UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD
FROM TO
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Commission file number:
001-33018
Hiland Holdings GP,
LP
(Exact name of Registrant as
specified in its charter)
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DELAWARE
(State or other jurisdiction
of
incorporation or organization)
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76-0828238
(I.R.S. Employer
Identification No.)
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205 West Maple, Suite 1100
Enid, Oklahoma
(Address of principal
executive offices)
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73701
(Zip Code)
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(580) 242-6040
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act).
o
Yes
þ
No
The number of the registrants outstanding equity units as
of November 5, 2009 was 21,613,500 common units.
HILAND
HOLDINGS GP, LP
INDEX
2
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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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(In thousands, except unit amounts)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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3,908
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$
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1,733
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Accounts receivable:
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Trade net of allowance for doubtful accounts of $304
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17,872
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23,864
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Affiliates
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918
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2,346
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18,790
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26,210
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Fair value of derivative assets
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3,860
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6,851
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Other current assets
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940
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1,936
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Total current assets
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27,498
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36,730
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Property and equipment, net
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325,649
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349,159
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Intangibles, net
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34,516
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40,780
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Fair value of derivative assets
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608
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7,141
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Other assets, net
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1,322
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1,750
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Total assets
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$
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389,593
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$
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435,560
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LIABILITIES AND PARTNERSHIP EQUITY
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Current liabilities:
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Accounts payable
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$
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11,452
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$
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22,833
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Accounts payable-affiliates
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4,306
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7,823
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Fair value of derivative liabilities
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835
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1,439
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Accrued liabilities and other
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8,476
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3,168
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Total current liabilities
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25,069
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35,263
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Commitments and contingencies (Note 9)
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Long-term debt
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256,934
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256,466
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Fair value of derivative liabilities
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267
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Asset retirement obligation
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2,593
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2,483
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Partners equity:
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Common unitholders (21,613,500 units issued and outstanding)
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(7,481
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)
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12,386
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Accumulated other comprehensive income (loss)
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(481
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)
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3,111
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Total limited partners equity
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(7,962
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)
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15,497
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Noncontrolling partners interest in Hiland Partners
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112,692
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125,851
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Total partners equity
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104,730
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141,348
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Total liabilities and partners equity
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$
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389,593
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$
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435,560
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The accompanying notes are an integral part of these
consolidated financial statements.
3
HILAND
HOLDINGS GP, LP
For the
Three and Nine Months Ended
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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(Unaudited)
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(In thousands, except per unit amounts)
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Revenues:
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Midstream operations
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Third parties
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$
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53,015
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$
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107,158
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$
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151,133
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$
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308,625
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Affiliates
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626
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7,390
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2,525
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10,433
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Compression services, affiliate
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1,205
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1,205
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3,615
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3,615
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Total revenues
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54,846
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115,753
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157,273
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322,673
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Operating costs and expenses:
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Midstream purchases (exclusive of items shown separately below)
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18,526
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45,616
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52,943
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139,258
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Midstream purchases affiliate (exclusive of items
shown separately below)
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11,740
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36,279
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35,538
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99,328
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Operations and maintenance
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7,736
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7,881
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23,216
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22,201
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Depreciation, amortization and accretion
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10,758
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9,842
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31,841
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28,513
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Property impairments
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20,500
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21,450
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Bad debt
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(7,799
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)
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304
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General and administrative
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3,217
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2,597
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11,649
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7,615
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Total operating costs and expenses
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72,477
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94,416
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176,637
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297,219
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Operating (loss) income
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(17,631
|
)
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21,337
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(19,364
|
)
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25,454
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Other income (expense):
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|
|
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Interest and other income
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|
10
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|
|
99
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|
92
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|
276
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|
Amortization of deferred loan costs
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(182
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)
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(169
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)
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(526
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)
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(493
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)
|
Interest expense
|
|
|
(2,728
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)
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|
|
(3,279
|
)
|
|
|
(7,777
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)
|
|
|
(9,915
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense), net
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(2,900
|
)
|
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(3,349
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)
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|
|
(8,211
|
)
|
|
|
(10,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(20,531
|
)
|
|
|
17,988
|
|
|
|
(27,575
|
)
|
|
|
15,322
|
|
Less: Noncontrolling partners interest in (loss) income of
Hiland Partners
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|
|
(8,152
|
)
|
|
|
6,800
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|
|
|
(9,762
|
)
|
|
|
4,402
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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Limited Partners interest in net (loss) income
|
|
$
|
(12,379
|
)
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|
$
|
11,188
|
|
|
$
|
(17,813
|
)
|
|
$
|
10,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Net (loss) income per limited partners unit
basic
|
|
$
|
(0.57
|
)
|
|
$
|
0.52
|
|
|
$
|
(0.82
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net (loss) income per limited partners unit
diluted
|
|
$
|
(0.57
|
)
|
|
$
|
0.52
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|
|
$
|
(0.82
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average limited partners units
outstanding basic
|
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|
21,608
|
|
|
|
21,603
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|
|
|
21,608
|
|
|
|
21,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding diluted
|
|
|
21,608
|
|
|
|
21,612
|
|
|
|
21,608
|
|
|
|
21,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
HILAND
HOLDINGS GP, LP
For the
Three and Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Net (loss) income
|
|
$
|
(20,531
|
)
|
|
$
|
17,988
|
|
|
$
|
(27,575
|
)
|
|
$
|
15,322
|
|
Closed derivative transactions reclassified to income
|
|
|
(1,969
|
)
|
|
|
1,395
|
|
|
|
(5,848
|
)
|
|
|
6,478
|
|
Change in fair value of derivatives
|
|
|
(1,143
|
)
|
|
|
13,219
|
|
|
|
(193
|
)
|
|
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
(23,643
|
)
|
|
|
32,602
|
|
|
|
(33,616
|
)
|
|
|
24,765
|
|
Less: Comprehensive (loss) income attributable to noncontrolling
interest in Hiland Partners
|
|
|
(9,415
|
)
|
|
|
12,717
|
|
|
|
(12,211
|
)
|
|
|
8,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to limited partners
|
|
$
|
(14,228
|
)
|
|
$
|
19,885
|
|
|
$
|
(21,405
|
)
|
|
$
|
16,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
HILAND
HOLDINGS GP, LP
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,575
|
)
|
|
$
|
15,322
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
31,724
|
|
|
|
28,411
|
|
Accretion of asset retirement obligation
|
|
|
117
|
|
|
|
102
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
Amortization of deferred loan cost
|
|
|
526
|
|
|
|
493
|
|
(Gain) loss on derivative transactions
|
|
|
(9
|
)
|
|
|
(3,685
|
)
|
Proceeds from settlement of derivative contracts
|
|
|
3,155
|
|
|
|
|
|
Unit based compensation
|
|
|
945
|
|
|
|
1,274
|
|
Bad debt
|
|
|
|
|
|
|
304
|
|
Gain on sale of assets
|
|
|
(3
|
)
|
|
|
(12
|
)
|
Increase in other assets
|
|
|
(57
|
)
|
|
|
(72
|
)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
5,991
|
|
|
|
(10,036
|
)
|
Accounts receivable affiliates
|
|
|
1,429
|
|
|
|
(4,145
|
)
|
Other current assets
|
|
|
996
|
|
|
|
(1,322
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(2,498
|
)
|
|
|
(2,813
|
)
|
Accounts payable affiliates
|
|
|
(3,517
|
)
|
|
|
480
|
|
Accrued liabilities and other
|
|
|
3,040
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
35,714
|
|
|
|
25,542
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(32,299
|
)
|
|
|
(37,164
|
)
|
Proceeds from disposals of property and equipment
|
|
|
12
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,287
|
)
|
|
|
(37,146
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
2,295
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
12,000
|
|
|
|
41,350
|
|
Payments on long-term borrowings
|
|
|
(11,000
|
)
|
|
|
|
|
Increase in deferred offering cost
|
|
|
|
|
|
|
(7
|
)
|
Debt issuance costs
|
|
|
(41
|
)
|
|
|
(356
|
)
|
Proceeds from Hiland Partners, LP unit options exercise
|
|
|
|
|
|
|
1,031
|
|
General partner contribution for issuance of restricted common
units and from conversion of vested phantom units
|
|
|
(3
|
)
|
|
|
|
|
Redemption of vested phantom units
|
|
|
|
|
|
|
(35
|
)
|
Forfeiture of unvested restricted common units
|
|
|
22
|
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(560
|
)
|
|
|
(369
|
)
|
Cash distributions to non-controlling partners of Hiland
Partners, LP
|
|
|
(1,803
|
)
|
|
|
(9,863
|
)
|
Cash distributions to unitholders
|
|
|
(2,162
|
)
|
|
|
(18,160
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,252
|
)
|
|
|
13,591
|
|
|
|
|
|
|
|
|
|
|
Increase for the period
|
|
|
2,175
|
|
|
|
1,987
|
|
Beginning of period
|
|
|
1,733
|
|
|
|
10,602
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
3,908
|
|
|
$
|
12,589
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
7,951
|
|
|
$
|
9,734
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
HILAND
HOLDINGS GP, LP
For the
Nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Partners
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Interest in
|
|
|
|
|
|
|
Common
|
|
|
Comprehensive
|
|
|
Hiland
|
|
|
|
|
|
|
Unitholders
|
|
|
Income (Loss)
|
|
|
Partners
|
|
|
Total
|
|
|
|
(Unaudited, in thousands)
|
|
|
Balance, January 1, 2009
|
|
$
|
12,386
|
|
|
$
|
3,111
|
|
|
$
|
125,851
|
|
|
$
|
141,348
|
|
Periodic cash distributions
|
|
|
(2,162
|
)
|
|
|
|
|
|
|
(1,803
|
)
|
|
|
(3,965
|
)
|
Unit based compensation
|
|
|
108
|
|
|
|
|
|
|
|
837
|
|
|
|
945
|
|
Distributions held in trust refunded to Hiland Partners on 2,750
forfeited unvested restricted common units
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
18
|
|
Other comprehensive income reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
(3,478
|
)
|
|
|
(2,370
|
)
|
|
|
(5,848
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
(114
|
)
|
|
|
(79
|
)
|
|
|
(193
|
)
|
Net loss
|
|
|
(17,813
|
)
|
|
|
|
|
|
|
(9,762
|
)
|
|
|
(27,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2009
|
|
$
|
(7,481
|
)
|
|
$
|
(481
|
)
|
|
$
|
112,692
|
|
|
$
|
104,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated
financial statement.
7
HILAND
HOLDINGS GP, LP
THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008
(in thousands, except unit information or unless otherwise
noted)
|
|
Note 1:
|
Organization,
Basis of Presentation and Principles of Consolidation
|
Unless the context requires otherwise, references to
we, us, our, Hiland
Holdings or the Partnership are intended to
mean the consolidated business and operations of Hiland Holdings
GP, LP. References to Hiland Partners are intended
to mean the consolidated business and operations of Hiland
Partners, LP and its subsidiaries.
Hiland Holdings GP, LP, a Delaware limited partnership, was
formed in May 2006 to own Hiland Partners GP, LLC, the general
partner of Hiland Partners, LP, and certain other common and
subordinated units in Hiland Partners. Hiland Partners GP, LLC
was formed in October 2004 to hold the 2% general partner
ownership interest in Hiland Partners and serve as its general
partner. Hiland Partners GP, LLC manages the operations of
Hiland Partners. In connection with the closing of our initial
public offering, all of the membership interests in Hiland
Partners GP, LLC were contributed to us.
Our general partner, Hiland Partners GP Holdings, LLC manages
our operations and activities, including, among other things,
paying our expenses and establishing the quarterly cash
distribution levels for our common units and reserves that our
general partner determines, in good faith, are necessary or
appropriate to provide for the conduct of our business, to
comply with applicable law, any of our debt instruments or other
agreements or to provide for future distributions to our
unitholders for any one or more of the upcoming four quarters.
Hiland Partners, a Delaware limited partnership, was formed in
October 2004 to acquire and operate certain midstream natural
gas plants, gathering systems and compression and water
injection assets located in the states of Oklahoma, North
Dakota, Wyoming, Texas and Mississippi that were previously
owned by Continental Gas, Inc. (CGI) and Hiland
Partners, LLC. Hiland Partners commenced operations on
February 15, 2005, and concurrently with the completion of
its initial public offering, CGI contributed a substantial
portion of its net assets to Hiland Partners. The transfer of
ownership of net assets from CGI to Hiland Partners represented
a reorganization of entities under common control and was
recorded at historical cost. CGI was formed in 1990 as a wholly
owned subsidiary of Continental Resources, Inc.
(CLR).
CGI operated in one segment, midstream, which involved the
purchasing, gathering, compressing, dehydrating, treating,
processing and marketing of natural gas and fractionating and
marketing of natural gas liquids, or NGLs. CGI historically
owned all of Hiland Partners natural gas gathering,
processing, treating and fractionation assets other than the
Worland, Bakken, Kinta Area, Woodford Shale and North Dakota
Bakken gathering systems. Hiland Partners, LLC historically
owned the Worland gathering system and compression services
assets, which Hiland Partners acquired on February 15,
2005, and the Bakken gathering system. Since its initial public
offering, Hiland Partners has operated in midstream and
compression services segments. On September 26, 2005,
Hiland Partners acquired Hiland Partners, LLC, which at such
time owned the Bakken gathering system, consisting of certain
southeastern Montana gathering assets, for $92.7 million,
$35.0 million of which was used to retire outstanding
Hiland Partners, LLC indebtedness. On May 1, 2006, Hiland
Partners acquired the Kinta Area gathering assets from Enogex
Gas Gathering, L.L.C., consisting of certain eastern Oklahoma
gas gathering assets, for $96.4 million. Hiland Partners
financed this acquisition with $61.2 million of borrowings
from its credit facility and $35.0 million of proceeds from
the issuance to Hiland Partners GP, LLC, its general partner, of
761,714 common units and 15,545 general partner equivalent
units, both at $45.03 per unit. Hiland Partners began
construction of the Woodford Shale gathering system in the first
quarter of 2007 and commenced initial
start-up
of
its operations in April 2007. Construction on the North Dakota
Bakken gathering system and processing plant began in October
2008 and became fully operational in May 2009. As of
September 30, 2009, Hiland Partners has invested
approximately $24.0 million in the North Dakota Bakken
gathering system.
