10-K/A 1 form10ka_2010.htm KMP 10K/A 2010 form10ka_2010.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

Form 10-K/A
(Amendment No. 1)

[X]
  
                   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                            OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

or
 
[  ]
  
                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                             OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____
 

Commission file number: 1-11234

Kinder Morgan Energy Partners, L.P.
(Exact name of registrant as specified in its charter)

Delaware
76-0380342
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

500 Dallas Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)

Registrant’s telephone number, including area code: 713-369-9000
_______________

Securities registered pursuant to Section 12(b) of the Act:

          Title of each class
                   Name of each exchange on which registered
Common Units
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes [X]    No [   ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes [   ]   No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]   No [   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]
 
 
1

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Large accelerated filer [X]   Accelerated filer [   ]     Non-accelerated filer [   ]     Smaller reporting company [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes [   ]   No [X]
 
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on closing prices in the daily composite list for transactions on the New York Stock Exchange on June 30, 2010 was approximately $12,836,486,727.  As of January 31, 2011, the registrant had 218,993,455 Common Units outstanding.
 












 
2

 
 
 

 


 
EXPLANATORY NOTE
 
 
The sole purpose of this amendment is to file to correct the signature line of the Report of Independent Registered Public Accounting Firm included in Item 8 "Financial Statements and Supplementary Data." The report had been signed by the Independent Registered Public Accounting Firm, but the signature line was inadvertently omitted when the Form 10-K was originally filed. As part of this amendment and as required, we are refiling "Item 8. Financial Statements and Supplementary Data" in its entirety. Other than correcting the signature line of the Report of Independent Registered Public Accounting Firm, we have made no changes to Item 8.
 
Item 8.  Financial Statements and Supplementary Data.
 
The information required in this Item 8 is included in this report as set forth in the “Index to Financial Statements” on page 114.
 
 
 
 
3

 
INDEX TO FINANCIAL STATEMENTS
 
 
 
Page
Number
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 
Report of Independent Registered Public Accounting Firm                                                                                                                                         
115
   
   
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008
116
   
   
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008
117
   
   
Consolidated Balance Sheets as of December 31, 2010 and 2009                                                                                                                                         
118
   
   
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
119
   
   
Consolidated Statements of Partners’ Capital for the years ended December 31, 2010, 2009 and 2008
121
   
   
Notes to Consolidated Financial Statements                                                                                                                                         
123



 
114

 

 
Report of Independent Registered Public Accounting Firm
 

To the Partners of
Kinder Morgan Energy Partners, L.P.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Kinder Morgan Energy Partners, L.P. and its subsidiaries (the "Partnership") at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Partnership's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing in Item 9A of the Partnership's 2010 Annual Report on Form 10-K.  Our responsibility is to express opinions on these financial statements and on the Partnership's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP


Houston, Texas
February 18, 2011






 
115

 

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
Revenues
 
(In millions except per unit amounts)
 
Natural gas sales
  $ 3,614.4     $ 3,137.2     $ 7,705.2  
Services
    3,024.7       2,739.1       2,770.3  
Product sales and other
    1,438.6       1,127.1       1,264.8  
Total Revenues
    8,077.7       7,003.4       11,740.3  
                         
Operating Costs, Expenses and Other
                       
Gas purchases and other costs of sales
    3,606.3       3,068.8       7,716.1  
Operations and maintenance
    1,415.0       1,136.2       1,282.8  
Depreciation, depletion and amortization
    904.8       850.8       702.7  
General and administrative
    375.2       330.3       297.9  
Taxes, other than income taxes
    171.4       137.0       186.7  
Other expense (income)
    (0.1 )     (34.8 )     2.6  
Total Operating Costs, Expenses and Other
    6,472.6       5,488.3       10,188.8  
                         
Operating Income
    1,605.1       1,515.1       1,551.5  
                         
Other Income (Expense)
                       
Earnings from equity investments
    223.1       189.7       160.8  
Amortization of excess cost of equity investments
    (5.8 )     (5.8 )     (5.7 )
Interest expense
    (507.6 )     (431.5 )     (398.2 )
Interest income
    22.7       22.5       10.0  
Other, net
    24.2       49.5       19.2  
Total Other Income (Expense)
    (243.4 )     (175.6 )     (213.9 )
                         
Income from Continuing Operations Before Income Taxes
    1,361.7       1,339.5       1,337.6  
                         
Income Taxes
    (34.6 )     (55.7 )     (20.4 )
                         
Income from Continuing Operations
    1,327.1       1,283.8       1,317.2  
                         
Discontinued Operations (Note 3):
                       
Gain on disposal of North System
    -       -       1.3  
Income from Discontinued Operations
    -       -       1.3  
                         
Net Income
    1,327.1       1,283.8       1,318.5  
                         
Net Income Attributable to Noncontrolling Interests
    (10.8 )     (16.3 )     (13.7 )
                         
Net Income Attributable to Kinder Morgan Energy Partners, L.P.
  $ 1,316.3     $ 1,267.5     $ 1,304.8  
                         
Calculation of Limited Partners’ Interest in Net Income
Attributable to Kinder Morgan Energy Partners, L.P.:
                       
Income from Continuing Operations
  $ 1,316.3     $ 1,267.5     $ 1,303.5  
Less: General Partner’s interest
    (884.9 )     (935.8 )     (805.8 )
Limited Partners’ interest
    431.4       331.7       497.7  
Add: Limited Partners’ interest in discontinued operations
    -       -       1.3  
Limited Partners’ Interest in Net Income
  $ 431.4     $ 331.7     $ 499.0  
                         
Limited Partners’ Net Income per Unit:
                       
Income from continuing operations
  $ 1.40     $ 1.18     $ 1.94  
Income from discontinued operations
    -       -       -  
Net Income
  $ 1.40     $ 1.18     $ 1.94  
                         
Weighted Average Number of Units Used in Computation of Limited
Partners’ Net Income Per Unit
    307.1       281.5       257.2  
                         
Per Unit Cash Distribution Declared
  $ 4.40     $ 4.20     $ 4.02  

The accompanying notes are an integral part of these consolidated financial statements.

 
116

 

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(In millions)
 
Net Income
  $ 1,327.1     $ 1,283.8     $ 1,318.5  
                         
Other Comprehensive Income (Loss):
                       
Change in fair value of derivatives utilized for hedging purposes
    (76.1 )     (458.2 )     658.0  
Reclassification of change in fair value of derivatives to net income
    188.4       100.3       670.5  
Foreign currency translation adjustments
    100.6       252.2       (333.2 )
Adjustments to pension and other postretirement benefit plan liabilities
    (2.3 )     (2.5 )     3.7  
Total Other Comprehensive Income (Loss)
    210.6       (108.2 )     999.0  
                         
Comprehensive Income
    1,537.7       1,175.6       2,317.5  
Comprehensive Income Attributable to Noncontrolling Interests
    (13.0 )     (15.2 )     (23.8 )
Comprehensive Income Attributable to Kinder Morgan Energy Partners, L.P.
  $ 1,524.7     $ 1,160.4     $ 2,293.7  

The accompanying notes are an integral part of these consolidated financial statements.









 
117

 

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

   
December 31,
 
   
2010
   
2009
 
   
(Dollars in millions)
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 129.1     $ 146.6  
Restricted deposits
    50.0       15.2  
Accounts, notes and interest receivable, net
    951.8       902.1  
Inventories
    92.0       71.9  
Gas in underground storage
    2.2       43.5  
Fair value of derivative contracts
    24.0       20.8  
Other current assets
    37.6       44.6  
Total current assets
    1,286.7       1,244.7  
                 
Property, plant and equipment, net
    14,603.9       14,153.8  
Investments
    3,886.0       2,845.2  
Notes receivable
    115.0       190.6  
Goodwill
    1,233.6       1,149.2  
Other intangibles, net
    302.2       218.7  
Fair value of derivative contracts
    260.7       279.8  
Deferred charges and other assets
    173.0       180.2  
Total Assets
  $ 21,861.1     $ 20,262.2  
                 
LIABILITIES AND PARTNERS’ CAPITAL
               
Current liabilities
               
Current portion of debt
  $ 1,262.4     $ 594.7  
Cash book overdrafts
    32.5       34.8  
Accounts payable
    630.9       614.8  
Accrued interest
    239.6       222.4  
Accrued taxes
    44.7       57.8  
Deferred revenues
    96.6       76.0  
Fair value of derivative contracts
    281.5       272.0  
Accrued other current liabilities
    176.0       145.1  
Total current liabilities
    2,764.2       2,017.6  
                 
Long-term liabilities and deferred credits
               
Long-term debt
               
Outstanding
    10,277.4       9,997.7  
Value of interest rate swaps
    604.9       332.5  
Total Long-term debt
    10,882.3       10,330.2  
Deferred income taxes
    248.3       216.8  
Fair value of derivative contracts
    172.2       460.1  
Other long-term liabilities and deferred credits
    501.6       513.4  
Total long-term liabilities and deferred credits
    11,804.4       11,520.5  
                 
Total Liabilities
    14,568.6       13,538.1  
                 
Commitments and contingencies (Notes 8, 12 and 16)
               
Partners’ Capital
               
Common units (218,880,103 and 206,020,826 units issued and outstanding
  as of December 31, 2010 and 2009, respectively)
    4,282.2       4,057.9  
Class B units (5,313,400 and 5,313,400 units issued and outstanding
  as of December 31, 2010 and 2009, respectively)
    63.1       78.6  
i-units (91,907,987 and 85,538,263 units issued and outstanding
  as of December 31, 2010 and 2009, respectively)
    2,807.5       2,681.7  
General partner
    244.3       221.1  
Accumulated other comprehensive loss
    (186.4 )     (394.8 )
Total Kinder Morgan Energy Partners, L.P. partners’ capital
    7,210.7       6,644.5  
Noncontrolling interests
    81.8       79.6  
Total Partners’ Capital
    7,292.5       6,724.1  
Total Liabilities and Partners’ Capital
  $ 21,861.1     $ 20,262.2  

The accompanying notes are an integral part of these consolidated financial statements.

