unit, compared with $0.42 for the third quarter of2002.  Earnings per unit for the ninemonths ended September 30, 2003 was $1.39 per unit, compared with $1.24per unit for the nine months ended September 30, 2002.  Earnings per unit was higher for the ninemonths ended September 30, 2003 due to an increase in net income primarilydue to the Midcoast acquisition, partially offset by an increase in the numberof units outstanding.  Due to the i-unitissuance in October 2002 and a Class A common unit issuance inMay 2003, the weighted average number of common units outstandingincreased.  On a quarterly basis, theweighted average number of common units outstanding increased from 35.2 millionin the third quarter of 2002 to 48.9 million in the third quarter of 2003.  On a year-to-date basis, it increased from34.7 million in the first nine months of 2002 to 46.8 million in the first ninemonths of 2003.

 

The Partnership’s reportable segments are based on the types of businessactivity and management control.  Eachsegment is managed separately because each business requires differentoperating strategies.  The Partnershiphas five reportable business segments: Liquids Transportation, Gathering andProcessing, Natural Gas Transportation, Marketing and Corporate.

 

Due to the purchase of natural gas assets in October 2002, thePartnership changed the organization of its business segments effective in thefourth quarter of 2002.  Prior to thefourth quarter of 2002, the Partnership reported Transportation as one segment,which consisted of receipt and delivery of crude oil, liquid hydrocarbons,natural gas and natural gas liquids. These activities are now reported within 3 segments – LiquidsTransportation, Natural Gas Transportation and Gathering and Processing.  Prior period segment results have beenrestated to conform to the Partnership’s current organization.

 

The following table reflects operating income bybusiness segment and corporate charges for each of the three and nine-monthperiods ended September 30, 2003 and 2002.

 
|                                    |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-----------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| **(unaudited; dollars in millions)**    |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                    |   |                                        |   |                                       |   |   |   |   |   |
| **Operating Income**                    |   |                                        |   |                                       |   |   |   |   |   |
| Liquids Transportation                  |   | $                                           | 28.7   |                                       | $      | 25.3 |   | $ | 88.0 |   | $ | 84.2 |   |
| Gathering and Processing                |   | 12.4                                        |   | 5.0                                        |   | 36.6 |   | 10.4 |   |
| Natural Gas Transportation              |   | 3.0                                         |   | —                                     |   | 11.0 |   | — |   |
| Marketing                               |   | 1.6                                         |   | —                                     |   | 8.8 |   | — |   |
| Corporate, operating and administrative |   | (0.7                                        | )      | 1.4                                        |   | (2.4 | ) | — |   |
| **Total Operating Income**              |   | $                                           | 45.0   |                                       | $      | 31.7 |   | $ | 142.0 |   | $ | 94.6 |   |
| Other income (expense), net             |   | (21.5                                       | )      | (14.1                                      | )      | (62.6 | ) | (42.5 | ) |
| **Net Income**                          |   | $                                           | 23.5   |                                       | $      | 17.6 |   | $ | 79.4 |   | $ | 52.1 |   |

* *

**Results of Operations– by Segment**

 

***LiquidsTransportation***

 

### ***Three monthsended September 30, 2003 compared with three months endedSeptember 30, 2002***

### *** ***

Operating income increased by approximately $3.4 million to $28.7million for the three months ended September 30, 2003, compared with $25.3million for the same period in 2002. Operating income was higher in the 2003 period due to higher revenue,lower operating expenses and lower depreciation.

 

Operating revenue for the third quarter of 2003 was $83.8 millioncompared with $82.5 million for the third quarter of 2002.  The increase of $1.3 million in 2003 wasprimarily due to an improvement in deliveries on the Lakehead system, partiallyoffset by lower tariffs.  Production ofwestern Canadian crude oil has increased over last year due to the start up ofnew oil sands projects in the Province of Alberta.  During the third quarter of 2003, deliveries on the Lakeheadsystem were lower than expected due to the August power outage thatoccurred in the northeastern United States and Canada, and supply disruptionsin Alberta.  While portions of theLakehead system were out of service for only 3 days as a result of the poweroutage, most lines in the Lakehead system had reduced rates over the secondhalf of August to accommodate processing limitations of downstreamrefiners as they returned to prior operating levels.  As a result of this interruption, tankage levels were close to

 

13

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capacity along the Lakehead system, with carry-over volumes to bedelivered in the fourth quarter of 2003. Crude oil supply was also impacted during the third quarter of 2003 bycontinued production volatility at some of the new oil sands projects.  Tariffs were lower due to the negativeFederal Energy Regulatory Commission (“FERC”) indexed-tariff adjustmenteffective July 1, 2003, and a decrease in the SEP II tariff effectiveMay 1, 2003.

