Exhibit 99(b)
ConsolidatedFinancial Statements

Entergy - Koch, LP

Years ended December 31, 2004,2003, and 2002

 

 

 

Report of Independent Auditors

 

The Audit Committee of the Board of Directors of EKLP, LLC, andPartners of Entergy - Koch, LPWe have audited the accompanying consolidated balance sheets of Entergy - Koch,LP (the "Partnership"), as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, changes in partners' capital, and cash flowsfor each of the three years in the period ended December 31, 2004. Thesefinancial statements are the responsibility of the Partnership's management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes consideration of internal controlover financial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Partnership's internal control overfinancial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of Entergy- Koch, LP, at December 31, 2004 and 2003, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with accounting principles generally acceptedin the United States.As further discussed in Note 3 to the consolidated financial statements, in 2003the Partnership changed its method of accounting for inventory held for tradingpurposes and energy trading contracts not qualifying as derivatives./s/ Ernst & Young LLPHouston, TexasMarch 1, 2005 

 

 

Entergy - Koch, LP

Consolidated Balance Sheets*(In Thousands)* 
**December 31** 
**2004**
**2003**    **Assets** Current assets:    Cash and cash equivalents**$ 240,052**$ 277,964  Margin and collateral deposits**4,485**186,624  Accounts receivable:      Trade (less allowance      of $4,526 and $12,307, respectively)**44,655**839,995    Affiliates**1,201**37,305  Receivable from Partners-4,500  Natural gas inventory-239,150  Assets from trading activities **6,617**680,643  Other current assets**4,365**192,011  Pipeline assets held for sale      -      1,019,873Total current assets**301,375**      3,478,065   Noncurrent assets:    Restricted cash - escrow**200,300**-  Property, plant, and equipment, net-20,787  Assets from trading activities-192,316  Other noncurrent assets      -      26,474Total noncurrent assets**200,300**      239,577      Total assets**$ 501,675**      $ 3,717,642
 
 
**December 31** 
**2004**
**2003**     **Liabilities and Partners'      capital**  Current liabilities:    Accounts payable:      Trade**$ 38,734**$ 807,168    Affiliates**-**7,478  Collateral held on      deposit**3,991**114,347  Liabilities from      trading activities**6,617**574,870  Accrued liabilities**67,046**87,228  Notes payable - credit      facilities-32,337  Other current      liabilities**11**6,485  Pipeline liabilities      held for sale      -      97,569Total current liabilities**116,399**      1,727,482   Noncurrent liabilities:    Senior notes (net of      discount)-501,721  Liabilities from      trading activities-291,542  Deferred gain on sale      of trading assets**200,300**-  Other noncurrent      liabilities**15,535**      13,651Total noncurrent liabilities**215,835**      806,914   Commitments and contingencies      *(Note 10)*     Partners' capital:    General Partner      (including accumulated other comprehensive   income (loss) of $-0- and $(21), respectively)**1,694**11,832  Limited Partners      (including accumulated other comprehensive   income (loss) of $-0- and $(2,030), respectively)**167,747**      1,171,414Total Partners' capital**169,441**      1,183,246Total liabilities and      Partners' capital**$ 501,675**      $ 3,717,642   *See accompanying notes.*
Entergy - Koch, LP

Consolidated Statements of Income(*In Thousands*)
 **Year ended December 31 
**2004**
**2003**
**2002**          Net (loss) gain from trading      activities**$ (108,302)**$ 339,362** **$      259,472** **    Depreciation and amortization**6,744 **11,790** **      11,233** **General and administrative**107,997 **117,805** **122,726** **Operating (loss) income**(223,043)**209,767** **125,513** **    Other income and expense:     Gain on sale of trading      assets**869,114 **-** **-** **  Interest income**8,143 **6,020** **      1,439** **  Interest expense**(22,842)**(28,124)      (24,317)  Loss on extinguishment      of debt**(60,228)**-** **-** **  Other (expense) income**(5,120)**171** **19,149** **Total other income (expense)**789,067 **(21,933)(3,729)Income from continuing      operations before  income tax expense and cumulative effect of  change in accounting principle**566,024 **187,834** **121,784** ** ** **  Income tax expense**15,761 **4,494** **3,684** **Income from continuing      operations before cumulative effect of change in accounting principle**550,263 **183,340** **118,100** **Discontinued operations:  ** **  Income (loss) from      discontinued operations**43,246 **(17,941)      31,160** **  Gain on sale of      discontinued operations**157,885 **-** **-** **Income before cumulative      effect of change in accounting principle**751,394 **165,399** **149,260** **Cumulative effect of change in      accounting  principle (net of tax benefit of $4,477 in  2003)**- **14,711** **-** **Net income**$ 751,394 **$ 180,110** **$ 149,260** *** 

See accompanying notes.*
Entergy - Koch, LP

Consolidated Statements of Changes inPartners' Capital(*In Thousands*)
 **General Partner**Limited Partners**Total          Balance at December 31, 2001
$ 10,248** **
$ 1,014,609** **
$ 1,024,857** **Capital contributions
328** **
32,503** **
32,831** **Net income
1,493** **
147,767** **
149,260** **  Other comprehensive income: 
 
     Foreign currency      translation37** **
3,606** **
3,643** **    Net cash flow hedge      gain26** **
2,543** **
2,569** **    Net cash flow hedge      gain recognized in net income      (40)
(3,955)
(3,995)  Total other comprehensive income      23** **
2,194** **
2,217** **Total comprehensive income      1,516** **
149,961** **
151,477** **Balance at December 31, 2002      12,092** **
1,197,073** **
1,209,165** **Capital distributions(2,000)
(198,000)
(200,000)Net income1,801** **
178,309** **
180,110** **  Other comprehensive income: 
 
     Foreign currency      translation
69** **
6,824** **
6,893** **    Net cash flow hedge      loss
(133)
(13,114)
(13,247)    Net cash flow hedge      loss recognized in net income
3** **
322** **
325** **  Total other comprehensive loss
(61)
(5,968)
(6,029)Total comprehensive income
1,740** **
172,341** **
174,081** **Balance at December 31, 2003
11,832** **
1,171,414** **
1,183,246** **Capital contributions**- **72,750 **72,750 Capital distributions**(17,673)**(1,822,327)**(1,840,000)Net income**7,514 **743,880 **751,394   Other comprehensive income:
 
 
     Foreign currency      translation**(109)**(10,762)**(10,871)    Net cash flow hedge      loss**(188)**(18,685)**(18,873)    Net cash flow hedge      loss recognized in net income**318 **31,477 **31,795   Total other comprehensive income**21 **2,030 **2,051 Total comprehensive income**7,535 **745,910 **753,445 Balance at December 31, 2004**$ 1,694 **$ 167,747 **$ 169,441 
Entergy - Koch, LP

Consolidated Statements of Cash Flows(*In Thousands*)
 **Year ended December 31 
**2004**
**2003**
**2002**      **Cash flows from operating    activities - continuing operations and discontinued operations**   Net income**$ 751,394 **$ 180,110** **$ 149,260** **Adjustments to reconcile net    income to net cash flows provided by (used in) operating activities:     Gain on sales of    trading assets and discontinued operations**(1,026,999)**-** **-** **  Loss on extinguishment    of debt**60,228 **-** **-** **  Provision for loss on    accounts receivable**1,508 **1,182** **11,507** **  Depreciation and    amortization**30,718 **42,851** **42,087** **  Cumulative effect of    change in accounting principle**- **(15,245)-** **  Change in net assets    from trading activities**410,282 **87,801** **15,844** **  Gain on sale of assets**- **-** **(775)  Net changes in working    capital**(207,091)**132,656** **(373,657)  Change in net other    noncurrent assets and liabilities**19,988 **1,273** **13,426** **Net cash flows provided by    (used in) operating activities**40,028 **430,628** **(142,308)    **Cash flows from investing    activities - continuing operations and discontinued operations**   Capital expenditures**(45,999)**(88,277)(50,133)Proceed from sale of asset**- **-** **9,897** **Net proceeds from sale of    discontinued operations**1,116,828 **-** **-** **Net proceeds from sales of    trading assets (exclusive of restricted cash of $200,000)**1,205,249 **-** **-** **Net cash flows provided by    (used in) investing activities**2,276,078 **(88,277)(40,236)    **Cash flows from financing    - continuing operations and discontinued operations**   Net (repayment) borrowing -    credit facilities notes payable**(32,337)**(215,663)88,000** **Net (repayment) proceeds -    senior notes **(555,674)**199,910** **-** **Capital contribution**72,750 **32,831** **-** **Capital distributions**(1,840,000)**(200,000)-** **Net cash flows (used in)    provided by financing activities**(2,355,261)**(182,922)88,000** **    Effect of exchange rate    changes on cash and cash equivalents**1,243 **2,575** **3,486** **  ** ** Net change in cash and cash    equivalents**(37,912)**162,004** **(91,058)Cash and cash equivalents,    beginning of year**277,964 **115,960** **207,018** **Cash and cash equivalents,    end of year**$ 240,052 **$ 277,964** **$ 115,960** **    Cash paid for income taxes    (in millions)**$ 15.7 **$ 6.9** **$ 6.4** **Cash paid for interest    (in millions)**$ 34.1 **$ 27.8** **$ 25.9** **
See accompanying notes. 