 
118

 

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(In millions)
 
Cash Flows From Operating Activities
                 
Net Income
  $ 1,327.1     $ 1,283.8     $ 1,318.5  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation, depletion and amortization
    904.8       850.8       702.7  
Amortization of excess cost of equity investments
    5.8       5.8       5.7  
Income from the allowance for equity funds used during construction
    (0.7 )     (22.7 )     (10.6 )
Income from the sale or casualty of property, plant and equipment and other net assets
    (8.9 )     (34.8 )     (11.7 )
Earnings from equity investments
    (223.1 )     (189.7 )     (160.8 )
Distributions from equity investments
    219.8       234.5       158.4  
Proceeds from termination of interest rate swap agreements
    157.6       144.4       194.3  
Changes in components of working capital:
                       
Accounts receivable
    17.7       54.5       105.4  
Inventories
    (20.8 )     (20.0 )     (7.3 )
Other current assets
    31.6       (75.9 )     (9.1 )
Accounts payable
    (9.4 )     (184.6 )     (100.6 )
Accrued interest
    17.1       50.2       41.1  
Accrued taxes
    (12.9 )     5.3       (22.3 )
Accrued liabilities
    12.8       (24.1 )     57.4  
Rate reparations, refunds and other litigation reserve adjustments
    (34.3 )     2.5       (13.7 )
Other, net
    34.8       37.1       (11.5 )
Net Cash Provided by Operating Activities
    2,419.0       2,117.1       2,235.9  
                         
Cash Flows From Investing Activities
                       
Acquisitions of equity investments
    (925.7 )     (36.0 )     -  
Acquisitions of assets
    (287.5 )     (292.9 )     (40.2 )
Repayment (Payment) for Trans Mountain Pipeline
    -       -       23.4  
Repayments (Loans) from customers
    -       109.6       (109.6 )
Capital expenditures
    (1,000.9 )     (1,323.8 )     (2,533.0 )
Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs
    34.3       47.4       47.8  
(Investments in) Net proceeds from margin and restricted deposits
    (32.2 )     (18.5 )     71.0  
Contributions to investments
    (299.3 )     (2,051.8 )     (366.7 )
Distributions from equity investments in excess of cumulative earnings
    189.8       112.0       89.1  
Other, net
    7.0       -       (7.2 )
Net Cash Used in Investing Activities
    (2,314.5 )     (3,454.0 )     (2,825.4 )
                         
Cash Flows From Financing Activities
                       
Issuance of debt
    7,140.1       6,891.9       9,028.6  
Payment of debt
    (6,186.4 )     (4,857.1 )     (7,525.0 )
Repayments from related party
    2.7       3.7       1.8  
Debt issue costs
    (22.9 )     (13.7 )     (12.7 )
(Decrease) Increase in cash book overdrafts
    (2.2 )     (8.0 )     23.8  
Proceeds from issuance of common units
    758.7       1,155.6       560.9  
Contributions from noncontrolling interests
    12.5       15.4       9.3  
Distributions to partners and noncontrolling interests:
                       
Common units
    (918.7 )     (809.2 )     (684.5 )
Class B units
    (22.9 )     (22.3 )     (20.7 )
General Partner
    (861.7 )     (918.4 )     (764.7 )
Noncontrolling interests
    (23.3 )     (22.0 )     (18.8 )
Other, net
    (0.2 )     (0.9 )     3.3  
Net Cash (Used in) Provided by Financing Activities
    (124.3 )     1,415.0       601.3  
                         
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    2.3       6.0       (8.2 )
                         
Net (decrease) increase in Cash and Cash Equivalents
    (17.5 )     84.1       3.6  
Cash and Cash Equivalents, beginning of period
    146.6       62.5       58.9  
Cash and Cash Equivalents, end of period
  $ 129.1     $ 146.6     $ 62.5  
                         
The accompanying notes are an integral part of these consolidated financial statements.

 
119

 

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS   (continued)

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(In millions)
 
Noncash Investing and Financing Activities
                 
Assets acquired by the issuance of units
  $ 81.7     $ 5.0     $ -  
Related party assets acquired by the issuance of units
  $ -     $ -     $ 116.0  
Assets acquired by the assumption or incurrence of liabilities
  $ 13.8     $ 7.7     $ 4.8  
Contribution of net assets to investments
  $ 20.0     $ -     $ -  
                         
Supplemental Disclosures of Cash Flow Information
                       
Cash paid during the period for interest (net of capitalized interest)
  $ 472.8     $ 400.3     $ 373.3  
Cash (received) paid during the period for income taxes
  $ (2.2 )   $ 3.4     $ 35.7  

The accompanying notes are an integral part of these consolidated financial statements.

 
120

 

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

   
2010
   
2009
   
2008
 
   
Units
   
Amount
   
Units
   
Amount
   
Units
   
Amount
 
   
(Dollars in millions)
 
Common Units:
                                   
Beginning Balance
    206,020,826     $ 4,057.9       182,969,427     $ 3,458.9       170,220,396     $ 3,048.4  
Net income
    -       299.5       -       229.0       -       343.4  
Units issued as consideration pursuant to common unit compensation plan for non-employee directors
    2,450       0.2       3,200       0.2       4,338       0.3  
Units issued as consideration in the acquisition of assets
    1,287,287       81.7       105,752       5.0       2,014,693       116.0  
Units issued for cash
    11,569,540       758.7       22,942,447       1,155.6       10,730,000       560.9  
Adjustments to capital resulting from related party
                                               
  acquisitions
    -       -       -       15.5       -       69.1  
Distributions
    -       (918.7 )     -       (809.2 )     -       (684.5 )
Other Adjustments
    -       2.9       -       2.9       -       5.3  
Ending Balance
    218,880,103       4,282.2       206,020,826       4,057.9       182,969,427       3,458.9  
                                                 
Class B Units:
                                               
Beginning Balance
    5,313,400       78.6       5,313,400       94.0       5,313,400       102.0  
Net income
    -       7.4       -       6.3       -       10.4  
Adjustments to capital resulting from related party
                                               
  acquisitions
    -       -       -       0.5       -       2.1  
Distributions
    -       (22.9 )     -       (22.3 )     -       (20.7 )
Other Adjustments
    -       -       -       0.1       -       0.2  
Ending Balance
    5,313,400       63.1       5,313,400       78.6       5,313,400       94.0  
                                                 
i-Units:
                                               
Beginning Balance
    85,538,263       2,681.7       77,997,906       2,577.1       72,432,482       2,400.8  
Net income
    -       124.5       -       96.4       -       145.2  
Adjustments to capital resulting from related party
                                               
  Acquisitions
    -       -       -       6.6       -       28.6  
Distributions
    6,369,724       -       7,540,357       -       5,565,424       -  
Other Adjustments
    -       1.3       -       1.6       -       2.5  
Ending Balance
    91,907,987       2,807.5       85,538,263       2,681.7       77,997,906       2,577.1  
                                                 
General Partner:
                                               
Beginning Balance
    -       221.1       -       203.3       -       161.1  
Net income
    -       884.9       -       935.8       -       805.8  
Adjustments to capital resulting from related party
                                               
  acquisitions
    -       -       -       0.3       -       1.0  
Distributions
    -       (861.7 )     -       (918.4 )     -       (764.7 )
Other Adjustments
    -       -       -       0.1       -       0.1  
Ending Balance
    -       244.3       -       221.1       -       203.3  
                                                 
Accumulated other comprehensive loss:
                                               
Beginning Balance
    -       (394.8 )     -       (287.7 )     -       (1,276.6 )
Change in fair value of derivatives utilized for hedging purposes
    -       (75.3 )     -       (453.6 )     -       651.4  
Reclassification of change in fair value of derivatives to net income
    -       186.5       -       99.3       -       663.7  
Foreign currency translation adjustments
    -       99.5       -       249.7       -       (329.8 )
Adjustments to pension and other postretirement benefit plan liabilities
    -       (2.3 )     -       (2.5 )     -       3.6  
Ending Balance
    -       (186.4 )     -       (394.8 )     -       (287.7 )
                                                 
Total Kinder Morgan Energy Partners, L.P. Partners’ Capital
    316,101,490     $ 7,210.7       296,872,489     $ 6,644.5       266,280,733     $ 6,045.6  

The accompanying notes are an integral part of these consolidated financial statements.


 
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL   (continued)

   
2010
   
2009
   
2008
 
   
Units
   
Amount
   
Units
   
Amount
   
Units
   
Amount
 
   
(Dollars in millions)
 
Noncontrolling interests:
                                   
Beginning Balance
    -     $ 79.6       -     $ 70.7       -     $ 54.2  
Net income
    -       10.8       -       16.3       -       13.7  
Adjustments to capital resulting from related party
                                               
 acquisitions
    -       -       -       0.3       -       2.2  
Contributions
    -       12.5       -       15.4       -       9.2  
Distributions
    -       (23.3 )     -       (22.0 )     -       (18.8 )
Change in fair value of derivatives utilized for hedging purposes
     -       (0.8 )      -       (4.6 )      -        6.6  
Reclassification of change in fair value of derivatives to net income
     -        1.9        -        1.0        -        6.8  
Foreign currency translation adjustments
    -       1.1       -       2.5       -       (3.4 )
Adjustments to pension and other postretirement  benefit plan liabilities
     -        -        -        -        -        0.1  
Other Adjustments
    -       -       -       -       -       0.1  
Ending Balance
    -       81.8       -       79.6       -       70.7  
                                                 
Total Partners’ Capital
    316,101,490     $ 7,292.5       296,872,489     $ 6,724.1       266,280,733     $ 6,116.3  

The accompanying notes are an integral part of these consolidated financial statements.

 
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  General
 
Organization
 
Kinder Morgan Energy Partners, L.P. is a Delaware limited partnership formed in August 1992.  Unless the context requires otherwise, references to “we,” “us,” “our,” “KMP,” or the “Partnership” are intended to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries.  We own and manage a diversified portfolio of energy transportation and storage assets and presently conduct our business through five reportable business segments.
 
These segments and the activities performed to provide services to our customers and create value for our unitholders are as follows:
 
 
Products Pipelines - transporting, storing and processing refined petroleum products;
 
 
Natural Gas Pipelines - transporting, storing, buying, selling, gathering, treating and processing natural gas;
 
 
CO2 – transporting oil, producing, transporting and selling carbon dioxide, commonly called CO2, for use in, and selling crude oil, natural gas and natural gas liquids produced from, enhanced oil recovery operations;
 
 
Terminals - transloading, storing and delivering a wide variety of bulk, petroleum, petrochemical and other liquid products at terminal facilities located across the United States and portions of Canada; and
 
 
Kinder Morgan Canada – transporting crude oil and refined petroleum products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia and the state of Washington, and owning a one-third interest in an integrated oil transportation network that connects Canadian and United States producers to refineries in the U.S. Rocky Mountain and Midwest regions.
 