 

The following table sets forth the Lakehead system’saverage deliveries per day, barrel miles, and average haul for the three andnine month periods ending September 30, 2003 and 2002:

 

|                              |   | **Three  months ended  September 30,** |       | **Nine  months ended  September 30,** |       |
|-----------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
|                              |   | **2003**                                    |       | **2002**                                   |       | **2003** |   | **2002** |   |
| Average BBls/day                  |   |                                        |       |                                       |       |   |   |   |   |
| United  States                    |   | 1,014                                       |       | 905                                        |       | 971 |   | 926 |   |
| Province  of Ontario              |   | 318                                         |       | 337                                        |       | 347 |   | 362 |   |
| **Total deliveries  (thousands)** |   | **1,332**                                   | ** ** | **1,242**                                  | ** ** | **1,318** | ** ** | **1,288** | ** ** |
|                              |   |                                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
| **Barrel miles (billions)**       |   | **84**                                      | ** ** | **83**                                     | ** ** | **250** | ** ** | **252** | ** ** |
| **Average haul (miles)**          |   | **690**                                     | ** ** | **720**                                    | ** ** | **696** | ** ** | **715** | ** ** |

 

Operating and administrative expenses were $26.5 million for the thirdquarter of 2003, compared with $27.9 million in the same period of 2002.  Increased oil measurement losses andproperty taxes of $3.2 million, in aggregate, were more than offset by lowerleak remediation, repair costs, and other general and administrative costs in2003.  The third quarter of 2002included repair, restoration and pipeline integrity costs of approximately $4.0million associated with a Lakehead system leak that occurred in July 2002.

 

Depreciation expense was $14.4 million for the thirdquarter of 2003, compared with $16.0 million in the third quarter of 2002.  The decrease was primarily due to reviseddepreciation rates on the Lakehead system. The revised rates better represent the expected remaining service lifeof the pipeline system.  Using therevised rates, depreciation expense was approximately $4.4 million lower thanit would have been using previous depreciation rates.  Compared to the same period in 2002, this reduction was offset by$2.8 million additional depreciation as a result of facilities placed into serviceduring the fourth quarter of 2002.

 

***Nine months endedSeptember 30, 2003 compared with nine months ended September 30, 2002***

 

Operating income increased for the nine months ended September 30,2003 by approximately $3.8 million to $88.0 million, as compared with $84.2million for the nine months ended September 30, 2002.  Operating income was higher in 2003primarily due to higher revenues and lower depreciation, partially offset byhigher operating expenses.

 

Operatingrevenue for the first nine months of 2003 increased by $4.9 million to $251.0million from $246.1 million for the same period in 2002 for the same reasons asnoted above in the three-month analysis.

 

Operating and administrative expenses for the first nine months of 2003increased $5.2 million to $79.8 million from $74.6 million for the same periodin 2002.  The increase was due to higherworkforce related costs, as well as an increase in costs associated with thecleanup and remediation of leaks that occurred during 2003 on the Lakeheadsystem.

 

Depreciation expense was $43.3 million forthe nine months ended September 30, 2003, compared with $48.0 million in2002.  The decrease of$4.7 million was due to revised depreciation rates on the Lakehead system,offset by additional depreciation on facilities placed into service during thefourth quarter 2002.  Depreciationexpense for the nine months ended September 30, 2003, was approximately$10.5 million lower than it would have been using previous depreciation rates.

 

***Gathering andProcessing***

 

The East Texas System was acquired on November 30, 2001, andadditional gathering and processing systems were purchased as part of theMidcoast System acquisition on October 17, 2002.  Therefore, comparative results for 2002 include only the resultsof operations from the East Texas System.