 

 

Entergy - Koch, LP

Notes to Consolidated Financial Statements

December 31, 2004
**1. Organization and Nature of Operations**
Entergy - Koch, LP ("EKLP" or the "Partnership"), is alimited partnership indirectly owned by subsidiaries of Entergy Corporation("Entergy") and Koch Industries, Inc. ("Koch") (collectively, the "Partners").Subsidiaries of Entergy and Koch own 99% of the Partnership through limitedpartner interests, and the remaining 1% of the Partnership is owned by thegeneral partner, EKLP, LLC, a company owned 50% by EK Holding III, LLC (anEntergy subsidiary), and 50% by Koch Energy, Inc. (a Koch subsidiary). EKLP,LLC, is managed by a board of directors, with each partner having equalrepresentation. 

Pursuant to the Agreement of Limited Partnership, datedJanuary 31, 2001 (the "Partnership Agreement"), general distributions areequally shared by the Partners; however, the Partners disproportionately sharein certain profits and special allocations, which occur periodically and wouldoccur upon liquidation. The Partnership Agreement also requires thatdistributions of cash be made quarterly, if EKLP, LLC, determines there isexcess cash, based on EKLP management's recommendation.

EKLP was formed to combine certain natural gas and powertrading contracts and assets of Entergy with the natural gas pipeline businessand the natural gas, power, and weather trading business of Koch. Theaccompanying consolidated financial statements reflect the transactions of thePartnership subsequent to its inception. The Partnership operated thesecontributed businesses, contracts, and assets primarily through four whollyowned subsidiaries: Gulf South Pipeline Company, LP ("Gulf South"), Entergy -Koch Trading, LP ("EKT US"), Entergy - Koch Trading Canada, ULC ("EKT CAN"), andEntergy - Koch Trading, Ltd. ("EKT Europe"). On September 2, 2004, Entergyannounced that EKLP had signed a definitive agreement to sell EKT Europe, EKTCAN, and substantially all of the assets of EKT US ("Trading Assets") to MerrillLynch Commodities, Inc. ("MLCI"), and was conducting a competitive process tosell Gulf South.

On November 1, 2004, EKLP sold Trading Assets to MLCI for apurchase price of $800 million plus the fair value of all trading assets sold.The agreement called for EKLP to establish an escrow account for $200 millionthat EKLP is entitled to, two years from closing, contingent on certain eventsthat may preclude former EKLP executives from being able to continue theirservices with MLCI. The $200 million contingent gain has been deferred and isclassified as restricted cash - escrow in noncurrent assets, and is recorded asa noncurrent liability on the consolidated balance sheets. Interest earned onthe restricted cash accrues to the benefit of EKLP, pending resolution of thecontingency. Such interest amounts to $0.3 million as of December 31, 2004. 

Due to the nature of the assets sold, mainly contracts withthird parties, and because EKLP will have to legally continue to maintain andmanage all the rights and obligations for certain contracts that are notassigned by the third party to MLCI, the sale of the Trading Assets do notqualify for discontinued operations in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 144 "*Accounting for the Impairment orDisposal of Long-Lived Assets*" ("SFAS No. 144"). As such, the gain on thesale of the Trading Assets is included in net income from continuing operationsin the consolidated statements of income. As part of the sales agreement, EKLPentered into a total return swap whereby MLCI assumes all the benefits anddetriments associated with any of EKLP's contracts that were included in thesales agreement and have not been assigned to MLCI. See Note 7, "Concentrationsof Credit Risk."

On December 29, 2004, EKLP sold Gulf South to TGT Pipeline,LLC. In accordance with SFAS No. 144, Gulf South's assets, liabilities, andresults of operations have been reclassified to discontinued operations in theconsolidated balance sheets and consolidated statements of income for allperiods presented. See Note 8, "Discontinued Operations."

EKLP's future operations will consist of winding down theaffairs of the Partnership. The proceeds from the combined sales were used toretire all of EKLP's senior notes and other credit facilities. Remainingproceeds, in excess of future working capital needs and minimum contractualcapitalization requirements, as determined by EKLP, were distributed to thePartners.
**2. Significant Accounting Policies***Principles of Consolidation - The consolidated financialstatements include the accounts of all of the Partnership's wholly ownedsubsidiaries after the elimination of significant intercompany transactions andbalances. Investments in entities that are not controlled by the Partnership areaccounted for using either the cost or equity method, as appropriate. Theseinvestments are regularly reviewed for impairment and propriety of currentaccounting treatment.
*Cash and Cash Equivalents - Cash and cash equivalentsconsist primarily of cash on deposit, certificates of deposit, and money marketaccounts with original maturities of three months or less. All highly liquidinvestments with original maturities of three months or less are classified ascash and cash equivalents. 
*Margin and Collateral Deposits - Margin and collateraldeposits consist primarily of cash that the Partnership has on deposit withcounterparties for margin or collateral requirements related to trading futures,swap, and option contracts. Pursuant to the Partnership's contracts with eachcounterparty, the margin or collateral on deposit will vary based on changes inmarket prices, the Partnership's credit rating, and various other factors. Asfurther discussed in Note 7, "Concentrations of Credit Risk," the Partnershipalso requires collateral from its counterparties based on similar criteria.Amounts from financial instruments received as collateral from counterpartiesare recorded as "collateral held on deposit."
*Accounts Receivable-Trade - Accounts receivable-trade arestated at the historical carrying amount net of write-offs and allowance fordoubtful accounts receivable, and represent claims against third parties thatwill be settled in cash. An allowance for doubtful accounts is established whenneeded based on factors including historical experience with the particularcounterparty, economic trends and conditions, the age of the underlyingreceivable, and the Partnership's ability to exercise the right of offset.Interest receivable on delinquent accounts receivable is included in theaccounts receivable-trade balance and recognized as interest income whencontractually permissible and collectibility is reasonably assured. Past-dueaccounts receivable-trade are written off when either internal collectionefforts have been unsuccessful or when a settlement is reached for an amountthat is less than the outstanding historical balance.
*Natural Gas Inventory - Inventory is comprised of naturalgas held for resale. As further discussed in Note 3, "Changes in AccountingPrinciples and New Accounting Pronouncements," the Partnership adopted EmergingIssues Task Force ("EITF") Issue No. 02-3, *Issues Involved in Accounting forDerivative Contracts Held for Trading Purposes and Contracts Involved in EnergyTrading and Risk Management Activities* ("EITF No. 02-3"). As such, inventoryas of December 31, 2003, is recorded at the lower of weighted-average cost ormarket.