We focus on providing fee-based services to customers, generally avoiding near-term commodity price risks and taking advantage of the tax benefits of a limited partnership structure.  We trade on the New York Stock Exchange under the symbol “KMP,” and we conduct our operations through the following five limited partnerships: (i) Kinder Morgan Operating L.P. “A”; (ii) Kinder Morgan Operating L.P. “B”; (iii) Kinder Morgan Operating L.P. “C”; (iv) Kinder Morgan Operating L.P. “D”; and (v) Kinder Morgan CO2 Company, L.P.
 
Combined, the five limited partnerships are referred to as our operating partnerships, and we are the 98.9899% limited partner and our general partner is the 1.0101% general partner in each.  Both we and our operating partnerships are governed by Amended and Restated Agreements of Limited Partnership, as amended, and certain other agreements that are collectively referred to in this report as the partnership agreements.
 
Kinder Morgan, Inc., Kinder Morgan Kansas, Inc. and Kinder Morgan G.P., Inc.
 
Kinder Morgan, Inc., a Delaware corporation and referred to as KMI in this report, indirectly owns all the common stock of Kinder Morgan Kansas, Inc.  Kinder Morgan Kansas, Inc. is a Kansas corporation and indirectly owns all the common stock of our general partner, Kinder Morgan G.P., Inc., a Delaware corporation; however, in July 2007, our general partner issued and sold 100,000 shares of Series A fixed-to-floating rate term cumulative preferred stock due 2057.  The consent of holders of a majority of these preferred shares is required with respect to a commencement of or a filing of a voluntary bankruptcy proceeding with respect to us or two of our subsidiaries, SFPP, L.P. and Calnev Pipe Line LLC.  As of December 31, 2010, KMI and its consolidated subsidiaries owned, through KMI’s general and limited partner interests in us and its ownership of shares issued by its subsidiary Kinder Morgan Management, LLC (discussed following), an approximate 12.8% interest in us.
 
Prior to May 30, 2007, Kinder Morgan Kansas, Inc. was known as Kinder Morgan, Inc., and on that date, it merged with a wholly-owned subsidiary of its parent, Knight Holdco LLC, a private company owned by investors led by Richard D. Kinder, Chairman and Chief Executive Officer of both our general partner and Kinder Morgan Management, LLC.  This merger is referred to in this report as the going-private transaction, and following the merger, Kinder Morgan, Inc. (the surviving legal entity from the merger) was renamed Knight, Inc.  On July 15, 2009, Knight Inc. changed its name back to Kinder Morgan, Inc., and subsequently, Knight Holdco LLC was renamed Kinder Morgan Holdco LLC.
 
 
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On November 23, 2010, Kinder Morgan Holdco LLC filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of its common stock.  The registration statement became effective on February 10, 2011, and the initial public offering closed on February 16, 2011.  In connection with the offering, Kinder Morgan Holdco LLC converted from a Delaware limited liability company to a Delaware corporation named Kinder Morgan, Inc. (KMI), and the former Kinder Morgan, Inc. was renamed Kinder Morgan Kansas, Inc.  All of the common stock that was sold in the offering was sold by existing investors, consisting of funds advised by or affiliated with Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC.  KMI did not receive any proceeds from the offering.  On February 11, 2011, KMI’s common stock began trading on the New York Stock Exchange under the symbol “KMI.”
 
Kinder Morgan Management, LLC
 
Kinder Morgan Management, LLC, referred to as KMR in this report, is a Delaware limited liability company that was formed on February 14, 2001.  Its shares represent limited liability company interests and are traded on the New York Stock Exchange under the symbol “KMR.”  Our general partner owns all of KMR’s voting securities and, pursuant to a delegation of control agreement, has delegated to KMR, to the fullest extent permitted under Delaware law and our partnership agreement, all of its power and authority to manage and control our business and affairs, except that KMR cannot take certain specified actions without the approval of our general partner.
 
Under the delegation of control agreement, KMR manages and controls our business and affairs and the business and affairs of our operating limited partnerships and their subsidiaries.  Furthermore, in accordance with its limited liability company agreement, KMR’s activities are limited to being a limited partner in, and managing and controlling the business and affairs of us, our operating limited partnerships and their subsidiaries.  As of December 31, 2010, KMR owned approximately 29.1% of our outstanding limited partner units (which are in the form of i-units that are issued only to KMR).
 
 
2.  Summary of Significant Accounting Policies
 
Basis of Presentation
 
Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise.  Canadian dollars are designated as C$.
 
Our accompanying consolidated financial statements include our accounts and those of our operating partnerships and their majority-owned and controlled subsidiaries, and all significant intercompany items have been eliminated in consolidation.  Our accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, and certain amounts from prior years have been reclassified to conform to the current presentation.  Effective September 30, 2009, the Financial Accounting Standards Boards’ Accounting Standards Codification became the single source of generally accepted accounting principles, and in this report, we refer to the Financial Accounting Standards Board as the FASB and the FASB Accounting Standards Codification as the Codification.
 
Additionally, our financial statements are consolidated into the consolidated financial statements of KMI; however, our financial statements reflect amounts on a historical cost basis, and, accordingly, do not reflect any purchase accounting adjustments related to KMI’s May 30, 2007 going-private transaction (discussed above in Note 1).  Also, except for the related party transactions described in Note 11 “Related Party Transactions—Asset Acquisitions and Sales,” KMI is not liable for, and its assets are not available to satisfy, the obligations of us and/or our subsidiaries and vice versa.  Responsibility for payments of obligations reflected in our or KMI’s financial statements is a legal determination based on the entity that incurs the liability.  Furthermore, the determination of responsibility for payment among entities in our consolidated group of subsidiaries is not impacted by the consolidation of our financial statements into the consolidated financial statements of KMI.
 
Use of Estimates
 
Certain amounts included in or affecting our financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions which cannot be known with certainty at the time our financial statements are prepared.  These estimates and assumptions affect the amounts we report for assets and liabilities, our revenues and expenses during the reporting period, and our disclosure of contingent assets and liabilities at the date of our financial statements.  We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances.  Nevertheless, actual results may differ significantly from our estimates.  Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
 
In addition, we believe that certain accounting policies are of more significance in our financial statement preparation process than others, and set out below are the principal accounting policies we apply in the preparation of our consolidated financial statements.
 
 
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Cash Equivalents
 
We define cash equivalents as all highly liquid short-term investments with original maturities of three months or less.
 
Restricted Deposits
 
Cash held in escrow is restricted cash and as of December 31, 2010, we deposited $50.0 million into a third-party escrow account to comply with contractual stipulations related to an equity investment in Watco Companies, LLC.  In January 2011, the funds were released from escrow and we used the cash for our investment.  For additional information on this investment, see Note 3 “Acquisitions and Divestitures—Acquisition Subsequent to December 31, 2010.”  As of December 31, 2009, our restricted deposits totaled $15.2 million and consisted of cash margin deposits associated with our energy commodity contract positions and over-the-counter swap partners.
 
Accounts Receivable
 
The amounts reported as “Accounts, notes and interest receivable, net” on our accompanying consolidated balance sheets as of December 31, 2010 and 2009 primarily consist of amounts due from third party payors (unrelated entities).  For information on receivables due to us from related parties, see Note 11.
 
Our policy for determining an appropriate allowance for doubtful accounts varies according to the type of business being conducted and the customers being served.  Generally, we make periodic reviews and evaluations of the appropriateness of the allowance for doubtful accounts based on a historical analysis of uncollected amounts, and we record adjustments as necessary for changed circumstances and customer-specific information.  When specific receivables are determined to be uncollectible, the reserve and receivable are relieved.  The following table shows the balance in the allowance for doubtful accounts and activity for the years ended December 31, 2010, 2009 and 2008 (in millions):
 
Valuation and Qualifying Accounts
Allowance for doubtful accounts
 
Balance at
beginning of
period
   
Additions
charged to costs
and expenses
   
Additions
charged to other
accounts
   
Deductions(a)
   
Balance at
end of
period
 
                               
Year ended December 31, 2010
  $ 5.4     $ 2.3     $ -     $ (0.9 )   $ 6.8  
                                         
Year ended December 31, 2009
  $ 6.1     $ 0.5     $ -     $ (1.2 )   $ 5.4  
                                         
Year ended December 31, 2008
  $ 7.0     $ 0.6     $ -     $ (1.5 )   $ 6.1  
____________
 
(a)
Deductions represent the write-off of receivables and currency translation adjustments.
 

In addition, the balances of “Accrued other current liabilities” in our accompanying consolidated balance sheets include amounts related to customer prepayments of approximately $7.1 million as of December 31, 2010 and $10.9 million as of December 31, 2009.
 
Inventories
 
Our inventories of products consist of natural gas liquids, refined petroleum products, natural gas, carbon dioxide and coal.  We report these assets at the lower of weighted-average cost or market, and in December 2008, we recognized a lower of cost or market adjustment of $12.9 million in our CO2 business segment.  We report materials and supplies inventories at cost, and periodically review for physical deterioration and obsolescence.
 

 
As of December 31, 2010 and 2009, the value of natural gas in our underground storage facilities under the weighted-average cost method was $2.2 million and $43.5 million, respectively, and we reported these amounts separately as “Gas in underground storage” in our accompanying consolidated balance sheets.
 
 
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Gas Imbalances
 
We value gas imbalances due to or due from interconnecting pipelines at the lower of cost or market, per our quarterly imbalance valuation procedures.  Gas imbalances represent the difference between customer nominations and actual gas receipts from, and gas deliveries to, our interconnecting pipelines and shippers under various operational balancing and shipper imbalance agreements.  Natural gas imbalances are either settled in cash or made up in-kind subject to the pipelines’ various tariff provisions.  As of December 31, 2010 and 2009, our gas imbalance receivables—including both trade and related party receivables—totaled $18.8 million and $14.0 million, respectively, and we included these amounts within “Other current assets” on our accompanying consolidated balance sheets.  As of December 31, 2010 and 2009, our gas imbalance payables—including both trade and related party payables—totaled $7.7 million and $7.4 million, respectively, and we included these amounts within “Accrued other current liabilities” on our accompanying consolidated balance sheets.
 
