ML PRINCIPAL PROTECTION LP - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2005

OR

/ / 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 0-25000

ML PRINCIPAL PROTECTION L.P.
----------------------------
(Exact Name of Registrant as
specified in its charter)

Delaware 13-3750642 (Registrant)
- --------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

c/o Merrill Lynch Investment Managers LLC
222 Broadway
27th Floor
New York, NY 10038-2510
-----------------------
(Address of principal executive offices)
(Zip Code)

609-282-6996
---------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF FINANCIAL CONDITION

See notes to financial statements.

2

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF OPERATIONS
(unaudited)

Substantially all items of income and expense are derived from the investment in
Global Horizons or MM LLC. (Note 2)

See notes to financial statements.

3

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)

See notes to financial statements.

4

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS
(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of ML
Principal Protection L.P. (the "Partnership") as of March 31, 2005, and the
results of its operations for the three months ended March 31, 2005 and
2004. The operating results for the interim periods may not be indicative
of the results for the full year.

Certain information and footnote disclosures normally included in quarterly
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Partnership's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2004.

2. INVESTMENTS

Effective December 31, 2004, the Partnership redeemed its entire interest
in ML Multi-Manager LLC ("MM LLC") and proceeds were invested on
January 2, 2005 in Global Horizons I L.P. ("Global Horizons"), formerly
known as ML Global Horizons L.P.

As of March 31, 2005 the Partnership had an investment in Global Horizons
of $12,083,012 and the Partnership's percentage ownership share of Global
Horizons was 4.61%.

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Condensed statement of financial condition and statements of operations for
Global Horizons and MM LLC are set forth as follows:

3. NET ASSET VALUE PER UNIT

Prior to the opening of business on January 2, 2005, Series A 2003, Series
2004 and Series S were consolidated into a new series, Series 2005, with a
$1.00 Unit Net Asset Value. The aggregate Net Asset Value of each
investor's new Units is equal to the aggregate Net Asset Value of their
original Units at December 31, 2004. The consolidation had no adverse
economic effect on the investors. MLIM LLC contributed $733 to the
Partnership, the amount necessary due to the effects of rounding, to ensure
that all investors received Units equal in value to their original holdings
at December 31, 2004. The following is a listing of the number of new Units
each investor received of Series 2005 for each Unit of their original
series holding:

Prior to the opening of business on January 2, 2004, Series G, H, and O
through R, those series that had come to term on or before December 31,
2003, but after December 31, 2002, were consolidated into a new series,
Series 2004, with a $1.00 per Unit Net Asset Value. The aggregate Net Asset
Value of each investor's new Units is equal to the aggregate Net Asset
Value of their original Units at December 31, 2003. The consolidation had
no adverse economic effect on the investors. The General Partner
contributed $314 to the Partnership, the amount necessary due to the
effects of rounding to ensure all investors received Units equal in value
to their original holdings at December

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31, 2003. The following is a list of the number of new Units each investor
received of Series 2004 for each Unit of their original series holding.

After the series consolidations, the brokerage commission rates for Series
2005 and Series 2004 were reduced to a monthly rate of 0.604 of 1% (a 7.25%
annual rate).

At March 31, 2005 and December 31, 2004, the Net Asset Values of the
different series of Units were:

March 31, 2005
(unaudited)

December 31, 2004

4. FAIR VALUE AND OFF-BALANCE SHEET RISK

The Partnership invests indirectly in derivative instruments as a result of
its investment in Global Horizons, but does not itself hold any derivative
instrument positions. The nature of this Partnership has certain risks,
which cannot be presented on the financial statements. The following
summarizes, resulting from its investment in Global Horizons, some of those
risks.

MARKET RISK

Derivative instruments involve varying degrees of off-balance sheet market
risk. Changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Partnership's allocation of net unrealized profit on such
derivative instruments as reflected in the Statements of Financial
Condition of Global Horizons. The Partnership's exposure to

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market risk is influenced by a number of factors, including the
relationships among the derivative instruments held by Global Horizons as
well as the volatility and liquidity of the markets in which such
derivative instruments are traded.