Included in other current assets as of December 31, 2003, areamounts related to natural gas volumes held in third-party facilities and forwhich title transferred to such third parties but to which the Partnership hadrights in the future. Such amounts are recorded at the lower of weighted-averagecost or market based on the notional volumes to which the Partnership hadrights. The Partnership held title to other natural gas volumes to which thirdparties had the rights under similar arrangements. The amounts related to thesetransactions are recorded in other current liabilities at the higher of marketor weighted-average cost.
*Trading and Risk Management Activities - Trading Services -EKLP offered risk management services to the natural gas, power, and weathermarkets, and optimization services related to the natural gas storage andtransportation assets of its customers. These services were provided through avariety of financial instruments, including forward contracts involving cashsettlement or physical delivery of natural gas or power; swap contractsrequiring payment to (or receipts from) counterparties based on the differencebetween two prices for (or related to) natural gas, power, or weather; andoption contracts requiring payment to (or receipts from) counterparties based onthe difference between the option's strike and the related market price fornatural gas, power, or weather.

As required by EITF No. 02-3, the mark-to-market method isused to account for all derivative trading activities and the accrual method ofaccounting is used to account for storage, transportation, and assetoptimization contracts not qualifying as derivatives under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities,*as amended ("SFASNo. 133").

As required by EITF Issue No. 99-2, *Accounting for WeatherDerivatives* ("EITF No. 99-2"), the Partnership uses the mark-to-marketmethod to account for all trading-related weather contracts.

Under the mark-to-market method, derivative contracts arerecorded at quoted or estimated market value, with resulting unrealized gainsand losses recorded as "Assets from trading activities" and "Liabilities fromtrading activities," respectively, on the consolidated balance sheets accordingto their term to maturity. Current period changes in the assets and liabilitiesfrom trading activities are recognized as net gains or losses in "Net gain(loss) from trading activities" on the consolidated statements of income.Changes in the assets and liabilities from trading activities result primarilyfrom changes in the valuation of the portfolio of contracts, maturity andsettlement of contracts, and newly originated transactions. Terms regarding cashsettlement of the contracts vary with respect to the actual timing of cashreceipts and payments. Accounts receivable, accounts payable, and margin andcollateral deposits include settlement amounts for financial derivatives forwhich the contractual settlement price has been published at the end of theaccounting period. As a result, at December 31, 2003, accounts receivable andaccounts payable included $88.2 million and $64 million, respectively, ofJanuary 2004 settled financial forward contracts valued using the publishedJanuary 2004 futures price. Margin and collateral deposits include$(1.9) million of January 2004 settled futures at December 31, 2003.

The market prices and models used to value the derivativesreflect management's best estimate considering various factors, includingclosing exchange and over-the-counter quotations, time value, and volatilityunderlying the contracts. The values are adjusted to reflect the potentialimpact of liquidating EKLP's positions in an orderly manner over a reasonabletime period under present market conditions and to reflect other types of risks,including model risk and credit risk. When quoted market prices are notavailable, EKLP utilizes other valuation techniques to estimate market value.The use of these techniques requires estimations with respect to future prices,volatility, liquidity, and other variables. Changes in market prices and theestimations used directly affect the estimated market value of thesetransactions. Accordingly, it is reasonably possible that such estimates couldchange in the near term.

Beginning January 1, 2003, EKT US utilized futures contractsto mitigate the variability in cash flows of anticipated future natural gaspurchases and sales. EKT US designated and accounted for these derivatives ascash flow hedges in accordance with SFAS No. 133. The changes in the fair valueof the hedge contracts were expected to, and did, have a high correlation tochanges in the anticipated natural gas purchases and sales and, therefore,qualified as cash flow hedges under SFAS No. 133. In addition, if the hedgecontracts ceased to have high correlation, or if the forecasted purchase or salewere deemed no longer probable to occur, hedge accounting was terminated and theassociated change in fair value of the derivatives was recognized in the relatedperiod of change in "Net (loss) gain from trading activities" on theconsolidated statements of income.

The fair value of these derivatives is reported in theconsolidated balance sheets in "Assets and liabilities from trading activities."As of December 31, 2003, EKT US included a net deferred loss on these cash flowhedges in "Accumulated other comprehensive income" of approximately$11.8 million. For the years ended December 31, 2004 and 2003, the ineffectiveportion of these hedges recorded in "Net (loss) gain from trading activities"was approximately $5 million and $6 million, respectively. Upon the sale of theTrading Assets, EKLP reclassified approximately $55 million of losses deferredin other comprehensive income to "Net gain from trading activities" because theforecasted purchase or sale that was being hedged became probable of notoccurring by the end of the originally specified time period, as documented atthe inception of the hedging relationship. EKLP did not have any open cash flowhedges as of December 31, 2004.

EKLP's asset optimization contracts relate to the natural gasstorage and transportation assets of the related counterparties. Revenues,costs, and profit-sharing obligations associated with these asset optimizationcontracts are recognized based on the terms of the contract as such revenues areearned and costs are incurred, and when profit-sharing obligations arise. Inaddition, EKLP entered into derivative contracts to manage market riskassociated with its asset optimization contracts. These derivative contractswere not designated as hedges and continued to be recorded at fair value. 
*Trading and Risk Management Activities - Treasury - ThePartnership entered into an interest rate swap agreement for interest rate riskexposures, which was designated as a fair value hedge pursuant to SFAS No. 133.The interest rate swap agreement utilized by the Partnership effectivelymodified the Partnership's exposure to interest risk by converting thePartnership's $200 million in fixed rate debt issued August 21, 2003, to afloating rate. This agreement involved the receipt of fixed rate amounts inexchange for floating rate interest payments over the life of the agreementwithout an exchange of the underlying principal amount. 

Hedge effectiveness is assessed as the change in the fairvalue of the hedging instrument relative to the change in the fair value of therelated debt. During the year ended December 31, 2003, the Partnershiprecognized an immaterial net gain, included as a component of interest income,related to the ineffective portion of its fair value hedge of interest rate riskexposure. The effect of the fair value hedge for the year ended December 31,2003, was to increase the carrying value of the associated debt by $2.5 million.A corresponding asset for approximately the same amount is recorded in "Otherassets." The Partnership terminated this hedge in August 2004 upon liquidatingthe interest rate swap. 

Additionally, the Partnership entered into forward foreigncurrency swaps associated with certain intercompany debt balances carried by thedomestic entity, which are denominated in British pounds. The swaps were used tocounteract the effects of changes in foreign currency exchange rates. For theyears ended December 31, 2004 and 2003, the foreign currency swaps resulted in aloss of $9 million and $15.9 million, respectively.
*Property, Plant, and Equipment - Property, plant, andequipment includes computer hardware and software and is depreciated using thestraight-line method based on average useful lives ranging from three to fiveyears.
*Assets Held for Sale - The Partnership classifies assetsas held for sale when the assets meet the held for sale criteria of SFASNo. 144. This statement established the criteria to determine when a qualifiedgroup of long-lived assets and liabilities should be classified as held forsale. Among other indicators, to classify long-lived assets as held for sale, anentity must be actively marketing the assets and the sale of the asset groupmust be probable. 
*Intangible Assets - EKLP's intangible assets related tothe weather trading business and represented the logic utilized in theproprietary weather derivative valuation models, analytics used to translateweather information into trading strategies, and the proprietary datainfrastructure that facilitates creation of structured weather derivativeproducts. The logic and valuation models were sold to MLCI as part of sale ofthe Trading Assets. 
*Income Taxes - The Partnership's consolidated financialstatements reflect no provision for United States federal and state income taxessince such taxes, if any, are the liabilities of the Partners. Foreign incometaxes are provided for the Partnership's subsidiaries, which are subject totaxation in foreign jurisdictions. All operating foreign subsidiaries were soldas part of the sale of the Trading Assets. At December 31, 2004, there were nodeferred tax assets or liabilities. Such deferred tax assets and liabilitieswere not significant at December 31, 2003.
*Net (loss) Gain From Trading Activities - Theaccompanying consolidated financial statements present revenues, costs, andrealized and unrealized gains and losses from derivatives for trading services,including physical sales and purchases of natural gas and power, on a net basisin "Net (loss) gain from trading activities" in the consolidated statements ofincome. Revenues from sales of physical natural gas and power are recognized inthe month of delivery. The associated costs, including transportation andtransmission charges, are recognized concurrent with the revenue.
*Foreign Currency - Management determined the functionalcurrency of EKT Europe to be the British pound. As such, the assets andliabilities of EKT Europe were translated at the exchange rate at December 31,2003. Revenues and expenses for EKT Europe were translated at a weighted-averageexchange rate for each reporting period presented in the accompanyingconsolidated statements of income. Foreign currency translation adjustments arereported in Partners' capital (as a component of other comprehensive income).Individually significant transactions are translated at the exchange rate on thedate of the transaction. Foreign exchange transaction gains and losses arerecognized as "Other income (expense)" on the consolidated statements of incomefor the period. For the years ended December 31, 2004, 2003, and 2002, foreignexchange gains of approximately $7.0 million, $14.1 million, and $7.1 million,respectively, were included in "Other income (expense)." All operating foreignsubsidiaries were sold as part of the sale of the Trading Assets. Approximately$12 million of foreign exchange gain was reclassified from "accumulated othercomprehensive income" to gain on sale of trading assets in the consolidatedstatements of income.
*Use of Estimates - The preparation of the consolidatedfinancial statements in conformity with accounting principles generally acceptedin the United States requires management to make various assumptions andestimates that affect amounts in the consolidated financial statements andaccompanying notes. Actual results could differ from those estimates. Seerelated discussion in "Trading and Risk Management Activities."
*Reclassifications - Certain reclassifications have beenmade to the presentation of balances from prior periods to conform with thecurrent-period presentation. These reclassifications have no net effect onpreviously reported results of operations.
**3. Changes in Accounting Principles and New Accounting Pronouncements

