Kinder Morgan Energy Partners, L.P. is a leading pipeline transportation and energy storage company in North America, and 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 an interest in or operate approximately 28,000 miles of pipelines and 180 terminals, and conduct our business through five reportable business segments (described further in Note 8).  Our pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, and our terminals store petroleum products and chemicals and handle bulk materials likesuch as coal and petroleum coke.  We are also the leading provider of carbon dioxide for enhanced oil recovery projects in North America.  Our general partner is owned by Kinder Morgan, Inc., as discussed following.below.

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.  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 March 31,June 30, 2011, 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%12.5% interest in us.

KMI was formed August 23, 2006 as a Delaware limited liability company principally for the purpose of acquiring (through a wholly-owned subsidiary) all of the common stock of Kinder Morgan Kansas, Inc.  The merger, referred to in this report as the going-private transaction, closed on May 30, 2007 with Kinder Morgan Kansas, Inc. continuing as the surviving legal entity.

On February 10, 2011, KMI converted from a Delaware limited liability company named Kinder Morgan Holdco LLC to a Delaware corporation named Kinder Morgan, Inc., and its outstanding units were converted into classes of capital stock.  On February 16, 2011, KMI completed the initial public offering of its common stock.  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.  No members of management sold shares in the offering and KMI did not receive any proceeds from the offering.  KMI’s common stock trades on the New York Stock Exchange under the symbol “KMI.”

We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the United States Securities and Exchange Commission.  These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s Accounting Standards Codification, the single source of generally accepted accounting principles in the United States of America and referred to in this report as the Codification. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with the Codification.  We believe, however, that our disclosures are adequate to make the information presented not misleading.

In addition, our consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair statement of our financial results for the interim periods, and certain amounts from prior periods have been reclassified to conform to the current presentation.  Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2010 Form 10-K/A.

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 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.

In addition, our financial statements are consolidated into the consolidated financial statements of KMI; however, except for the related party transactions described in Note 9 “Related Party Transactions—Asset Acquisitions,” 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.

We compute Limited Partners’ Net Income (Loss) per Unit by dividing our limited partners’ interest in net income (loss) by the weighted average number of units outstanding during the period.  The overall computation, presentation, and disclosure requirements for our Limited Partners’ Net Income (Loss) per Unit  are made in accordance with the “Earnings per Share” Topic of the Codification.

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.  Pursuant to the agreement, we receive priority, cumulative cash distributions from the preferred shares at a rate of 3.25% per quarter, and we 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 consolidated balance sheet.  As of March 31,June 30, 2011, our $50.0net equity investment in Watco totaled $51.6 million investmentand is included within “Investments” on our accompanying consolidated balance sheet.  The acquired investment complemented our existing rail transload operations.  We account for thisour investment under the equity method of accounting, and we 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.  It also operates transload/intermodal and mechanical services divisions.  Our investment provides capital to Watco for further expansion of specific projects, complements our existing terminal network, provides our customers more transportation services for many of the commodities that we currently handle, and offers us the opportunity to share in additional growth opportunities through new projects.

On February 17, 2011, Deeprock Energy Resources, LLC, Mecuria Energy Trading, Inc., and our subsidiary Kinder Morgan Cushing LLC, and Mecuria Energy Trading, Inc. entered into formal agreements for a crude oil storage joint venture located in Cushing, Oklahoma. On this date, we contributed $15.9 million for a 50% ownership interest in an existing crude oil tank farm that has storage capacity of one million barrels, and we expect to invest an additional $8.8 million for the construction of three new storage tanks that will provide incremental storage capacity of 750,000 barrels.  The new tanks are expected to be placed in service byduring the end of the thirdfourth quarter of 2011.  The joint venture is named Deeprock North, LLC.  Deeprock Energy owns a 12.02% member interest in Deeprock North, LLC and will remain construction manager and operator of the joint venture.  Mecuria owns the remaining 37.98% member interest and will remain the anchor tenant for the joint venture’s crude oil capacity for the next five years with an option to extend.  In addition, we entered into a development agreement with Deeprock Energy that gives us an option to participate in future expansions on Deeprock’s remaining 254 acres of undeveloped land.

