Exhibit 99(a)

 

CONSOLIDATED FINANCIAL STATEMENTSEntergy - Koch, LPYears ended December 31, 2004, 2003, and 2002 

 

 

                                                                                   Report of Independent AuditorsThe Audit Committee of the Board of     Directors of EKLP, LLC, and    Partners of Entergy - Koch, LP 

We 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 LLP

Houston, TexasMarch 1, 2005 

 

 

Entergy - Koch, LPConsolidated 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 $12,307,                  respectively)**44,655**      839,995              Affiliates**1,201**37,305   Receivable from      Partners-4,500   Natural gas      inventory-239,150   Assets from trading      activities **6,617**680,643   Other current assets**4,365**192,011   Pipeline assets held      for sale      -      1,019,873Total current assets**301,375**3,478,065   Noncurrent assets:   Restricted cash -      escrow**200,300**-   Property, plant, and      equipment, net-20,787   Assets from trading      activities-192,316   Other noncurrent      assets      -      26,474Total noncurrent assets**200,300**239,577Total assets**$ 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 contributions328** **32,503** **32,831** **Net income
1,493** **
147,767** **
149,260** **   Other      comprehensive income:  ** **           Foreign currency translation
37** **
3,606** **
3,643** **           Net cash flow hedge gain
26** **
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 income
1,801** **
178,309** **
180,110** **   Other      comprehensive income (loss):              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 (loss):              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 a limited partnershipindirectly owned by subsidiaries of Entergy Corporation ("Entergy") and KochIndustries, Inc. ("Koch") (collectively, the "Partners"). Subsidiaries ofEntergy and Koch own 99% of the Partnership through limited partner interests,and the remaining 1% of the Partnership is owned by the general partner, EKLP,LLC, a company owned 50% by EK Holding III, LLC (an Entergy subsidiary), and 50%by Koch Energy, Inc. (a Koch subsidiary). EKLP, LLC, is managed by a board ofdirectors, with each partner having equal representation. Pursuant to the Agreement of Limited Partnership, dated January 31, 2001 (the"Partnership Agreement"), general distributions are equally shared by thePartners; however, the Partners disproportionately share in certain profits andspecial allocations, which occur periodically and would occur upon liquidation.The Partnership Agreement also requires that distributions of cash be madequarterly, if EKLP, LLC, determines there is excess cash, based on EKLPmanagement's recommendation.EKLP was formed to combine certain natural gas and power trading contracts andassets of Entergy with the natural gas pipeline business and the natural gas,power, and weather trading business of Koch. The accompanying consolidatedfinancial statements reflect the transactions of the Partnership subsequent toits inception. The Partnership operated these contributed businesses, contracts,and assets primarily through four wholly owned subsidiaries: Gulf South PipelineCompany, LP ("Gulf South"), Entergy - Koch Trading, LP ("EKT US"), Entergy -Koch Trading Canada, ULC ("EKT CAN"), and Entergy - Koch Trading, Ltd. ("EKTEurope"). On September 2, 2004, Entergy announced that EKLP had signed adefinitive agreement to sell EKT Europe, EKT CAN, and substantially all of theassets of EKT US ("Trading Assets") to Merrill Lynch Commodities, Inc. ("MLCI"),and was conducting a competitive process to sell Gulf South.On November 1, 2004, EKLP sold Trading Assets to MLCI for a purchase price of$800 million plus the fair value of all trading assets sold. The agreementcalled for EKLP to establish an escrow account for $200 million that EKLP isentitled to, two years from closing, contingent on certain events that maypreclude former EKLP executives from being able to continue their services withMLCI. The $200 million contingent gain has been deferred and is classified asrestricted cash - escrow in noncurrent assets, and is recorded as a noncurrentliability on the consolidated balance sheets. Interest earned on the restrictedcash accrues to the benefit of EKLP, pending resolution of the contingency. Suchinterest amounts to $0.3 million as of December 31, 2004. Due to the nature of the assets sold, mainly contracts with third parties, andbecause EKLP will have to legally continue to maintain and manage all the rightsand obligations for certain contracts that are not assigned by the third partyto MLCI, the sale of the Trading Assets do not qualify for discontinuedoperations in accordance with Statement of Financial Accounting Standards ("SFAS")No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFASNo. 144"). As such, the gain on the sale of the Trading Assets is included innet income from continuing operations in the consolidated statements of income.As part of the sales agreement, EKLP entered into a total return swap wherebyMLCI assumes all the benefits and detriments associated with any of EKLP'scontracts that were included in the sales agreement and have not been assignedto MLCI. See Note 7, "Concentrations of Credit Risk."On December 29, 2004, EKLP sold Gulf South to TGT Pipeline, LLC. In accordancewith SFAS No. 144, Gulf South's assets, liabilities, and results of operationshave been reclassified to discontinued operations in the consolidated balancesheets and consolidated statements of income for all periods presented. See Note8, "Discontinued Operations."EKLP's future operations will consist of winding down the affairs of thePartnership. The proceeds from the combined sales were used to retire all ofEKLP's senior notes and other credit facilities. Remaining proceeds, in excessof future working capital needs and minimum contractual capitalizationrequirements, as determined by EKLP, were distributed to the Partners.**2.     Significant Accounting Policies***Principles of Consolidation* - The consolidated financial statementsinclude the accounts of all of the Partnership's wholly owned subsidiaries afterthe elimination of significant intercompany transactions and balances.Investments in entities that are not controlled by the Partnership are accountedfor using either the cost or equity method, as appropriate. These investmentsare regularly reviewed for impairment and propriety of current accountingtreatment.*Cash and Cash Equivalents*- Cash and cash equivalents consist primarilyof cash on deposit, certificates of deposit, and money market accounts withoriginal maturities of three months or less. All highly liquid investments withoriginal maturities of three months or less are classified as cash and cashequivalents. *Margin and Collateral Deposits* - Margin and collateral deposits consistprimarily of cash that the Partnership has on deposit with counterparties formargin or collateral requirements related to trading futures, swap, and optioncontracts. Pursuant to the Partnership's contracts with each counterparty, themargin or collateral on deposit will vary based on changes in market prices, thePartnership's credit rating, and various other factors. As further discussed inNote 7, "Concentrations of Credit Risk," the Partnership also requirescollateral from its counterparties based on similar criteria. Amounts fromfinancial instruments received as collateral from counterparties are recorded as"collateral held on deposit."