8
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The unaudited financial statements for the three and nine months
ended September 30, 2009 and 2008 included herein have been
prepared pursuant to the rules and regulations of the United
States Securities and Exchange Commission (the SEC).
The interim financial statements reflect all adjustments, which
in the opinion of our management, are necessary for a fair
presentation of our results for the interim periods. Such
adjustments are considered to be of a normal recurring nature.
Subsequent events have been evaluated through November 8,
2009. Results of operations for the three and nine months ended
September 30, 2009 are not necessarily indicative of the
results of operations that will be realized for the year ending
December 31, 2009. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with
the consolidated financial statements and notes thereto included
in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008.
Principles
of Consolidation
Because we own the general partner of Hiland Partners, the
consolidated financial statements include our accounts, the
accounts of Hiland Partners GP, LLC and the accounts of Hiland
Partners and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Use of
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Concentration
and Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents and receivables. Hiland Partners places cash
and cash equivalents with high-quality institutions and in money
market funds. Hiland Partners derives its revenue from customers
primarily in the oil and gas and utility industries. These
industry concentrations have the potential to impact Hiland
Partners overall exposure to credit risk, either
positively or negatively, in that its customers could be
affected by similar changes in economic, industry or other
conditions. However, we believe that the credit risk posed by
this industry concentration is offset by the creditworthiness of
Hiland Partners customer base. Hiland Partners
portfolio of accounts receivable is comprised primarily of
mid-size to large domestic corporate entities. The
counterparties to Hiland Partners commodity based
derivative instruments as of September 30, 2009 are BP
Energy Company and Bank of Oklahoma, N.A. The counterparty to
Hiland Partners interest rate swap as of
September 30, 2009 is Wells Fargo Bank, N.A.
Fair
Value of Financial Instruments
Our financial instruments, which require fair value disclosure,
consist primarily of cash and cash equivalents, accounts
receivable, financial derivatives, accounts payable and
long-term debt. The carrying value of cash and cash equivalents,
accounts receivable and accounts payable are considered to be
representative of their respective fair values, due to the short
maturity of these instruments. Derivative instruments are
reported in the accompanying consolidated financial statements
at fair value. Fair value of our derivative instruments is
determined based on management estimates through utilization of
market data including forecasted forward natural gas and NGL
prices as a function of forward New York Mercantile Exchange
(NYMEX) natural gas and light crude prices and
forecasted forward interest rates as a function of forward
London Interbank Offered Rate (LIBOR) interest
rates. The fair value of long-term debt approximates its
carrying value due to the variable interest rate feature of such
debt.
9
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Interest
Rate Risk Management
Hiland Partners is exposed to interest rate risk on its variable
rate bank credit facility. Hiland Partners manages a portion of
the interest rate exposure by utilizing an interest rate swap to
convert a portion of variable rate debt into fixed rate debt.
The swap fixes the one month LIBOR rate at the indicated rates
for a specified amount of related debt outstanding over the term
of the swap agreement. Hiland Partners has elected to designate
the interest rate swap as a cash flow hedge for accounting
treatment. Accordingly, unrealized gains and losses relating to
the interest rate swap are recorded in accumulated other
comprehensive income until the related interest rate expense is
recognized in earnings. Any ineffective portion of the gain or
loss is recognized in earnings immediately.
Commodity
Risk Management
Hiland Partners engages in price risk management activities in
order to minimize the risk from market fluctuation in the prices
of natural gas and NGLs. To qualify as an accounting hedge, the
price movements in the commodity derivatives must be highly
correlated with the underlying hedged commodity. Gains and
losses related to commodity derivatives that qualify as
accounting hedges are recognized in income when the underlying
hedged physical transaction closes and are included in the
consolidated statement of operations as revenues from midstream
operations. Gains and losses related to commodity derivatives
that are not designated as accounting hedges or do not qualify
as accounting hedges are recognized in income immediately and
are included in revenues from midstream operations in the
consolidated statement of operations.
US GAAP requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position and measure those instruments at fair value. However,
if a derivative does qualify for hedge accounting, depending on
the nature of the hedge, changes in fair value can be offset
against the change in fair value of the hedged item through
earnings or recognized in accumulated other comprehensive income
until such time as the hedged item is recognized in earnings. To
qualify for cash flow hedge accounting, the cash flows from the
hedging instrument must be highly effective in offsetting
changes in cash flows due to changes in the underlying item
being hedged. In addition, all hedging relationships must be
designated, documented and reassessed periodically. Certain
normal purchases and normal sales contracts are not subject to
fair value measurement. Normal purchases and normal sales are
contracts that provide for the purchase or sale of something
other than a financial instrument or derivative instrument that
will be delivered in quantities expected to be used or sold by
the reporting entity over a reasonable period in the normal
course of business.
Hiland Partners derivative financial instruments that
qualify for hedge accounting are designated as cash flow hedges.
The cash flow hedge instruments hedge the exposure of
variability in expected future cash flows that is attributable
to a particular risk. The effective portion of the gain or loss
on these derivative instruments is recorded in accumulated other
comprehensive income in partners equity and reclassified
into earnings in the same period in which the hedged transaction
closes. The assets or liabilities related to the derivative
instruments are recorded on the balance sheet as fair value of
derivative assets or liabilities. Any ineffective portion of the
gain or loss is recognized in earnings immediately.
Long
Lived Assets
Hiland Partners evaluates its long-lived assets of identifiable
business activities for impairment when events or changes in
circumstances indicate, in managements judgment, that the
carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on
managements estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of
the assets. If impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying
value is greater than the fair value. For assets identified to
be disposed of in the future, the carrying value of these assets
is compared to the
10
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
estimated fair value less the cost to sell to determine if
impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events
or circumstances change.
When determining whether impairment of one or more of its
long-lived assets has occurred, Hiland Partners estimates the
undiscounted future cash flows attributable to the asset or
asset group. Estimates of future cash flows are based on
assumptions regarding the volumes of reserves providing asset
cash flow, future natural gas and NGL product prices, estimated
future operating and maintenance capital expenditures . The
amount of reserves and drilling activities are dependent in part
on natural gas and crude oil prices. Projections of reserves,
future commodity prices and operating and maintenance capital
expenditures are inherently subjective and contingent upon a
number of variable factors, including, but not limited to:
|
|
|
|
|
changes in general economic conditions in regions in which the
assets are located;
|
|
|
|
the availability and prices of NGLs and NGL products and
competing commodities;
|
|
|
|
the availability and prices of raw natural gas supply;
|
|
|
|
Hiland Partners ability to negotiate favorable marketing
agreements;
|
|
|
|
the risks that third party oil and gas exploration and
production activities will not occur or be successful;
|
|
|
|
Hiland Partners dependence on certain significant
customers and producers of natural gas; and
|
|
|
|
competition from other midstream service providers and
processors, including major energy companies.
|
Any significant variance in any of the above assumptions or
factors could materially affect Hiland Partners cash
flows, which could require Hiland Partners to record an
impairment one or more assets.
As a result of recent volume declines and projected future
volume declines at Hiland Partners Kinta Area gathering
system located in southeastern Oklahoma, Hiland Partners
recognized impairment charges of $20,500 in September 2009.
Additionally, as a result of volume declines at Hiland
Partners natural gas gathering systems located in Texas
and Mississippi, combined with significantly reduced natural gas
prices, Hiland Partners recognized impairment charges of $950 in
March 2009. No impairment charges were recognized during the
three and nine months ended September 30, 2008.
Net
Income (Loss) per Limited Partners Unit
Net income (loss) per limited partners unit is computed
based on the weighted-average number of common units outstanding
during the period. The computation of diluted net income (loss)
per limited partner unit further assumes the dilutive effect of
restricted units. Net income (loss) per limited partners
unit is computed by dividing net income (loss) applicable to
limited partners by both the basic and diluted weighted-average
number of limited partnership units outstanding.
Noncontrolling
Partners Interest in Hiland Partners
The noncontrolling partners interest in Hiland Partners
presented in partners equity on our consolidated balance
sheets as of September 30, 2009 and December 31, 2008
reflects the outside ownership interest of Hiland Partners. This
noncontrolling partners interest in Hiland Partners
presented as Minority interests in the mezzanine
section of the balance sheet at December 31, 2008 has been
reclassified to the partners equity section on the
consolidated balance sheet . The noncontrolling partners
interest in income (loss) of Hiland Partners is calculated by
multiplying the noncontrolling partners proportionate
ownership of limited partner units in Hiland Partners by the
limited partners allocation of Hiland Partners net
income (loss). Hiland Partners net income (loss) is
allocated to its limited partners and its general partner based
on the proportionate share of the cash distributions declared
for the period, with adjustments made for incentive
distributions
11
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
specifically allocated to its general partner. All amounts we
have received from Hiland Partners issuance and sale of
limited partner units have been recorded as increases to the
noncontrolling partners interest in Hiland Partners in the
partners equity section on the consolidated balance sheet.
Contributions
to Subsidiary
The Partnership directly and indirectly owns all of the equity
interests in Hiland Partners GP, LLC, the general partner of
Hiland Partners. Hiland Partners GP, LLC is required to make
contributions to Hiland Partners each time Hiland Partners
issues common units or restricted common units in order to
maintain its 2% general partner ownership in Hiland Partners.
Contributions for the three and nine months ended
September 30, 2009 and 2008 were insignificant.
Recent
Accounting Pronouncements
In September 2009, the FASB issued new authoritative accounting
guidance, effective for financial statements issued for interim
and annual periods ending after September 15, 2009, which
identifies the FASB Accounting Standards Codification
(Codification) as the authoritative source of GAAP
in the United States. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative
GAAP for SEC registrants. Codification is not intended to change
GAAP. The adoption of this new accounting guidance had no impact
on our financial statements and disclosures therein.
In May 2009, the FASB issued new authoritative accounting
guidance on subsequent events that establishes general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. This new accounting guidance is
effective for interim or annual periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB issued new authoritative accounting
guidance on interim disclosures about fair value of financial
instruments which expands the fair value disclosures required
for all financial instruments to interim periods. This new
guidance also requires entities to disclose in interim periods
the methods and significant assumptions used to estimate the
fair value of financial instruments. This new accounting
guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB revised the authoritative guidance
related to the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. Generally, assets acquired and liabilities assumed
in a business combination that arise from contingencies must be
recognized at fair value at the acquisition date. This guidance
was adopted January 1, 2009. As this guidance is applied
prospectively to business combinations with an acquisition date
on or after the date the guidance became effective, the impact
cannot be determined until the transactions occur. No such
transactions have occurred during 2009.
In April 2008, the FASB issued amended guidance on the factors
that an entity should consider in developing renewal or
extension assumptions used in determining the useful life of
recognized intangible assets, including goodwill. In determining
the useful life of an acquired intangible asset, this guidance
removes the requirement for an entity to consider whether
renewal of the intangible asset requires significant costs or
material modifications to the related arrangement and replaces
the previous useful life assessment criteria with a requirement
that an entity considers its own experience or market
participant assumptions in renewing similar arrangements. This
guidance was adopted effective January 1, 2009, and will
apply to future intangible assets acquired. We dont
believe the adoption will have a material impact on our
financial position, results of operations or cash flows.
12
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
In March 2008, the FASB amended and expanded the disclosure
requirements related to derivative instruments and hedging
activities to improve transparency in financial reporting by
requiring enhanced disclosures of an entitys derivative
instruments and hedging activities and their effects on the
entitys financial position, financial performance, and
cash flows. The revised guidance requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. This guidance was adopted effective
January 1, 2009 and did not have a material impact on our
financial statements and disclosures therein.
In March 2008, the FASB issued authoritative accounting guidance
which requires the calculation of a Master Limited
Partnerships (MLPs) net earnings per limited
partner unit for each period presented according to
distributions declared and participation rights in undistributed
earnings as if all of the earnings for that period had been
distributed. In periods with undistributed earnings above
specified levels, the calculation per the two-class method
results in an increased allocation of such undistributed
earnings to the general partner and a dilution of earnings to
the limited partners. This guidance was adopted effective
January 1, 2009 and did not have a significant impact on
our financial statements and disclosures therein.
In December 2007, the FASB revised the authoritative guidance
for business combinations which provides guidance for how the
acquirer recognizes and measures goodwill acquired in the
business combination or a gain from a bargain purchase, the
identifiable assets acquired, liabilities assumed and any
noncontrolling interest in the acquiree. This guidance also
determines what information to disclose to enable users to be
able to evaluate the nature and financial effects of the
business combination. This guidance was adopted effective
January 1, 2009 and will apply to future business
combinations.
In December 2007, the FASB issued authoritative guidance
clarifying that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.
This guidance requires the equity amount of consolidated net
income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the
consolidated income statement and that changes in a
parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted
for consistently and similarly as equity transactions.
Consolidated net income and comprehensive income are now
determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, this guidance establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. This guidance is effective for
fiscal years beginning on or after December 15, 2008, was
adopted effective January 1, 2009 and did not have a
material impact on our financial position, results of operations
or cash flows. Certain adjustments have been made to prior
period information to conform to current period presentation
related to our adoption of this guidance.
In February 2007, the FASB expanded guidance on fair value
measurements which expands opportunities to use fair value
measurement in financial reporting and permits entities to
choose to measure many financial instruments and certain other
items at fair value. This guidance was adopted effective
January 1, 2008, at which time no financial assets or
liabilities, not previously required to be recorded at fair
value by other authoritative literature, were designated to be
recorded at fair value. The adoption of this guidance did not
have any impact on our financial position, results of operations
or cash flows.
In September 2006, the FASB issued new authoritative accounting
guidance for fair value measurements, which defines fair value
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework
for measuring fair value in generally accepted accounting
principles (GAAP) such as fair value hierarchy used
to classify the source of information used in fair value
measurements (i.e., market based or non-market based)
13
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
and expands disclosure about fair value measurements based on
their level in the hierarchy. This guidance establishes a fair
value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value and defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
This guidance was adopted effective January 1, 2009 and did
not have a material impact on our financial statements or
disclosures therein.
|
|
Note 2:
|
Merger
Agreements
|
On November 3, 2009, the Partnership amended its merger
agreement with affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of the Partnership (other than certain
restricted common units owned by officers and employees) not
owned by Mr. Hamm, his affiliates or the Hamm family trusts
(the Hiland Holdings Merger). The amendment
increased the consideration payable to common unitholders of the
Partnership from $2.40 to $3.20 per common unit and extended the
end date under the merger agreement to December 11, 2009.