We account for our investment under the equity method of accounting, and our investment and our pro rata share of Deeprock North LLC’s operating results are included as part of our Terminals business segment.  As of March 31,June 30, 2011, our net equity investment in Deeprock North, LLC totaled $16.0$20.6 million and is included within “Investments” on our accompanying consolidated balance sheet.  In April

On June 10, 2011, we contributedacquired a newly constructed petroleum coke terminal located in Port Arthur, Texas from TGS Development, L.P. (TGSD) for an aggregate consideration of $74.1 million, consisting of $42.9 million in cash, $23.7 million in common units, and an obligation to pay additional $2.1consideration of $7.5 million.  We estimate our remaining $7.5 million obligation will be paid to TGSD approximately one year from the closing (in May or June 2012), and will be settled in a combination of cash and common units, depending on TGSD’s election.

All of the acquired assets are located in Port Arthur, Texas, and include long-term contracts to provide petroleum coke handling and cutting services to improve the refining of heavy crude oil at Total Petrochemicals USA Inc.’s recently expanded Port Arthur refinery.  The refinery is expected to produce more than one million tons of petroleum coke annually.  Based on our measurement of fair values for all of the identifiable tangible and intangible assets acquired, we preliminarily assigned $42.6 million of our combined purchase price to “Property, plant and equipment, net,” and the remaining $31.5 million to Deeprock North“Other Intangibles, net,” representing the combined fair values of two separate intangible customer contracts with Total.  The acquisition complements our existing Gulf Coast bulk terminal facilities and expands our pre-existing petroleum coke handling operations.  All of the acquired assets are included as partial fundingpart of our Terminals business segment.

Effective July 1, 2011, we acquired from Petrohawk Energy Corporation both the remaining 50% equity ownership interest in KinderHawk Field Services LLC that we did not already own and a 25% equity ownership interest in Petrohawk’s natural gas gathering and treating business located in the Eagle Ford shale formation in South Texas for its ongoing tankagean aggregate consideration of $911.9 million, consisting of $834.9 million in cash (consisting of $836.2 million in cash paid, offset by $1.3 million in cash acquired) and truck rack expansion projects.assumed debt of $77.0 million.  We then repaid the outstanding $154.0 million of borrowings under KinderHawk’s bank credit facility, and following this repayment, KinderHawk had no outstanding debt.

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 sold our ownership interest in the boat fleeting business we acquired from Megafleet Towing Co., Inc. in April 2009 to the joint venture for $4.1 million in cash and a 49% ownership interest in the joint venture.  Kirby then made cash contributions to the joint venture in exchange for the remaining 51% ownership interest.  Related to the above transactions, we recorded a loss of $5.5 million ($4.1 million after tax) in the fourth quarter of 2010 to write down the carrying value of the net assets to be sold to their estimated fair values as of December 31, 2010.

In the first quarter of 2011, after final reconciliation and measurement of all of the net assets sold, we recognized a combined $2.2 million increase in income from the sale of these net assets, primarily consisting of a $1.9 million reduction in income tax expense, which is included within the caption “Income Taxes”Tax (Expense) Benefit” in our accompanying consolidated statement of income for the threesix months ended March 31,June 30, 2011.  Additionally, the sale of our ownership interest resulted in a $10.6 million non-cash reduction in our goodwill (see Note 3), and was a transaction with a related party (see Note 9).  Information about our acquisition of assets from Megafleet Towing Co., Inc. is described more fully in Note 3 to our consolidated financial statements included in our 2010 Form 10-K/A.

Effective April 1, 2011, we sold 51% ownership interests in two separate wholly-owned subsidiaries to two separate buyers, both Oklahoma limited liability companies, for an aggregate consideration of $5.1$8.1 million, consisting of a $4.1 million note receivable, and $1.0 million in cash.cash, and a $3.0 million receivable for the settlement of working capital items.  Following the sale, we continue to own 49% membership interests in both River Consulting, LLC, a Louisiana limited liability company engaged in the business of providing engineering, consulting and management services, and Devco USA L.L.C., an Oklahoma limited liabilitya company engaged in the business of processing, handling and marketing sulfur, and selling related pouring equipment.  We now account for our retained investments under the equity method of accounting.  At the time of the sale, the combined carrying value of the net assets (and members’ capital on a 100% basis) of both entities totaled approximately $7.5$8.8 million and consisted mostly of technology-based assets and trade receivables and technology-based assets.  Thereceivables.  We now account for our retained investments under the equity method of accounting.