*Accounts Receivable-Trade* - Accounts receivable-trade are stated at thehistorical carrying amount net of write-offs and allowance for doubtful accountsreceivable, and represent claims against third parties that will be settled incash. An allowance for doubtful accounts is established when needed based onfactors including historical experience with the particular counterparty,economic trends and conditions, the age of the underlying receivable, and thePartnership's ability to exercise the right of offset. Interest receivable ondelinquent accounts receivable is included in the accounts receivable-tradebalance and recognized as interest income when contractually permissible andcollectibility is reasonably assured. Past-due accounts receivable-trade arewritten off when either internal collection efforts have been unsuccessful orwhen a settlement is reached for an amount that is less than the outstandinghistorical balance.*Natural Gas Inventory* - Inventory is comprised of natural gas held forresale. As further discussed in Note 3, "Changes in Accounting Principles andNew Accounting Pronouncements," the Partnership adopted Emerging Issues TaskForce ("EITF") Issue No. 02-3, *Issues Involved in Accounting for DerivativeContracts Held for Trading Purposes and Contracts Involved in Energy Trading andRisk Management Activities* ("EITF No. 02-3"). As such, inventory as of December31, 2003, is recorded at the lower of weighted-average cost or market.Included in other current assets as of December 31, 2003, are amounts related tonatural gas volumes held in third-party facilities and for which titletransferred to such third parties but to which the Partnership had rights in thefuture. Such amounts are recorded at the lower of weighted-average cost ormarket based on the notional volumes to which the Partnership had rights. ThePartnership held title to other natural gas volumes to which third parties hadthe rights under similar arrangements. The amounts related to these transactionsare recorded in other current liabilities at the higher of market orweighted-average cost.*Trading and Risk Management Activities* - *Trading Services*- EKLP offeredrisk management services to the natural gas, power, and weather markets, andoptimization services related to the natural gas storage and transportationassets of its customers. These services were provided through a variety offinancial instruments, including forward contracts involving cash settlement orphysical delivery of natural gas or power; swap contracts requiring payment to(or receipts from) counterparties based on the difference between two prices for(or related to) natural gas, power, or weather; and option contracts requiringpayment to (or receipts from) counterparties based on the difference between theoption's strike and the related market price for natural gas, power, or weather.As required by EITF No. 02-3, the mark-to-market method is used to account forall derivative trading activities and the accrual method of accounting is usedto account for storage, transportation, and asset optimization contracts notqualifying as derivatives under SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended ("SFAS No. 133").As required by EITF Issue No. 99-2, *Accounting for Weather Derivatives*("EITFNo. 99-2"), the Partnership uses the mark-to-market method to account for alltrading-related weather contracts.Under the mark-to-market method, derivative contracts are recorded at quoted orestimated market value, with resulting unrealized gains and losses recorded as"Assets from trading activities" and "Liabilities from trading activities,"respectively, on the consolidated balance sheets according to their term tomaturity. Current period changes in the assets and liabilities from tradingactivities are recognized as net gains or losses in "Net gain (loss) fromtrading activities" on the consolidated statements of income. Changes in theassets and liabilities from trading activities result primarily from changes inthe valuation of the portfolio of contracts, maturity and settlement ofcontracts, and newly originated transactions. Terms regarding cash settlement ofthe contracts vary with respect to the actual timing of cash receipts andpayments. Accounts receivable, accounts payable, and margin and collateraldeposits include settlement amounts for financial derivatives for which thecontractual settlement price has been published at the end of the accountingperiod. As a result, at December 31, 2003, accounts receivable and accountspayable included $88.2 million and $64 million, respectively, of January 2004settled financial forward contracts valued using the published January 2004futures price. Margin and collateral deposits include $(1.9) million of January2004 settled futures at December 31, 2003.The market prices and models used to value the derivatives reflect management'sbest estimate considering various factors, including closing exchange andover-the-counter quotations, time value, and volatility underlying thecontracts. The values are adjusted to reflect the potential impact ofliquidating EKLP's positions in an orderly manner over a reasonable time periodunder present market conditions and to reflect other types of risks, includingmodel risk and credit risk. When quoted market prices are not available, EKLPutilizes other valuation techniques to estimate market value. The use of thesetechniques requires estimations with respect to future prices, volatility,liquidity, and other variables. Changes in market prices and the estimationsused directly affect the estimated market value of these transactions.Accordingly, it is reasonably possible that such estimates could change in thenear term.Beginning January 1, 2003, EKT US utilized futures contracts to mitigate thevariability in cash flows of anticipated future natural gas purchases and sales.EKT US designated and accounted for these derivatives as cash flow hedges inaccordance with SFAS No. 133. The changes in the fair value of the hedgecontracts were expected to, and did, have a high correlation to changes in theanticipated natural gas purchases and sales and, therefore, qualified as cashflow hedges under SFAS No. 133. In addition, if the hedge contracts ceased tohave high correlation, or if the forecasted purchase or sale were deemed nolonger probable to occur, hedge accounting was terminated and the associatedchange in fair value of the derivatives was recognized in the related period ofchange in "Net (loss) gain from trading activities" on the consolidatedstatements of income.The fair value of these derivatives is reported in the consolidated balancesheets in "Assets and liabilities from trading activities." As of December 31,2003, EKT US included a net deferred loss on these cash flow hedges in"Accumulated other comprehensive income" of approximately $11.8 million. For theyears ended December 31, 2004 and 2003, the ineffective portion of these hedgesrecorded in "Net (loss) gain from trading activities" was approximately $5million and $6 million, respectively. Upon the sale of the Trading Assets, EKLPreclassified approximately $55 million of losses deferred in other comprehensiveincome to "Net gain from trading activities" because the forecasted purchase orsale that was being hedged became probable of not occurring by the end of theoriginally specified time period, as documented at the inception of the hedgingrelationship. EKLP did not have any open cash flow hedges as of December 31,2004.EKLP's asset optimization contracts relate to the natural gas storage andtransportation assets of the related counterparties. Revenues, costs, andprofit-sharing obligations associated with these asset optimization contractsare recognized based on the terms of the contract as such revenues are earnedand costs are incurred, and when profit-sharing obligations arise. In addition,EKLP entered into derivative contracts to manage market risk associated with itsasset optimization contracts. These derivative contracts were not designated ashedges 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 fair value of the hedginginstrument relative to the change in the fair value of the related debt. Duringthe year ended December 31, 2003, the Partnership recognized an immaterial netgain, included as a component of interest income, related to the ineffectiveportion of its fair value hedge of interest rate risk exposure. The effect ofthe fair value hedge for the year ended December 31, 2003, was to increase thecarrying value of the associated debt by $2.5 million. A corresponding asset forapproximately the same amount is recorded in "Other assets." The Partnershipterminated this hedge in August 2004 upon liquidating the interest rate swap.Additionally, the Partnership entered into forward foreign currency swapsassociated with certain intercompany debt balances carried by the domesticentity, 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, and equipment includescomputer hardware and software and is depreciated using the straight-line methodbased on average useful lives ranging from three to five years.