Property, Plant and Equipment
 
Capitalization, Depreciation and Depletion and Disposals
 
We report property, plant and equipment at its acquisition cost.  We expense costs for maintenance and repairs in the period incurred.  As discussed below, for assets used in our oil and gas producing activities or in our unregulated bulk and liquids terminal activities, the cost of property, plant and equipment sold or retired and the related depreciation are removed from our balance sheet in the period of sale or disposition, and we record any related gains and losses from sales or retirements to income or expense accounts.  For our pipeline system assets, we generally charge the original cost of property sold or retired to accumulated depreciation and amortization, net of salvage and cost of removal.  We do not include retirement gain or loss in income except in the case of significant retirements or sales.  Gains and losses on minor system sales, excluding land, are recorded to the appropriate accumulated depreciation reserve.  Gains and losses for operating systems sales and land sales are booked to income or expense accounts in accordance with regulatory accounting guidelines.
 
We generally compute depreciation using the straight-line method based on estimated economic lives; however, for certain depreciable assets, we employ the composite depreciation method, applying a single depreciation rate for a group of assets.  Generally, we apply composite depreciation rates to functional groups of property having similar economic characteristics.  The rates range from 1.6% to 12.5%, excluding certain short-lived assets such as vehicles.  Depreciation estimates are based on various factors, including age (in the case of acquired assets), manufacturing specifications, technological advances and historical data concerning useful lives of similar assets.  Uncertainties that impact these estimates included changes in laws and regulations relating to restoration and abandonment requirements, economic conditions, and supply and demand in the area.  When assets are put into service, we make estimates with respect to useful lives (and salvage values where appropriate) that we believe are reasonable.  However, subsequent events could cause us to change our estimates, thus impacting the future calculation of depreciation and amortization expense.  Historically, adjustments to useful lives have not had a material impact on our aggregate depreciation levels from year to year.
 
Our oil and gas producing activities are accounted for under the successful efforts method of accounting.  Under this method costs that are incurred to acquire leasehold and subsequent development costs are capitalized.  Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found.  Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of certain non-producing leasehold costs are expensed as incurred.  The capitalized costs of our producing oil and gas properties are depreciated and depleted by the units-of-production method.  Other miscellaneous property, plant and equipment are depreciated over the estimated useful lives of the asset.
 
A gain on the sale of  property, plant and equipment used in our oil and gas producing activities or in our bulk and liquids terminal activities is calculated as the difference between the cost of the asset disposed of, net of depreciation, and the sales proceeds received.  A gain on an asset disposal is recognized in income in the period that the sale is closed.  A loss on the sale of  property, plant and equipment is calculated as the difference between the cost of the asset disposed of, net of depreciation, and the sales proceeds received or the maket value if the asset is being held for sale.  A loss is recognized when the asset is sold or when the net cost of an asset held for sale is greater than the market value of the asset.
 
 
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In addition, we engage in enhanced recovery techniques in which carbon dioxide is injected into certain producing oil reservoirs.  In some cases, the acquisition cost of the carbon dioxide associated with enhanced recovery is capitalized as part of our development costs when it is injected.  The acquisition cost associated with pressure maintenance operations for reservoir management is expensed when it is injected.  When carbon dioxide is recovered in conjunction with oil production, it is extracted and re-injected, and all of the associated costs are expensed as incurred.  Proved developed reserves are used in computing units of production rates for drilling and development costs, and total proved reserves are used for depletion of leasehold costs.  The units-of-production rate is determined by field.
 
As discussed in “—Inventories” above, we own and maintain natural gas in underground storage as part of our inventory. This component of our inventory represents the portion of gas stored in an underground storage facility generally known as working gas, and represents an estimate of the portion of gas in these facilities available for routine injection and withdrawal.  In addition to this working gas, underground gas storage reservoirs contain injected gas which is not routinely cycled but, instead, serves the function of maintaining the necessary pressure to allow efficient operation of the facility.  This gas, generally known as cushion gas, is divided into the categories of recoverable cushion gas and unrecoverable cushion gas, based on an engineering analysis of whether the gas can be economically removed from the storage facility at any point during its life.  The portion of the cushion gas that is determined to be unrecoverable is considered to be a permanent part of the facility itself (thus, part of our “Property, plant and equipment, net” balance in our accompanying consolidated balance sheets), and this unrecoverable portion is depreciated over the facility’s estimated useful life.  The portion of the cushion gas that is determined to be recoverable is also considered a component of the facility but is not depreciated because it is expected to ultimately be recovered and sold.
 
Impairments
 
We measure long-lived assets that are to be disposed of by sale at the lower of book value or fair value less the cost to sell, and we review for the impairment of long-lived assets whenever events or changes in circumstances indicate that our carrying amount of an asset may not be recoverable.  We would recognize an impairment loss when estimated future cash flows expected to result from our use of the asset and its eventual disposition is less than its carrying amount.
 
We evaluate our oil and gas producing properties for impairment of value on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure, using undiscounted future cash flows based on total proved and risk-adjusted probable and possible reserves.  For the purpose of impairment testing, we use the forward curve prices as observed at the test date; however, due to differences between the forward curve and spot prices, the forward curve cash flows may differ from the amounts presented in our supplemental information on oil and gas producing activities disclosed in Note 20.
 
Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future cash flows based on total proved and risk-adjusted probable and possible reserves or, if available, comparable market values.  Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment.  Due to the decline in crude oil and natural gas prices during 2008, on December 31, 2008, we conducted an impairment test on our oil and gas producing properties in our CO2 business segment and determined that no impairment was necessary.
 
Allowance for Funds Used During Construction/Capitalized Interest
 
Included in the cost of our qualifying property, plant and equipment is (i) an allowance for funds used during construction (AFUDC) or upgrade for assets regulated by the Federal Energy Regulatory Commission; or (ii) capitalized interest.  The primary difference between AFUDC and capitalized interest is that AFUDC may include a component for equity funds, while capitalized interest does not.  AFUDC on debt, as well as capitalized interest, represents the estimated cost of capital, from borrowed funds, during the construction period that is not immediately expensed, but instead is treated as an asset (capitalized) and amortized to expense over time in our income statements.  Total AFUDC on debt and capitalized interest in 2010, 2009 and 2008 was $12.5 million, $32.9 million and $48.6 million, respectively.  Similarly, AFUDC on equity represents an estimate of the cost of capital funded by equity contributions, and in the years ended December 31, 2010, 2009 and 2008, we also capitalized approximately $0.7 million, $22.7 million and $10.6 million, respectively, of equity AFUDC.
 
Asset Retirement Obligations
 
We record liabilities for obligations related to the retirement and removal of long-lived assets used in our businesses.  We record, as liabilities, the fair value of asset retirement obligations on a discounted basis when they are incurred, which is typically at the time the assets are installed or acquired.  Amounts recorded for the related assets are increased by the amount of these obligations.  Over time, the liabilities increase due to the change in their present value, and the initial capitalized costs are depreciated over the useful lives of the related assets.  The liabilities are eventually extinguished when the asset is taken out of service.  ] ] [ For more information on our asset retirement obligations, see Note 5 “Property, Plant and Equipment—Asset Retirement Obligations.”
 
 
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Equity Method of Accounting
 
We account for investments greater than 20% in affiliates—which we do not control but do have the ability to exercise significant influence—by the equity method of accounting.  Under this method, our equity investments are carried originally at our acquisition cost, increased by our proportionate share of the investee’s net income and by contributions made, and decreased by our proportionate share of the investee’s net losses and by distributions received.
 
Goodwill
 
Goodwill represents the excess of the cost of an acquisition price over the fair value of acquired net assets, and such amounts are reported separately as “Goodwill” on our accompanying consolidated balance sheets.  Our total goodwill was $1,233.6 million as of December 31, 2010, and $1,149.2 million as of December 31, 2009.  Goodwill cannot be amortized, but instead must be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value.
 
We perform our goodwill impairment test on May 31 of each year.  There were no impairment charges resulting from our May 31, 2010, 2009 or 2008 impairment testing, and no event indicating an impairment has occurred subsequent to May 31, 2010.  For more information on our goodwill, see Note 7.
 
Revenue Recognition Policies
 
We recognize revenues as services are rendered or goods are delivered and, if applicable, title has passed.  We generally sell natural gas under long-term agreements, generally based on Houston Ship Channel index posted prices.  In some cases, we sell natural gas under short-term agreements at prevailing market prices.  In all cases, we recognize natural gas sales revenues when the natural gas is sold to a purchaser at a fixed or determinable price, delivery has occurred and title has transferred, and collectibility of the revenue is reasonably assured.  The natural gas we market is primarily purchased gas produced by third parties, and we market this gas to power generators, local distribution companies, industrial end-users and national marketing companies.  We recognize gas gathering and marketing revenues in the month of delivery based on customer nominations and generally, our natural gas marketing revenues are recorded gross, not net of cost of gas sold.
 
In addition to storing and transporting a significant portion of the natural gas volumes we purchase and resell, we provide various types of natural gas storage and transportation services for third-party customers.  The natural gas remains the property of these customers at all times.  In many cases, generally described as firm service, the customer pays a two-part rate that includes (i) a fixed fee reserving the right to transport or store natural gas in our facilities; and (ii) a per-unit rate for volumes actually transported or injected into/withdrawn from storage.  The fixed-fee component of the overall rate is recognized as revenue in the period the service is provided.  The per-unit charge is recognized as revenue when the volumes are delivered to the customers’ agreed upon delivery point, or when the volumes are injected into/withdrawn from our storage facilities.
 
In other cases, generally described as interruptible service, there is no fixed fee associated with the services because the customer accepts the possibility that service may be interrupted at our discretion in order to serve customers who have purchased firm service.  In the case of interruptible service, revenue is recognized in the same manner utilized for the per-unit rate for volumes actually transported under firm service agreements.  In addition to our firm and interruptible transportation services, we also provide natural gas balancing services to assist customers in managing short-term gas surpluses or deficits.  Revenues are recognized based on the terms negotiated under these contracts.
 