In the second quarter of 2011, we recognized a $3.6 million pre-tax gain from the sale of 51%these ownership interests (including a $2.1 million gain related to the remeasurement of eachour retained investment to fair value) and we included this gain within the caption “Other, net” in our accompanying consolidated statements of these two subsidiaries will not haveincome for the three and six months ended June 30, 2011.  We also recognized a material impact on$1.4 million increase in income tax expense related to this gain, which is included within the caption “Income Tax (Expense) Benefit” in our resultsaccompanying consolidated statement of operations or our cash flows.income for the six months ended June 30, 2011.

The fair value of each reporting unit was determined from the present value of the expected future cash flows from the applicable reporting unit (inclusive of a terminal value calculated using market multiples between six and ten times cash flows) discounted at a rate of 9.0%8.0%.  The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.

Changes in the gross amounts of our goodwill and accumulated impairment losses for the threesix months ended March 31,June 30, 2011 are summarized as follows (in millions):

In addition, we identify any premium or excess cost we pay over our proportionate share of the underlying fair value of net assets acquired and accounted for as investments under the equity method of accounting.  This premium or excess cost is referred to as equity method goodwill and is also not subject to amortization but rather to impairment testing.  For all investments we own containing equity method goodwill, no event or change in circumstances that may have a significant adverse effect on the fair value of our equity investments has occurred during the first threesix months of 2011.  As of March 31,June 30, 2011 and December 31, 2010, we reported $286.9 million and $283.0 million, respectively, in equity method goodwill within the caption “Investments” in our accompanying consolidated balance sheets.  The increase in our equity method goodwill since December 31, 2010 was due to measurement period adjustments related to our acquisition of a 50% ownership interest in KinderHawk Field Services LLC in May 2010.

Excluding goodwill, our other intangible assets include customer relationships, contracts and agreements, technology-based assets, and lease value.  These intangible assets have definite lives and are reported separately as “Other intangibles, net” in our accompanying consolidated balance sheets.  Following is information related to our intangible assets subject to amortization (in millions):

We amortize the costs of our intangible assets to expense in a systematic and rational manner over their estimated useful lives.  Among the factors we weigh, depending on the nature of the asset, are the effects of obsolescence, new technology, and competition.  For the three and six months ended March 31,June 30, 2011, and 2010, the amortization expense on our intangibles totaled $9.7 million and $11.3$19.4 million, respectively, and for the same prior year periods, the amortization expense on our intangibles totaled $11.1 million and $22.4 million, respectively.  As of March 31,June 30, 2011, the weighted average amortization period for our intangible assets was approximately 13.615.4 years, and our estimated amortization expense for these assets for each of the next five fiscal years (2012 – 2016) is approximately $33.4$33.1 million, $29.5$29.2 million, $26.4$26.1 million, $23.6$23.3 million and $19.9$19.6 million, respectively.

We classify our debt based on the contractual maturity dates of the underlying debt instruments.  We defer costs associated with debt issuance over the applicable term.  These costs are then amortized as interest expense in our consolidated statements of income.

The net carrying amount of our debt (including both short-term and long-term amounts and excluding the value of interest rate swap agreements) as of March 31,June 30, 2011 and December 31, 2010 was $11,748.8$11,406.9 million and $11,539.8 million, respectively.  The weighted average interest rate on all of our borrowings (both short-term and long-term) was approximately 4.44%4.29% during the firstsecond quarter of 2011, and approximately 4.32%4.33% during the firstsecond quarter of 2010.  For the first six months of 2011 and 2010, the weighted average interest rate on all of our borrowings was approximately 4.36% and 4.33%, respectively.

Our outstanding short-term debt as of March 31,June 30, 2011 was $1,333.2$991.3 million.  The balance consisted of (i) $500.0 million in principal amount of 9.00% senior notes due February 1, 2019, that may be repurchased by us at the option of the holder on February 1, 2012 pursuant to certain repurchase provisions contained in the bond indenture; (ii) $450.0 million in principal amount of 7.125% senior notes due March 15, 2012 (including discount, the notes had a carrying amount of $449.8$449.9 million as of March 31,June 30, 2011); (iii) $343.0 million of commercial paper borrowings; (iv) $23.7 million in principal amount of tax-exempt bonds that mature on April 1, 2024, that are due on demand pursuant to certain standby purchase agreement provisions contained in the bond indenture (our subsidiary Kinder Morgan Operating L.P. “B” is the obligor on the bonds); (v)(iv) a $9.4$9.6 million portion of a 5.40% long-term note payable (our subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note); and (vi)(v) a $7.3$7.4 million portion of 5.23% long-term senior notes (our subsidiary Kinder Morgan Texas Pipeline, L.P. is the obligor on the notes); and (vi) a $0.7 million portion of 6.00% long-term note payable (our subsidiary Kinder Morgan Arrow Terminals, L.P. is the obligor on the note).