 

14

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Volatility in natural gas prices can impact the operating income of theGathering and Processing segment.  Whennatural gas prices are high, processing activities may be non-economic oncertain facilities where processing is mandatory as a result of downstreampipeline quality specifications. Operating income from this segment is derived from fixed fee contractstructures, percentage-of-index contract structures, and trucking operations.

 

During the first nine months of 2003, historically high natural gasprices made keep-whole processing contracts non-economic for the gathering andprocessing segment.  A negativeprocessing margin of approximately $1.6 million was recorded for the first ninemonths of 2003, whereas $5.8 million of processing margin was expected for thesame period.  First of the month naturalgas prices fluctuated between $4.93 and $9.11 per Mmbtu resulting in an averageprice of approximately $5.65 per Mmbtu during the nine months ended September 30,2003.  Due to fluctuations in both thenatural gas and natural gas liquids prices, the processing margin was positivein some months and negative in others. When processing margins were positive, the Partnership processed volumesbeyond the contractual mandatory****levels.  Assuming an approximate $5 per Mmbtu naturalgas price and stable NGL prices, it is expected that processing margins in theGathering and Processing segment will break even for the remainder of the year.Should natural gas prices increase by $1 per Mmbtu and remain constant for thelast quarter of 2003, processing margins could be****negative approximately $2.0 million for the last three monthsof 2003.  This estimate assumes constantNGL prices, expected natural gas volumes, and other assumptions.  Natural gas price changes will also impactcontractual in-kind natural gas operational balancing agreements, which arerevalued monthly at market prices.

 

The following table indicates the average daily volume for each of themajor systems in the Partnership’s Gathering and Processing segment during thethree and nine months ended September 30, 2003 and 2002, in millionBritish thermal units per day (“Mmbtu/d”).

 

|                   |   | **Three  months ended  September 30,** |       | **Nine  months ended  September 30,** |       |
|------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
|                   |   | **2003**                                    |       | **2002**                                   |       | **2003** |   | **2002** |   |
| **Gathering Systems:** |   |                                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
| East Texas             |   | 450                                         |       | 411                                        |       | 441 |   | 397 |   |
| Anadarko               |   | 262                                         |       | N/A                                        |       | 249 |   | N/A |   |
| Northeast Texas        |   | 129                                         |       | N/A                                        |       | 133 |   | N/A |   |
| Tilden                 |   | 37                                          |       | N/A                                        |       | 36 |   | N/A |   |
| Total                  |   | 878                                         |       | 411                                        |       | 859 |   | 397 |   |

 

*East Texas System. *Operating income for the third quarter of 2003 of $6.3 million wasimproved by $1.3 million compared with the same period in 2002.  Higher volumes were offset by lowerprocessing margins due to higher gas prices during 2003.  Operating income for the East Texas Systemwas $13.1 million for the nine months ended 2003 compared with $10.4 millionfor the same period ended September 30, 2002.  The increase of $2.7 million was primarily due to higher volumesand the absence of expenses related to treating plant maintenance shutdownsthat occurred during the first half of 2002, offset by less favorableprocessing in 2003.  Higher volumes area result of an increase in natural gas production and new drilling by producersin the East Texas area.

* *

*Other Gathering andProcessing systems.*Operating income on the Anadarko system was positively impactedby higher volumes and improvedprocessing margins, which were realized from lower natural gas prices andhigher natural gas liquid (“NGL”) prices during the third quarter of2003.  The increase in operating incomewas partially offset by higher operating costs.  Volumes on the Northeast Texas system were slightly lower duringthe third quarter of 2003 due to well declines.  Expectations are for a stable supply on the Northeast Texassystem during the remainder of 2003.

 

***Natural GasTransportation***

 

The Natural Gas Transportation segment was established upon theacquisition of the Midcoast System on October 17, 2002.  This segment’s results of operations areincluded in the Partnership’s results since that date and, therefore, there isno comparative data for prior periods.

 

Natural Gas Transportation systems contributed $3.0million and $11.0 million to operating income for the three and  nine month periods ended September 30,2003, respectively.  Performance of theNatural Gas Transportation segment is largely dependent upon revenues derivedfrom reserved pipeline capacity. Natural gas transportation revenue is typically higher in the wintermonths from increased pipeline rates and greater pipeline reservations; thusthe first and fourth quarter operating

 

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income is typically higher as compared to the secondand third quarter operating income.