*Assets Held for Sale* - The Partnership classifies assets as held for salewhen the assets meet the held for sale criteria of SFAS No. 144. This statementestablished the criteria to determine when a qualified group of long-livedassets and liabilities should be classified as held for sale. Among otherindicators, to classify long-lived assets as held for sale, an entity must beactively marketing the assets and the sale of the asset group must be probable.*Intangible Assets* - EKLP's intangible assets related to the weathertrading business and represented the logic utilized in the proprietary weatherderivative valuation models, analytics used to translate weather informationinto trading strategies, and the proprietary data infrastructure thatfacilitates creation of structured weather derivative products. The logic andvaluation models were sold to MLCI as part of sale of the Trading Assets. *Income Taxes*- The Partnership's consolidated financial statementsreflect no provision for United States federal and state income taxes since suchtaxes, if any, are the liabilities of the Partners. Foreign income taxes areprovided for the Partnership's subsidiaries, which are subject to taxation inforeign jurisdictions. All operating foreign subsidiaries were sold as part ofthe sale of the Trading Assets. At December 31, 2004, there were no deferred taxassets or liabilities. Such deferred tax assets and liabilities were notsignificant at December 31, 2003.*Net (loss) Gain From Trading Activities* - The accompanying consolidatedfinancial statements present revenues, costs, and realized and unrealized gainsand losses from derivatives for trading services, including physical sales andpurchases of natural gas and power, on a net basis in "Net (loss) gain fromtrading activities" in the consolidated statements of income. Revenues fromsales of physical natural gas and power are recognized in the month of delivery.The associated costs, including transportation and transmission charges, arerecognized concurrent with the revenue.*Foreign Currency* - Management determined the functional currency of EKTEurope to be the British pound. As such, the assets and liabilities of EKTEurope were translated at the exchange rate at December 31, 2003. Revenues andexpenses for EKT Europe were translated at a weighted-average exchange rate foreach reporting period presented in the accompanying consolidated statements ofincome. Foreign currency translation adjustments are reported in Partners'capital (as a component of other comprehensive income). Individually significanttransactions are translated at the exchange rate on the date of the transaction.Foreign exchange transaction gains and losses are recognized as "Other income(expense)" on the consolidated statements of income for the period. For theyears ended December 31, 2004, 2003, and 2002, foreign exchange gains ofapproximately $7.0 million, $14.1 million, and $7.1 million, respectively, wereincluded in "Other income (expense)." All operating foreign subsidiaries weresold as part of the sale of the Trading Assets. Approximately $12 million offoreign exchange gain was reclassified from "accumulated other comprehensiveincome" to gain on sale of trading assets in the consolidated statements ofincome.*Use of Estimates* - The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make various assumptions and estimates thataffect amounts in the consolidated financial statements and accompanying notes.Actual results could differ from those estimates. See related discussion in"Trading and Risk Management Activities."*Reclassifications* - Certain reclassifications have been made to thepresentation of balances from prior periods to conform with the current-periodpresentation. These reclassifications have no net effect on previously reportedresults of operations.**3.     Changes in Accounting Principles and NewAccounting PronouncementsChanges in Accounting Principles***EITF No. 02-3* - In October 2002, the EITF reached consensus in EITFNo. 02-3 to rescind EITF Issue No. 98-10, *Accounting for Contracts Involvedin Energy Trading and Risk Management Activities*("EITF No. 98-10"), EITFIssue No. 00-17, *Measuring the Fair Value of Energy-Related Contracts inApplying No. 98-10*, and Financial Accounting Standards Board ("FASB") StaffAnnouncement Topic D-105, *Accounting in Consolidation for Energy TradingContracts, between Affiliated Entities When Activities of One but Not BothAffiliates 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 to SFAS 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 EITF No. 02-3 relatingto inventory held for trading purposes and energy trading contracts notqualifying as derivatives and executed subsequent to October 25, 2002. ThePartnership adopted EITF No. 02-3 in January 1, 2003, for its nonderivativeenergy trading contracts executed prior to October 26, 2002, and reported anincrease to net income of $14.7 million as a cumulative effect of a change inaccounting principle, net of tax. As a result of the adoption of EITF No. 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 an unrealized gain orloss at inception of a derivative instrument should not be recognized unless thefair value of that instrument is obtained from a quoted market price in anactive market or is otherwise evidenced by comparison to other observablecurrent market transactions or based on a valuation technique incorporatingobservable market data. Adoption by the Partnership of this November revision toEITF No. 02-3 was applied by the Partnership prospectively and did not have amaterial impact on the Partnership's consolidated financial position or resultsof operations.*SFAS No. 149* - In April 2003, SFAS No. 149, *Amendment of Statement 133on Derivative Instruments and Hedging Activities* ("SFAS No. 149"), wasissued. SFAS No.149 amends and clarifies accounting for derivative instruments,including certain derivative instruments embedded in other contracts and hedgingactivities under SFAS No. 133. SFAS No. 149 clarifies under what circumstances acontract with an initial net investment meets the characteristic of a derivativeas discussed in SFAS No. 133. In addition, it clarifies when a derivativecontains a financing component that warrants special reporting in the statementof cash flows. SFAS No. 149 amends certain other existing pronouncements. Thesechanges will result in a more consistent reporting of contracts that arederivatives in their entirety or that contain embedded derivatives that warrantseparate accounting. SFAS No. 149 was effective for contracts entered into ormodified after June 30, 2003, except as stated below, and for hedgingrelationships designated after June 30, 2003. The guidance is to be appliedprospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133, *Implementation Issues*, that have been effective for periods that began priorto June 15, 2003, continue to be applied in accordance with their respectiveeffective dates. The adoption of SFAS No. 149 did not have an impact on theconsolidated financial statements of the Partnership.
**4.     Accumulated Other Comprehensive Income (Loss)**
The components of accumulated other comprehensive income areas follows:
 