Changes in Accounting Principles***EITF No. 02-3 - In October 2002, the EITF reachedconsensus in EITF No. 02-3 to rescind EITF Issue No. 98-10, *Accounting forContracts Involved in Energy Trading and Risk Management Activities* ("EITFNo. 98-10"), EITF Issue No. 00-17, *Measuring the Fair Value of Energy-RelatedContracts in Applying No. 98-10*, and Financial Accounting Standards Board ("FASB")Staff Announcement Topic D-105, *Accounting in Consolidation for EnergyTrading Contracts, between Affiliated Entities When Activities of One but NotBoth Affiliates Are within the Scope of EITF Issue No. 98-10, "Accounting forContracts Involved in Energy Trading and Risk Management Activities"*("TopicNo. D-105"). According to the consensus, "other energy contracts" such asstorage and transportation contracts, not qualifying as derivatives pursuant toSFAS No. 133, executed prior to October 26, 2002, shall no longer bemarked-to-market effective January 1, 2003. The accrual basis of accounting isrequired for contracts executed subsequent to October 25, 2002. In addition, forfiscal years beginning after December 15, 2002, gains and losses on allderivative instruments should be shown net in the income statement, whether ornot settled physically, if the derivatives are held for trading purposes. EITFNo. 02-3 also clarified that with the rescission of EITF No. 98-10, it would nolonger be an acceptable industry practice to account for inventory held fortrading purposes at fair value when fair value exceeds cost, except as providedby higher level accounting principles generally accepted in the United States.

The Partnership prospectively adopted the provisions of EITFNo. 02-3 relating to inventory held for trading purposes and energy tradingcontracts not qualifying as derivatives and executed subsequent to October 25,2002. The Partnership adopted EITF No. 02-3 in January 1, 2003, for itsnonderivative energy trading contracts executed prior to October 26, 2002, andreported an increase to net income of $14.7 million as a cumulative effect of achange in accounting principle, net of tax. As a result of the adoption of EITFNo. 02-3, the Partnership no longer recognizes energy trading contracts undermark-to-market accounting unless these contracts meet the definition of aderivative in accordance with SFAS No. 133 or the contract is a weatherderivative. The Partnership has retained net presentation of all of its tradingactivities in the consolidated statements of income. 

In November 2002, EITF No. 02-3 was revised to state that anunrealized gain or loss at inception of a derivative instrument should not berecognized unless the fair value of that instrument is obtained from a quotedmarket price in an active market or is otherwise evidenced by comparison toother observable current market transactions or based on a valuation techniqueincorporating observable market data. Adoption by the Partnership of thisNovember revision to EITF No. 02-3 was applied by the Partnership prospectivelyand did not have a material impact on the Partnership's consolidated financialposition or results of operations.
*SFAS No. 149 - In April 2003, SFAS No. 149, *Amendmentof Statement 133 on Derivative Instruments and Hedging Activities* ("SFASNo. 149"), was issued. SFAS No.149 amends and clarifies accounting forderivative instruments, including certain derivative instruments embedded inother contracts and hedging activities under SFAS No. 133. SFAS No. 149 clarifies under what circumstances a contract with aninitial net investment meets the characteristic of a derivative as discussed inSFAS No. 133. In addition, it clarifies when a derivative contains a financingcomponent that warrants special reporting in the statement of cash flows. SFASNo. 149 amends certain other existing pronouncements. These changes will resultin a more consistent reporting of contracts that are derivatives in theirentirety or that contain embedded derivatives that warrant separate accounting.SFAS No. 149 was effective for contracts entered into or modified after June 30,2003, except as stated below, and for hedging relationships designated afterJune 30, 2003. The guidance is to be applied prospectively. The provisions ofSFAS No. 149 that relate to SFAS No. 133, *Implementation Issues*, thathave been effective for periods that began prior to June 15, 2003, continue tobe applied in accordance with their respective effective dates. The adoption ofSFAS No. 149 did not have an impact on the consolidated financial statements ofthe Partnership.
**4. Accumulated Other Comprehensive Income (Loss)**
The components of accumulated other comprehensive income areas follows:
 
**December 31, 2004**
**December 31, 2003**
**December 31, 2002** **General Partner**Limited Partners**Total**General Partner**Limited Partners**Total**General Partner**Limited Partners**Total *(In Thousands)          Accumulated    other comprehensive income:         Accumulated    foreign currency translation**$ -****$ -****$ -**$    109 $    10,762 $    10,871 $    40 $    3,938 $    3,978 Accumulated    net cash flow hedge (loss) gain**-**-**-
(51)
(5,013)
(5,064)
82 
8,101 
8,183 Accumulated    net cash flow hedge gain recognized in net income**-**-**-
(79)
(7,779)
(7,858)
(82)
(8,101)
(8,183) **$ -**$ -**$ -
$ (21)
$ (2,030)
$ (2,051)
$ 40 
$ 3,938 
$ 3,978 **5. Supplemental Cash Flow Information**
Changes in the components of working capital are as follows:
 **Year ended December 31 
**2004**
**2003**
**2002** *(In Thousands)Changes in operating assets and      liabilities:   Decrease (increase) in accounts      receivable, trade**$ 125,207 **$ (91,225)$ (262,697)Increase in accounts receivable, affiliate**(3,965)**(7,238)(8,387)Decrease in receivable from partners**6,755 **891 3,731 Change in net transportation and exchange      receivables and payables**3,456 **(5,111)(1,461)Change in net margin and collateral**(237,652)**(76,404)4,056 (Increase) decrease in natural gas      inventory**(238,819)**154,641 (168,327)(Decrease) increase in accounts payable,      trade**(65,146)**128,680 231,953 Increase (decrease) in accounts payable,      affiliates**5,596 **(24,300)1,392 (Decrease) increase in accrued liabilities**(74,139)**42,934 (20,583)Change in other current assets and      liabilities, net**271,616 **      9,788       (153,334)Total**$ (207,091)**      $ 132,656       $ (373,657)**6. Fair Value of Financial Instruments**
At December 31, 2004 and 2003, the carrying amounts ofcertain financial instruments held by the Partnership, including cashequivalents, accounts receivable, accounts payable, and notes payable arerepresentative of fair value because of the short-term maturity of theseinstruments. In addition to the financial instruments listed below, thePartnership held financial instruments for trading and risk managementactivities, as well as debt instruments, as disclosed.