Merrill Lynch Investment Managers ("MLIM LLC"), The General Partner, has
procedures in place intended to control market risk exposure, although
there can be no assurance that they will, in fact, succeed in doing so.
These procedures focus primarily on monitoring the trading of the Advisors
selected from time to time by the General Partner of Global Horizons,
calculating the Net Asset Value of their respective Partnership's accounts
and Global Horizons' accounts as of the close of business on each day and
reviewing outstanding positions for over-concentrations both on an
Advisor-by-Advisor and on an overall Partnership basis. While MLIM LLC does
not itself intervene in the markets to hedge or diversify the Partnership's
market exposure, MLIM LLC may urge Advisors to reallocate positions, or
itself reallocate Partnership assets through Global Horizons among Advisors
(although typically only as of the end of a month) in an attempt to avoid
over-concentrations. However, such interventions are unusual. Except in
cases in which it appears that an Advisor has begun to deviate from past
practice or trading policies or to be trading erratically, MLIM LLC's basic
risk control procedures consist simply of the ongoing process of advisor
monitoring and selection with the market risk controls being applied by the
Advisors themselves.

CREDIT RISK

The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders must
rely solely on the credit of their respective individual counterparties.
Margins, which may be subject to loss in the event of a default, are
generally required in exchange trading, and counterparties may require
margin in the over-the-counter markets.

The Partnership, through Global Horizons, has credit risk with respect to
non-performance of its counterparties and brokers, but attempts to mitigate
this risk by dealing almost exclusively with Merrill Lynch entities as
clearing brokers.

The Partnership, through Global Horizons, in its normal course of business,
enters into various contracts, with Merrill Lynch Pierce Fenner & Smith
("MLPF&S") acting as its commodity broker. Pursuant to the brokerage
agreement with MLPF&S (which includes a netting arrangement), to the extent
that such trading results in receivables from and payables to MLPF&S, these
receivables and payables are offset and reported as a net receivable or
payable in the financial statements of Global Horizons in the Equity in
commodity futures trading accounts in the Statements of Financial
Condition.

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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations

MONTH-END NET ASSET VALUE PER SERIES A 2003 UNIT

MONTH-END NET ASSET VALUE PER SERIES 2005 UNIT

Performance Summary

All of the Partnership's trading assets are invested in Global Horizons.
The Partnership recognizes trading profits or losses as an investor in
Global Horizons. The following commentary describes the trading results of
Global Horizons.

January 1, 2005 to March 31, 2005

The Partnership posted a loss for the first quarter. Losses in the currency
and global equity sectors outweighed gains experienced in the agricultural
sector.

The interest rate sector was the best performing sector for the
Partnership. The Partnership benefited from long U.S. dollar positions
versus the Euro and long Euro and Japanese fixed incomes. Systematic,
long-term trend followers also posted gains in the interest rate sector.

The energy sector was the second highest performing sector for the
Partnership. Gains were experienced in the energy sector as the Partnership
benefited from long positions in crude oil and gas as these industries
profited. Gains were also posted in long crude oil and heating oil
positions.

The agricultural sector also performed well for the quarter. Gains were
experienced from long positions in cattle and hog markets. Short grain
positions and long soybean positions detracted from performance
mid-quarter. However, the quarter ended with gains posted due to coffee,
which experienced a lack of supply and a growing demand.

The metals sector posted a gain for the quarter. The Partnership benefited
from long positions in base and precious metals, such as gold, copper and
zinc.

The stock indices sector posted a loss for the quarter. Losses occurred in
the beginning of the quarter due to a trend reversal from long global
equities to short global equities. Profits were made through long positions
on the FTSE index and Asian equities. Stock indices contributed negatively
to performance as the equity markets declined at the end of the quarter.

The currency sector posted the greatest loss for the Partnership. Losses at
the beginning of the quarter were due to a trend reversal from short U.S.
dollar positions to long U.S. dollar positions. Long Japanese yen and Swiss
franc positions also experienced losses. With the U.S. Federal Reserve
expressing concern about inflation, investors predicted that interest rates
and the U.S. dollar would rise. This caused losses as investors fled from
emerging currencies. Long Australian dollar and Mexican peso positions also
contributed to negative performance.