**December 31, 2004**
**December 31, 2003**
**December 31,** **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 of certain financialinstruments held by the Partnership, including cash equivalents, accountsreceivable, accounts payable, and notes payable are representative of fair valuebecause of the short-term maturity of these instruments. In addition to thefinancial instruments listed below, the Partnership held financial instrumentsfor trading and risk management activities, as well as debt instruments, asdisclosed.The fair value of all of the Partnership's derivative financial instruments andother trading contracts is the estimated amount at which management believes theinstruments could be liquidated over a reasonable period of time, based onquoted market prices, current market conditions, or other estimates obtainedfrom third-party brokers or dealers. See Note 2, "Significant AccountingPolicies," under "Trading and Risk Management Activities" for additionalinformation.

The fair value of the Partnership's derivatives, financial instruments, andother trading contracts at December 31, 2004 and 2003, is summarized in thefollowing 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 total return 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 oftrading services, including natural gas derivatives for cash flow         hedgesaccounted for in accordance with SFAS No. 133. The carrying amount oftrading services         derivatives is included in the consolidated balance sheet as"Assets and liabilities from trading activities."(2)    The carrying amount is included in the consolidatedbalance sheet in "Other current assets" and "Other         current liabilities."(3)    The estimated fair value of the senior notes hasbeen determined by the Partnership using available         market information andselected valuation methodologies. Considerable judgment isrequired in         interpreting market data to develop the fair value estimate. The useof different market assumptions or         valuation  methodologies could have amaterial effect on the estimated fair value.**7.     Concentrations of Credit Risk**EKLP managed its own portfolio through its Trading Assets using a variety offinancial instruments, which include forwards, futures, swaps, options, storagecontracts, and transportation contracts. This portfolio was sold in its entiretyto MLCI as part of the sale of the Trading Assets. As part of the sale, EKLPentered into a total return swap with MLCI where MLCI assumes all the benefitsand detriments associated with any of EKLP contracts that were included in thesales agreement and have not been assigned to MLCI. Assets and liabilities fromtrading activities that have not been assigned at December 31, 2004, are $6.6million and $0.2 million, respectively. To record the total return swap, $6.4million due to MLCI has been recorded in liabilities from trading activities.Trade receivables and payables relating to the contracts that have not beenassigned to MLCI at December 31, 2004, but that are related to the total returnswap are $37.8 million and $1.1 million, respectively. To record the totalreturn swap, a net $36.7 million payable due to MLCI has been recorded in tradepayables.Inherent in trading and risk management activities are certain business risks,including market risk and credit risk. Market risk is the risk that the value ofthe contracts and derivative financial instruments will change, either favorablyor unfavorably, in response to changing market conditions. Credit risk is therisk of loss from nonperformance by suppliers, customers, or financialcounterparties to a contract or an agreement. The total return swap transferredall market risk and credit risk to MLCI. Thus, at December 31, 2004, EKLP isonly exposed to credit risk with MLCI. During January 2005 contracts, related toapproximately 70% of the fair value of the total return swap at December 31,2004, were assigned to MLCI. Based on MLCI's creditworthiness, the Partnershipdoes not anticipate a material adverse effect on its consolidated financialposition as a result of counterparty nonperformance.The notional volumes of the Partnership's realized physical activity included in"Net gain from trading activities" are set forth below. These notional volumesrepresent the gross transaction volumes for trading contracts before the sale ofthe Trading Assets that were physically settled and are not a measure of thePartnership'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 to credit risk, consistprincipally of cash equivalents and trade receivables. In accordance with thePartnership's investment policy, cash equivalents are invested such that creditexposure to any one financial institution is limited.Trade receivables are predominantly with energy, utility, and other tradingcompanies in the United States. For the years ended December 31, 2004, 2003, and2002, no single counterparty contributed in excess of 10% of "Net gain fromtrading activities" on the consolidated statements of income.The counterparties associated with "Assets from trading activities" at December31, 2003, are summarized in the following tables: 
 