On the same day, Hiland Partners amended its merger agreement
with affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of Hiland Partners (other than certain
restricted common units owned by officers and employees) not
owned by the Partnership (the Hiland Partners
Merger). The amendment increased the consideration payable
to common unitholders of Hiland Partners from $7.75 to
$10.00 per common unit and extended the end date under the
merger agreement to December 11, 2009.
Upon consummation of the mergers, the common units of the Hiland
companies will no longer be publicly owned or publicly traded.
Conflicts committees comprised entirely of independent members
of the boards of directors of the general partners of the
Partnership and Hiland Partners separately determined that the
merger agreements, as amended, and the mergers are advisable,
fair to and in the best interests of the applicable Hiland
company and its public unitholders. In determining to make their
recommendations to the boards of directors, each conflicts
committee considered, among other things, the opinion received
from its respective financial advisor related to the fairness of
the increased merger consideration. Based on the recommendation
of its conflicts committee, the board of directors of the
general partner of each of the Partnership and Hiland Partners
has approved the applicable merger agreement and has
recommended, along with its respective conflicts committee, that
the public unitholders of the Partnership and Hiland Partners,
respectively, approve the applicable merger. Consummation of the
Hiland Holdings Merger is subject to certain conditions,
including the approval of holders of a majority of our
outstanding common units not owned by Mr. Hamm, his
affiliates and the Hamm family trusts, the absence of any
restraining order or injunction, and other customary closing
conditions. Additionally, the obligation of Mr. Hamm and
his affiliates to complete the Hiland Holdings Merger is
contingent upon the concurrent completion of the Hiland Partners
Merger, and the Hiland Partners Merger is subject to closing
conditions similar to those described above. There can be no
assurance that the Hiland Holdings Merger or any other
transaction will be approved or consummated.
In connection with amending the merger agreements, each Hiland
company adjourned its special meeting of unitholders until
December 4, 2009, to allow the unitholders of each Hiland
company additional time to consider the proposals to approve the
applicable merger agreement and merger. The Partnership and
Hiland Partners intend to file with the SEC a supplement to the
definitive joint proxy statement on Schedule 14A, which,
upon clearance by the SEC, the Hiland companies intend to mail
to all holders of record of the Hiland companies as of
September 9, 2009, the record date for the special
meetings. The definitive joint proxy statement on
Schedule 14A was filed with the SEC on September 11,
2009 and first mailed to unitholders on or around
September 16, 2009.
14
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Each of the Hiland companies had previously amended the
respective merger agreement between that Hiland company and
affiliates of Harold Hamm on October 26, 2009 to extend the
end date under the merger agreement from November 1 to
November 6. Those amendments were to provide the boards of
directors and conflicts committees of each of the Hiland
companies additional time to consider the proposals made by
Harold Hamm in letters delivered to the conflicts committees on
October 26, 2009, to increase the consideration payable to
common unitholders of the Partnership and Hiland Partners under
the respective merger agreements.
On July 10, 2009, the United States Federal Trade
Commission granted early termination of the waiting period under
the
Hart-Scott-Rodino
Act with respect to the Hiland Partners Merger.
|
|
Note 3:
|
Property
and Equipment and Asset Retirement Obligations
|
Property and equipment consisted of the following for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
295
|
|
|
$
|
295
|
|
Construction in progress
|
|
|
2,558
|
|
|
|
15,583
|
|
Midstream pipeline, plants and compressors
|
|
|
446,341
|
|
|
|
410,330
|
|
Compression and water injection equipment
|
|
|
19,421
|
|
|
|
19,391
|
|
Other
|
|
|
4,987
|
|
|
|
4,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473,602
|
|
|
|
450,220
|
|
Less: accumulated depreciation and amortization
|
|
|
147,953
|
|
|
|
101,061
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325,649
|
|
|
$
|
349,159
|
|
|
|
|
|
|
|
|
|
|
As a result of recent volume declines and projected future
volume declines at Hiland Partners Kinta Area gathering
system located in southeastern Oklahoma, Hiland Partners
recognized impairment charges consisting of
right-of-ways,
pipelines, compressors and related equipment of $18,854 in
September 2009. Additionally, as a result of volume declines at
Hiland Partners natural gas gathering systems located in
Texas and Mississippi, combined with significantly reduced
natural gas prices, Hiland Partners recognized impairment
charges of $950 in March 2009. Neither we nor Hiland Partners
incurred impairment charges during the nine months ended
September 30, 2008. During the three and nine months ended
September 30, 2009, we capitalized interest of $2 and $106,
respectively. We capitalized interest of $5 and $160 during the
three and nine months ended September 30, 2008,
respectively.
We recorded the fair value of liabilities for asset retirement
obligations in the periods in which they are incurred with
corresponding increases in the carrying amounts of the related
long-lived assets. The asset retirement costs are subsequently
allocated to expense using a systematic and rational method and
the liabilities are accreted to measure the change in liability
due to the passage of time. Hiland Partners asset
retirement obligations primarily apply to dismantlement and site
restoration of certain of Hiland Partners plants,
pipelines and compressor stations. Hiland Partners has evaluated
its asset retirement obligations as of September 30, 2009
and have determined that revisions in the carrying values are
not necessary at this time.
15
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table summarizes our activity related to asset
retirement obligations for the indicated period:
|
|
|
|
|
Asset retirement obligation, January 1, 2009
|
|
$
|
2,483
|
|
Less: obligation extinguished
|
|
|
(17
|
)
|
Add: additions on leased locations
|
|
|
10
|
|
Add: accretion expense
|
|
|
117
|
|
|
|
|
|
|
Asset retirement obligation, September 30, 2009
|
|
$
|
2,593
|
|
|
|
|
|
|
|
|
Note 4:
|
Intangible
Assets
|
Intangible assets consist of the acquired value of customer
relationships and existing contracts to purchase, gather and
sell natural gas and other NGLs and compression contracts, which
do not have significant residual value. The customer
relationships and the contracts are being amortized over their
estimated lives of ten years. We review intangible assets for
impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. If such a review should
indicate that the carrying amount of intangible assets is not
recoverable, we reduce the carrying amount of such assets to
fair value based on the discounted probable cash flows of the
intangible assets. As a result of recent volume declines and
projected future volume declines at Hiland Partners Kinta
Area gathering system located in southeastern Oklahoma, Hiland
Partners recognized impairment charges related to customer
relationships of $1,646 in September 2009. Neither we nor
Hiland Partners incurred impairment charges during the nine
months ended September 30, 2008.
Intangible assets consisted of the following for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gas sales contracts
|
|
$
|
32,564
|
|
|
$
|
32,564
|
|
Compression contracts
|
|
|
18,515
|
|
|
|
18,515
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,571
|
|
|
|
61,571
|
|
Less accumulated amortization
|
|
|
27,055
|
|
|
|
20,791
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
34,516
|
|
|
$
|
40,780
|
|
|
|
|
|
|
|
|
|
|
During each of the three months ended September 30, 2009
and 2008, we recorded $1,539 of amortization expense. During
each of the nine months ended September 30, 2009 and 2008,
we recorded $4,618 of amortization expense. Estimated aggregate
amortization expense for the remainder of 2009 is $1,477 and
$5,907 for each of the four succeeding fiscal years from 2010
through 2013 and a total of $9,411 for all years thereafter.
Interest
Rate Swap
Hiland Partners is subject to interest rate risk on its credit
facility and has entered into an interest rate swap to reduce
this risk. Hiland Partners entered into a one year interest rate
swap agreement with its counterparty on October 7, 2008 for
the period from January 2009 through December 2009 at a rate of
2.245% on a notional amount of $100.0 million. The swap
fixes the one month LIBOR rate at 2.245% for the notional amount
of debt outstanding over the term of the swap agreement. During
the three and nine months
16
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
ended September 30, 2009, one month LIBOR interest rates
were lower than the contracted fixed interest rate of 2.245%.
Consequently, for the three and nine months ended
September 30, 2009, Hiland Partners incurred additional
interest expense of $501 and $1,406, respectively, upon monthly
settlements of the interest rate swap agreement.
The following table provides information about Hiland
Partners interest rate swap at September 30, 2009 for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Notional
|
|
Interest
|
|
Asset
|
Description and Period
|
|
Amount
|
|
Rate
|
|
(Liability)
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 December 2009
|
|
$
|
100,000
|
|
|
|
2.245
|
%
|
|
$
|
(512
|
)
|
Commodity
Swaps
Hiland Partners has entered into certain derivative contracts
that are classified as cash flow hedges which relate to
forecasted natural gas sales in 2009 and 2010. Hiland Partners
entered into these financial swap instruments to hedge
forecasted natural gas sales against the variability in expected
future cash flows attributable to changes in commodity prices.
Under these swap agreements with its counterparties, Hiland
Partners receives a fixed price and pays a floating price based
on certain indices for the relevant contract period as the
underlying natural gas is sold.
Hiland Partners formally documents all relationships between
hedging instruments and the items being hedged, including its
risk management objective and strategy for undertaking the
hedging transactions. This includes matching the natural gas
futures, the sold fixed for floating price or
buy fixed for floating price contracts, to the
forecasted transactions. Hiland Partners assesses, both at the
inception of the hedge and on an ongoing basis, whether the
derivatives are highly effective in offsetting changes in the
fair value of hedged items. Highly effective is deemed to be a
correlation range from 80% to 125% of the change in cash flows
of the derivative in offsetting the cash flows of the hedged
transaction. If it is determined that a derivative is not highly
effective as a hedge or it has ceased to be a highly effective
hedge, due to the loss of correlation between changes in natural
gas reference prices under a hedging instrument and actual
natural gas prices, Hiland Partners will discontinue hedge
accounting for the derivative and subsequent changes in fair
value for the derivative will be recognized immediately into
earnings. Hiland Partners assesses effectiveness using
regression analysis and ineffectiveness using the dollar offset
method.
Derivatives are recorded on our consolidated balance sheet as
assets or liabilities at fair value. For derivatives qualifying
as hedges, the effective portion of changes in fair value is
recognized in partners equity as accumulated other
comprehensive income (loss) and reclassified to earnings when
the underlying hedged physical transaction closes. The
ineffective portions of qualifying derivatives are recognized in
earnings as they occur. Actual amounts that will be reclassified
will vary as a result of future changes in prices. Hedge
ineffectiveness is recorded in income while the hedge contract
is open and may increase or decrease until settlement of the
contract. Realized cash gains and losses on closed/settled
instruments and hedge ineffectiveness are reflected in the
contract month being hedged as an adjustment to our midstream
revenue.
On June 26, 2009, Hiland Partners unwound (cash settled) a
2010 coupled qualified hedge for a discounted net amount of
$3,155 and entered into a new cash flow swap agreement for the
same underlying forecasted natural gas sales which settle in the
same monthly periods in 2010. The coupled qualified hedge Hiland
Partners cash settled on June 26, 2009 consisted of a
receipt of $4,499 from one counterparty offset by a payment of
$1,344 to another counterparty. Of the $4,499 cash received,
$3,571 had previously been recognized as midstream revenues in
2008 as the hedge, at that time, did not qualify for hedge
accounting. The net unrecognized loss of $416 has been recorded
to accumulated other comprehensive income and will be recorded
as reductions in midstream revenues as the hedged transactions
settle in 2010. Under the terms of the
17
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
new derivative contract, Hiland Partners receives a fixed price
of $5.08 and pays a floating CIG index price for the same
relevant volumes and contract period as the underlying natural
gas is sold.
On October 1, 2009, Hiland Partners entered into a
financial swap agreement related to forecasted natural gas sales
in 2010 whereby Hiland Partners receives a fixed price and pays
a floating price based on NYMEX Henry Hub pricing for the
relevant contract period as the underlying natural gas is sold.
This swap agreement with BP Energy Company replaces a previous
swap agreement Hiland Partners entered into with Bank of
Oklahoma, N.A. on May 27, 2008. The terms of the new swap
agreement are identical to the May 27, 2008 swap agreement.
The new swap agreement is coupled with a derivative contract
entered into on January 13, 2009 whereby Hiland Partners
receives a floating NYMEX Henry Hub index price less a
differential of $2.13 and pays a CIG index price for the same
relevant volumes and contract period as the underlying natural
gas related to the October 1, 2009 derivative contract is
sold, qualifying the coupled agreements for hedge accounting.
Presented in the table below is information related to Hiland
Partners derivatives for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net gains (losses) on closed/settled transactions reclassified
from (to) accumulated other comprehensive income
|
|
$
|
1,969
|
|
|
$
|
(1,395
|
)
|
|
$
|
5,848
|
|
|
$
|
(6,478
|
)
|
Increases (decreases) in fair values of open derivatives
recorded to (from) accumulated other comprehensive income
|
|
$
|
(1,143
|
)
|
|
$
|
13,219
|
|
|
$
|
(193
|
)
|
|
$
|
2,965
|
|
Unrealized non-cash gains (losses) on ineffective portions of
qualifying derivative transactions
|
|
$
|
(238
|
)
|
|
$
|
133
|
|
|
$
|
9
|
|
|
$
|
128
|
|
Unrealized non-cash gains on non-qualifying derivatives
|
|
$
|
|
|
|
$
|
5,487
|
|
|
$
|
|
|
|
$
|
3,557
|
|
At September 30, 2009, Hiland Partners accumulated
other comprehensive income (loss) was $(808). Of this amount,
Hiland Partners anticipates $1,786 will be reclassified to
earnings during the next twelve months and $(2,594) will be
reclassified to earnings in subsequent periods.
The fair value of derivative assets and liabilities are as
follows for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of derivative assets current
|
|
$
|
3,860
|
|
|
$
|
6,851
|
|
Fair value of derivative assets long term
|
|
|
608
|
|
|
|
7,141
|
|
Fair value of derivative liabilities current
|
|
|
(835
|
)
|
|
|
(1,439
|
)
|
Fair value of derivative liabilities long term
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivatives
|
|
$
|
3,366
|
|
|
$
|
12,553
|
|
|
|
|
|
|
|
|
|
|
The terms of Hiland Partners derivative contracts
currently extend as far as December 2010. At September 30,
2009, the counterparties to Hiland Partners
commodity-based derivative instruments were BP Energy
Company and Bank of Oklahoma, N.A. Effective October 1,
2009, the counterparty to Hiland Partners
commodity-based derivative contracts is BP Energy Company. The
counterparty to Hiland Partners interest rate swap is
Wells Fargo Bank, N.A.