We provide crude oil transportation services and refined petroleum products transportation and storage services to customers.  Revenues are recorded when products are delivered and services have been provided, and adjusted according to terms prescribed by the toll settlements with shippers and approved by regulatory authorities.
 
We recognize bulk terminal transfer service revenues based on volumes loaded and unloaded.  We recognize liquids terminal tank rental revenue ratably over the contract period.  We recognize liquids terminal throughput revenue based on volumes received and volumes delivered.  Liquids terminal minimum take-or-pay revenue is recognized at the end of the contract year or contract term depending on the terms of the contract.  We recognize transmix processing revenues based on volumes processed or sold, and if applicable, when title has passed.  We recognize energy-related product sales revenues based on delivered quantities of product.
 
 
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Revenues from the sale of crude oil, natural gas liquids and natural gas production are recorded using the entitlement method.  Under the entitlement method, revenue is recorded when title passes based on our net interest.  We record our entitled share of revenues based on entitled volumes and contracted sales prices.  Since there is a ready market for oil and gas production, we sell the majority of our products soon after production at various locations, at which time title and risk of loss pass to the buyer.  As a result, we maintain a minimum amount of product inventory in storage.
 
Environmental Matters
 
We expense or capitalize, as appropriate, environmental expenditures that relate to current operations.  We expense expenditures that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation.  We do not discount environmental liabilities to a net present value, and we record environmental liabilities when environmental assessments and/or remedial efforts are probable and we can reasonably estimate the costs.  Generally, our recording of these accruals coincides with our completion of a feasibility study or our commitment to a formal plan of action.  We recognize receivables for anticipated associated insurance recoveries when such recoveries are deemed to be probable.
 
We routinely conduct reviews of potential environmental issues and claims that could impact our assets or operations.  These reviews assist us in identifying environmental issues and estimating the costs and timing of remediation efforts.  We also routinely adjust our environmental liabilities to reflect changes in previous estimates.  In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us, and potential third-party liability claims.  Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs.  These revisions are reflected in our income in the period in which they are reasonably determinable.  For more information on our environmental disclosures, see Note 16.
 
Legal
 
We are subject to litigation and regulatory proceedings as the result of our business operations and transactions.  We utilize both internal and external counsel in evaluating our potential exposure to adverse outcomes from orders, judgments or settlements.  When we identify specific litigation that is expected to continue for a significant period of time and require substantial expenditures, we identify a range of possible costs expected to be required to litigate the matter to a conclusion or reach an acceptable settlement, and we accrue for such amounts.  To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected.  In general, we expense legal costs as incurred and all recorded legal liabilities are revised as better information becomes available.  For more information on our legal disclosures, see Note 16.
 
Pensions and Other Postretirement Benefits  
 
We fully recognize the overfunded or underfunded status of our consolidating subsidiaries’ pension and postretirement benefit plans as either assets or liabilities on our balance sheet.  A plan’s funded status is the difference between the fair value of plan assets and the plan’s benefit obligation.  We record deferred plan costs and income—unrecognized losses and gains, unrecognized prior service costs and credits, and any remaining unamortized transition obligations—in accumulated other comprehensive income, until they are amortized to expense.  For more information on our pension and postretirement benefit disclosures, see Note 9.
 
Noncontrolling Interests
 
Noncontrolling interests represents the outstanding ownership interests in our five operating limited partnerships and their consolidated subsidiaries that are not owned by us.  In our accompanying consolidated income statements, the noncontrolling interest in the net income (or loss) of our consolidated subsidiaries is shown as an allocation of our consolidated net income and is presented separately as “Net income attributable to noncontrolling interests.”  In our accompanying consolidated balance sheets, noncontrolling interests represents the ownership interests in our consolidated subsidiaries’ net assets held by parties other than us.  It is presented separately as “Noncontrolling interests” within “Partners’ Capital.”
 
As of December 31, 2010, our noncontrolling interests consisted of the following: (i) the 1.0101% general partner interest in each of our five operating partnerships; (ii) the 0.5% special limited partner interest in SFPP, L.P.; (iii) the 50% interest in Globalplex Partners, a Louisiana joint venture owned 50% and controlled by Kinder Morgan Bulk Terminals, Inc.; (iv) the 33 1/3% interest in International Marine Terminals Partnership, a Louisiana partnership owned 66 2/3% and controlled by Kinder Morgan Operating L.P. “C”; (v) the approximate 31% interest in the Pecos Carbon Dioxide Company, a Texas general partnership owned approximately 69% and controlled by Kinder Morgan CO2 Company, L.P. and its consolidated subsidiaries; and (vi) the 35% interest in Guilford County Terminal Company, LLC, a limited liability company owned 65% and controlled by Kinder Morgan Southeast Terminals LLC.
 
 
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Income Taxes
 
We are not a taxable entity for federal income tax purposes.  As such, we do not directly pay federal income tax.  Our taxable income or loss, which may vary substantially from the net income or net loss we report in our consolidated statement of income, is includable in the federal income tax returns of each partner.  The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined as we do not have access to information about each partner’s tax attributes in us.
 
Some of our corporate subsidiaries and corporations in which we have an equity investment do pay U.S. federal, state, and foreign income taxes.  Deferred income tax assets and liabilities for certain operations conducted through corporations are recognized for temporary differences between the assets and liabilities for financial reporting and tax purposes.  Changes in tax legislation are included in the relevant computations in the period in which such changes are effective.  Deferred tax assets are reduced by a valuation allowance for the amount of any tax benefit not expected to be realized.  For more information on our income tax disclosures, see Note 4.
 
Foreign Currency Transactions and Translation
 
Foreign currency transactions are those transactions whose terms are denominated in a currency other than the currency of the primary economic environment in which our reporting subsidiary operates, also referred to as its functional currency.  Transaction gains or losses result from a change in exchange rates between (i) the functional currency, for example the Canadian dollar for a Canadian subsidiary; and (ii) the currency in which a foreign currency transaction is denominated, for example the U.S. dollar for a Canadian subsidiary.  In our accompanying consolidated income statements, gains and losses from our foreign currency transactions are included within “Other Income (Expense)—Other, net.”
 
We translate the assets and liabilities of each of our consolidating foreign subsidiaries that have a local functional currency to U.S. dollars at year-end exchange rates.  Income and expense items are translated at weighted-average rates of exchange prevailing during the year and partners’ capital equity accounts are translated by using historical exchange rates.  Translation adjustments result from translating all assets and liabilities at current year-end rates, while partners’ capital equity is translated by using historical and weighted-average rates.  The cumulative translation adjustments balance is reported as a component of “Accumulated other comprehensive loss” within “Partners’ Capital” in our consolidated balance sheets.
 
Comprehensive Income
 
For each of the years ended December 31, 2010, 2009 and 2008, the difference between our net income and our comprehensive income resulted from (i) unrealized gains or losses on derivative contracts utilized for hedging our exposure to fluctuating expected future cash flows produced by both energy commodity price risk and interest rate risk; (ii) foreign currency translation adjustments; and (iii) unrealized gains or losses related to changes in pension and other postretirement benefit plan liabilities.  For more information on our risk management activities, see Note 13.
 
Cumulative revenues, expenses, gains and losses that under generally accepted accounting principals are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Partners’ Capital” in our consolidated balance sheets.  The following table summarizes changes in the amount of our “Accumulated other comprehensive loss” in our accompanying consolidated balance sheets for each of the two years ended December 31, 2010 and 2009 (in millions):
 

 

 

 
 
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Net unrealized
gains/(losses)
on cash flow
hedge derivatives
   
Foreign
currency
translation
adjustments
   
Pension and
other
postretirement
liability adjs.
   
Total
Accumulated other
comprehensive
income/(loss)
 
December 31, 2008
  $ (64.6 )   $ (217.3 )   $ (5.8 )   $ (287.7 )
Change for period
    (354.3 )     249.7       (2.5 )     (107.1 )
December 31, 2009
    (418.9 )     32.4       (8.3 )     (394.8 )
Change for period
    111.2       99.5       (2.3 )     208.4  
December 31, 2010
  $ (307.7 )   $ 131.9     $ (10.6 )   $ (186.4 )
 
Limited Partners’ Net Income per Unit
 
We compute Limited Partners’ Net Income per Unit by dividing our limited partners’ interest in net income by the weighted average number of units outstanding during the period.  The overall computation, presentation, and disclosure requirements for our Limited Partners’ Net Income per Unit  are made in accordance with the “Earnings per Share” Topic of the Codification.
 
Risk Management Activities
 
We utilize energy commodity derivative contracts for the purpose of mitigating our risk resulting from fluctuations in the market price of natural gas, natural gas liquids and crude oil.  In addition, we enter into interest rate swap agreements for the purpose of hedging the interest rate risk associated with our debt obligations.  We measure our derivative contracts at fair value and we report them on our balance sheet as either an asset or liability.  If the derivative transaction qualifies for and is designated as a normal purchase and sale, it is exempted from fair value accounting and is accounted for using traditional accrual accounting.
 
Furthermore, changes in our derivative contracts’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met.  If a derivative contract meets those criteria, the contract’s gains and losses is allowed to offset related results on the hedged item in our income statement, and we are required to both formally designate the derivative contract as a hedge and document and assess the effectiveness of the contract associated with the transaction that receives hedge accounting.  Only designated qualifying items that are effectively offset by changes in fair value or cash flows during the term of the hedge are eligible to use the special accounting for hedging.
 
Our derivative contracts that hedge our energy commodity price risks involve our normal business activities, which include the sale of natural gas, natural gas liquids and crude oil, and we have designated these derivative contracts as cash flow hedges—derivative contracts that hedge exposure to variable cash flows of forecasted transactions—and the effective portion of these derivative contracts’ gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings.  The ineffective portion of the gain or loss is reported in earnings immediately.  See Note 13 for more information on our risk management activities and disclosures.
 
Accounting for Regulatory Activities
 
Regulatory assets and liabilities represent probable future revenues or expenses associated with certain charges and credits that will be recovered from or refunded to customers through the ratemaking process.  The amount of regulatory assets and liabilities reflected within “Deferred charges and other assets” and “Other long-term liabilities and deferred credits,” respectively, in our accompanying consolidated balance sheets as of December 31, 2010 and 2009 are not material to our consolidated balance sheets.
 