 

The table below indicates the average daily volumes in Mmbtu/d for themajor systems in the Partnership’s Natural Gas Transportation segment for thethree and nine-month periods ended September 30, 2003.

 

|                                          |   | **Three  months ended  September 30, 2003** |   | **Nine  months ended  September 30, 2003** |   |
|-----------------------------------------------|--------|--------------------------------------------------|--------|-------------------------------------------------|--------|
|                                          |   | **(average  Mmbtu/d)**                           |   |
| **Major Natural Gas Transportation Systems:** |   |                                             |   |                                            |   |
| UTOS  Pipeline                                |   | 184                                              |   | 222                                             |   |
| MidLa Pipeline                                |   | 106                                              |   | 116                                             |   |
| AlaTenn Pipeline                              |   | 44                                               |   | 59                                              |   |
| Kansas Pipeline                               |   | 22                                               |   | 46                                              |   |
| Bamagas Pipeline                              |   | 24                                               |   | 17                                              |   |
| **Other Major Intrastates**                   |   | 179                                              |   | 182                                             |   |
| **Total**                                     |   | 559                                              |   | 642                                             |   |

 

***Marketing***

 

The Marketing segment was established upon theacquisition of the Midcoast System on October 17, 2002. This segment’sresults of operations are included in the Partnership’s results since thatdate, as such, there is no comparative data for prior periods.

 

Operating income for the Marketing segment was $1.6 million for thethree months and $8.8 million for the nine months ended September 30,2003.  Colder weather during the firstfour months of 2003 created greater demand for natural gas.  This increased the ability to optimize firmtransportation contracts in competitive markets, because of strong demand fromwholesale customers.  Results for theMarketing segment for the nine months ended September 30, 2003 alsoinclude the positive impact of approximately $1.9 million due to the settlementof disputed amounts.  Typically, thefirst and fourth quarters will result in higher operating income for theMarketing segment due to colder weather in the market areas served by thissegment because colder weather generates significant incremental sales to thePartnership’s wholesale customers and creates the opportunity to optimizetransportation and storage agreements.

 

***Corporate***

 

Other income (expense) was $(0.1) million for thethree month period ending September 30, 2003 and $1.7 million for thenine-month period ending September 30, 2003, compared with ($0.5) millionfor the three months and ($0.3) million for the nine months endedSeptember 30, 2002.  The balancefor 2003 is primarily due to gains related to settlements of previouslydisputed amounts associated with certain assets purchased in the Midcoastacquisition in October 2002.

 

Interest expense was $21.4 million for the threemonths ended September 30, 2003, compared with $13.5 million for the sameperiod in 2002.  Interest expense was$64.3 million for the nine months ended September 30, 2003, compared with$41.7 million for the same period in 2002. The increase in both periods is due to higher debt balances in the 2003period compared to the 2002 period, coupled with higher interest rates.

 

**Liquidity and CapitalResources**

 

The Partnership believes that it will continue to have adequateliquidity to fund future recurring operating and investing activities.  The primary cash requirements for thePartnership consist of normal operating expenses, maintenance and expansioncapital expenditures, debt service payments, distributions to partners andacquisitions of new assets or businesses. Short-term cash requirements, such as operating expenses, maintenancecapital expenditures and quarterly distributions to partners, are expected tobe funded by operating cash flows. Long-term cash requirements for expansion projects and acquisitions areexpected to be funded by several sources, including cash flows from operatingactivities, borrowings under credit facilities, and the issuance of additionalequity and debt securities, including common units and i-units.  The Partnership’s ability to complete futuredebt and equity offerings and the timing of any such offerings will depend onvarious factors, including prevailing market conditions, interest rates and thefinancial condition of the Partnership and its credit rating at the time.

 

Working capital decreased by $86.5 million to($147.6) million at September 30, 2003, compared with ($61.1) million at

 

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December 31, 2002, primarily due to the netincrease in current maturities and short-term debt, as well as interest payableon long-term debt.  The increase ofcurrent maturities of long-term debt relates to the 364-day credit facility,which is due in January 2004.  Tothe extent that an outstanding balance exists at maturity, the Partnershipanticipates refinancing through an extended or renegotiated credit facility.