18
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table provides information about Hiland
Partners commodity derivative instruments at
September 30, 2009 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Fair Value
|
|
Description and Production Period
|
|
Volume
|
|
|
Price
|
|
|
Asset
|
|
|
|
(MMBtu)
|
|
|
(per MMBtu)
|
|
|
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 September 2010
|
|
|
2,136,000
|
|
|
$
|
6.87
|
|
|
$
|
3,537
|
|
October 2010 December 2010
|
|
|
534,000
|
|
|
$
|
6.73
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6:
|
Fair
Value Measurements
|
We adopted FASB authoritative accounting guidance on fair value
measurement beginning in the first quarter of 2008. We adopted
amended guidance for nonfinancial assets and nonfinancial
liabilities measured at fair value, except those that are
recognized or disclosed on a recurring basis (at least annually)
effective January 1, 2009, which applies to nonfinancial
assets and liabilities measured at fair value in a business
combination; impaired properties, plants and equipment;
intangible assets and goodwill; and initial recognition of asset
retirement obligations and restructuring costs for which we use
fair value. The adopted fair value guidance defines fair value
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date and establishes a framework
for measuring fair value in GAAP such as fair value hierarchy
used to classify the source of information used in fair value
measurements (i.e., market based or non-market based) and
expands disclosure about fair value measurements based on their
level in the hierarchy. The adopted fair value guidance further
establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The fair value
hierarchy defines three levels of inputs that may be used to
measure fair value. Level 1 refers to assets that have
observable market prices, level 2 assets do not have an
observable price but do have inputs that are based
on such prices in which components have observable data points
and level 3 refers to assets in which one or more of the
inputs do not have observable prices and calibrated model
parameters, valuation techniques or managements
assumptions are used to derive the fair value.
US GAAP requires derivatives and other financial instruments be
measured at fair value at initial recognition and for all
subsequent periods. We use the fair value methodology outlined
to value assets and liabilities for our outstanding fixed price
cash flow swap derivative contracts. Valuations of our natural
gas derivative contracts are based on published forward price
curves for natural gas and, as such, are defined as Level 2
fair value hierarchy assets and liabilities. We value our
interest rate-based derivative on a comparative
mark-to-market
value received from our counterparty and, as such, is defined as
Level 3. The following table represents the fair value
hierarchy for Hiland Partners assets and liabilities
measured at fair value on a recurring basis at
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Commodity based derivative assets
|
|
$
|
|
|
|
$
|
4,468
|
|
|
$
|
|
|
|
$
|
4,468
|
|
Commodity based derivative liabilities
|
|
|
|
|
|
|
(590
|
)
|
|
|
|
|
|
|
(590
|
)
|
Interest based derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
(512
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
3,878
|
|
|
$
|
(512
|
)
|
|
$
|
3,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table provides a summary of changes in the fair
value of Hiland Partners Level 3 interest rate-based
derivatives for the nine months ended September 30, 2009:
|
|
|
|
|
Balance, January 1, 2009
|
|
$
|
(1,439
|
)
|
Cash settlements from other comprehensive income
|
|
|
1,406
|
|
Change in fair value of derivative
|
|
|
(479
|
)
|
|
|
|
|
|
Balance, September 30, 2009
|
|
$
|
(512
|
)
|
|
|
|
|
|
Hiland Partners reviews properties for impairment when events
and circumstances indicate a possible decline in the
recoverability of the carrying value of such property. Hiland
Partners compares each propertys estimated expected future
cash flows to the carrying amount of the property to determine
if the carrying amount is recoverable. If the carrying amount of
the property exceeds its estimated undiscounted future cash
flows, the carrying amount of the property is reduced to its
estimated fair value. Fair value may be estimated using
comparable market data, a discounted cash flow method, or a
combination of the two. In the discounted cash flow method,
estimated future cash flows are based on managements
expectations for the future and include estimates of future oil
and gas reserves, commodity prices based on commodity futures
price strips as of the date of the estimate, operating and
development costs, and a risk-adjusted discount rate.
As a result of recent volume declines and projected future
volume declines at Hiland Partners Kinta Area gathering
system located in southeastern Oklahoma, Hiland Partners
determined that tangible and intangible carrying amounts
totaling approximately $20,500 were not recoverable from future
cash flows and, therefore, were impaired at September 30,
2009. Hiland Partners reduced the carrying amounts of these
nonrecurring level 3 hierarchy assets to their estimated
fair values of approximately $72,600 by using a combination of
estimated future cash flows and comparable market data.
Additionally, as a result of volume declines combined with
significantly reduced natural gas prices, Hiland Partners
determined that carrying amounts totaling approximately $950
related to natural gas gathering systems located in Texas and
Mississippi were not recoverable from future cash flows and,
therefore, were impaired at March 31, 2009. Hiland Partners
reduced the carrying amounts of these nonrecurring level 3
hierarchy assets to their estimated fair values of approximately
$249 by using the discounted cash flow method described above,
as comparable market data was not available.
Long-term debt consisted of the following for the indicated
periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Hiland Partners-revolving credit facility
|
|
$
|
253,064
|
|
|
$
|
252,064
|
|
Hiland Holdings-revolving credit facility
|
|
|
3,000
|
|
|
|
705
|
|
Capital lease obligations
|
|
|
4,492
|
|
|
|
5,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,556
|
|
|
|
257,820
|
|
Less current portion:
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
622
|
|
|
|
649
|
|
Hiland Holdings-revolving credit facility
|
|
|
3,000
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
256,934
|
|
|
$
|
256,466
|
|
|
|
|
|
|
|
|
|
|
20
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Hiland
Partners Credit Facility
Hiland Partners borrowing capacity under its senior secured
revolving credit facility, as amended, is $300.0 million
consisting of a $291.0 million senior secured revolving
credit facility to be used for funding acquisitions and other
capital expenditures, issuance of letters of credit and general
corporate purposes (the Acquisition Facility) and a
$9.0 million senior secured revolving credit facility to be
used for working capital and to fund distributions (the
Working Capital Facility).
In addition, Hiland Partners senior secured revolving credit
facility provides for an accordion feature, which permits Hiland
Partners, if certain conditions are met, to increase the size of
the Acquisition Facility by up to $50.0 million and allows
for the issuance of letters of credit of up to
$15.0 million in the aggregate. The credit facility will
mature in May 2011. At that time, the agreement will terminate
and all outstanding amounts thereunder will be due and payable.
Hiland Partners senior secured revolving credit facility
requires Hiland Partners to meet certain financial tests,
including a maximum consolidated funded debt to EBITDA covenant
ratio of 4.0 to 1.0 as of the last day of any fiscal quarter;
provided that in the event that Hiland Partners makes certain
permitted acquisitions or capital expenditures, this ratio may
be increased to 4.75 to 1.0 for the three fiscal quarters
following the quarter in which such permitted acquisition or
capital expenditure occurs. Hiland Partners met the permitted
capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the ratio to
4.75 to 1.0 on March 31, 2009 for the quarters ended
March 31, 2009, June 30, 2009 and September 30,
2009. During this
step-up
period, the applicable margin with respect to loans under the
credit facility increases by 35 basis points per annum and
the unused commitment fee increases by 12.5 basis points
per annum. The ratio will revert back to 4.0 to 1.0 for the
quarter ended December 31, 2009. If commodity prices and
inlet natural gas volumes do not improve above the current
forward prices and expected inlet natural gas volumes for the
fourth quarter of 2009, the Partnership could be in violation of
the maximum consolidated funded debt to EBITDA covenant ratio as
early as December 31, 2009, unless this ratio is amended,
Hiland Partners receives an infusion of equity capital, Hiland
Partners debt is restructured or Hiland Partners is able
to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, Hiland Partners expects that any solution will
require the assessment of fees and increased rates, the infusion
of additional equity capital or the incurrence of subordinated
indebtedness by Hiland Partners and the suspension of
distributions for a certain period of time. There can be no
assurance that any such agreement will be reached with the
lenders, that any required equity or debt financing will be
available to Hiland Partners, or that Hiland Partners will have
sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
Hiland Partners obligations under the credit facility are
secured by substantially all of its assets and guaranteed by
Hiland Partners, and all of its subsidiaries, other than Hiland
Operating, LLC, its operating company, which is the borrower
under the credit facility.
Indebtedness under Hiland Partners credit facility will
bear interest, at its option, at either (i) an Alternate
Base Rate plus an applicable margin ranging from 50 to
125 basis points per annum or (ii) LIBOR plus an
applicable margin ranging from 150 to 225 basis points per
annum based on its ratio of consolidated funded debt to EBITDA.
The Alternate Base Rate is a rate per annum equal to the
greatest of (a) the Prime Rate in effect on such day,
(b) the base CD rate in effect on such day plus 1.50% and
(c) the Federal Funds effective rate in effect on such day
plus
1
/2
of 1%. Hiland Partners has elected for the indebtedness to bear
interest at LIBOR plus the applicable margin. A letter of credit
fee will be payable for the aggregate amount
21
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
of letters of credit issued under the credit facility at a
percentage per annum equal to 1.0%. An unused commitment fee
ranging from 25 to 50 basis points per annum based on
Hiland Partners ratio of consolidated funded debt to
EBITDA will be payable on the unused portion of the credit
facility. During the
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At September 30, 2009,
the interest rate on outstanding borrowings from Hiland
Partners credit facility was 2.87%.
Hiland Partners is subject to interest rate risk on its credit
facility and has entered into an interest rate swap to reduce
this risk. See Note 5 Derivatives for a
discussion of Hiland Partners interest rate swap.
The credit facility prohibits Hiland Partners from making
distributions to unitholders if any default or event of default,
as defined in the credit facility, has occurred and is
continuing or would result from such distributions. In addition,
the credit facility contains various covenants that limit, among
other things, subject to certain exceptions and negotiated
baskets, Hiland Partners ability to incur
indebtedness, grant liens, make certain loans, acquisitions and
investments, make any material changes to the nature of its
business, amend its material agreements, including its Omnibus
Agreement, which contains non-compete and indemnity provisions
with affiliates, or enter into a merger, consolidation or sale
of assets.
The credit facility defines EBITDA as Hiland Partners
consolidated net income (loss), plus income tax expense,
interest expense, depreciation, amortization and accretion
expense, amortization of intangibles and organizational costs,
non-cash unit based compensation expense, and adjustments for
non-cash gains and losses on specified derivative transactions
and for other extraordinary or non-recurring items.
The credit facility limits distributions to Hiland
Partners unitholders to available cash, as defined by the
agreement, and borrowings to fund such distributions are only
permitted under the revolving working capital facility. The
revolving working capital facility is subject to an annual
clean-down period of 15 consecutive days in which
the amount outstanding under the revolving working capital
facility is reduced to zero.
As of September 30, 2009, Hiland Partners had
$253.1 million outstanding under this credit facility and
was in compliance with its financial covenants. Hiland
Partners EBITDA to interest expense ratio was 4.93 to 1.0
and its consolidated funded debt to EBITDA ratio was 4.50 to 1.0.
Hiland
Holdings Credit Facility
On September 25, 2006, concurrently with the closing of our
initial public offering, we entered into a three-year
$25.0 million senior secured credit facility. Pursuant to
the terms of the agreement, we elected to reduce the commitment
level on the credit facility to $10.0 million effective
May 15, 2009 and we elected to further reduce the
commitment level on the credit facility to $3.0 million on
August 7, 2009. Concurrently with the reduction of the
commitment level to $3.0 million, the existing lenders
under the credit facility assigned their interests in the
facility to a new lender and we entered into a first amended and
restated senior secured credit agreement with The Security
National Bank of Enid. The credit facility is secured by all of
our ownership interests in Hiland Partners and its general
partner, other than the 2% general partner interest and the
incentive distribution rights. The credit facility will mature
on December 31, 2009, at which time all outstanding amounts
thereunder become due and payable.
Indebtedness under the credit facility bears interest at the
prime rate plus 1% per annum, but in no event less than 5% per
annum, to be adjusted as changes occur in the prime rate. At
September 30, 2009, the interest rate on outstanding
borrowings from our credit facility was 5.0%.
The credit facility contains several covenants that, among other
things, require the maintenance of a
debt-to-worth
ratio not to be greater than 1.25 to 1.0 and require financial
reports to be submitted periodically. The credit facility also
contains various covenants that limit, among other things,
subject to certain exceptions, our ability to grant liens, enter
into agreements restricting our ability to grant liens on our
assets or amend the
22
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
credit facility, make certain loans, acquisitions and
investments or enter into a merger, consolidation or sale of
assets.
The amount we may borrow under the credit facility is limited to
the lesser of: (i) 50% of the sum of the value of the
Hiland Partners common and subordinated units and (ii) the
maximum available amount of the credit facility (currently
$3.0 million). For purposes of this calculation, the value
of (i) the Hiland Partners common units on any date shall
be the closing price for such units as reflected on the NASDAQ
National Market on any date and (ii) the Hiland Partners
subordinated units on any date shall be deemed to equal 85% of
the value of the Hiland Partners common units on such date. At
September 30, 2009, the borrowing base was
$3.0 million.
As of September 30, 2009, we had $3.0 million
outstanding under this credit facility and were in compliance
with our
debt-to-worth
covenant ratio . The outstanding $3.0 million at
September 30, 2009, which matures on December 31,
2009, is included in accrued liabilities and other in the
balance sheet. Our
debt-to-worth
covenant ratio was 0.80 to 1.0 at September 30, 2009.
On November 3, 2009, we entered into a $1.5 million
term promissory note agreement with Harold Hamm, Chairman of our
general partner and, together with affiliates of Mr. Hamm,
majority owner of the Partnership. The note agreement matures on
December 31, 2009, at which time all outstanding amounts
thereunder become due and payable. The note agreement is secured
by all of our ownership interests in Hiland Partners and its
general partner, other than the 2% general partner interest and
the incentive distribution rights, but is subordinate in
security to the first amended and restated senior secured credit
agreement. Indebtedness under the note agreement bears interest
at the prime rate plus 1% per annum, but in no event less than
5% per annum.