 
3.  Acquisitions and Divestitures
 
Acquisitions from Unrelated Entities
 
During 2010, 2009 and 2008, we completed the following acquisitions from unrelated entities.  For each of these acquisitions, we recorded all the acquired assets and assumed liabilities at their estimated fair market values (not the acquired entity’s book values) as of the acquisition date.  The results of operations from these acquisitions accounted for as business combinations are included in our consolidated financial statements from the acquisition date.
 

 
 
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               Assignment of Purchase Price  
               (in millions)  
Ref.
   
Date
 
Acquisition
 
Purchase
Price
   
Current
Assets
   
Property
Plant &
Equipment
   
Deferred
Charges
& Other
   
Goodwill
 
  (1 )     8/08  
Wilmington, North Carolina Liquids Terminal
  $ 12.7     $ -     $ 5.9     $ -     $ 6.8  
  (2 )     12/08  
Phoenix, Arizona Products Terminal
    27.5       -       27.5       -       -  
  (3 )     4/09  
Megafleet Towing Co., Inc. Assets
    21.7       -       7.1       4.0       10.6  
  (4 )     7/09  
Portland Airport Pipeline
    9.0       -       9.0       -       -  
  (5 )     10/09  
Crosstex Energy, L.P. Natural Gas Treating Business
    270.7       15.0       181.7       25.4       48.6  
  (6 )     11/09  
Endeavor Gathering LLC
    36.0       -       -       36.0       -  
  (7 )     1/10  
USD Terminal Acquisition
    201.1       -       43.1       100.0       58.0  
  (8 )     3/10  
Mission Valley, California Products Terminal
    13.5       -       13.5       -       -  
  (9 )     3/10  
Slay Industries Terminal Acquisition
    101.6       -       67.9       32.8       0.9  
  (10 )     5/10  
KinderHawk Field Services LLC
    917.4       -       -       917.4       -  
  (11 )     7/10  
Direct Fuels Terminal Acquisition
    16.0       -       5.3       -       10.7  
  (12 )     9/10  
Gas-Chill, Inc. Natural Gas Treating Assets
    13.1       -       8.0       5.1       -  
  (13 )     10/10  
Allied Concrete Terminal Acquisition
    8.6       -       3.9       4.7       -  
  (14 )     10/10  
Chevron Refined Products Terminals
    32.3       -       32.1       0.2       -  
 
(1) Wilmington, North Carolina Liquids Terminal
 
On August 15, 2008, we purchased certain terminal assets from Chemserve, Inc. for an aggregate consideration of $12.7 million, consisting of $11.8 million in cash and $0.9 million in assumed liabilities.  The liquids terminal facility is located in Wilmington, North Carolina and stores petroleum products and chemicals.   The acquisition both expanded and complemented our existing Southeast region terminal operations, and all of the acquired assets are included in our Terminals business segment.  We assigned $6.8 million of our purchase price to “Goodwill,” and the entire amount is expected to be deductible for tax purposes.  We believe this acquisition resulted in the recognition of goodwill primarily because of certain advantageous factors (including the synergies provided by increasing our liquids storage capacity in the Southeast region of the U.S.) that contributed to our acquisition price exceeding the fair value of acquired identifiable net assets and liabilities—in the aggregate, these factors represented goodwill.
 
(2) Phoenix, Arizona Products Terminal
 
Effective December 10, 2008, our West Coast Products Pipelines operations acquired a refined petroleum products terminal located in Phoenix, Arizona from ConocoPhillips for approximately $27.5 million in cash.  The terminal has storage capacity of approximately 200,000 barrels for gasoline, diesel fuel and ethanol.  The acquisition complemented our existing Phoenix liquids assets, and the acquired incremental storage increased our combined storage capacity in the Phoenix market by approximately 13%.  The acquired terminal is included as part our Products Pipelines business segment.
 
(3) Megafleet Towing Co., Inc. Assets
 
Effective April 23, 2009, we acquired certain terminals assets from Megafleet Towing Co., Inc. for an aggregate consideration of approximately $21.7 million.  Our consideration included $18.0 million in cash and an obligation to pay additional cash consideration on April 23, 2014 (five years from the acquisition date) contingent upon the purchased assets providing us an agreed-upon amount of earnings, as defined by the purchase and sale agreement, during the five year period.  The contingent consideration had a fair value of $3.7 million as of the acquisition date.
 
The acquired assets primarily consisted of nine marine vessels that provide towing and harbor boat services along the Gulf coast, the intracoastal waterway, and the Houston Ship Channel, and the acquisition complemented and expanded our existing Gulf Coast and Texas petroleum coke terminal operations.  We assigned $10.6 million of our purchase price to “Goodwill,” and we expect that approximately $5.0 million of goodwill will be deductible for tax purposes.  We believe the primary item that generated the goodwill is the value of the synergies created between the acquired assets and our pre-existing terminal assets (resulting from the increase in services now offered by our Texas petroleum coke operations).  In February 2010, the JR Nicholls, one of the acquired vessels, overturned and sank in the Houston Ship Channel.  For further information about the JR Nicholls incident, see Note 16.  For information about events occurring subsequent to December 31, 2010, see “—Divestiture Subsequent to December 31, 2010” below.
 
(4) Portland Airport Pipeline
 
On July 31, 2009, we acquired a refined products pipeline, as well as associated valves, equipment and other fixtures, from Chevron Pipe Line Company for $9.0 million in cash.  The approximate 8.5 mile, 8-inch diameter pipeline is located in Multnomah County, Oregon.  The line transports commercial jet fuel from our Willbridge liquids terminal facility to the Portland International Airport, both located in Portland, Oregon.  It has an estimated system capacity of approximately 26,000 barrels per day.  The acquisition enhanced our West Coast terminal operations, and the acquired assets are included in our Products Pipelines business segment.
 
 
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(5) Crosstex Energy, L.P. Natural Gas Treating Business
 
On October 1, 2009, we acquired the natural gas treating business from Crosstex Energy, L.P. and Crosstex Energy, Inc. for an aggregate consideration of $270.7 million, consisting of $265.3 million in cash and assumed liabilities of $5.4 million.  The acquired assets primarily consisted of approximately 290 natural gas amine-treating and hydrocarbon dew-point control plants and related equipment, and are used to remove impurities and liquids from natural gas in order to meet pipeline quality specifications.  The assets are predominantly located in Texas and Louisiana, with additional facilities located in Mississippi, Oklahoma, Arkansas and Kansas.  The acquisition complemented and expanded the existing natural gas treating operations offered by our Texas intrastate natural gas pipeline group, and all of the acquired assets are included in our Natural Gas Pipelines business segment.
 
We measured the identifiable intangible assets acquired at fair value on the acquisition date, and accordingly, we recognized $25.4 million in “Deferred charges and other assets,” representing the purchased fair value of separate and identifiable relationships with existing natural gas producing customers.  We estimate the remaining useful life of these existing customer relationships to be between approximately eight and nine years.  After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, we recognized $48.6 million of “Goodwill,” an intangible asset representing the future economic benefits expected to be derived from this acquisition that are not assigned to other identifiable, separately recognizable assets acquired.  We believe the primary item that generated the goodwill is our ability to grow the business by leveraging our pre-existing natural gas operations (resulting from the increase in services now offered by our natural gas processing and treating operations in the state of Texas), and we believe that this value contributed to our acquisition price exceeding the fair value of acquired identifiable net assets and liabilities—in the aggregate, these factors represented goodwill.  Furthermore, this entire amount of goodwill is expected to be deductible for tax purposes.
 
(6) Endeavor Gathering LLC
 
On November 1, 2009, we acquired a 40% membership interest in Endeavor Gathering LLC for $36.0 million in cash.  Endeavor Gathering LLC owns the natural gas gathering and compression business previously owned by GMX Resources Inc. and its wholly-owned subsidiary, Endeavor Pipeline, Inc.  Endeavor Gathering LLC provides natural gas gathering service to GMX Resources’ exploration and production activities in its Cotton Valley Sands and Haynesville/Bossier Shale horizontal well developments located in East Texas.  The remaining 60% interest in Endeavor Gathering LLC is owned by GMX Resources, Inc., and Endeavor Pipeline Inc. remained operator of the business.  The acquired investment complemented our existing natural gas gathering and transportation business located in the state of Texas.  We account for this investment under the equity method of accounting, and the investment is included in our Natural Gas Pipelines business segment.  For more information on our investments, see Note 6.
 
(7) USD Terminal Acquisition
 
On January 15, 2010, we acquired three ethanol handling train terminals from US Development Group LLC for an aggregate consideration of $201.1 million, consisting of $114.3 million in cash, $81.7 million in common units, and $5.1 million in assumed liabilities.  The three train terminals are located in Linden, New Jersey; Baltimore, Maryland; and Euless, Texas.  As part of the transaction, we announced the formation of a joint venture with US Development Group LLC to optimize and coordinate customer access to the three acquired terminals, other ethanol terminal assets we already own and operate, and other terminal projects currently under development by both parties.  The acquisition complemented and expanded the ethanol and rail terminal operations we previously owned, and all of the acquired assets are included in our Terminals business segment.
 
Based on our measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, we assigned $94.6 million of our combined purchase price to “Other intangibles, net,” and a combined $5.4 million to “Other current assets” and “Deferred charges and other assets.”  The acquired intangible amount represented the fair value of customer relationships, and we estimated the remaining useful life of these customer relationships to be 10 years.  After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, we recognized $58.0 million of “Goodwill,” an intangible asset representing the future economic benefits expected to be derived from this acquisition that are not assigned to other identifiable, separately recognizable assets.  We believe the primary items that generated the goodwill are the value of the synergies created between the acquired assets and our pre-existing ethanol handling assets, and our expected ability to grow the business by leveraging our pre-existing experience in ethanol handling operations.  We expect that the entire amount of goodwill will be deductible for tax purposes.
 
 
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(8) Mission Valley Terminal Acquisition
 
On March 1, 2010, we acquired the refined products terminal assets at Mission Valley, California from Equilon Enterprises LLC (d/b/a Shell Oil Products US) for $13.5 million in cash.  The acquired assets included buildings, equipment, delivery facilities (including two truck loading racks), and storage tanks with a total capacity of approximately 170,000 barrels for gasoline, diesel fuel and jet fuel.  The terminal operates under a long-term terminaling agreement with Tesoro Refining and Marketing Company.  The acquisition enhanced our Pacific operations and complemented our existing West Coast terminal operations, and the acquired assets are included in our Products Pipelines business segment.
 