 

At September 30, 2003, cash and cash equivalents totaled $78.9million, compared with $60.3 million at December 31, 2002.  Of the cash balance, $50.4 million ($0.925per unit) will be used for the distribution payable November 14, 2003,including $9.1 million relating to the i-units and $0.2 million retained fromthe General Partner to maintain its 2% interest in respect of the i-unitdistribution, which will be retained by the Partnership for use in itsbusiness.  The remaining $28.5 millionis available for future cash distributions, capital expenditures or otherbusiness needs.

 

Cash flow from operating activities for the nine months endedSeptember 30, 2003 was $134.1 million as compared with $126.1 million forthe same period last year.  The increaseof $8.0 million is primarily due to an increase in net income and depreciationexpense, which was offset by increased payments to the General Partner andaffiliates, an increase in the gas in storage, and a payment made upon settlementof derivative transactions related to an interest rate hedge that was enteredinto place for the May 2003 debt issuance.

 

Cash flow used in investing activities during the nine months endedSeptember 30, 2003 was $97.9 million, compared with $182.8 million for thesame period in 2002.  The decrease of$84.9 million is primarily due to a decrease in additions to property, plantand equipment, which is a result of the Terrace Phase III expansion.  The majority of the construction activityrelated to the Terrace Phase III expansion occurred during 2002.

 

Cash flow used in financing activities during thenine months ended September 30, 2003 was $17.6 million, compared with cashflow provided by financing activities of $88.5 million for the same period in2002.  The decrease in cash flow isprimarily due to changes in debt, which include the net repayments of loansfrom the General Partner of $313.2 million and other repayments of $102.0million outstanding under credit facilities, as compared to additional netborrowings of $168.0 million in 2002. This was partially offset by the issuance of senior unsecured Notes of$396.3 million and Class A common unit issuances of $169.0 million inMay 2003, compared to only $93.3 million in Class A common unit issuancesduring the nine months ended September 30, 2002.

 

In May 2003, the Partnership issued 3.85million Class A common units at $44.79 per unit, which generated proceeds, netof underwriters’ fees and discounts, commissions and issuance expenses, ofapproximately $165.5 million.  Proceedsfrom this offering were used to reduce borrowings under the Partnership’scredit facility and an affiliate loan from Enbridge (U.S.) Inc.  In addition to the proceeds generated fromthe unit issuances, the General Partner contributed $3.5 million to thePartnership to maintain its 2% general partner interest in the Partnership.

 

On May 27, 2003, the Partnership issued $200.0 million inaggregate principal amount of its 4.75% Notes due 2013 and $200.0 million inaggregate principal amount of its 5.95% Notes due 2033 (the “Notes”) in aprivate placement.  The Partnership usedthe proceeds of approximately $396.3 million, net of expenses of approximately$3.0 million, to repay existing loans from affiliates of Enbridge Inc. andother bank debt.  The Partnershiprecorded a discount of $0.7 million in conjunction with the issuance of the twoseries of Notes.  On June 30, 2003,the Partnership completed a Form S-4 with the Securities and ExchangeCommission (the “SEC”) to register offers to exchange the unregistered Notesfor publicly registered Notes.

 

The Partnership has in effect a universal shelf registration statementwith the SEC.  The Partnership may offerand sell debt securities or Class A Common Units, from time to time, up to atotal of $1.5 billion, with the amount, price and terms to be determined at thetime of the sale.  The Partnershipexpects to use the net proceeds from any future sales of securities under theuniversal shelf registration statement for operations and for other generalcorporate purposes, including repayment or refinancing of borrowings, workingcapital, capital expenditures, or acquisitions of businesses or assets. As ofSeptember 30, 2003, the Partnership has not issued any securities pursuantto the shelf registration statement.

 

In May 2003, Moody’s assigned the Partnership’s senior unsecureddebt a Baa2 rating.  In May 2003,Moody’s also lowered its senior unsecured debt rating of Enbridge Energy,Limited Partnership, a wholly-owned subsidiary of the Partnership, from A3 toBaa1.