Capital
Lease Obligations
Hiland Partners is obligated under two separate capital lease
agreements entered into with respect to its Bakken and Badlands
gathering systems in the third quarter of 2007. Under the terms
of a capital lease agreement for a rail loading facility and an
associated products pipeline at its Bakken gathering system,
Hiland Partners is repaying a counterparty a predetermined
amount over a period of eight years. Once fully paid, title to
the leased assets will transfer to Hiland Partners no later than
the end of the eight-year period commencing from the inception
date of the lease. Hiland Partners also incurred a capital lease
obligation to a counterparty for the aid to construct several
electric substations at its Badlands gathering system which, by
agreement, is being repaid in equal monthly installments over a
period of five years.
During the three and nine months ended September 30, 2009,
Hiland Partners made principal payments of $210 and $560,
respectively, on the above described capital lease obligations.
The current portion of the capital lease obligations presented
in the table above is included in accrued liabilities and other
in the balance sheet.
|
|
Note 8:
|
Share-Based
Compensation
|
Hiland
Holdings GP, LP Long Term Incentive Plan
Hiland Partners GP Holdings, LLC, the general partner of Hiland
Holdings, adopted the Hiland Holdings GP, LP Long-Term Incentive
Plan for its employees and directors of its general partner and
employees of its affiliates. The long-term incentive plan
consists of three components: unit options, restricted units and
phantom units. The long-term incentive plan limits the number of
units that are permitted to be delivered pursuant to awards to
2,160,000 units. The plan is administered by the board of
directors of our general partner or the compensation committee
of the board of directors of our general partner. The plan will
expire upon the first to occur of its termination by the board
of directors or the compensation committee, the date when no
units
23
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
remain available under the plan for awards or the tenth
anniversary of the date the plan is approved by our unitholders.
Awards then outstanding will continue pursuant to the terms of
their grants.
The board of directors of our general partner and the
compensation committee of the board may terminate or amend the
long-term incentive plan at any time with respect to any units
for which a grant has not yet been made. Our board of directors
and the compensation committee of the board also have the right
to alter or amend the long-term incentive plan or any part of
the plan from time to time, including increasing the number of
units that may be granted subject to unitholder approval as may
be required by applicable law or stock exchange rules. However,
no change in any outstanding grant may be made that would
materially reduce the benefits of the participant without the
consent of the participant. Restricted common units granted vest
and become exercisable in one-fourth increments on the
anniversary of the grant date over four years. A restricted unit
is a common unit that is subject to forfeiture, and upon
vesting, the grantee receives a common unit that is not subject
to forfeiture. Distributions on unvested restricted common units
are held in trust by our general partner until the units vest,
at which time the distributions are distributed to the grantee.
Each non-employee board member of Hiland Partners GP Holdings,
LLC received an additional 1,000 restricted common units on each
anniversary date of the initial reward with the exception of the
anniversary date on September 25, 2009. We issued no
restricted units during the three and nine months ended
September 30, 2009. During the three months ended
September 30, 2009, a total of 6,000 restricted common
units issued to non-employee board members of our general
partner in 2006, 2007 and 2008 vested and were converted into
common units. Non-cash unit based compensation expense related
to restricted units issued is to be recognized over their
respective four-year vesting period on the graded vesting
attribution method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
Unvested at January 1, 2009
|
|
|
16,500
|
|
|
$
|
22.52
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(6,000
|
)
|
|
$
|
22.25
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009
|
|
|
10,500
|
|
|
$
|
22.67
|
|
|
|
|
|
|
|
|
|
|
We recorded non-cash compensation expense related to the
restricted units of $36 and $108 for the three and nine months
ended September 30, 2009, respectively, and $38 and $115
for the three and nine months ended September 30, 2008,
respectively. We will record additional non-cash unit based
compensation expense of $109 over the next four years.
Hiland
Partners, LP Long Term Incentive Plan
Hiland Partners GP, LLC, the general partner of Hiland Partners,
adopted the Hiland Partners, LP Long-Term Incentive Plan for its
employees and directors of its general partner and employees of
its affiliates. The long-term incentive plan currently permits
an aggregate of 680,000 of Hiland Partners common units to be
issued with respect to unit options, restricted units and
phantom units granted under the plan. No more than 225,000 of
the 680,000 common units may be issued with respect to vested
restricted or phantom units. The plan is administered by the
compensation committee of Hiland Partners GP, LLCs board
of directors. The plan will continue in effect until the
earliest of (i) a date determined by the board of directors
of the general partner; (ii) the date that common units are
no longer available for payment of awards under the plan; or
(iii) the tenth anniversary of the plan.
24
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Hiland Partners GP, LLCs board of directors or
compensation committee may, in their discretion, terminate,
suspend or discontinue the long-term incentive plan at any time
with respect to any units for which a grant has not yet been
made. Hiland Partners GP, LLCs board of directors or its
compensation committee also has the right to alter or amend the
long-term incentive plan or any part of the plan from time to
time, including increasing the number of units that may be
granted, subject to unitholder approval if required by the
exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would
materially impair the rights of the participant without the
consent of the participant. Under the unit option grant
agreement, granted options of common units vest and become
exercisable in one-third increments on the anniversary of the
grant date over three years. Vested options are exercisable
within the options contractual life of ten years after the
grant date. Restricted common units granted vest and become
exercisable in one-fourth increments on the anniversary of the
grant date over four years. A restricted unit is a common unit
that is subject to forfeiture, and upon vesting, the grantee
receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted common units are held in
trust by Hiland Partners general partner until the units
vest, at which time the distributions are distributed to the
grantee. Granted phantom common units are generally more
flexible than restricted units and vesting periods and
distribution rights may vary with each grant. A phantom unit is
a common unit that is subject to forfeiture and is not
considered issued until it vests. Upon vesting, holders of
phantom units will receive (i) a common unit that is not
subject to forfeiture, cash in lieu of the delivery of such unit
equal to the fair market value of the unit on the vesting date,
or a combination thereof, at the discretion of Hiland
Partners general partners board of directors and
(ii) the distributions held in trust, if applicable,
related to the vested units.
Phantom Units.
On August 8, 2009, 1,875
phantom units awarded to our Chief Operations Officer in August
2008 vested, of which 1,494 were converted to common units and
381 were redeemed.
The following table summarizes information about Hiland
Partners phantom units for the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value at
|
|
|
|
|
|
|
at Grant
|
|
|
Redemption
|
|
Phantom Units
|
|
Units
|
|
|
Date ($)
|
|
|
Date ($)
|
|
|
Unvested at January 1, 2009
|
|
|
50,794
|
|
|
$
|
47.74
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and converted or redeemed
|
|
|
(8,250
|
)
|
|
$
|
49.34
|
|
|
$
|
7.40
|
|
Forfeited
|
|
|
(5,050
|
)
|
|
$
|
45.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009
|
|
|
37,494
|
|
|
$
|
47.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2009,
Hiland Partners incurred non-cash unit based compensation
expense of $189 and $652, respectively, related to phantom
units. During the three and nine months ended September 30,
2008, Hiland Partners incurred non-cash unit based compensation
expense of $297 and $877, respectively, related to phantom
units. Hiland Partners will recognize additional expense of $803
over the next four years, and the additional expense is to be
recognized over a weighted average period of 2.2 years.
Restricted Units.
Each non-employee board
member of Hiland Partners GP, LLC received an additional 1,000
restricted common units on each anniversary date of the initial
reward with the exception of the anniversary date on
August 10, 2009. Hiland Partners issued no restricted units
during the three and nine months ended September 30, 2009
During the three months ended September 30, 2009, a total
of 6,000 restricted common units issued to non-employee board
members of our general partner in 2005, 2006, 2007 and 2008
vested and were converted into common units. Non-cash unit based
compensation expense related to restricted units issued is to be
recognized over their respective four-year vesting period on the
graded vesting attribution method.
25
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table summarizes information about Hiland Partners
restricted units for the nine months ended September 30,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
per Unit
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
Unvested at January 1, 2009
|
|
|
18,500
|
|
|
$
|
48.73
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(6,000
|
)
|
|
$
|
44.29
|
|
Forfeited
|
|
|
(4,250
|
)
|
|
$
|
47.56
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009
|
|
|
8,250
|
|
|
$
|
52.56
|
|
|
|
|
|
|
|
|
|
|
Non-cash unit based compensation expense related to Hiland
Partners restricted units was $46 and $183 for the three and
nine months ended September 30, 2009, respectively, and was
$91 and $258 for the three and nine months ended
September 30, 2008, respectively. As of September 30,
2009, there was $166 of total unrecognized cost related to
Hiland Partners unvested restricted units. This cost is to be
recognized over a weighted average period of 2.1 years.
Unit Options.
At September 30, 2009, all
common unit options awarded by Hiland Partners have vested. The
weighted average exercise price of 33,336 outstanding
exercisable common unit options at September 30, 2009 is
$37.79 per unit, and such common units have a weighted average
remaining contractual term of 6.2 years. Non-cash unit
based compensation expense related to the unit options was
insignificant for the three and nine months ended
September 30, 2009 and 2008, respectively.
|
|
Note 9:
|
Commitments
and Contingencies
|
We maintain a defined contribution retirement plan for our
employees under which we make discretionary contributions to the
plan based on a percentage of eligible employees
compensation. Contributions to the plan are 5.0% of eligible
employees compensation and resulted in expense for the
three months ended September 30, 2009 and 2008 of $100 and
$85, respectively and for the nine months ended
September 30, 2009 and 2008 was $290 and $240, respectively.
We maintain our health and workers compensation insurance
through third-party providers. Property and general liability
insurance is also maintained through third-party providers with
a $100 deductible on each policy.
The operation of pipelines, plants and other facilities for
gathering, compressing, treating, or processing natural gas,
NGLs and other products is subject to stringent and complex laws
and regulations pertaining to health, safety and the
environment. Our management believes that compliance with
federal, state or local environmental laws and regulations will
not have a material adverse effect on our business, financial
position or results of operations.
Although there are no significant regulatory proceedings in
which we are currently involved, periodically we may be a party
to regulatory proceedings. The results of regulatory proceedings
cannot be predicted with certainty; however, our management
believes that we presently do not have material potential
liability in connection with regulatory proceedings that would
have a significant financial impact on our consolidated
financial condition, results of operations or cash flows.
Hiland Partners leases certain equipment, vehicles and
facilities under operating leases, most of which contain annual
renewal options. We and Hiland Partners also lease office space
from a related entity. See Note 11 Related Party
Transactions. Under these lease agreements, rent expense
was $437 and $731,
26
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
respectively, for the three months ended September 30, 2009
and 2008, respectively and $2,031 and $1,983 for the nine months
ended September 30, 2009 and 2008, respectively.
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings
Merger. These lawsuits are as follows: (i)
Robert
Pasternack v. Hiland Partners, LP et al.
, In the Court
of Chancery of the State of Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Partners, the general partner of each of the Partnership and
Hiland Partners, and the members of the board of directors of
each of the Partnership and Hiland Partners. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an Amended
Class Action Complaint and a motion to enjoin the mergers.
This Amended Class Action Complaint alleges, among other
things, that (i) the original consideration and revised
consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Partners that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. On August 13, 2009, the Partnership, Hiland
Partners and certain individual defendants moved to dismiss the
claims added in the July 31, 2009 Amended Class Action
Complaint. The plaintiffs moved to expedite proceedings on
September 4, 2009. On September 4, 2009, the
plaintiffs filed a motion to expedite the proceedings. On
September 9, 2009, the Delaware Chancery Court requested
that the defendants file a response to plaintiffs motion
that same day and set a hearing on plaintiffs motion for
September 11, 2009. Defendants responded to
plaintiffs motion as ordered by the Court, and, following
the hearing on September 11, 2009, plaintiffs motion
to expedite the proceedings was denied.
We cannot predict the outcome of these lawsuits, or others, nor
can we predict the amount of time and expense that will be
required to resolve the lawsuits.
|
|
Note 10:
|
Significant
Customers and Suppliers
|
All of Hiland Partners revenues are domestic revenues. The
following table presents Hiland Partners top midstream
customers as a percent of total revenue for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Customer 1
|
|
|
24
|
%
|
|
|
5
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
Customer 2
|
|
|
18
|
%
|
|
|
7
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
Customer 3
|
|
|
12
|
%
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
9
|
%
|
Customer 4
|
|
|
7
|
%
|
|
|
18
|
%
|
|
|
9
|
%
|
|
|
13
|
%
|
Customer 5
|
|
|
2
|
%
|
|
|
14
|
%
|
|
|
2
|
%
|
|
|
10
|
%
|
27
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Customer 1 above is SemStream, L.P., a subsidiary of SemGroup,
L.P., who filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code on
July 22, 2008. In March 2009, Hiland Partners received a
good faith deposit from SemStream, L.P. for $3,000 in lieu of
renewing a letter of credit to our benefit. The $3,000 deposit
received is included in accrued liabilities and other in the
balance sheet.
All of Hiland Partners purchases are from domestic
sources. The following table presents Hiland Partners top
midstream suppliers as a percent of total midstream purchases
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Supplier 1 (affiliated company)
|
|
|
39
|
%
|
|
|
45
|
%
|
|
|
41
|
%
|
|
|
42
|
%
|
Supplier 2
|
|
|
20
|
%
|
|
|
14
|
%
|
|
|
19
|
%
|
|
|
15
|
%
|
Supplier 3
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
18
|
%
|
|
|
Note 11:
|
Related
Party Transactions
|
Hiland Partners purchases natural gas and NGLs from affiliated
companies. Purchases of product from affiliates totaled $11,740
and $36,279 for the three months ended September 30, 2009
and 2008, respectively and totaled $35,538 and $99,328 for the
nine months ended September 30, 2009 and 2008,
respectively. Hiland Partners also sells natural gas and NGLs to
affiliated companies. Sales of product to affiliates totaled
$626 and $7,390 for the three months ended September 30,
2009 and 2008, respectively and totaled $2,525 and $10,433 for
the nine months ended September 30, 2009 and 2008,
respectively. Compression revenues from affiliates were $1,205
and $3,615 for each of the three and nine months ended
September 30, 2009 and 2008, respectively.
Accounts receivable affiliates of $918 at
September 30, 2009 include $823 from one affiliate for
midstream sales. Accounts receivable affiliates of
$2,346 at December 31, 2008, includes $2,083 from one
affiliate for midstream sales.