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January 1, 2004 to March 31, 2004

All of the Partnership's trading assets were invested in MM LLC. The
Partnership recognizes trading profits or losses as an investor in Global
Horizons. The following commentary describes the trading results of MM LLC.

MM LLC experienced gains in the interest rate, metals, agricultural
commodities, energy, and currency sectors and losses in stock indices.
Overall, for the quarter, MM LLC experienced gains.

The interest sector posted the largest gains for the quarter despite choppy
trading conditions early in the quarter. In January, profits were generated
from various positions at the short end of the curve in Canada and Europe,
while losses were posted at longer points in the curve in both the U.S. and
Europe. In February, fixed income markets resumed their slow upward trend.
In March, long exposure to most of the major global yield curves proved to
generate positive results.

The metals sector posted gains for the quarter as well. In January, both
precious and industrial metals generated positive returns from the long
side. Base metals continued to move higher with the exception of nickel.
Copper rose to its highest price in more than six years due to supply
disruptions and heavy demand from new home construction. In February, base
metals continued their upward move as the sector experienced strong demand,
shrinking supply and U.S. dollar weakness, helping to drive prices higher.
Strong industrial demand for copper and continued speculative interest
pushed the market to a seven year high. In March, industrial metals
generated minor losses for MM LLC, while precious metals contributed
significantly, particularly, gold and silver.

The agricultural commodities sector posted gains early in the quarter as
the USDA cut its forecast of the crop supply for both soybeans and corn,
which sent prices surging. In February, grain markets extended their
long-term rally, with corn and soybeans being pushed to highs on strong
demand and low stockpiles. Grain markets continued to extend their
long-term rally in March, with corn, soybeans and soymeal being pushed
higher on strong demand from Asia and lower estimates of supply from South
America.

The energy sector posted gains for the quarter. In crude oil and more broad
energy markets, weather and OPEC were the dominant factors behind price
moves during January. Weather was extremely cold in the Northeast and
Midwest U.S., which caused a sharp rally in natural gas and heating oil.
Crude oil had a sharp rally in early February and gradually sold-off as the
markets became complacent about the OPEC meeting. The market continued this
trend, as weather-related demand and tight U.S. inventories continued. In
March, the energy sectors posted a small loss under extremely volatile
market conditions. The crude oil market had very choppy performance during
the month, as did the heating oil market.

The currency sector posted slight gains for the quarter. The currency
sector began the quarter with gains as it continued its long trend of a
weakening U.S. dollar. However, trading was very choppy and gains generated
in the early part of January were lost. In February and March, the trend
continued as currency trading was very difficult due to the heightened
volatility in the markets.

Stock indices posted losses despite gains early in the quarter. Stock
indices posted a profit for January, as long exposure to global equities
from momentum based and fundamental models performed well. In February,
long exposure to global equities produced positive performance. In March,
stock indices posted a loss that exceeded the gains from earlier in the
quarter. Long Nikkei profits were overcome by losses in long exposure to
European equities, which later flipped to short positions, by month-end.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

Merrill Lynch Investment Managers LLC, the General Partner of ML Principal
Protection L.P., with the participation of the General Partner's Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures with respect to the Partnership within 90 days of the filing
date of this quarterly report, and, based on this evaluation, has concluded
that these disclosure controls and procedures are effective. Additionally,
there were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of this evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which the Partnership, Global
Horizons, or MLIM LLC is a party.

Item 2. Changes in Securities and Use of Proceeds

(a) None
(b) None
(c) None
(d) None

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

There are no exhibits required to be filed with this report.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the first three months of
fiscal 2005.

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SIGNATURES

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 the
undersigned thereunto duly authorized.

ML PRINCIPAL PROTECTION L.P.

By: MERRILL LYNCH INVESTMENT
MANAGERS LLC
General Partner

Date: May 16, 2005 By /s/ FABIO P. SAVOLDELLI
-----------------------
Fabio P. Savoldelli
Managing Director and Chief Investment Officer
- Alternative Strategies Division
(Principal Executive Officer)

Date: May 16, 2005 By /s/ PATRICK HAYWARD
-------------------
Patrick Hayward
Chief Financial Officer
(Principal Financial and Accounting Officer)