**December 31, 2003** **Investment Grade(1)**Total *(In Thousands)   Gas and electric utilities$ 188,105$ 211,220          Energy marketers117,732274,712          Financial institutions285,879300,805          Oil and gas producers15,64266,766          Industrials10,57011,746          Other12,24512,534     Total$ 630,173877,783          Credit valuation      adjustments (4,824)     Trading exposure(2) 872,959          Collateral (379,735) (3)Assets from trading      activities, net of collateral  $ 493,224      
(1)     "Investment Grade" is primarily determined usingpublicly 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 minimumimplied through internal credit analysis,         Standard & Poor's or Moody'srating of BBB- or Baa3, respectively.(2)     Trading exposure reflects netting between currentand noncurrent assets and liabilities from trading activities         under masternetting agreements, as applicable.  Three customers' exposure atDecember 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 standbyletters of credit. An additional $73.5 million of collateral is         being appliedagainst estimated accounts receivable. 

**8.     Discontinued Operations**On December 29, 2004, EKLP sold its pipeline business for $1.136 billion plusthe net working capital as of the closing date ("Base Purchase Price").Accordingly, the assets, liabilities, and results of operations of the pipelinebusiness have been reported as discontinued operations for all periodspresented. Operating revenues for Gulf South classified as discontinuedoperations in the consolidated statements of income for the years ended December31, 2004, 2003, and 2002, were $198 million, $177 million, and $161 million,respectively.The Partnership reclassified $0.5 million from the 2003 cumulative effect of achange in accounting principle related to Gulf South's adoption of SFAS No. 143,*Accounting for Asset Retirement Obligations*, to loss from discontinuedoperations. 

A summary of assets and liabilities related to Gulf South reclassified asassets and liabilities held for sale on the consolidated balance sheets as ofDecember 31, 2003, is as follows:  
 