The fair value of all of the Partnership's derivativefinancial instruments and other trading contracts is the estimated amount atwhich management believes the instruments could be liquidated over a reasonableperiod of time, based on quoted market prices, current market conditions, orother estimates obtained from third-party brokers or dealers. See Note 2,"Significant Accounting Policies," under "Trading and Risk ManagementActivities" for additional information.

The fair value of the Partnership's derivatives, financialinstruments, and other trading contracts at December 31, 2004 and 2003, issummarized in the following tables: 
 
**December 31, 2004** **Estimated Fair Value**Carrying Amount **Assets**Liabilities**Assets**Liabilities *(In Thousands)     **Trading**    Natural gas**$ 6,557****$ 218****$ 6,557****$ 218**Power**30**-**30**-Weather**30****7****30****7**Other(1)**-****6,392****-****6,392** **$ 6,617****$ 6,617****$ 6,617****$ 6,617**
(1) Represents the fair value of the totalreturn swap with MLCI. See Note 7, "Concentrations of Credit Risk."
 
**December 31, 2003** **Estimated Fair Value**Carrying Amount **Assets**Liabilities**Assets**Liabilities *(In Thousands)     **Trading**(1)    Natural gas$ 499,610$ 541,699$ 499,610$ 541,699Power348,267296,814348,267296,814Weather20,06921,17720,06921,177Other energy-related      commodities5,0136,7225,0136,722 $ 872,959$ 866,412$ 872,959$ 866,412**Non-Trading**(2)    Interest rate swap$ 2,058$ -$ 2,058$ -Foreign currency swap-1,497-1,497 $ 2,058$ 1,497$ 2,058$ 1,497     **Debt instruments**    Senior notes(3)$ -$ 546,252$ -$ 501,721
(1) Represents the fair value of all derivatives of  trading services, including natural gas derivatives for cash flow hedges  accounted for in accordance with SFAS No. 133. The carrying amount of trading  services derivatives is included in the consolidated balance sheet as "Assets  and liabilities from trading activities."

(2)The carrying amount is included in the  consolidated balance sheet in "Other current assets" and "Other current  liabilities."
(3) The estimated fair value of the senior notes has  been determined by the Partnership using available market information and  selected valuation methodologies. Considerable judgment is required in  interpreting market data to develop the fair value estimate. The use of  different market assumptions or valuation methodologies could have a material  effect on the estimated fair value.
**7. Concentrations of Credit Risk**
EKLP managed its own portfolio through its Trading Assetsusing a variety of financial instruments, which include forwards, futures,swaps, options, storage contracts, and transportation contracts. This portfoliowas sold in its entirety to MLCI as part of the sale of the Trading Assets. Aspart of the sale, EKLP entered into a total return swap with MLCI where MLCIassumes all the benefits and detriments associated with any of EKLP contractsthat were included in the sales agreement and have not been assigned to MLCI.Assets and liabilities from trading activities that have not been assigned atDecember 31, 2004, are $6.6 million and $0.2 million, respectively. To recordthe total return swap, $6.4 million due to MLCI has been recorded in liabilitiesfrom trading activities. Trade receivables and payables relating to thecontracts that have not been assigned to MLCI at December 31, 2004, but that arerelated to the total return swap are $37.8 million and $1.1 million,respectively. To record the total return swap, a net $36.7 million payable dueto MLCI has been recorded in trade payables.

Inherent in trading and risk management activities arecertain business risks, including market risk and credit risk. Market risk isthe risk that the value of the contracts and derivative financial instrumentswill change, either favorably or unfavorably, in response to changing marketconditions. Credit risk is the risk of loss from nonperformance by suppliers,customers, or financial counterparties to a contract or an agreement. The totalreturn swap transferred all market risk and credit risk to MLCI. Thus, atDecember 31, 2004, EKLP is only exposed to credit risk with MLCI. During January2005 contracts, related to approximately 70% of the fair value of the totalreturn swap at December 31, 2004, were assigned to MLCI. Based on MLCI'screditworthiness, the Partnership does not anticipate a material adverse effecton its consolidated financial position as a result of counterpartynonperformance.

The notional volumes of the Partnership's realized physicalactivity included in "Net gain from trading activities" are set forth below.These notional volumes represent the gross transaction volumes for tradingcontracts before the sale of the Trading Assets that were physically settled andare a measure of the Partnership's exposure to market or credit risk.
 **Year ended December 31
**2004**
**2003** *(In Thousands) **Trading**  Power (in MWh)**323,421**445,979Gas (in MMBtu)**1,713,861**2,347,045
Financial instruments, which subject the Partnership tocredit risk, consist principally of cash equivalents and trade receivables. Inaccordance with the Partnership's investment policy, cash equivalents areinvested such that credit exposure to any one financial institution is limited.

Trade receivables are predominantly with energy, utility, andother trading companies in the United States. For the years ended December 31,2004, 2003, and 2002, no single counterparty contributed in excess of 10% of"Net gain from trading activities" on the consolidated statements of income.

The counterparties associated with "Assets from tradingactivities" at December 31, 2003, are summarized in the following tables:
 
**December 31, 2003** **Investment Grade(1)**Total *(In Thousands)   Gas and      electric utilities$ 188,105$ 211,220Energy      marketers117,732274,712Financial      institutions285,879300,805Oil and gas      producers15,64266,766Industrials10,57011,746Other12,24512,534Total$ 630,173877,783Credit      valuation adjustments (4,824)Trading      exposure(2) 872,959Collateral (379,735) (3)Assets from      trading activities, net of collateral  $ 493,224
(1) "Investment  Grade" is primarily determined using publicly available credit ratings along  with consideration of cash, collateral, standby letters of credit, and parent  company guarantees. Included in "Investment Grade" are counterparties with a  minimum, or a minimum implied through internal credit analysis, Standard &  Poor's or Moody's rating of BBB- or Baa3, respectively.
(2) Trading exposure reflects netting between current  and noncurrent assets and liabilities from trading activities under master  netting agreements, as applicable. Three customers' exposure at December 31,  2003, comprised greater than 5% of assets from trading activities, of which  two are included above as "Investment Grade."

(3)Includes collateral held on deposit and standby  letters of credit. An additional $73.5 million of collateral is being applied  against estimated accounts receivable.**8. Discontinued Operations**
On December 29, 2004, EKLP sold its pipeline business for$1.136 billion plus the net working capital as of the closing date ("BasePurchase Price"). Accordingly, the assets, liabilities, and results ofoperations of the pipeline business have been reported as discontinuedoperations for all periods presented. Operating revenues for Gulf Southclassified as discontinued operations in the consolidated statements of incomefor the years ended December 31, 2004, 2003, and 2002, were $198 million,$177 million, and $161 million, respectively.

The Partnership reclassified $0.5 million from the 2003cumulative effect of a change in accounting principle related to Gulf South'sadoption of SFAS No. 143, *Accounting for Asset Retirement Obligations*, toloss from discontinued operations. 

A summary of assets and liabilities related to Gulf Southreclassified as assets and liabilities held for sale on the consolidated balancesheets as of December 31, 2003, is as follows: 
 
**December 31** 
**2003** *(In Thousands)**ASSETS Accounts receivables$ 19,333Transportation and exchange receivables44,169Receivable from partners2,255Natural gas inventory10,182Property, plant, and equipment, net927,053(1)Other assets      16,881Total assets      $ 1,019,873  **LIABLITIES Accounts payables$ 14,567Transportation and exchange payables28,277Accrued liabilities48,348Other liabilities      6,377Total liabilities      $ 97,569
(1) Net property, plant, and equipment includes land of $712,  pipeline facilities of $861,661, working gas and base gas of $93,635, computer  hardware and software of $13,832, construction in progress of $43,464, and  accumulated depreciation of $(86,251). 

In accordance with the Purchase and Sale Agreement betweenEKLP and TGT Pipeline, LLC (the "Agreement"), TGT Pipeline, LLC, has assumed allcontingent liabilities related to the pipeline business. Management has madecustomary representations and warranties in the Agreement regarding contingentliabilities and other matters related to the pipeline business. Allrepresentations and warranties made in the Agreement are in effect until ninemonths after the closing date, and the purchase price will be adjusted ifaggregate losses actually incurred by the buyer exceed 2% of the Base PurchasePrice and in no event shall EKLP's aggregate liabilities exceed 10% of the Base

Purchase Price. Management does not anticipate, and noprovision has been made in these financial statements for, subsequent paymentsunder these indemnification provisions in the Agreement. 