The total limited partner units represent our limited partners’ interest and an effective 98% interest in us, exclusive of our general partner’s incentive distribution rights.  Our general partner has an effective 2% interest in us, excluding its right to receive incentive distribution rights.distributions.

As of March 31,June 30, 2011, our total common units consisted of 203,642,331212,919,382 units held by third parties, 14,646,428 units held by KMI and its consolidated affiliates (excluding our general partner), and 1,724,000 units held by our general partner.  As of December 31, 2010, our total common units consisted of 202,509,675 units held by third parties, 14,646,428 units held by KMI and its consolidated affiliates (excluding our general partner), and 1,724,000 units held by our general partner.

As of both March 31,June 30, 2011 and December 31, 2010, all of our 5,313,400 Class B units were held by a wholly-owned subsidiary of KMI.  The Class B units are similar to our common units except that they are not eligible for trading on the New York Stock Exchange.

For each of the three and six month periods ended March 31,June 30, 2011 and 2010, changes in the carrying amounts of our Partners’ Capital attributable to both us and our noncontrolling interests, including our comprehensive income (loss) are summarized as follows (in millions):

During the first threesix months of both 2011 and 2010, there were no material changes in our ownership interests in subsidiaries in which we retained a controlling financial interest.

On February 25, 2011, we entered into a second amended and restated equity distribution agreement with UBS Securities LLC to provide for the offer and sale of common units having an aggregate offering price of up to $1.2 billion (up from an aggregate offering price of up to $600 million under our first amended and restated agreement) from time to time through UBS, as our sales agent.  During the three and six months ended March 31,June 30, 2011, we issued 1,130,2061,247,090 and 2,377,296, respectively, of our common units pursuant to this equity distribution agreement, and afteragreement.  After commissions of $0.6$0.7 million and $1.3 million, respectively, we received net proceeds of $81.2$90.7 million and $171.9 million, respectively, from the issuance of these common units.  We used the proceeds to reduce the borrowings under our commercial paper program.  For additional information regarding our equity distribution agreement, see Note 10 to our consolidated financial statements included in our 2010 Form 10-K/A.

For the purposes of maintaining partner capital accounts, our partnership agreement specifies that items of income and loss shall be allocated among the partners, other than owners of i-units, in accordance with their percentage interests.  Normal allocations according to percentage interests are made, however, only after giving effect to any priority income allocations in an amount equal to the incentive distributions that are allocated 100% to our general partner.  Incentive distributions are generally defined as all cash distributions paid to our general partner that are in excess of 2% of the aggregate value of cash and i-units being distributed, and we determine the allocation of incentive distributions to our general partner by the amount quarterly distributions to unitholders exceed certain specified target levels, according to the provisions of our partnership agreement.

On February 14,May 13, 2011, we paid a cash distribution of $1.13$1.14 per unit to our common unitholders and to our Class B unitholder for the quarterly period ended DecemberMarch 31, 2010.2011.  KMR, our sole i-unitholder, received a distribution of 1,598,5561,599,149 i-units from us on February 14,May 13, 2011, based on the $1.13$1.14 per unit distributed to our common unitholders on that date.  The distributions were declared on January 19,April 20, 2011, payable to unitholders of record as of JanuaryApril 29, 2011.

On May 14, 2010, we paid a cash distribution of $1.07 per unit to our common unitholders and our Class B unitholders for the quarterly period ended March 31, 2011.2010.  KMR, our sole i-unitholder, received a distribution of 1,556,130 i-units from us on May 14, 2010, based on the $1.07 per unit distributed to our common unitholders on that date.  The distributions were declared on April 21, 2010, payable to unitholders of record as of April 30, 2010.

▪ $1.14,$1.15, the cash amount distributed per common unit

by

▪ $66.659,$64.265, the average of KMR’s shares’ closing market prices from April 12-26,July 14-27, 2011, the ten consecutive trading days preceding the date on which the shares began to trade ex-dividend under the rules of the New York Stock Exchange.

Our declared distribution for the firstsecond quarter of 2011 of $1.14$1.15 per unit will result in an incentive distribution to our general partner of $280.0$292.8 million (including the effect of a waived incentive distribution amount of $7.1 million related to our KinderHawk acquisition, as discussed above)acquisition).