**December 31** 
**2003** *(In Thousands)**ASSETS Accounts receivables$ 19,333   Transportation and exchange receivables44,169   Receivable from partners2,255   Natural gas inventory10,182    Property, plant, and equipment, net927,053(1)Other assets16,881   Total assets        $ 1,019,873        **LIABLITIES Accounts payables$ 14,567   Transportation and exchange payables28,277   Accrued liabilities48,348   Other liabilities6,377   Total 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 between EKLP and TGTPipeline, LLC (the "Agreement"), TGT Pipeline, LLC, has assumed all contingentliabilities related to the pipeline business. Management has made customaryrepresentations and warranties in the Agreement regarding contingent liabilitiesand other matters related to the pipeline business. All representations andwarranties made in the Agreement are in effect until nine months after theclosing date, and the purchase price will be adjusted if aggregate lossesactually incurred by the buyer exceed 2% of the Base Purchase Price and in noevent shall EKLP's aggregate liabilities exceed 10% of the Base Purchase Price. Management does not anticipate, and no provision has beenmade in these financial statements for, subsequent payments under theseindemnification provisions in the Agreement. In addition, each party under the Agreement is allowed time to evaluate thefinal working capital calculation used to determine the Base Purchase Price. TGTPipeline, LLC's period for evaluation expired on February 28, 2005, after whichEKLP has 45 days to continue its evaluation. TGT Pipeline, LLC, has identified a$4.2 million adjustment to the Base Purchase Price. EKLP disagrees with theadjustment and continues to assess a resolution. The Agreement provides formediation if a resolution cannot be reached. Any changes in the working capitaladjustment will result in adjustment to the Base Purchase Price. No provisionhas been made in these consolidated financial statements 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 to manage itsshort-term cash requirements: a 364-day credit facility and a multi-year creditfacility. In addition to these two facilities, Entergy - Koch Trading, LP, andEntergy - Koch Trading, Ltd., had short-term credit facilities for additionalliquidity.On December 19, 2003, EKLP renewed its 364-day credit facility with totalcommitments of $230 million. This facility included the ability to issue up to$75 million of letters of credit within the total commitment of $230 million.This facility was terminated and all commitments and obligations under thisagreement were released on November 1, 2004, in conjunction with the sale of theTrading Assets to MLCI. At December 31, 2003, no loans or letters of credit wereoutstanding under this facility. On February 1, 2001, EKLP entered into a multi-year credit facility with totalcommitments of $105 million. This facility included the ability to issue up to$105 million of letters of credit within the total commitment of $105 million.At December 31, 2003, no loans were outstanding under this facility and $3.9million in letters of credit were outstanding. This facility was terminated andall commitments and obligations under this agreement were released on November1, 2004, in conjunction with the sale of the Trading Assets to MLCI. At the timeof termination, EKLP had $4.48 million in letters of credit outstanding. EKLPentered into a collateral agreement under which cash was posted to fullycollateralize the outstanding letters of credit until the credits could bereturned and terminated. At December 31, 2004, no collateral had been returned,but EKLP expects to have all letters of credit terminated and the cashcollateral returned by March 31, 2005. On September 25, 2003, EKT US entered into a 364-day credit facility with atotal commitment of $25 million. This facility was used solely for the purposeof financing a portion of the Partnership's margin requirements related toenergy trading. Advances under the facility would bear interest at LIBOR plus0.75%, and the Partnership was required to pay a facility fee at a rate of0.125% per annum on the total commitment regardless of usage. As of December 31,2003, $25 million was outstanding under this facility at a weighted-averageinterest rate of 1.85%. This facility expired on September 23, 2004, and was notrenewed.On December 1, 2003, EKT Europe entered into an uncommitted short-term creditfacility with a limit of 10 million British pounds. Advances under the facilitywould 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) wereoutstanding at a weighted-average interest rate of 1.84%. This facility expiredon April 24, 2004, and was renewed. In conjunction with the sale of the TradingAssets to MLCI, all rights and obligations were assigned at closing to MLCI. **Long-Term Debt**On August 21, 2003, EKLP issued $200 million of senior unsecured notes at3.65%, due August 20, 2006. These senior notes were offered at a discountedissue price of 99.955%, resulting in an effective interest rate of 3.67%. On July 24, 2001, EKLP issued $300 million of senior unsecured notes at 6.9%,due August 1, 2011. These senior notes were offered at a discounted issue priceof 99.698%, resulting in an effective interest rate of 6.92%. In conjunction with the sale of the Trading Assets to MLCI, a tender offer wasmade for the full amount of outstanding notes. At December 31, 2004, all noteshad been tendered or redeemed as provided for in the debenture, and EKLP nolonger has any obligations outstanding under the debentures. EKLP recognized aloss of $60.2 million as loss on extinguishment of debt in the consolidatedstatements of income due to the early retirement of these notes. **Other Credit Facilities**On October 31, 2003, EKT Europe entered into a 364-day credit facility witha commitment of 40 million British pounds. At December 31, 2003, letters ofcredit/bank guarantees in the amount of 19.3 million British pounds ($34.6million) were outstanding. This facility expired on October 29, 2004, and wasnot renewed. There are no further obligations outstanding under this facility.On December 1, 2003, EKT Europe entered into an uncommitted short-term creditfacility with a limit of 25 million British pounds. At December 31, 2003,letters of credit/bank guarantees in the amount of 15.1 million British pounds($27.0 million) were outstanding. This facility expired on April 24, 2004, andwas renewed. In conjunction with the sale of the Trading Assets to MLCI, allrights and obligations under this agreement were assigned and transferred toMLCI effective with the closing of the sale. **10.     Commitments and Contingencies***Purchase Agreement Indemnifications* - In the purchase agreements forthe sale of Trading Assets and Gulf South, EKLP has agreed to indemnify therespective purchasers for certain potential losses relating to any breaches ofthe sellers' representations, warranties and obligations under each of thepurchase 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 legal actions arising inthe normal course of business. Management believes that the disposition ofoutstanding legal actions will not have a material adverse impact on thePartnership's consolidated financial position.*Environmental and Other Indemnification Matters* - Koch Energy, Inc.,indemnified the Partnership for all known environmental liabilities as ofFebruary 1, 2001, arising from conditions existing or events occurring at GulfSouth prior to the inception of the Partnership. In addition, Koch Energy, Inc.,and affiliates of Entergy have indemnified the Partnership for any unknownenvironmental liabilities that occurred prior to February 1, 2001, related tothe respective assets contributed to the Partnership by such parties, which areidentified before the tenth anniversary date of the Partnership's formation. Anysuch environmental liabilities first identified prior to the sixth anniversarydate are subject to a $50,000 per event deductible while those first identifiedafter the sixth anniversary date but before the tenth anniversary date aresubject to a $1.0 million per event deductible.All environmental liabilities arising from the operations of the Partnershipsubsequent to January 31, 2001, are the obligation of the Partnership. KochEnergy, Inc., and affiliates of Entergy have also agreed to indemnify thePartnership for all other losses and expenses the Partnership incurs inconnection 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, this indemnification, as it relatedto the pipeline operations, was terminated and a $5.4 million payment was madeto Gulf South from a Koch subsidiary for the indemnification release. EKLP doesnot anticipate any additional future losses in excess of $5.4 million related tothese environmental matters. *Regulatory Matters* - EKLP is subject to regulation by various federal,state, and local government agencies and from time to time receives formal andinformal requests for information from such agencies.As an indirect partially owned subsidiary of Entergy, a registered holdingcompany under the Public Utility Holding Company Act of 1935 (the "1935 Act"), EKLP generally must comply with certain requirements established in the 1935Act, as well as rules and orders issued by the Securities and ExchangeCommission under the 1935 Act that are applicable to investments by Entergy innon-utility companies.At the federal level, the Federal Energy Regulatory Commission ("FERC")regulates certain activities of EKT US regarding energy commodity transportationand wholesale trading. EKT US is also subject to certain aspects of thejurisdiction of the Commodity Futures Trading Commission ("CFTC").