In addition, each party under the Agreement is allowed timeto evaluate the final working capital calculation used to determine the BasePurchase Price. TGT Pipeline, LLC's period for evaluation expired onFebruary 28, 2005, after which EKLP has 45 days to continue its evaluation. TGTPipeline, LLC, has identified a $4.2 million adjustment to the Base PurchasePrice. EKLP disagrees with the adjustment and continues to assess a resolution.The Agreement provides for mediation if a resolution cannot be reached. Anychanges in the working capital adjustment will result in adjustment to the BasePurchase Price. No provision has been made in these consolidated financialstatements for this disputed item. 
**9. Senior Notes and Credit Facilities**
The Partnership's debt is summarized as follows:
 
**December 31** 
**2004**
**2003** 
(*In Thousands*)Short-term debt:    Entergy - Koch, LP Credit Agreement      (364-Day)**$ -**$ -  Entergy - Koch, LP Credit Agreement      (Five-Year Term)**-**-  Entergy - Koch Trading, LP Margin      Facility Agreement**-**25,000  Entergy - Koch Trading, Ltd.      Short-Term Revolving Facility**-**      7,337Notes payable - credit facilities**$ -**      $ 32,337   Long-term debt:    Entergy - Koch, LP 3.65% Senior      Notes due 2006, net of   discount and including fair value adjustment**$ -**$ 202,408  Entergy - Koch, LP 6.90% Senior      Notes due 2011, net of   discount**-**      299,313
Senior notes (net of discount)**$ -**      $ 501,721**Short-Term Debt**
EKLP historically maintained two primary credit facilities tomanage its short-term cash requirements: a 364-day credit facility and amulti-year credit facility. In addition to these two facilities, Entergy - KochTrading, LP, and Entergy - Koch Trading, Ltd., had short-term credit facilitiesfor additional liquidity.

On December 19, 2003, EKLP renewed its 364-day creditfacility with total commitments of $230 million. This facility included theability to issue up to $75 million of letters of credit within the totalcommitment of $230 million. This facility was terminated and all commitments andobligations under this agreement were released on November 1, 2004, inconjunction with the sale of the Trading Assets to MLCI. At December 31, 2003,no loans or letters of credit were outstanding under this facility. 

On February 1, 2001, EKLP entered into a multi-year creditfacility with total commitments of $105 million. This facility included theability to issue up to $105 million of letters of credit within the totalcommitment of $105 million. At December 31, 2003, no loans were outstandingunder this facility and $3.9 million in letters of credit were outstanding. Thisfacility was terminated and all commitments and obligations under this agreementwere released on November 1, 2004, in conjunction with the sale of the TradingAssets to MLCI. At the time of termination, EKLP had $4.48 million in letters ofcredit outstanding. EKLP entered into a collateral agreement under which cashwas posted to fully collateralize the outstanding letters of credit until thecredits could be returned and terminated. At December 31, 2004, no collateralhad been returned, but EKLP expects to have all letters of credit terminated andthe cash collateral returned by March 31, 2005. 

On September 25, 2003, EKT US entered into a 364-day creditfacility with a total commitment of $25 million. This facility was used solelyfor the purpose of financing a portion of the Partnership's margin requirementsrelated to energy trading. Advances under the facility would bear interest atLIBOR plus 0.75%, and the Partnership was required to pay a facility fee at arate of 0.125% per annum on the total commitment regardless of usage. As ofDecember 31, 2003, $25 million was outstanding under this facility at aweighted-average interest rate of 1.85%. This facility expired on September 23,2004, and was not renewed.

On December 1, 2003, EKT Europe entered into an uncommittedshort-term credit facility with a limit of 10 million British pounds. Advancesunder the facility would bear interest at the bank's cost of funds plus 0.75%.As of December 31, 2003, loans in the amount of 4.1 million British pounds($7.3 million) were outstanding at a weighted-average interest rate of 1.84%.This facility expired on April 24, 2004, and was renewed. In conjunction withthe sale of the Trading Assets to MLCI, all rights and obligations were assignedat closing to MLCI. 
**Long-Term Debt**
On August 21, 2003, EKLP issued $200 million of seniorunsecured notes at 3.65%, due August 20, 2006. These senior notes were offeredat a discounted issue price of 99.955%, resulting in an effective interest rateof 3.67%. 

On July 24, 2001, EKLP issued $300 million of seniorunsecured notes at 6.9%, due August 1, 2011. These senior notes were offered ata discounted issue price of 99.698%, resulting in an effective interest rate of6.92%. 

In conjunction with the sale of the Trading Assets to MLCI, atender offer was made for the full amount of outstanding notes. At December 31,2004, all notes had been tendered or redeemed as provided for in the debenture,and EKLP no longer has any obligations outstanding under the debentures. EKLPrecognized a loss of $60.2 million as loss on extinguishment of debt in theconsolidated statements of income due to the early retirement of these notes.
**Other Credit Facilities**
On October 31, 2003, EKT Europe entered into a 364-day creditfacility with a commitment of 40 million British pounds. At December 31, 2003,letters of credit/bank guarantees in the amount of 19.3 million British pounds($34.6 million) were outstanding. This facility expired on October 29, 2004, andwas not renewed. There are no further obligations outstanding under thisfacility. 

On December 1, 2003, EKT Europe entered into an uncommittedshort-term credit facility with a limit of 25 million British pounds. AtDecember 31, 2003, letters of credit/bank guarantees in the amount of15.1 million British pounds ($27.0 million) were outstanding. This facilityexpired on April 24, 2004, and was renewed. In conjunction with the sale of theTrading Assets to MLCI, all rights and obligations under this agreement wereassigned and transferred to MLCI effective with the closing of the sale. 
**10. Commitments and Contingencies***Purchase Agreement Indemnifications - In the purchaseagreements for the sale of Trading Assets and Gulf South, EKLP has agreed toindemnify the respective purchasers for certain potential losses relating to anybreaches of the sellers' representations, warranties and obligations under eachof the purchase agreements. EKLP does not expect any material claims under theseindemnification obligations, but to the extent that any are asserted and paid,subsequent adjustments to the realized gains on these sales will be required.
*Litigation - The Partnership is party to various legalactions arising in the normal course of business. Management believes that thedisposition of outstanding legal actions will not have a material adverse impacton the Partnership's consolidated financial position.
*Environmental and Other Indemnification Matters - KochEnergy, Inc., indemnified the Partnership for all known environmentalliabilities as of February 1, 2001, arising from conditions existing or eventsoccurring at Gulf South prior to the inception of the Partnership. In addition,Koch Energy, Inc., and affiliates of Entergy have indemnified the Partnershipfor any unknown environmental liabilities that occurred prior to February 1,2001, related to the respective assets contributed to the Partnership by suchparties, which are identified before the tenth anniversary date of thePartnership's formation. Any such environmental liabilities first identifiedprior to the sixth anniversary date are subject to a $50,000 per eventdeductible while those first identified after the sixth anniversary date butbefore the tenth anniversary date are subject to a $1.0 million per eventdeductible.

All environmental liabilities arising from the operations ofthe Partnership subsequent to January 31, 2001, are the obligation of thePartnership. Koch Energy, Inc., and affiliates of Entergy have also agreed toindemnify the Partnership for all other losses and expenses the Partnershipincurs in connection with any claim, litigation, or suit arising prior to thePartnership's formation out of the operations of the Partners' respectivebusinesses or assets that the Partners contributed to EKLP.

In connection with the sale of Gulf South, thisindemnification, as it related to the pipeline operations, was terminated and a$5.4 million payment was made to Gulf South from a Koch subsidiary for theindemnification release. EKLP does not anticipate any additional future lossesin excess of $5.4 million related to these environmental matters. 
*Regulatory Matters - EKLP is subject to regulation byvarious federal, state, and local government agencies and from time to timereceives formal and informal requests for information from such agencies.