(9) Slay Industries Terminal Acquisition                       
 
On March 5, 2010, we acquired certain bulk and liquids terminal assets from Slay Industries for an aggregate consideration of $101.6 million, consisting of $97.0 million in cash, assumed liabilities of $1.6 million, and an obligation to pay additional cash consideration of $3.0 million in years 2013 through 2019, contingent upon the purchased assets providing us an agreed-upon amount of earnings during the three years following the acquisition.  Including accrued interest, we expect to pay approximately $2.0 million of this contingent consideration in the first half of 2013.
 
The acquired assets included (i) a marine terminal located in Sauget, Illinois; (ii) a transload liquid operation located in Muscatine, Iowa; (iii) a liquid bulk terminal located in St. Louis, Missouri; and (iv) a warehousing distribution center located in St. Louis.  All of the acquired terminals have long-term contracts with large creditworthy shippers.  As part of the transaction, we and Slay Industries entered into joint venture agreements at both the Kellogg Dock coal bulk terminal, located in Modoc, Illinois, and at the newly created North Cahokia terminal, located in Sauget and which has approximately 175 acres of land ready for development.  All of the assets located in Sauget have access to the Mississippi River and are served by five rail carriers.  The acquisition complemented and expanded our pre-existing Midwest terminal operations by adding a diverse mix of liquid and bulk capabilities, and all of the acquired assets are included in our Terminals business segment.
 
Based on our measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, we assigned $24.6 million of our combined purchase price to “Other intangibles, net” (representing customer contracts with an estimated remaining useful life of 20 years), and $8.2 million to “Investments.”  We also recorded $0.9 million of our combined purchase price as “Goodwill,” representing certain advantageous factors that contributed to our acquisition price exceeding the fair value of acquired identifiable net assets.  In the aggregate, these factors represented goodwill, and we expect to deduct the entire amount of goodwill for tax purposes.
 
(10) KinderHawk Field Services LLC
 
On May 21, 2010, we purchased a 50% ownership interest in Petrohawk Energy Corporation’s natural gas gathering and treating business in the Haynesville shale gas formation located in northwest Louisiana.  We paid an aggregate consideration of $917.4 million in cash for our 50% equity ownership interest, consisting of $921.4 million we paid on closing, and $4.0 million we received in the fourth quarter of 2010 for the final settlement of estimated capital expenditures and estimated net cash outflows from operating activities for the period January 1, 2010 through May 21, 2010.
 
During a short transition period, Petrohawk continued to operate the business, and effective October 1, 2010, a newly formed company named KinderHawk Field Services LLC, owned 50% by us and 50% by Petrohawk, assumed the joint venture operations.  The acquisition complemented and expanded our existing natural gas gathering and treating businesses, and we assigned our entire purchase price to “Investments” (including $144.8 million of equity method goodwill, representing the excess of our investment cost over our proportionate share of the fair value of the joint venture’s identifiable net assets).  Our investment and our pro rata share of the joint venture’s operating results are included as part of our Natural Gas Pipelines business segment.
 
(11) Direct Fuels Terminal Acquisition
 
On July 22, 2010, we acquired a terminal with ethanol tanks, a truck rack and additional acreage in Dallas, Texas, from Direct Fuels Partners, L.P. for an aggregate consideration of $16 million, consisting of $15.9 million in cash and an assumed property tax liability of $0.1 million.  The acquired terminal facility is connected to and complements the Dallas, Texas unit train terminal we acquired from USD Development Group LLC in January 2010 (described above in “—(7) USD Terminal Acquisition).  All of the acquired assets are included in our Terminals business segment.  After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, we recognized $10.7 million of “Goodwill,” an intangible asset representing the future economic benefits expected to be derived from the acquisition that was not assigned to other identifiable, separately recognizable assets acquired.  We believe the primary items that generated the goodwill are the value of the synergies created between the acquired assets and our pre-existing ethanol handling assets, and our expected ability to grow the business by leveraging our pre-existing experience in ethanol handling operations.  We expect that the entire amount of goodwill will be deductible for tax purposes.
 
 
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(12) Gas-Chill, Inc. Asset Acquisition
 
On September 1, 2010, we acquired the natural gas treating assets of Gas-Chill, Inc. for an aggregate consideration of $13.1 million, consisting of $10.5 million in cash paid on closing, and an obligation to pay a holdback amount of $2.6 million within eighteen months from closing.  The acquired assets primarily consist of more than 100 mechanical refrigeration natural gas hydrocarbon dew point control units that are used to remove hydrocarbon liquids from natural gas streams prior to entering transmission pipelines.  The acquisition complemented and expanded the existing natural gas treating operations offered by our Texas intrastate natural gas pipeline group, and all of the acquired assets are included in our Natural Gas Pipelines business segment.  We assigned $8.0 million of our purchase price to “Property, Plant and Equipment, net” and the remaining $5.1 million to “Other intangibles, net” (representing both a technology-based asset and customer-related contract values).
 
(13) Allied Concrete Bulk Terminal Assets                                                                       
 
On October 1, 2010, we acquired certain bulk terminal assets and real property located in Chesapeake, Virginia, from Allied Concrete Products, LLC and Southern Concrete Products, LLC for an aggregate consideration of $8.6 million, consisting of $8.1 million in cash and an assumed environmental liability of $0.5 million.  The acquired terminal facility is situated on 42 acres of land and can handle approximately 250,000 tons of material annually, including pumice, aggregates and sand.  The acquisition complemented the bulk commodity handling operations at our nearby Elizabeth River terminal, also located in Chesapeake, and all of the acquired assets are included in our Terminals business segment.  We assigned $3.9 million of our purchase price to “Property, Plant and Equipment, net” and the remaining $4.7 million to “Other intangibles, net” (representing customer-related contract values).
 
(14) Chevron Refined Products Terminal Assets                                                                                 
 
On October 8, 2010, we acquired four separate refined petroleum products terminals from Chevron U.S.A. Inc. for an aggregate consideration of $32.3 million, consisting of $31.5 million in cash and an assumed environmental liability of $0.8 million.  Combined, the terminals have storage capacity of approximately 650,000 barrels for gasoline, diesel fuel and jet fuel.  Chevron has entered into long-term contracts with us to terminal product at the terminals.  The acquisition complemented and expanded our existing refined petroleum products assets, and all of the acquired assets are included in our Products Pipelines business segment.  We assigned $32.1 million of our purchase price to “Property, Plant and Equipment, net” and the remaining $0.2 million to “Deferred charges and other assets” (representing the fair value of petroleum pipeline product additives).
 
Pro Forma Information
 
 Pro forma consolidated income statement information that gives effect to all of the acquisitions we have made and all of the joint ventures we have entered into since January 1, 2009 as if they had occurred as of January 1, 2009 is not presented because it would not be materially different from the information presented in our accompanying consolidated statements of income.
 
Acquisitions from KMI
 
According to the provisions of the Codification’s “Control of Partnerships and Similar Entities” Subtopic, effective January 1, 2006, KMI (which indirectly owns all the common stock of our general partner) was deemed to have control over us and no longer accounted for its investment in us under the equity method of accounting.  Instead, as of this date, KMI included our accounts, balances and results of operations in its consolidated financial statements.
 
Accordingly, we accounted for each of the two separate acquisitions discussed below as transfers of net assets between entities under common control.  When accounting for transfers of net assets between entities under common control, the acquisition cost provisions (as they relate to purchase business combinations involving unrelated entities) explicitly do not apply; instead, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination.  That is, no recognition is made for a purchase premium or discount representing any difference between the consideration paid and the book value of the net assets acquired.
 
 
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Therefore, for each of the two separate acquisitions from KMI discussed below, we recognized the assets and liabilities acquired at their carrying amounts (historical cost) in the accounts of KMI (the transferring entity) at the date of transfer.  Description of the consideration we paid or received for these net assets is also described below.
 
Trans Mountain Pipeline System
 
On April 30, 2007, we acquired the Trans Mountain pipeline system from KMI for $549.1 million in cash.  The Trans Mountain pipeline system transports crude oil and refined products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia and the state of Washington.  In April 2008, as a result of finalizing certain “true-up” provisions in our acquisition agreement related to Trans Mountain pipeline expansion spending, we received a cash contribution of $23.4 million from KMI.  Pursuant to the accounting provisions concerning transfers of net assets between entities under common control, and consistent with our treatment of cash payments made to KMI for Trans Mountain net assets in 2007, we accounted for this 2008 cash contribution as an adjustment to equity—primarily as an increase in “Partners’ Capital”—and we also included this $23.4 million receipt as a cash inflow item from investing activities in our accompanying consolidated statement of cash flows.
 
Express and Jet Fuel Pipeline Systems
 
Effective August 28, 2008, we acquired KMI’s 33 1/3% ownership interest in the Express pipeline system.  The pipeline system is a batch-mode, common-carrier, crude oil pipeline system consisting of both the Express Pipeline and the Platte Pipeline (collectively referred to in this report as the Express pipeline system).  We also acquired KMI’s full ownership of an approximately 25-mile jet fuel pipeline that serves the Vancouver International Airport, located in Vancouver, British Columbia, Canada (referred to in this report as the Jet Fuel pipeline system).  As consideration for these assets, we paid to KMI approximately 2.0 million common units, valued at $116.0 million. The acquisition complemented our Trans Mountain pipeline system, and all of the acquired assets (including an acquired cash balance of $7.4 million) are included in our Kinder Morgan Canada business segment.
 
We operate the Express pipeline system, and we account for our 33 1/3% ownership in the system under the equity method of accounting.  In addition to our 33 1/3% equity ownership, our investment in Express includes an investment in unsecured debenture bonds denominated in Canadian dollars and issued by Express Holdings U.S. L.P., the partnership that maintains ownership of the U.S. portion of the Express pipeline system.  For more information on this long-term note receivable, see Note 11 “Related Party Transactions—Notes Receivable.”
 