Accounts payable affiliates of $4,306 at
September 30, 2009 include $3,365 due to one affiliate for
midstream purchases. Accounts payable affiliates of
$7,823 at December 31, 2008 include $6,682 payable to the
same affiliate for midstream purchases.
Hiland Partners utilizes affiliated companies to provide
services to its plants and pipelines and certain administrative
services. The total expenditures to these companies were $94 and
$157 during the three months ended September 30, 2009 and
2008, respectively and were $350 and $420 during the nine months
ended September 30, 2009 and 2008, respectively.
We and Hiland Partners lease office space under operating leases
directly or indirectly from an affiliate. Rent expense
associated with these leases totaled $41 and $42 for the three
months ended September 30, 2009 and 2008, respectively and
totaled $121 and $117 for the nine months ended
September 30, 2009 and 2008, respectively.
|
|
Note 12:
|
Reportable
Segments
|
Hiland Partners has distinct operating segments for which
additional financial information must be reported. Hiland
Partners operations are classified into two reportable
segments:
(1) Midstream, which is the purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas and the fractionating and marketing of NGLs.
(2) Compression, which is providing air compression and
water injection services for oil and gas secondary recovery
operations that are ongoing in North Dakota.
28
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
These business segments reflect the way Hiland Partners manages
its operations. Hiland Partners operations are conducted
in the United States. General and administrative costs, which
consist of executive management, accounting and finance,
operations and engineering, marketing and business development,
are allocated to the individual segments based on revenues.
Midstream assets totaled $368,331 at September 30, 2009.
Assets attributable to compression operations totaled $21,271.
All but $30 of the total capital expenditures of $23,413 for the
nine months ended September 30, 2009 was attributable to
midstream operations. All but $63 of the total capital
expenditures of $38,043 for the nine months ended
September 30, 2008 was attributable to midstream operations.
The tables below present information for the reportable segments
for the three and nine months ended September 30, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Revenues
|
|
$
|
53,641
|
|
|
$
|
1,205
|
|
|
$
|
54,846
|
|
|
$
|
114,548
|
|
|
$
|
1,205
|
|
|
$
|
115,753
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
30,266
|
|
|
|
|
|
|
|
30,266
|
|
|
|
81,895
|
|
|
|
|
|
|
|
81,895
|
|
Operations and maintenance
|
|
|
7,559
|
|
|
|
177
|
|
|
|
7,736
|
|
|
|
7,617
|
|
|
|
264
|
|
|
|
7,881
|
|
Depreciation and amortization
|
|
|
9,861
|
|
|
|
897
|
|
|
|
10,758
|
|
|
|
8,946
|
|
|
|
896
|
|
|
|
9,842
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
|
|
20,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,799
|
)
|
|
|
|
|
|
|
(7,799
|
)
|
General and administrative
|
|
|
3,146
|
|
|
|
71
|
|
|
|
3,217
|
|
|
|
2,570
|
|
|
|
27
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
71,332
|
|
|
|
1,145
|
|
|
|
72,477
|
|
|
|
93,229
|
|
|
|
1,187
|
|
|
|
94,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(17,691
|
)
|
|
$
|
60
|
|
|
|
(17,631
|
)
|
|
$
|
21,319
|
|
|
$
|
18
|
|
|
|
21,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
(169
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(2,728
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
(20,531
|
)
|
|
|
|
|
|
|
|
|
|
|
17,988
|
|
Less: Noncontrolling partners interest in (loss) income of
Hiland Partners
|
|
|
|
|
|
|
|
|
|
|
(8,152
|
)
|
|
|
|
|
|
|
|
|
|
|
6,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net (loss) income
|
|
|
|
|
|
|
|
|
|
$
|
(12,379
|
)
|
|
|
|
|
|
|
|
|
|
$
|
11,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Revenues
|
|
$
|
153,658
|
|
|
$
|
3,615
|
|
|
$
|
157,273
|
|
|
$
|
319,058
|
|
|
$
|
3,615
|
|
|
$
|
322,673
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
88,481
|
|
|
|
|
|
|
|
88,481
|
|
|
|
238,586
|
|
|
|
|
|
|
|
238,586
|
|
Operations and maintenance
|
|
|
22,612
|
|
|
|
604
|
|
|
|
23,216
|
|
|
|
21,428
|
|
|
|
773
|
|
|
|
22,201
|
|
Depreciation and amortization
|
|
|
29,149
|
|
|
|
2,692
|
|
|
|
31,841
|
|
|
|
25,827
|
|
|
|
2,686
|
|
|
|
28,513
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
|
|
21,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
11,379
|
|
|
|
270
|
|
|
|
11,649
|
|
|
|
7,529
|
|
|
|
86
|
|
|
|
7,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
173,071
|
|
|
|
3,566
|
|
|
|
176,637
|
|
|
|
293,674
|
|
|
|
3,545
|
|
|
|
297,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(19,413
|
)
|
|
$
|
49
|
|
|
|
(19,364
|
)
|
|
$
|
25,384
|
|
|
$
|
70
|
|
|
|
25,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
(27,575
|
)
|
|
|
|
|
|
|
|
|
|
|
15,322
|
|
Less: Noncontrolling partners interest in (loss) income of
Hiland Partners
|
|
|
|
|
|
|
|
|
|
|
(9,762
|
)
|
|
|
|
|
|
|
|
|
|
|
4,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net (loss) income
|
|
|
|
|
|
|
|
|
|
$
|
(17,813
|
)
|
|
|
|
|
|
|
|
|
|
$
|
10,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 13:
|
Net
Income (Loss) per Limited Partners Unit
|
The computation of basic net income (loss) per limited
partners unit is based on the weighted-average number of
common units outstanding during the period. The computation of
diluted net income (loss) per unit further assumes the dilutive
effect of restricted units. Net income (loss) per unit
applicable to limited partners is computed by dividing net
income (loss) applicable to limited partners by the
weighted-average number of limited partnership units
outstanding. The following is a reconciliation of the limited
partner units used in the calculations of net income (loss) per
limited partner unit basic and net income (loss) per
limited partner unit diluted assuming dilution for
the three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
Per
|
|
|
to Limited
|
|
|
Limited
|
|
|
Per
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Loss) income per limited partner unit-basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners
|
|
$
|
(12,379
|
)
|
|
|
|
|
|
$
|
(0.57
|
)
|
|
$
|
11,188
|
|
|
|
|
|
|
$
|
0.52
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
21,608,000
|
|
|
|
|
|
|
|
|
|
|
|
21,603,000
|
|
|
|
|
|
Income per limited partner unit diluted: Restricted
units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners plus assumed
conversions
|
|
$
|
(12,379
|
)
|
|
|
21,608,000
|
|
|
$
|
(0.57
|
)
|
|
$
|
11,188
|
|
|
|
21,612,000
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Available to
|
|
|
|
|
|
|
|
|
Available to
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
Per
|
|
|
Limited
|
|
|
Limited
|
|
|
Per
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Loss) income per limited partner unit-basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners
|
|
$
|
(17,813
|
)
|
|
|
|
|
|
$
|
(0.82
|
)
|
|
$
|
10,920
|
|
|
|
|
|
|
$
|
0.51
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
21,608,000
|
|
|
|
|
|
|
|
|
|
|
|
21,603,000
|
|
|
|
|
|
Income per limited partner unit diluted: Restricted
units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners plus assumed
conversions
|
|
$
|
(17,813
|
)
|
|
|
21,608,000
|
|
|
$
|
(0.82
|
)
|
|
$
|
10,920
|
|
|
|
21,610,000
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2009,
approximately 10,500 restricted units were excluded from the
computation of diluted earnings attributable to limited partner
units because the inclusion of such units would have been
anti-dilutive.
31
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 14:
|
Partners
Capital and Cash Distributions
|
Hiland
Holdings
Our unitholders (limited partners) have only limited voting
rights on matters affecting our operations and activities and,
therefore, limited ability to influence our managements
decisions regarding our business. Unitholders did not select our
general partner or elect the board of directors of our general
partner and effectively have no right to select our general
partner or elect its board of directors in the future.
Unitholders voting rights are further restricted by our
partnership agreement, which provides that any units held by a
person that owns 20% or more of any class of units then
outstanding, other than the general partner, its affiliates,
their transferees and persons who acquired such units with the
prior approval of the board of directors of our general partner,
cannot be voted on any matter. In addition, our partnership
agreement contains provisions limiting the ability of our
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting a
unitholders ability to influence the manner or direction
of our management.
Our partnership agreement requires that we distribute all of our
cash on hand at the end of each quarter, less reserves
established at our general partners discretion. We refer
to this as available cash. Our only cash-generating
assets are our interests in Hiland Partners from which we may
receive quarterly distributions. The amount of available cash
may be greater than or less than the minimum quarterly
distributions.
We have suspended quarterly cash distributions beginning with
the first quarter distribution of 2009 and Hiland Partners has
also suspended quarterly cash distributions on its common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margins and cash flows
combined with future required levels of capital expenditures and
the outstanding indebtedness under Hiland Partners senior
secured revolving credit facility. Under the terms of the Hiland
Partners partnership agreement, the Hiland Partners common units
carry an arrearage of $1.35 per unit, representing the minimum
quarterly distribution to the Hiland Partners common units for
the first three quarters of 2009 that must be paid before Hiland
Partners can make distributions to the Hiland Partners
subordinated units. All distributions paid by us to our common
unitholders from January 1, 2008 forward, including amounts
paid to affiliate owners, were as follows (in thousands, except
per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Cash
|
|
|
Per Unit Cash
|
|
|
|
|
Distribution for
|
|
Distribution
|
|
|
Distribution
|
|
|
Total Cash
|
|
Quarter Ending
|
|
Paid
|
|
|
Amount
|
|
|
Distribution
|
|
|
12/31/07
|
|
|
02/19/08
|
|
|
$
|
0.2550
|
|
|
$
|
5,513
|
|
03/31/08
|
|
|
05/19/08
|
|
|
|
0.2800
|
|
|
|
6,053
|
|
06/30/08
|
|
|
08/19/08
|
|
|
|
0.3050
|
|
|
|
6,593
|
|
09/30/08
|
|
|
11/19/08
|
|
|
|
0.3175
|
|
|
|
6,866
|
|
12/31/08
|
|
|
02/18/09
|
|
|
|
0.1000
|
|
|
|
2,162
|
|
03/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.2575
|
|
|
$
|
27,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland
Partners
The unitholders (limited partners) of Hiland Partners have only
limited voting rights on matters affecting its operations and
activities and, therefore, limited ability to influence its
managements decisions regarding its business. The Hiland
Partners unitholders did not select Hiland Partners GP, LLC as
general partner or elect
32
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
its board of directors and effectively have no right to select a
general partner or elect its board of directors in the future.
The Hiland Partners unitholders voting rights are further
restricted by Hiland Partners partnership agreement, which
provides that any units held by a person that owns 20% or more
of any class of units then outstanding, other than the general
partner, its affiliates, their transferees and persons who
acquired such units with the prior approval of Hiland Partners
GP, LLCs board of directors, cannot be voted on any
matter. In addition, Hiland Partners partnership agreement
contains provisions limiting the ability of its unitholders to
call meetings or to acquire information about its operations, as
well as other provisions limiting a unitholders ability to
influence the manner or direction of Hiland Partners
management.
Hiland Partners partnership agreement requires that it
distribute all of its cash on hand at the end of each quarter,
less reserves established at Hiland Partners GP, LLCs
discretion. Hiland Partners refers to this as available
cash. The amount of available cash may be greater than or
less than the minimum quarterly distributions described below.
In general, Hiland Partners will pay any cash distribution made
each quarter in the following manner:
|
|
|
|
|
first,
98% to the common units, pro rata, and 2% to
Hiland Partners GP, LLC, until each common unit has received a
minimum quarterly distribution of $0.45 plus any arrearages from
prior quarters;
|
|
|
|
second,
98% to the subordinated units, pro rata, and 2%
to Hiland Partners GP, LLC, until each subordinated unit has
received a minimum quarterly distribution of $0.45; and
|
|
|
|
third,
98% to all units, pro rata, and 2% to Hiland
Partners GP, LLC, until each unit has received a distribution of
$0.495.
|
If cash distributions per unit exceed $0.495 in any quarter,
Hiland Partners GP, LLC as general partner will receive
increasing percentages, up to a maximum of 50% of the cash
Hiland Partners distributes in excess of that amount. Hiland
Partners refers to these distributions as incentive
distributions.
The distributions on the subordinated units may be reduced or
eliminated if necessary to ensure the common units receive their
minimum quarterly distribution. Subordinated units do not accrue
arrearages. The subordination period will extend until the first
day of any quarter beginning after March 31, 2010 that each
of the following tests are met: distributions of available cash
from operating surplus on each of the outstanding common units
and subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date; the
adjusted operating surplus (as defined in the
partnership agreement) generated during each of the three
consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum
quarterly distributions on all of the outstanding common units
and subordinated units during those periods on a fully diluted
basis and the related distribution on the 2% general partner
interest during those periods; and there are no arrearages in
payment of the minimum quarterly distribution on the common
units. In addition, if the tests for ending the subordination
period are satisfied for any three consecutive four quarter
periods ending on or after March 31, 2008, 25% of the
subordinated units will convert into an equal number of common
units. On May 14, 2008 these tests were met and
accordingly, 1,020,000, or 25%, of the subordinated units
converted into an equal number of common units.