As an indirect partially owned subsidiary of Entergy, aregistered holding company under the Public Utility Holding Company Act of 1935(the "1935 Act"), EKLP generally must comply with certain requirementsestablished in the 1935 Act, as well as rules and orders issued by theSecurities and Exchange Commission under the 1935 Act that are applicable toinvestments by Entergy in non-utility companies.

At the federal level, the Federal Energy RegulatoryCommission ("FERC") regulates certain activities of EKT US regarding energycommodity transportation and wholesale trading. EKT US is also subject tocertain aspects of the jurisdiction of the Commodity Futures Trading Commission("CFTC").
*Commodity Futures Trading Commission Matter - OnMarch 26, 2003, the FERC published a "Final Report on Price Manipulation inWestern Markets," focusing on gas and power activity in California. EKT US waslisted in the FERC report among the entities that had allegedly engaged inso-called "wash trading" in the gas markets with respect to 61 pairs of trades.In addition, EKT US received a subpoena from the CFTC seeking certaininformation about its gas and power business, relating to so-called "washtrades," and about information furnished to energy industry publications. EKT USalso received a document request in connection with an informal inquiry by theSecurities and Exchange Commission (the "SEC") relating to so-called "washtrades."

On January 28, 2004, the CFTC approved an order settling theadministrative action relating to the CFTC's investigation. EKT US agreed to paya civil penalty of $3 million without admitting or denying the CFTC's findingsand recorded a liability for such amount as of December 31, 2003, which was paidin full in February 2004. The order cites EKT US for reporting false priceinformation. There were no findings of price manipulation, attempted pricemanipulation, or wash trading made against EKT US or the Partnership. The orderrequires EKT US's continued cooperation with the CFTC. The CFTC notified EKT USthat this settlement concluded the issues that were subject to theirinvestigation.
*Cornerstone Matter - On August 18, 2003, CornerstonePropane Partners, LP, filed suit against EKT US and other entities on behalf ofa putative class of persons who purchased and/or sold natural gas futures andoptions contracts on the New York Mercantile Exchange ("NYMEX") betweenJanuary 1, 2000, and December 31, 2002. On November 14, 2003, Dominick Violafiled a similar complaint, naming EKT US. On November 25, 2003, the DistrictCourt for the Southern District of New York consolidated these cases with twoother cases, neither of which named EKT US as a defendant. On January 20, 2004,the plaintiffs filed a consolidated class action complaint that allegesviolations of the Commodity Exchange Act including manipulation (Section 9(a)),wash trades (Section 4c), and aiding and abetting violations of the Act (Section22(a)). The defendants including EKT US filed a joint motion to dismiss thisconsolidated complaint on February 19, 2004. On September 24, 2004, the courtdenied the joint motion to dismiss. Discovery has commenced. Plaintiffs filed aMotion for the Class Certification on January 25, 2005. Defendants' Motion inOpposition to Class Certification is due on March 25, 2005. The outcome of thislitigation cannot be determined at this time. Consequently, it is not possibleto assess the impact, if any, of this action on EKT US. EKT US intends tovigorously defend this action.
*Northern Illinois Gas Company Matter - On November 12,2002, the SEC issued a subpoena requesting that Koch Industries, Inc., producecertain documents and information concerning business activities with Nicor,Inc. ("Nicor"). On November 22, 2002, the Partnership submitted to the SEC alimiting letter that, among other things, clarified that the entity that had thebusiness relationship with Nicor was EKT US. EKT US is cooperating with the SECand the U.S. Attorney's office in this matter and has produced documents andinformation in response to the subpoena. The SEC's inquiry regarding Nicor isongoing, and the outcome or timing of this matter cannot be predicted. Otherfederal governmental authorities that are also investigating Nicor may befocusing on its business relationship with EKT US. 

Proceedings have been underway since 2002 before the IllinoisCommerce Commission (the "ICC") concerning Nicor that appear to be examining, atleast in part, its business relationship with EKT US. EKT US has receivedcertain requests for documents and information in that proceeding and inconnection with a civil action in Cook County, Illinois, in which Nicor soughtdeclaratory relief and specific performance. That action has been settled. Othergovernmental authorities in Illinois are participating in the ICC proceedingsand may themselves have authority to conduct their own investigations into thesematters.

On May 19, 2004, Nicor filed under seal a Verified Complaintagainst EKT US in Circuit Court of Cook County, Illinois, Chancery Division. TheComplaint sought production of certain records that Nicor claimed were necessaryto verify the accuracy of payments it made to EKT US pursuant to certaincontracts between them. Nicor further asked for an accounting between theparties. The Complaint did not include a claim for damages. On July 16, 2004,the Circuit Court entered a Protective Order and a Dismissal Order, dismissingthe Complaint in part with prejudice and in part without prejudice, whileretaining jurisdiction to enforce or modify the Protective Order entered alongwith the Dismissal Order. On August 3, 2004, the parties, following extensivenegations, entered into an Order modifying the terms of the Court's priorProtective Order. As before, however, the case was dismissed, in part withoutprejudice and with the Court retaining the right to enforce or modify itsProtective Order. To date, no enforcement proceedings have been initiatedagainst EKT US.

On August 25, 2004, the CFTC issued an informal request thatEKT US produce certain information and preserve records that are related to anyasset optimization agreement entered into between EKLP and/or IMD Storage andTransportation Asset Management Company ("IMD") and any third party. In 1998,Koch Energy Trading, Inc. ("KET"), a predecessor of EKT US, acquired a 50%ownership share in IMD. In 2000, KET increased its existing stake in IMD to 100%by acquiring the remaining ownership interest. The assets of KET, including IMD,subsequently became part of EKLP in February 2001. On September 13, 2004, aformal order of investigation was issued. The CFTC clarified the scope of itsinformal request and requested that EKT US produce information as part of aninvestigation related to EKT US's and/or IMD's trading activities with Nicor andPublic Service Enterprise Group through December 31, 2002. EKT US is cooperatingwith the CFTC and is providing the requested information and preserving thereferenced records. No enforcement proceedings have been initiated against EKTUS or any of its affiliates.
*Illinois Commerce Commission v. Entergy-Koch Trading, L.P. -On November 22, 2004, the Illinois Commerce Commission ("ICC") filed anApplication to Compel Attendance of Witnesses and the Production of TapeRecordings and Documents ("Application") against EKT US in the Circuit Court ofCook County, Illinois. The Application seeks the production of certain taperecordings and documents sought by Nicor as specified in a subpoena issued bythe ICC in June 2004 pursuant to Nicor's request in an ICC proceeding to whichEKT is not a party. The Application does not seek monetary damages. On February1, 2005, the Court denied EKT's motion to dismiss the Application onjurisdictional grounds. EKT US is pursuing as appeal of that ruling. EKT'sanswer to the Application is due on February 22, 2005. No discovery has occurredin the case. No enforcement proceedings have been initiated against EKT US orany of its affiliates.
*City of Tacoma v. American Electric Power ServiceCorporation, et al*-* On June 7, 2004, a complaint was filed in theU.S. District Court for the Western District of Washington in which Koch Energy Trading,Inc., a predecessor of EKT US, was named as a defendant along with approximately55 other entities. The complaint relates to power trading in California in 2000and 2001 and seeks damages under the Sherman Act. 