*Commodity Futures Trading Commission Matter* - On March 26, 2003, the FERCpublished a "Final Report on Price Manipulation in Western Markets," focusing ongas and power activity in California. EKT US was listed in the FERC report amongthe entities that had allegedly engaged in so-called "wash trading" in the gasmarkets with respect to 61 pairs of trades. In addition, EKT US received asubpoena from the CFTC seeking certain information about its gas and powerbusiness, relating to so-called "wash trades," and about information furnishedto energy industry publications. EKT US also received a document request inconnection with an informal inquiry by the Securities and Exchange Commission(the "SEC") relating to so-called "wash trades."On January 28, 2004, the CFTC approved an order settling the administrativeaction relating to the CFTC's investigation. EKT US agreed to pay a civilpenalty of $3 million without admitting or denying the CFTC's findings andrecorded a liability for such amount as of December 31, 2003, which was paid infull 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, Cornerstone Propane Partners,LP, filed suit against EKT US and other entities on behalf of a putative classof persons who purchased and/or sold natural gas futures and options contractson the New York Mercantile Exchange ("NYMEX") between January 1, 2000, andDecember 31, 2002. On November 14, 2003, Dominick Viola filed a similarcomplaint, naming EKT US. On November 25, 2003, the District Court for theSouthern District of New York consolidated these cases with two other cases,neither of which named EKT US as a defendant. On January 20, 2004, theplaintiffs filed a consolidated class action complaint that alleges violationsof the Commodity Exchange Act including manipulation (Section 9(a)), wash trades(Section 4c), and aiding and abetting violations of the Act (Section 22(a)). Thedefendants including EKT US filed a joint motion to dismiss this consolidatedcomplaint on February 19, 2004. On September 24, 2004, the court denied thejoint motion to dismiss. Discovery has commenced. Plaintiffs filed a Motion forthe Class Certification on January 25, 2005. Defendants' Motion in Opposition toClass Certification is due on March 25, 2005. The outcome of this litigationcannot be determined at this time. Consequently, it is not possible to assessthe impact, if any, of this action on EKT US. EKT US intends to vigorouslydefend this action.*Northern Illinois Gas Company Matter* - On November 12, 2002, the SECissued a subpoena requesting that Koch Industries, Inc., produce certaindocuments and information concerning business activities with Nicor, Inc. ("Nicor").On November 22, 2002, the Partnership submitted to the SEC a limiting letterthat, among other things, clarified that the entity that had the businessrelationship with Nicor was EKT US. EKT US is cooperating with the SEC and theU.S. Attorney's office in this matter and has produced documents and informationin response to the subpoena. The SEC's inquiry regarding Nicor is ongoing, andthe outcome or timing of this matter cannot be predicted. Other federalgovernmental authorities that are also investigating Nicor may be focusing onits business relationship with EKT US. Proceedings have been underway since 2002 before the Illinois CommerceCommission (the "ICC") concerning Nicor that appear to be examining, at least inpart, its business relationship with EKT US. EKT US has received certainrequests for documents and information in that proceeding and in connection witha civil action in Cook County, Illinois, in which Nicor sought declaratoryrelief 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 Complaint against EKT US inCircuit Court of Cook County, Illinois, Chancery Division. The Complaint soughtproduction of certain records that Nicor claimed were necessary to verify theaccuracy of payments it made to EKT US pursuant to certain contracts betweenthem. Nicor further asked for an accounting between the parties. The Complaintdid not include a claim for damages. On July 16, 2004, the Circuit Court entereda Protective Order and a Dismissal Order, dismissing the Complaint in part withprejudice and in part without prejudice, while retaining jurisdiction to enforceor modify the Protective Order entered along with the Dismissal Order. On August3, 2004, the parties, following extensive negations, entered into an Ordermodifying the terms of the Court's prior Protective Order. As before, however,the case was dismissed, in part without prejudice and with the Court retainingthe right to enforce or modify its Protective Order. To date, no enforcementproceedings have been initiated against EKT US.On August 25, 2004, the CFTC issued an informal request that EKT US producecertain information and preserve records that are related to any assetoptimization 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 November22, 2004, the Illinois Commerce Commission ("ICC") filed an Application toCompel Attendance of Witnesses and the Production of Tape Recordings andDocuments ("Application") against EKT US in the Circuit Court of Cook County,Illinois. The Application seeks the production of certain tape recordings anddocuments sought by Nicor as specified in a subpoena issued by the ICC in June2004 pursuant to Nicor's request in an ICC proceeding to which EKT US is not aparty. The Application does not seek monetary damages. On February 1, 2005, theCourt denied EKT US's motion to dismiss the Application on jurisdictional grounds.EKT US is pursuing as appeal of that ruling. EKT US's answer to the Application isdue on February 22, 2005. No discovery has occurred in the case. No enforcementproceedings have been initiated against EKT US or any of its affiliates.*City of Tacoma v. American Electric Power Service Corporation, et al* - OnJune 7, 2004, a complaint was filed in the U.S. District Court for the WesternDistrict of Washington in which Koch Energy Trading, Inc., a predecessor of EKT US, wasnamed as a defendant along with approximately 55 other entities. The complaintrelates to power trading in California in 2000 and 2001 and seeks damages underthe Sherman Act. On August 20, 2004, the judicial Panel on Multidistrict Litigation issued aConditional Transfer Order, transferring the case to the Southern District ofCalifornia to be assigned to Judge Robert H. Whaley and to be consolidated orcoordinated with the other cases involved in the In re California WholesaleElectricity Antitrust Litigation, MDL No. 1405. Plaintiffs have represented thattwo of the suits in front of judge Whaley have been dismissed and are now onappeal to the Ninth Circuit and that the remainder of the suits in front ofJudge Whaley have been stayed pending the Ninth Circuit's decision on thedismissed cases. The defendant filed a joint motion to dismiss the complaint onDecember 9, 2004, which EKT US joined. On February 11, 2005, the Court grantedthe motion to dismiss and dismissed the lawsuit. It is not certain what the Cityof Tacoma will do in response to the Court's dismissal of the case. EKT USintends to continue to vigorously defend this action, if necessary.