Hiland Partners has suspended quarterly cash distributions on
its common and subordinated units beginning with the first
quarter distribution of 2009 due to the impact of lower
commodity prices and reduced drilling activity on Hiland
Partners current and projected throughput volumes,
midstream segment margins and cash flows combined with future
required levels of capital expenditures and the outstanding
indebtedness under Hiland Partners senior secured
revolving credit facility. Under the terms of the Hiland
Partners partnership agreement, the Hiland Partners common units
carry an arrearage of $1.35 per unit, representing the minimum
quarterly distribution to the Hiland Partners common units for
the first three quarters of 2009 that must be paid before Hiland
Partners can make distributions to the Hiland Partners
subordinated units. We own 3,060,000 of the Hiland Partners
subordinated units which will not receive a cash distribution
until the
33
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
distribution arrearage to the Hiland Partners common units is
paid. Presented below are cash distributions to the Hiland
Partners common and subordinated unitholders, including amounts
to affiliate owners and regular and incentive distributions to
Hiland Partners GP, LLC paid by Hiland Partners from
January 1, 2008 forward (in thousands, except per unit
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Cash
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution for
|
|
Distribution
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Quarter Ending
|
|
Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
12/31/07
|
|
02/14/08
|
|
$
|
0.7950
|
|
|
$
|
4,169
|
|
|
$
|
3,243
|
|
|
$
|
182
|
|
|
$
|
1,492
|
|
|
$
|
9,086
|
|
03/31/08
|
|
05/14/08
|
|
|
0.8275
|
|
|
|
4,364
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
9,723
|
|
06/30/08
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
5,446
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
10,400
|
|
09/30/08
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
5,574
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
10,750
|
|
12/31/08
|
|
02/13/09
|
|
|
0.4500
|
|
|
|
2,849
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
4,312
|
|
03/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.8150
|
|
|
$
|
22,402
|
|
|
$
|
13,329
|
|
|
$
|
884
|
|
|
$
|
7,656
|
|
|
$
|
44,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presented below are cash distributions by Hiland Partners to us
and Hiland Partners GP, LLC from January 1, 2008 forward
(in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Cash
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution for
|
|
Distribution
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Quarter Ending
|
|
Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
12/31/07
|
|
02/14/08
|
|
$
|
0.7950
|
|
|
$
|
1,035
|
|
|
$
|
3,243
|
|
|
$
|
182
|
|
|
$
|
1,492
|
|
|
$
|
5,952
|
|
03/31/08
|
|
05/15/08
|
|
|
0.8275
|
|
|
|
1,077
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
6,436
|
|
06/30/08
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
2,003
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
6,957
|
|
09/30/08
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
2,043
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
7,219
|
|
12/31/08
|
|
02/13/09
|
|
|
0.4500
|
|
|
|
1,045
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
2,508
|
|
03/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.8150
|
|
|
$
|
7,203
|
|
|
$
|
13,329
|
|
|
$
|
884
|
|
|
$
|
7,656
|
|
|
$
|
29,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 15:
|
Supplemental
Information
|
Following are the financial statements of Hiland Holdings which
are included to provide additional information with respect to
Hiland Holdings financial position, results of operations
and cash flows on a stand-alone basis.
HILAND
HOLDINGS GP, LP
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
352
|
|
|
$
|
561
|
|
Accounts receivable-affiliates
|
|
|
|
|
|
|
2
|
|
Other current assets
|
|
|
124
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
476
|
|
|
|
914
|
|
Investment in subsidiary
|
|
|
|
|
|
|
4,195
|
|
Property and equipment, net
|
|
|
2,967
|
|
|
|
3,304
|
|
Intangibles, net
|
|
|
4,614
|
|
|
|
5,138
|
|
Other assets, net
|
|
|
20
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,077
|
|
|
$
|
13,617
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
231
|
|
|
$
|
363
|
|
Accounts payable-affiliates
|
|
|
353
|
|
|
|
163
|
|
Other current liabilities
|
|
|
3,010
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,594
|
|
|
|
1,231
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Partners equity
|
|
|
|
|
|
|
|
|
Common unitholders (21,613,500 units issued and outstanding)
|
|
|
4,483
|
|
|
|
12,386
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
4,483
|
|
|
|
12,386
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$
|
8,077
|
|
|
$
|
13,617
|
|
|
|
|
|
|
|
|
|
|
35
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
HILAND
HOLDINGS GP, LP
Statements
of Operations
For the
Three and Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(287
|
)
|
|
$
|
(287
|
)
|
|
$
|
(860
|
)
|
|
$
|
(861
|
)
|
General and administrative
|
|
|
(638
|
)
|
|
|
(339
|
)
|
|
|
(3,192
|
)
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(925
|
)
|
|
|
(626
|
)
|
|
|
(4,052
|
)
|
|
|
(2,053
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (loss) earnings of affiliates
|
|
|
569
|
|
|
|
11,841
|
|
|
|
(1,683
|
)
|
|
|
13,058
|
|
Interest and other income
|
|
|
0
|
|
|
|
3
|
|
|
|
1
|
|
|
|
9
|
|
Amortization of deferred loan costs
|
|
|
(33
|
)
|
|
|
(22
|
)
|
|
|
(77
|
)
|
|
|
(67
|
)
|
Interest expense
|
|
|
(26
|
)
|
|
|
(8
|
)
|
|
|
(38
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
510
|
|
|
|
11,814
|
|
|
|
(1,797
|
)
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(415
|
)
|
|
$
|
11,188
|
|
|
$
|
(5,849
|
)
|
|
$
|
10,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
HILAND
HOLDINGS GP, LP
Statements
of Cash Flows
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,849
|
)
|
|
$
|
10,920
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
860
|
|
|
|
861
|
|
Amortization of deferred loan cost
|
|
|
77
|
|
|
|
67
|
|
Unit based compensation
|
|
|
108
|
|
|
|
115
|
|
Loss (earnings) in Hiland Partners, LP
|
|
|
1,683
|
|
|
|
(13,058
|
)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable affiliates
|
|
|
2
|
|
|
|
3
|
|
Other current assets
|
|
|
228
|
|
|
|
137
|
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
|
(132
|
)
|
|
|
44
|
|
Accounts payable affiliates
|
|
|
190
|
|
|
|
(258
|
)
|
Other current liabilities
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,823
|
)
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
(1
|
)
|
|
|
(28
|
)
|
Cash distributions received from subsidiaries
|
|
|
2,513
|
|
|
|
19,345
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
2,512
|
|
|
|
19,317
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
3,000
|
|
|
|
|
|
Payments on short-term borrowings
|
|
|
(705
|
)
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
|
|
|
|
350
|
|
Debt issuance costs
|
|
|
(31
|
)
|
|
|
(1
|
)
|
Cash distributions to unitholders
|
|
|
(2,162
|
)
|
|
|
(18,160
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
102
|
|
|
|
(17,811
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period
|
|
|
(209
|
)
|
|
|
337
|
|
Beginning of period
|
|
|
561
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
352
|
|
|
$
|
442
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
28
|
|
|
$
|
28
|
|
37
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 16:
|
Subsequent
Events
|
On November 3, 2009, we entered into a $1.5 million
term promissory note agreement with Harold Hamm, Chairman of our
general partner and, together with affiliates of Mr. Hamm,
majority owner of the Partnership. The note agreement matures on
December 31, 2009, at which time all outstanding amounts
thereunder become due and payable. The note agreement is secured
by all of our ownership interests in Hiland Partners and its
general partner, other than the 2% general partner interest and
the incentive distribution rights, but is subordinate in
security to the first amended and restated senior secured credit
agreement. Indebtedness under the note agreement bears interest
at the prime rate plus 1% per annum, but in no event less than
5% per annum.
On November 3, 2009, the Partnership amended its merger
agreement with affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of the Partnership (other than certain
restricted common units owned by officers and employees) not
owned by Mr. Hamm, his affiliates or the Hamm family
trusts. The amendment increased the consideration payable to
common unitholders of the Partnership from $2.40 to $3.20 per
common unit and extended the end date under the merger agreement
to December 11, 2009. On the same day, Hiland Partners
amended its merger agreement with affiliates of Harold Hamm,
pursuant to which Mr. Hamms affiliates had agreed to
acquire all of the outstanding common units of Hiland Partners
(other than certain restricted common units owned by officers
and employees) not owned by the Partnership. The amendment
increased the consideration payable to common unitholders of
Hiland Partners from $7.75 to $10.00 per common unit and
extended the end date under the merger agreement to
December 11, 2009.
On November 3, 2009, in connection with amending the merger
agreements, each Hiland company has adjourned its special
meeting of unitholders until December 4, 2009, to allow the
unitholders of each Hiland company additional time to consider
the proposals to approve the applicable merger agreement and
merger. The Partnership and Hiland Partners intend to file with
the SEC a supplement to the definitive joint proxy statement on
Schedule 14A, which, upon clearance by the SEC, the Hiland
companies intend to mail to all holders of record of the Hiland
companies as of September 9, 2009, the record date for the
special meetings.
Concurrently with the filing of the supplement to the joint
proxy statement, (i) the Partnership, our general partner,
Hiland Partners and its general partner, HH GP Holding, LLC, an
affiliate of Harold Hamm, HLND MergerCo, LLC, a wholly-owned
subsidiary of HH GP Holding, LLC, Harold Hamm, Chairman of the
Hiland Companies, Joseph L. Griffin, Chief Executive Officer and
President of the Hiland Companies, and Matthew S. Harrison,
Chief Financial Officer, Vice President Finance and
Secretary of the Hiland Companies will file Amendment No. 7
to their Transaction Statement on
Schedule 13E-3
with the SEC and (ii) the Partnership, our general partner,
HH GP Holding, LLC, HPGP MergerCo, LLC, Continental Gas
Holdings, Inc. (an affiliate of Mr. Hamm) and
Messrs. Hamm, Griffin and Harrison will file Amendment
No. 7 to their Transaction Statement on
Schedule 13E-3
with the SEC.
The definitive joint proxy statement on Schedule 14A was
filed with the SEC on September 11, 2009 and first mailed
to unitholders on or around September 16, 2009.
Each of the Hiland companies had previously amended the
respective merger agreement between that Hiland company and
affiliates of Harold Hamm on October 26, 2009 to extend the
end date under the merger agreement from November 1 to
November 6. Those amendments were to provide the boards of
directors and conflicts committees of each of the Hiland
companies additional time to consider the proposals made by
Harold Hamm in letters delivered to the conflicts committees on
October 26, 2009, to increase the consideration payable to
common unitholders of the Partnership and Hiland Partners under
the respective merger agreements.
On October 1, 2009, Hiland Partners entered into a
financial swap agreement related to forecasted natural gas sales
in 2010 whereby Hiland Partners receives a fixed price and pays
a floating price based on NYMEX Henry Hub pricing for the
relevant contract period as the underlying natural gas is sold.
This swap agreement with BP Energy Company replaces a previous
swap agreement Hiland Partners entered into with Bank of
Oklahoma, N.A. on May 27, 2008. The terms of the new swap
agreement are identical to the May 27, 2008 swap agreement.
38
Cautionary
Statement About Forward-Looking Statements
This report on
Form 10-Q
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding our plans, goals,
beliefs or current expectations. Statements using words such as
anticipate, believe, intend,
project, plan, continue,
estimate, forecast, may,
will or similar expressions help identify
forward-looking statements. Although we believe such
forward-looking statements are based on reasonable assumptions
and current expectations and projections about future events, no
assurance can be given that every objective will be reached.
Our actual results may differ materially from any results
projected, forecasted, estimated or expressed in forward-looking
statements since many of the factors that determine these
results are subject to uncertainties and risks, difficult to
predict, and beyond managements control. Such factors
include:
|
|
|
|
|
with respect to the mergers: (1) the occurrence of any
event, change or other circumstances that could give rise to the
termination of the merger agreements or the failure of required
conditions to close the mergers; (2) the outcome of any
legal proceedings that have been or may be instituted against
Hiland Partners
and/or
the
Partnership and others; (3) the inability to obtain
unitholder approval or the failure to satisfy other conditions
to completion of the mergers, including the receipt of certain
regulatory approvals; (4) risks that the proposed
transaction disrupts current plans and operations and the
potential difficulties in employee retention as a result of the
mergers; (5) the performance of Harold Hamm, his affiliates
and the Hamm family trusts, (6) the amount of the costs,
fees, expenses and related charges and (7) the ability of
the Hiland companies to receive clearance of the supplement to
the definitive joint proxy statement a sufficient amount of time
prior to the reconvened special meeting date to permit
distribution of the supplement;
|
|
|
|
the ability to comply with the certain covenants in our or
Hiland Partners credit facilities and the ability to reach
agreement with ours or Hiland Partners lenders in the
event of a breach of such covenants;
|
|
|
|
the ability to pay distributions to our unitholders;
|
|
|
|
our expected receipt of distributions from Hiland Partners;
|
|
|
|
Hiland Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
Hiland Partners ability to make distributions to its
unitholders, including us;
|
|
|
|
Hiland Partners continued ability to find and contract for
new sources of natural gas supply;
|
|
|
|
the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
|
|
|
|
the amount of natural gas gathered on Hiland Partners
gathering systems and the associated level of throughput in
Hiland Partners natural gas processing and treating
facilities given the recent reduction in drilling activity in
its areas of operations;
|
|
|
|
the fees Hiland Partners charges and the margins realized for
its services;
|
|
|
|
the prices and market demand for, and the relationship between,
natural gas and NGLs;
|
|
|
|
energy prices generally;
|
|
|
|
the level of domestic crude oil and natural gas production;
|
|
|
|
the availability of imported crude oil and natural gas;
|
|
|
|
actions taken by foreign crude oil and natural gas producing
nations;
|
|
|
|
the political and economic stability of petroleum producing
nations;
|
|
|
|
the weather in Hiland Partners operating areas;
|
39
|
|
|
|
|
the extent of governmental regulation and taxation;
|
|
|
|
hazards or operating risks incidental to the gathering, treating
and processing of natural gas and NGLs that may not be fully
covered by insurance;
|
|
|
|
competition from other midstream companies;
|
|
|
|
loss of key personnel;
|
|
|
|
the availability and cost of capital and Hiland Partners
ability to access certain capital sources;
|
|
|
|
margin call risk with counterparties on Hiland Partners
derivative instruments;
|
|
|
|
changes in laws and regulations to which we and Hiland Partners
are subject, including tax, environmental, transportation and
employment regulations;
|
|
|
|
the costs and effects of legal and administrative proceedings;
|
|
|
|
the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to Hiland
Partners financial results;
|
|
|
|
risks associated with the construction of new pipelines and
treating and processing facilities or additions to Hiland
Partners existing pipelines and facilities;
|
|
|
|
the completion of significant, unbudgeted expansion projects may
require debt
and/or
equity financing which may not be available to Hiland Partners
on acceptable terms, or at all; and
|
|
|
|
increases in interest rates could increase Hiland Partners
borrowing costs, adversely impact its unit price and its ability
to issue additional equity, which could have an adverse effect
on Hiland Partners cash flows and its ability to fund its
growth.
|
These factors are not necessarily all of the important factors
that could cause our actual results to differ materially from
those expressed in any of our forward-looking statements. Our
future results will depend upon various other risks and
uncertainties, including, but not limited to those described
above. Other unknown or unpredictable factors also could have
material adverse effects on our future results. You should not
place undue reliance on any forward-looking statements.