On August 20, 2004, the judicial Panel on MultidistrictLitigation issued a Conditional Transfer Order, transferring the case to theSouthern District of California to be assigned to Judge Robert H. Whaley and tobe consolidated or coordinated with the other cases involved in the *In reCalifornia Wholesale Electricity Antitrust Litigation*, MDL No. 1405.Plaintiffs have represented that two of the suits in front of judge Whaley havebeen dismissed and are now on appeal to the Ninth Circuit and that the remainderof the suits in front of Judge Whaley have been stayed pending the NinthCircuit's decision on the dismissed cases. The defendant filed a joint motion todismiss the complaint on December 9, 2004, which EKT US joined. On February 11,2005, the Court granted the motion to dismiss and dismissed the lawsuit. It isnot certain what the City of Tacoma will do in response to the Court's dismissalof the case. EKT US intends to continue to vigorously defend this action, ifnecessary.
*Other - In addition, EKT US has received several formaland informal requests for information from various regulatory and governmentalagencies in connection with the Partnership's gas and power businesses. At thispoint, the Partnership does not believe that these inquiries will result in amaterial impact on the Partnership.
**Non-Cancelable Operating Obligations***Optimization Contracts - EKT is required to makespecified minimum payment relative to optimizing certain customers' natural gasstorage and transportation assets. For the years ended December 31, 2004, 2003,and 2002, approximately $54.2 million, $30.5 million, and $20.4 million,respectively, of these specified minimum payments were made. All optimizationcontracts were assigned to MLCI as part of the sale of Trading Assets to MLCI.
*Operating Leases - EKLP has various noncancelableoperating lease commitments extending through the year 2011. Most operatingleases were assigned to MLCI and TGT Pipeline, LLC, as part of the sale ofTrading Assets and Gulf South. Total operating lease expense for the years endedDecember 31, 2004, 2003, and 2002, were $5.0 million, $6.3 million, and$6.5 million, respectively. EKLP's remaining minimum future commitments relatedto these items as of December 31, 2004, are as follows (in thousands): 
2005**$ 180**2006**180**2007**180**2008**180**2009**180**Thereafter**195**Total**$ 1,095****11. Related-Party Transactions**
EKT US was a party to an electric power purchase and saleagreement with an Entergy affiliate to provide various energy risk managementservices. For the years ended December 31, 2004, 2003, and 2002, EKT US received$2.3 million, $3.5 million, and $3.9 million, respectively, from the Entergyaffiliate as reimbursement for the resources needed to provide these services.

EKT Europe was party to an energy management agreement withEntergy affiliates whereby EKT Europe provides various risk management servicesfor the Entergy affiliates. For the year ended December 31, 2002, EKT Europereceived $0.9 million from the Entergy affiliate as reimbursement for theresources needed to provide these services. This agreement has expired in 2003,and the amount received by EKT Europe for the year ended December 31, 2003, wasimmaterial.

At December 31, 2004, the Partnership did not hold any assetsand liabilities from trading activities relative to transactions with Entergyand Koch affiliates. At December 31, 2003, included in assets and liabilitiesfrom trading activities are assets of $15.5 million and liabilities of$8.7 million relative to transactions with Entergy and Koch affiliates.

Included in the net gain from trading activities for the yearended December 31, 2004, are affiliate revenues of $378.2 million (1.8% oftrading revenues), affiliate cost of sales of $79.5 million (0.4% of tradingcost of sales), and net realized affiliate gain of $11.4 million from financialinstruments. Included in the net gain from trading activities for the year endedDecember 31, 2003, are affiliate revenues of $538.6 million (2.3% of tradingrevenues), affiliate cost of sales of $188.2 million (0.8% of trading cost ofsales), and net realized affiliate loss of $17.7 million from financialinstruments. Included in the net gain from trading activities for the year endedDecember 31, 2002, are affiliate revenues of $434.0 million (2.7% of tradingrevenues), affiliate cost of sales of $424.4 million (3.2% of trading cost ofsales), and net realized affiliate loss of $9.0 million from financialinstruments.

EKLP has a building operating lease agreement with Entergyand Koch extending to the years 2014 and 2011, respectively. The Partnership hadrelated rent expense of approximately $2.6 million, $4.0 million, and$3.1 million for the years ended December 31, 2004, 2003, and 2002,respectively.

Gulf South had trade receivables with an affiliate, Entergy,in the amounts of $0.6 million as of December 31, 2003. Gulf South providedtransportation and storage services to Entergy and related companies in theamount of $7.2 million, $7.7 million, and $8.1 million for the years endedDecember 31, 2004, 2003, and 2002, respectively.

Additionally, the Partnership purchased informationtechnology services from a Koch affiliate in the amount of $10.2 million,$11.2 million, and $12.0 million for the years ended December 31, 2004, 2003,and 2002, respectively.

Included in receivables from Partners at December 31, 2003,are amounts related to certain incentive compensation obligations that existedprior to the formation of the Partnership. Such amounts were fully reimbursed in2004 by the Partners.

See also Note 12, "Partners' Capital," for indemnificationprovided by Entergy.
**12. Partners' Capital**
Pursuant to the Partnership Agreement, one of the limitedpartners made a contribution of $72.7 million in January 2004. The equivalentamounts were distributed to the remaining limited partner. In addition, inJanuary 2004 certain assets of the Partnership were revalued to measure theeconomic impact to the Partners at this date. Such revaluation did not have anyeffect on the historical cost basis consolidated financial statements of thePartnership.

In 2002, EKLP had a contractual dispute with a counterparty,and the resulting loss was indemnified by Entergy. In connection with theindemnification, the Partnership recorded a receivable from Entergy of$32.8 million and a corresponding contribution to capital in the accompanyingconsolidated statement of changes in partners' capital as December 31, 2002. The$32.8 million was paid by Entergy to the Partnership on February 7, 2003. Aspart of the indemnification arrangement, beginning in January 2003, Entergy isentitled to all the benefits and detriments associated with the contractualagreements with the counterparty, and as a result, EKLP had a $2.3 millionreceivable (included in receivables from affiliated from Entergy at December 31,2003). EKLP no longer services the power needs of the counterparty on behalf ofEntergy.
**13. Employee Retirement Plans**
For its domestic operations, the Partnership established theMoney Purchase Pension Plan, which is available to all active employees meetingcertain minimum requirements. This plan is a defined contribution plan subjectto the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").Under the terms of the plan, 4% of employees' base compensation is contributedto the plan.

For its domestic operations, the Partnership also establishedthe 401(k) Retirement Plan, which is available to all active employees. Thisplan is a defined contribution plan subject to the provisions of the ERISA.Under the terms of the plan, employees may contribute a percentage of theirannual salary, subject to Internal Revenue Service limits, with the Partnershipmatching 100% of the first 6% contributed by employees with over one year ofservice. 

In December 2004, the Partnership transferred sponsorship ofboth the Money Purchase Pension Plan and the 401(k) Retirement Plan to GulfSouth. Upon the sale of Gulf South, EKLP ceased to have any title, interest, orliabilities associated with either of these plans. 

For its European operations, the Partnership established aGroup Personal Pension Plan, which is available to all active employees and ismanaged by Scottish Equitable. Under the terms of the plan, employees cancontribute from 2% to 5% of their base compensation on a pretax basis. ThePartnership contributed from 3% to 8% of an employee's base compensationdepending on the amount that the employee contributed to the plan. The GroupPersonal Pension Plan was held by EKLP's subsidiary EKT Europe, which was soldas part of the sale of the Trading Assets to MLCI.

For its employees' participation in these plans, thePartnership recorded expense for the years ended December 31, 2004, 2003, and2002, of approximately $4.5 million, $4.5 million, and $4.4 million,respectively. Partnership contributions to the above plans are subject tovesting requirements.
**14. Taxes**
EKT Europe is subject to UK taxes. The net income beforeincome taxes and cumulative effect of change in accounting principle attributedto European operations for the years ended December 31, 2004, 2003, and 2002, is$48.3 million, $20.6 million, and $9.8 million, respectively. The total incometax expense related to the net income before income taxes and cumulative effectof change in accounting principle that is attributed to foreign operations is$15.8 million, $4.5 million, and $3.7 million for the years ended December 31,2004, 2003, and 2002, respectively. Such income tax expense amounts werereflected as current income taxes. 
**15. Accrued Liabilities**
Accrued liabilities is summarized as follows:
 
**December 31** 
**2004**
**2003** *(In Thousands)   Accrued working capital adjustments      related to the sale of the trading assets and Gulf South**$ 32,596**$ -Accrued transaction and exit costs**26,348**-Accrued interest**-**11,273Other accrued liabilities **8,102**      75,955Total accrued liabilities**$ 67,046**      $ 87,228
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