 

The Partnership anticipates spending approximately $84.0 million forpipeline system enhancements, $27.0 million for core maintenance and $39.0million for Lakehead System expansion projects in 2003.  Excluding major expansion projects, ongoingcapital expenditures are expected to average approximately $70.0 million on anannual basis (approximately 40% for core maintenance and 60% for enhancement ofthe systems).  Core maintenance activities,such as the replacement of

 

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equipment and planned major maintenance programs, will be undertaken toenable the Partnership’s systems to continue to operate at their maximumoperating capacity.  Enhancements to thesystems, such as renewal and replacement of pipe, are expected to extend thelife of the systems, reduce costs or enhance revenues, and permit thePartnership to respond to developing industry and government standards and thechanging service expectations of its customers.  The Partnership continuously evaluates capital projects that mayimpact the estimates noted in this paragraph.

 

**General Matters**

 

From 1998,when the Kansas Pipeline system (“KPC”) became subject to the FERCjurisdiction, until November 9, 2002, when KPC’s rate case rates becameeffective, the FERC established initial rates based upon an annual cost ofservice of approximately $31 million. Since that time, these initial rates have been the subject of variousongoing challenges that remain unresolved.

 

The United States Court of Appeals for the D.C. Circuit issued an orderon August 12, 2003 vacating the FERC’s 2001 remand order and 2002rehearing order and remanded the issue of KPC’s initial rates back to the FERCwith directions that the FERC address the question of an appropriate raterefund.  In prior KPC orders in thisproceeding, the FERC determined that it had no authority to impose a refundcondition on initial rates.  On October 3,2003, KPC filed a pleading at the FERC requesting the issuance of an order findingthat it had no refund obligation and requesting termination of the proceedingson remand.  There are other actions andadministrative proceedings that may be undertaken in connection with theCourt’s determination.  The outcome ofKPC’s motion or any proceedings, including the amount of any refunds that maybe ordered, is uncertain.   If the FERCdetermines refunds are required, after all administrative options and courtappeals are exhausted, the amount of the refunds effecting the Partnership's earningsmay range from $Nil to $9.0 million.

 

On June 25, 2003, the Partnership and Williams Field Services(“Williams”) mutually agreed to terminate an agreement for the sale by Williamsof certain South Texas natural gas transmission lines to the Partnership.  On May 2, 2003, the FERC issued anorder denying the abandonment of the South Texas system, reversing a previousruling granting the approvals necessary for the sale.  This decision effectively prevents the sale from proceeding underthe terms of the purchase and sale agreement.

 

***ITEM 3******.******                         QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK***

 

*EffectiveSeptember 29, 2003, the Partnership entered into two  floating-to-fixed interest rate swapcontracts with a notional amount of $100.0 million maturing on October 6and 7, 2004, for the purpose of locking in LIBOR interest rates on existingfloating rate debt borrowings.  As ofSeptember 30, 2003, the fair value of the swaps was insignificant.  The swaps are fully effective cash flowhedges under the guidelines set forth in FASB Statement 133.  All changes to the fair value of thederivative instrument are recorded in accumulated other comprehensive income.*

* *

*EffectiveAugust 15, 2003, the Partnership entered into three fixed-to-floatinginterest rate swap contracts with a notional amount of $125.0 million maturingJune 1, 2013, to hedge the fair value of an existing term debtissuance.  This hedge effectivelyconverts the fixed rate debt instrument into a LIBOR based floating rate debtinstrument.  As of September 30,2003, the fair value of the swaps totaled $4.5 million.  The hedges are fully effective fair valuehedges under the guidelines set forth in FASB Statement 133.  All changes to the fair value of both thederivative instrument and the hedged debt are recorded to income.*

* *

In May 2003, the Partnership entered into a notional $104.0million treasury lock contract for the purpose of locking in the U.S. Treasurybond interest rate on an anticipated fixed rate term debt offering.  The hedge has been amended to mature onDecember 1, 2003.  As ofSeptember 30, 2003, the fair value of the hedge totaled $0.6 million andis deemed to be an effective cash flow hedge under the guidelines set forth inFASB Statement 133.  All changes to thefair value of the derivative instrument are recorded in accumulated othercomprehensive income.