Additionally, based upon our management’s consideration of all of the quantitative and qualitative aspects of the transfer of the interests in the Express and Jet Fuel pipeline system net assets from KMI to us, we determined that the presentation of combined financial statements which include the financial information of the Express and Jet Fuel pipeline systems would not be materially different from financial statements which did not include such information and accordingly, we elected not to include the financial information of the Express and Jet Fuel pipeline systems in our consolidated financial statements for any periods prior to the transfer date of August 28, 2008.  Our consolidated financial statements and all other financial information included in this report therefore, have been prepared assuming that the transfer of both the 33 1/3% interest in the Express pipeline system net assets and the Jet Fuel pipeline system net assets from KMI to us had occurred at the date of transfer (August 28, 2008).
 
 Divestitures
 
 North System Natural Gas Liquids Pipeline System – Discontinued Operations
 
On July 2, 2007, we announced that we entered into an agreement to sell the North System natural gas liquids pipeline and our 50% ownership interest in the Heartland Pipeline Company (collectively referred to in this report as our North System) to ONEOK Partners, L.P. for approximately $298.6 million in cash.  Our investment in net assets, including all transaction related accruals, was approximately $145.8 million, most of which represented property, plant and equipment, and we recognized approximately $152.8 million of gain in the fourth quarter of 2007 from the sale of these net assets.
 
 
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In the first half of 2008, following final account and inventory reconciliations, we paid a net amount of $2.4 million to ONEOK to fully settle amounts related to (i) working capital items; (ii) total physical product liquids inventory and inventory obligations for certain liquids products; and (iii) the allocation of pre-acquisition investee distributions.  Based primarily upon these adjustments, which were below the amounts reserved, we recognized an additional gain of $1.3 million in 2008.  We accounted for the North System business as a discontinued operation and we reported the gain amount separately as “Gain on disposal of North System” within the discontinued operations section of our accompanying consolidated statement of income for the year ended December 31, 2008.  Prior to the sale, we included the financial results of the North System within our Products Pipelines business segment and, because the sale of the North System did not change the structure of our internal organization in a manner that caused a change to our reportable business segments, we included the incremental gain within our Products Pipelines business segment disclosures for 2008.
 
Thunder Creek Gas Services, LLC
 
Effective April 1, 2008, we sold our 25% ownership interest in Thunder Creek Gas Services, LLC, referred to in this report as Thunder Creek, to PVR Midstream LLC, a subsidiary of Penn Virginia Corporation.  Prior to the sale, we accounted for our investment in Thunder Creek under the equity method of accounting and included its financial results within our Natural Gas Pipelines business segment.  In the second quarter of 2008, we received cash proceeds, net of closing costs and settlements, of approximately $50.7 million for our investment, and we recognized a gain of $13.0 million with respect to this transaction.  We included the amount of the gain within the caption “Other, net” in our accompanying consolidated statement of income for the year ended December 31, 2008.
 
Cypress Interstate Pipeline LLC            
 
Effective October 1, 2010, Westlake Petrochemicals LLC, a wholly-owned subsidiary of Westlake Chemical Corporation, exercised an option it held to purchase a 50% ownership interest in our Cypress Pipeline.  Accordingly, we sold a 50% interest in our subsidiary, Cypress Interstate Pipeline LLC, to Westlake and we received proceeds of $10.2 million.  At the time of the sale, the carrying value of the net assets of Cypress Interstate Pipeline LLC totaled $20.0 million and consisted mostly of property, plant and equipment.  In the fourth quarter of 2010, we recognized an $8.8 million gain from this sale, including an $8.6 million gain amount related to the remeasurement of our retained investment to its fair value.  Due to the loss of control of Cypress Interstate Pipeline LLC, we recognized the retained investment at its fair value, and the gain amount related to remeasurement represents the excess of the fair value of our retained investment ($18.6 million as of October 1, 2010) over its carrying value ($10.0 million).  This fair value of our retained investment was determined by applying a multiple to the future annual cash flows expected from our retained 50% interest.  The $10.2 million value of the transaction with Westlake Chemical Corporation was based on a contract price and does not represent the fair value of a 50% interest in the Cypress Pipeline in an orderly transaction between market participants.  We now account for our retained investment under the equity method of accounting.  We included the entire gain within the caption “Other, net” in our accompanying consolidated statement of income for the year ended December 31, 2010.
 
Acquisition Subsequent to December 31, 2010
 
On January 3, 2011, we purchased 50,000 Class A preferred shares of Watco Companies, LLC for $50.0 million in cash in a private transaction.  In connection with our purchase of these preferred shares, the most senior equity security of Watco, we entered into a limited liability company agreement with Watco that provides us certain priority and participating cash distribution and liquidation rights.  We will receive priority, cumulative cash distributions from the preferred shares at a rate of 3.25% per quarter, and we will participate partially in additional profit distributions at a rate equal to 0.5%.  The preferred shares have no conversion features and hold no voting powers, but do provide us certain approval rights, including the right to appoint one of the members to Watco’s Board of Managers.  As of December 31, 2010, we placed our $50.0 million investment in a cash escrow account and we included this amount within “Restricted Deposits” on our accompanying balance sheet.  The acquired investment complements our existing rail transload operations and we will account for our investment under the equity method of accounting and include it in our Terminals business segment.
 
Watco Companies, LLC is a privately owned, Pittsburg, Kansas based transportation company that was formed in 1983.  It is the largest privately held short line railroad company in the United States, operating 22 short line railroads on approximately 3,500 miles of leased and owned track.  Its services include (i) rail freight transportation; (ii) industrial switching services; (iii) railcar and locomotive repair; (iv) track construction, maintenance and repair; (v) freight railroad specific transloading and intermodal services; (vi) freight railroad specific warehouse logistics activities; and (vii) port terminal freight railroads and associated operations.
 
 
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Divestiture Subsequent to December 31, 2010
 
On February 9, 2011, we sold a marine vessel to Kirby Inland Marine, L.P., and additionally, we and Kirby formed a joint venture named Greens Bayou Fleeting, LLC.  Pursuant to the joint venture agreement, we both sold a 51% ownership interest in the boat fleeting business we acquired from Megafleet Towing Co., Inc. in April 2009 (discussed above in “—Acquisitions from Unrelated Entities—(3) Megafleet Towing Co., Inc. Assets”) to the joint venture for $4.1 million in cash, and we contributed the remaining business to the joint venture for a 49% ownership interest.  Kirby then made cash contributions to the joint venture in exchange for the remaining 51% ownership interest.  Related to the above transactions, in the fourth quarter of 2010, we recorded a combined loss amount of $5.5 million to write down the carrying value of the net assets to be sold to their estimated fair values as of December 31, 2010.  We included this loss within the caption “Other expense (income)” in our accompanying consolidated statement of income for the year ended December 31, 2010.
 
4.  Income Taxes
 
Components of the income tax provision applicable to continuing operations for federal, foreign and state taxes are as follows (in millions):
 
   
Year Ended December 31,
 
 
 
2010
   
2009
   
2008
 
Taxes current expense:
                 
Federal
  $ 4.8     $ 2.7     $ 24.4  
State
    1.2       6.7       8.5  
Foreign
    3.6       (1.0 )     (4.5 )
Total
    9.6       8.4       28.4  
Taxes deferred expense:
                       
Federal
    4.7       7.3       6.0  
State
    9.7       9.4       1.5  
Foreign
    10.6       30.6       (15.5 )
Total
    25.0       47.3       (8.0 )
Total tax provision
  $ 34.6     $ 55.7     $ 20.4  
Effective tax rate
    2.5 %     4.2 %     1.5 %
 
The difference between the statutory federal income tax rate and our effective income tax rate is summarized as follows:
 
   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
Federal income tax rate
    35.0 %     35.0 %     35.0 %
Increase (decrease) as a result of:
                       
Partnership earnings not subject to tax
    (35.0 ) %     (35.0 ) %     (35.0 ) %
Corporate subsidiary earnings subject to tax
    - %     - %     1.6 %
Income tax expense attributable to corporate equity earnings
    0.7 %     0.8 %     0.6 %
Income tax expense attributable to foreign corporate earnings
    1.0 %     2.2 %     (1.2 ) %
State taxes
    0.8 %     1.2 %     0.5 %
Effective tax rate                                                                         
    2.5 %     4.2 %     1.5 %

Our deferred tax assets and liabilities as of December 31, 2010 and 2009 resulted from the following (in millions):

   
December 31,
 
   
2010
   
2009
 
Deferred tax assets:
           
Book accruals
  $ 2.1     $ 16.6  
Net Operating Loss/Alternative minimum tax credits
    17.8       11.4  
Other
    1.3       1.3  
Total deferred tax assets
    21.2       29.3  
                 
Deferred tax liabilities:
               
Property, plant and equipment
    263.9       239.3  
Other
    5.6       6.8  
Total deferred tax liabilities
    269.5       246.1  
Net deferred tax liabilities
  $ 248.3     $ 216.8  

 
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We account for uncertainty in income taxes in accordance with the “Income Taxes” Topic of the Codification.  Pursuant to these provisions, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based not only on the technical merits of the tax position based on tax law, but also on the past administrative practices and precedents of the taxing authority.  The tax benefits recognized in our financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
 
A reconciliation of our beginning and ending gross unrecognized tax benefits for each of the years ended December 31, 2010 and 2009 is as follows (in millions):
 
   
Year Ended December 31,
 
   
2010
   
2009
 
Balance at beginning of period
  $ 23.3     $ 14.9  
Additions based on current year tax positions
    -       -  
Additions based on prior year tax positions
    10.2       8.5  
Reductions based on settlements with taxing authority
    -       -  
Reductions due to lapse in statute of limitations
    (0.1 )     (0.1 )
Balance at end of period
  $ 33.4     $ 23.3  
 
Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.  During the year ended December 31, 2010, we recognized a reduction in interest expense of approximately $0.5 million, and during each of the years ended December 31, 2009 and 2008, we recognized approximately $1.1 million and $0.5 million, respectively, in interest expense.
 
As of December 31, 2010 (i) we had $1.8 million of accrued interest and no accrued penalties; (ii) we believe it is reasonably possible that our $33.4 million liability for unrecognized tax benefits will increase by approximately $7.6 million during the next twelve months; and (iii) we believe the full amount of $33.4 million of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate in future periods.  As of December 31, 2009, we had $2.3 million of accrued interest and no accrued penalties.  In addition, we have U.S. and state tax years open to examination for the periods 2006 through 2010.
 
 
5.  Property, Plant and Equipment