*Other* - In addition, EKT US has received several formal and informalrequests for information from various regulatory and governmental agencies inconnection with the Partnership's gas and power businesses. At this point, thePartnership does not believe that these inquiries will result in a materialimpact on the Partnership.**Non-Cancelable Operating Obligations***Optimization Contracts* - EKT is required to make specified minimumpayment relative to optimizing certain customers' natural gas storage andtransportation assets. For the years ended December 31, 2004, 2003, and 2002,approximately $54.2 million, $30.5 million, and $20.4 million, respectively, ofthese specified minimum payments were made. All optimization contracts wereassigned to MLCI as part of the sale of Trading Assets to MLCI.*Operating Leases* - EKLP has various noncancelable operating leasecommitments extending through the year 2011. Most operating leases were assignedto MLCI and TGT Pipeline, LLC, as part of the sale of Trading Assets and GulfSouth. Total operating lease expense for the years ended December 31, 2004,2003, and 2002, were $5.0 million, $6.3 million, and $6.5 million, respectively. EKLP's remaining minimum futurecommitments related to these items as of December 31, 2004, are as follows (inthousands):  
2005**$ 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 sale agreement with anEntergy affiliate to provide various energy risk management services. For theyears ended December 31, 2004, 2003, and 2002, EKT US received $2.3 million,$3.5 million, and $3.9 million, respectively, from the Entergy affiliate asreimbursement for the resources needed to provide these services. EKT Europe was party to an energy management agreement with Entergy affiliateswhereby EKT Europe provides various risk management services for the Entergyaffiliates. For the year ended December 31, 2002, EKT Europe received $0.9million from the Entergy affiliate as reimbursement for the resources needed toprovide these services. This agreement has expired in 2003, and the amountreceived by EKT Europe for the year ended December 31, 2003, was immaterial.At December 31, 2004, the Partnership did not hold any assets and liabilitiesfrom trading activities relative to transactions with Entergy and Kochaffiliates. At December 31, 2003, included in assets and liabilities fromtrading activities are assets of $15.5 million and liabilities of $8.7 millionrelative to transactions with Entergy and Koch affiliates.Included in the net gain from trading activities for the year ended December 31,2004, are affiliate revenues of $378.2 million (1.8% of trading revenues),affiliate cost of sales of $79.5 million (0.4% of trading cost of sales), andnet realized affiliate gain of $11.4 million from financial instruments.Included in the net gain from trading activities for the year ended December 31,2003, are affiliate revenues of $538.6 million (2.3% of trading revenues),affiliate cost of sales of $188.2 million (0.8% of trading cost of sales), andnet realized affiliate loss of $17.7 million from financial instruments.Included in the net gain from trading activities for the year ended December 31,2002, are affiliate revenues of $434.0 million (2.7% of trading revenues),affiliate cost of sales of $424.4 million (3.2% of trading cost of sales), andnet realized affiliate loss of $9.0 million from financial instruments.EKLP has a building operating lease agreement with Entergy and Koch extending tothe years 2014 and 2011, respectively. The Partnership had related rent expenseof approximately $2.6 million, $4.0 million, and $3.1 million for the yearsended 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 provided transportation andstorage services to Entergy and related companies in the amount of $7.2 million,$7.7 million, and $8.1 million for the years ended December 31, 2004, 2003, and2002, respectively.Additionally, the Partnership purchased information technology services from aKoch affiliate in the amount of $10.2 million, $11.2 million, and $12.0 millionfor the years ended December 31, 2004, 2003, and 2002, respectively.Included in receivables from Partners at December 31, 2003, are amounts relatedto certain incentive compensation obligations that existed prior to theformation of the Partnership. Such amounts were fully reimbursed in 2004 by thePartners.See also Note 12, "Partners' Capital," for indemnification provided by Entergy.**12.     Partners' Capital**Pursuant to the Partnership Agreement, one of the limited partners made acontribution of $72.7 million in January 2004. The equivalent amounts weredistributed to the remaining limited partner. In addition, in January 2004certain assets of the Partnership were revalued to measure the economic impactto the Partners at this date. Such revaluation did not have any effect on thehistorical cost basis consolidated financial statements of the Partnership.In 2002, EKLP had a contractual dispute with a counterparty, and the resultingloss was indemnified by Entergy. In connection with the indemnification, thePartnership recorded a receivable from Entergy of $32.8 million and acorresponding contribution to capital in the accompanying consolidated statementof changes in partners' capital as December 31, 2002. The $32.8 million was paidby Entergy to the Partnership on February 7, 2003. As part of theindemnification arrangement, beginning in January 2003, Entergy is entitled toall the benefits and detriments associated with the contractual agreements withthe counterparty, and as a result, EKLP had a $2.3 million receivable (includedin receivables from affiliated from Entergy at December 31, 2003). EKLP nolonger services the power needs of the counterparty on behalf of Entergy.**13.     Employee Retirement Plans**For its domestic operations, the Partnership established the Money PurchasePension Plan, which is available to all active employees meeting certain minimumrequirements. This plan is a defined contribution plan subject to the provisionsof the Employee Retirement Income Security Act of 1974 ("ERISA"). Under theterms of the plan, 4% of employees' base compensation is contributed to theplan.For its domestic operations, the Partnership also established the 401(k)Retirement Plan, which is available to all active employees. This plan is adefined contribution plan subject to the provisions of the ERISA. Under theterms of the plan, employees may contribute a percentage of their annual salary,subject to Internal Revenue Service limits, with the Partnership matching 100%of the first 6% contributed by employees with over one year of service. In December 2004, the Partnership transferred sponsorship of both the MoneyPurchase Pension Plan and the 401(k) Retirement Plan to Gulf South. Upon thesale of Gulf South, EKLP ceased to have any title, interest, or liabilitiesassociated with either of these plans. For its European operations, the Partnership established a Group PersonalPension Plan, which is available to all active employees and is managed byScottish Equitable. Under the terms of the plan, employees can contribute from2% to 5% of their base compensation on a pretax basis. The Partnershipcontributed from 3% to 8% of an employee's base compensation depending on theamount that the employee contributed to the plan. The Group Personal PensionPlan was held by EKLP's subsidiary EKT Europe, which was sold as part of thesale of the Trading Assets to MLCI.For its employees' participation in these plans, the Partnership recordedexpense for the years ended December 31, 2004, 2003, and 2002, of approximately$4.5million, $4.5 million, and $4.4 million, respectively. Partnership contributionsto the above plans are subject to vesting requirements.**14.     Taxes**EKT Europe is subject to UK taxes. The net income before income taxes andcumulative effect of change in accounting principle attributed to Europeanoperations for the years ended December 31, 2004, 2003, and 2002, is $48.3million, $20.6 million, and $9.8 million, respectively. The total income taxexpense related to the net income before income taxes and cumulative effect ofchange in accounting principle that is attributed to foreign operations is $15.8million, $4.5 million, and $3.7 million for the years ended December 31, 2004,2003, and 2002, respectively. Such income tax expense amounts were reflected ascurrent 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*******************************************************************************************************************************************************