 

The Partnership’s earnings and cash flows associated with its LiquidsTransportation systems are not significantly impacted by changes in commodityprices, as the Partnership does not own the crude oil and Natural Gas Liquids(“NGLs”) it transports.  However, thePartnership has commodity risk related to degradation losses associated withthe fluctuating differentials between the price of heavy crude oil relative tolight crude oil.  Commodity prices havea significant impact on the underlying supply of, and demand for, crude oil andNGLs that the Partnership transports.

 

The total change in value of the financial derivatives over the quarterwas predominantly driven by the significant rise in near and long term naturalgas forward prices.  As thePartnership’s natural gas hedge portfolio is largely comprised of long termfixed price forward sale agreements, an increase in the forward market priceswill cause the unrealized hedge loss to increase.

 

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With the Partnership’s acquisition of the East TexasSystem on November 30, 2001, and the natural gas assets inOctober 2002, a portion of the Partnership’s earnings and cash flows are exposedto movements in the prices of natural gas and NGLs.  The Partnership has entered into hedge transactions to mitigateexposure to movements in these prices. Pursuant to policies approved by the Board of Directors of its GeneralPartner, the Partnership may not enter into derivative instruments forspeculative purposes.  All financialderivative transactions must be undertaken with creditworthy counter parties.

 

***ITEM 4******.******                         CONTROLSAND PROCEDURES***

 

The Partnership and Enbridge Inc. maintain systems of disclosurecontrols and procedures designed to provide reasonable assurance that thePartnership is able to record, process, summarize and report the informationrequired in the Partnership’s annual and quarterly reports under the SecuritiesExchange Act of 1934.  Management of thePartnership has evaluated the effectiveness of our disclosure controls andprocedures as of September 30, 2003. Based upon that evaluation, our principal executive officer andprincipal financial officer concluded that our disclosure controls andprocedures are effective to accomplish their purpose.  In conducting this assessment, management of the Partnershiprelied on similar evaluations conducted by employees of Enbridge Inc.affiliates who provide certain treasury, accounting and other services onbehalf of the Partnership.  Nosignificant changes were made to our internal controls or other factors thatcould significantly affect these controls subsequent to the date of theirevaluation, nor were any corrective actions with respect to significantdeficiencies and material weaknesses necessary.

 

***PARTII******- OTHER INFORMATION***

 

***ITEM1.  LEGAL******PROCEEDINGS***

 

The Partnership is a participant in other various legal proceedingsarising in the ordinary course of business. Some of these proceedings are covered, in whole or in part, byinsurance.  The Partnership believesthat the outcome of all these proceedings will not, individually or in theaggregate, have a material adverse effect on the financial condition of thePartnership.

 

For information regarding other legal proceedingsarising in 2002 or with regard to which material developments were reportedduring 2002, see Part I. Item 3., “Legal Proceedings,” in the Partnership’sAnnual Report on Form 10-K for the year ended December 31, 2002.

 

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

 

a)             Exhibits

 

31.1 Sarbanes-Oxley Section 302(a) Certification of PrincipalExecutive Officer.

31.2 Sarbanes-Oxley Section 302(a) Certification of PrincipalFinancial Officer.

32.1 Certification of Principal Executive Officer.

32.2 Certification of Principal Financial Officer.

 

b)            Reports on Form 8-K

 

The Partnership filed the following reports on Form 8-K during thethird quarter of 2003:

 

A report on Form 8-K was filed on July 31, 2003 that containsthe Consolidated Statements of Financial Position of Enbridge EnergyCompany, Inc., at June 30, 2003 and December 31, 2002.  Enbridge Energy Company, Inc., is theGeneral Partner of the Partnership.

 

A report on Form 8-K was filed on July 29, 2003 attaching a pressrelease dated July 23, 2003 regarding the financial results of thePartnership for the three and six months ended June 30, 2003.

 

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**SIGNATU****RE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned 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/ Mark A. Maki*                                                                                    |   |
|   |                                |                                                                                                  | *Mark A. Maki* |   |
|   |                                |                                                                                                  | *Vice President,  Finance  (Duly Authorized Officer)* |   |
|   |                                |                                                                                                  |
|   |                                |                                                                                                  |
|   |                                | Date:  November 13, 2003                                                                    |
|        |                                     |                                                                                                       |  |  |  |  |  |  |

 

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