All forward-looking statements attributable to us are qualified
in their entirety by this cautionary statement. We undertake no
duty to update our forward-looking statements to reflect the
impact of events or circumstances after the date of the
forward-looking statements.
40
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Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Unless the context requires otherwise, references to
we, our, us, Hiland
Holdings or the Partnership are intended to
mean the consolidated business and operations of Hiland Holdings
GP, LP. References to Hiland Partners are intended
to mean the consolidated business and operations of Hiland
Partners, LP and its subsidiaries.
General
Trends and Outlook
We expect Hiland Partners business to continue to be
affected by the key trends described below. These expectations
are based on assumptions made by us and information currently
available to us. To the extent our underlying assumptions about
or interpretations of available information prove to be
incorrect, our expectations may vary materially from actual
results. Please see Forward-Looking Statements.
U.S. Natural Gas Supply and
Outlook.
Natural gas prices have declined
significantly since the peak New York Mercantile Exchange
(NYMEX) Henry Hub last day settle price of
$13.11/MMBtu in July 2008 to the NYMEX Henry Hub last day settle
price of $3.73 in October 2009, a 72% decline. NYMEX Henry Hub
last day settle prices averaged $3.92 for the first ten months
of 2009 compared to an average of $9.51 for the same periods in
2008, a decrease of $5.59, or 59%. According to data published
by Baker Hughes Incorporated (Baker Hughes),
U.S. natural gas drilling rig counts have declined by
approximately 53% to 728 as of October 30, 2009, compared
to 1,552 natural gas drilling rigs as of October 31, 2008,
and have declined approximately 55% compared to the peak natural
gas drilling rig count of 1,606 in September 2008. Natural gas
storage levels have recently approached 3.7 Tcf (trillion
cubic feet), which surpassed the November 2007 record
working gas storage of 3.5 Tcf. We believe that current natural
gas prices will continue to result in reduced natural
gas-related drilling in our service territories until the
economic environment in the United States improves and increases
the demand for natural gas.
U.S. Crude Oil Supply and Outlook.
A
weaker economic environment and the resulting drop in demand for
crude oil products in 2009 compared to 2008 continues to impact
the price for crude oil. West Texas Intermediate (WTI) crude oil
pricing has declined from a peak of $134.62/bbl in July 2008 to
a low of $33.87/Bbl in January 2009, a 75% decline, increasing
to $71.55/Bbl in October 2009, a 47% decline from July 2008.
West Texas Intermediate (WTI) crude oil prices averaged $54.52
for the first ten months of 2009 compared to an average of
$113.25 for the same periods in 2008, a decrease of $58.73, or
52%. According to data published by Baker Hughes,
U.S. crude oil drilling rig counts have declined by
approximately 19% to 330 as of October 30, 2009, compared
to 408 crude oil drilling rigs as of October 24, 2008, and
have declined approximately 25% compared to the peak crude oil
drilling rig count of 442 in November 2008. Baker Hughes also
published that U.S. crude oil drilling rig counts have
steadily increased from a low of 179 as of June 5, 2009 to
330 as of October 30, 2009, an increase of 84% from
June 5, 2009. Crude oil prices have steadily increased from
$33.87/Bbl in January 2009 to $71.55/Bbl in October 2009. In
addition, the forward curve for WTI crude oil pricing has
recently improved.
U.S. NGL Supply and Outlook.
A weaker
economic environment and the resulting drop in demand for NGL
products in 2009 compared to 2008 has impacted the price for
NGLs. Conway NGL prices have dropped dramatically since the peak
Conway NGL basket pricing of $1.97/gallon in June 2008 to a low
of $0.61/gallon in December 2008, a 69% decline, increasing to
$1.12/gallon in October 2009, a 43% decline from June 2008.
Conway NGL basket pricing has historically correlated to WTI
crude oil pricing. In addition, the forward curve for Conway NGL
basket pricing and WTI crude oil pricing has recently improved.
A number of the areas in which Hiland Partners operates are
experiencing a significant decline in drilling activity as a
result of the recent decline in natural gas and crude oil
prices. Along Hiland Partners systems, excluding its North
Dakota Bakken gathering system, which commenced operations in
April 2009, Hiland Partners connected 26 wells during the
first nine months of 2009 as compared to 83 wells connected
during the same period in 2008, a 69% decrease. At the North
Dakota Bakken gathering system, Hiland Partners connected
41 wells during the nine months ended September 30,
2009. As of October 23, 2009, there are two rigs drilling
along Hiland Partners dedicated acreage company wide.
While we anticipate continued exploration and production
activities in the areas in which Hiland Partners operates,
albeit at depressed levels,
41
fluctuations in energy prices can greatly affect production
rates and investments by third parties in the development of
natural gas and crude oil reserves. Drilling activity generally
decreases as natural gas and crude oil prices decrease. Hiland
Partners has no control over the level of drilling activity in
the areas of its operations.
Disruption
to functioning of capital markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained,
particularly for non-investment grade midstream companies like
Hiland. We expect that ours and Hiland Partners ability to
raise debt and equity at prices that are similar to offerings in
recent years to be limited over the next three to six months and
possibly longer should capital markets remain constrained.
Overview
of Hiland Holdings
We are a Delaware limited partnership formed in May 2006 to own
Hiland Partners GP, LLC, the general partner of Hiland Partners,
and certain other common and subordinated units in Hiland
Partners. We reflect our ownership interest in Hiland Partners
on a consolidated basis, which means that our financial results
are combined with Hiland Partners financial results. The
noncontrolling partners interest in income (loss) of
Hiland Partners is reflected as an equity amount of consolidated
net income (loss) attributable to the noncontrolling
partners interest on our consolidated statements of
operations and the ownership interests of the noncontrolling
partners interest in Hiland Partners is presented within
the equity section of our consolidated balance sheets. Hiland
Partners GP, LLCs results of operations principally
reflect the results of operations of Hiland Partners and are
adjusted for noncontrolling partners interests in Hiland
Partners net income (loss).
Our cash generating assets consist of our direct or indirect
ownership interests in Hiland Partners. Hiland Partners is
principally engaged in purchasing, gathering, compressing,
dehydrating, treating, processing and marketing of natural gas,
fractionating and marketing of NGLs and providing air
compression and water injection services for oil and gas
secondary recovery operations. Our aggregate ownership interests
in Hiland Partners consist of the following:
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the 2% general partner interest in Hiland Partners;
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|
|
|
100% of the incentive distribution rights in Hiland
Partners; and
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|
|
2,321,471 common units and 3,060,000 subordinated units of
Hiland Partners, representing a 57.5% limited partner interest
in Hiland Partners.
|
Hiland Partners is required by its partnership agreement to
distribute all of its cash on hand at the end of each quarter,
after establishing reserves to provide for the proper conduct of
its business or to provide funds for future distributions. If
commodity and inlet natural gas volumes do not improve above the
current forward prices and expected inlet natural gas volumes
for the fourth quarter of 2009, Hiland Partners could be in
violation of the maximum consolidated funded debt to EBITDA
covenant ratio as early as December 31, 2009, unless this
ratio is amended, Hiland Partners receives an infusion of equity
capital, Hiland Partners debt is restructured or Hiland
Partners is able to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, Hiland Partners expects that any solution will
require the assessment of fees and increased rates, the infusion
of additional equity capital or the incurrence of subordinated
indebtedness by Hiland Partners and the suspension of
distributions for a certain period of time. There can be no
assurance that any such agreement will be reached with the
lenders, , that any required equity or debt financing will be
available to Hiland Partners, or that Hiland Partners will have
sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
42
Cash Distributions.
Hiland Partners has
suspended quarterly cash distributions on its common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margins and cash flows
combined with future required levels of capital expenditures and
the outstanding indebtedness under Hiland Partners senior
secured revolving credit facility. Under the terms of the Hiland
Partners partnership agreement, the Hiland Partners common units
carry an arrearage of $1.35 per unit, representing the minimum
quarterly distribution to the Hiland Partners common units for
the first three quarters of 2009 that must be paid before Hiland
Partners can make distributions to the Hiland Partners
subordinated units. We own 3,060,000 of the Hiland Partners
subordinated units which will not receive a cash distribution
until the distribution arrearage to the Hiland Partners common
units is paid. The following table presents Hiland
Partners distributions paid to us on November 14,
2008 for the three and nine months ended September 30, 2008.
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|
|
|
|
|
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Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
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September 30,
|
|
|
September 30,
|
|
Hiland Partners Distributions
|
|
2008
|
|
|
2008
|
|
|
Common units
|
|
$
|
2,003
|
|
|
$
|
4,115
|
|
Subordinated units
|
|
|
2,639
|
|
|
|
9,258
|
|
Ownership interest in Hiland Partners general partner
|
|
|
208
|
|
|
|
584
|
|
General partners incentive distribution rights
|
|
|
2,107
|
|
|
|
5,388
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,957
|
|
|
$
|
19,345
|
|
|
|
|
|
|
|
|
|
|
Because we own Hiland Partners GP, LLC, the distributions to us
include the distributions made to Hiland Partners GP, LLC.
Overview
of Hiland Partners
Hiland Partners is engaged in purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas, fractionating and marketing of NGLs, and providing
air compression and water injection services for oil and gas
secondary recovery operations. Hiland Partners operations
are primarily located in the Mid-Continent and Rocky Mountain
regions of the United States.
Hiland Partners manages its business and analyzes and reports
its results of operations on a segment basis. Hiland
Partners operations are divided into two business segments:
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Midstream Segment,
which is engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionating and marketing of
NGLs. The midstream segment generated 95.1% and 96.4% of total
segment margin for the three months ended September 30,
2009 and 2008, respectively and 94.7% and 95.7% of total segment
margin for the nine months ended September 30, 2009 and
2008, respectively.
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|
Compression Segment,
which is engaged in providing air
compression and water injection services for oil and gas
secondary recovery operations that are ongoing in North Dakota.
The compression segment generated 4.9% and 3.6% of total segment
margin for the three months ended September 30, 2009 and
2008, respectively and 5.3% and 4.3% of total segment margin for
the nine months ended September 30, 2009 and 2008,
respectively.
|
Hiland Partners midstream assets currently consist of 15
natural gas gathering systems with approximately
2,160 miles of gas gathering pipelines, six natural gas
processing plants, seven natural gas treating facilities and
three NGL fractionation facilities. Hiland Partners
compression assets consist of two air compression facilities and
a water injection plant.
Hiland Partners results of operations are determined
primarily by five interrelated variables: (1) the volume of
natural gas gathered through its pipelines; (2) the volume
of natural gas processed; (3) the volume of NGLs
fractionated; (4) the levels and relationship of natural
gas and NGL prices; and (5) Hiland Partners current
contract portfolio. Because Hiland Partners profitability
is a function of the difference between the
43
revenues it receives from its operations, including revenues
from the products it sells, and the costs associated with
conducting its operations, including the costs of products it
purchases, increases or decreases in Hiland Partners
revenues alone are not necessarily indicative of increases or
decreases in its profitability. To a large extent, Hiland
Partners contract portfolio, the pricing environment for
natural gas and NGLs and the price of NGLs relative to natural
gas prices will dictate increases or decreases in its
profitability. Hiland Partners profitability is also
dependent upon prices and market demand for natural gas and
NGLs, which fluctuate with changes in market and economic
conditions and other factors.
Recent
Events
Merger Agreements.
On November 3, 2009,
the Partnership amended its merger agreement with affiliates of
Harold Hamm, pursuant to which Mr. Hamms affiliates
had agreed to acquire all of the outstanding common units of the
Partnership (other than certain restricted common units owned by
officers and employees) not owned by Mr. Hamm, his
affiliates or the Hamm family trusts. The amendment increased
the consideration payable to common unitholders of the
Partnership from $2.40 to $3.20 per common unit and extended the
end date under the merger agreement to December 11, 2009.
On the same day, Hiland Partners amended its merger agreement
with affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of Hiland Partners (other than certain
restricted common units owned by officers and employees) not
owned by the Partnership. The amendment increased the
consideration payable to common unitholders of Hiland Partners
from $7.75 to $10.00 per common unit and extended the end date
under the merger agreement to December 11, 2009.
Each of the Hiland companies had previously amended the
respective merger agreement between that Hiland company and
affiliates of Harold Hamm on October 26, 2009 to extend the
end date under the merger agreement from November 1 to
November 6. Those amendments were to provide the boards of
directors and conflicts committees of each of the Hiland
companies additional time to consider the proposals made by
Harold Hamm in letters delivered to the conflicts committees on
October 26, 2009, to increase the consideration payable to
common unitholders of the Partnership and Hiland Partners under
the respective merger agreements.
Term Promissory Note.
On November 3,
2009, we entered into a $1.5 million term promissory note
agreement with Harold Hamm, Chairman of our general partner and,
together with affiliates of Mr. Hamm, majority owner of the
Partnership. The note agreement matures on December 31,
2009, at which time all outstanding amounts thereunder become
due and payable. The note agreement is secured by all of our
ownership interests in Hiland Partners and its general partner,
other than the 2% general partner interest and the incentive
distribution rights, but is subordinate in security to the first
amended and restated senior secured credit agreement.
Indebtedness under the note agreement bears interest at the
prime rate plus 1% per annum, but in no event less than 5% per
annum.
Hedging Transactions.
On October 1, 2009,
Hiland Partners entered into a financial swap agreement related
to forecasted natural gas sales in 2010 whereby Hiland Partners
receives a fixed price and pays a floating price based on NYMEX
Henry Hub pricing for the relevant contract period as the
underlying natural gas is sold. This swap agreement with BP
Energy Company replaces a previous swap agreement Hiland
Partners entered into with Bank of Oklahoma, N.A. on
May 27, 2008. The terms of the new swap agreement are
identical to the May 27, 2008 swap agreement.
SEC Filings.
The Partnership and Hiland
Partners intend to file with the SEC a supplement to the
definitive joint proxy statement on Schedule 14A, which,
upon clearance by the SEC, the Hiland companies intend to mail
to all holders of record of the Hiland companies as of
September 9, 2009, the record date for the special meetings.
Concurrently with the filing of the supplement to the joint
proxy statement, (i) the Partnership, our general partner,
Hiland Partners and its general partner, HH GP Holding, LLC, an
affiliate of Harold Hamm, HLND MergerCo, LLC, a wholly-owned
subsidiary of HH GP Holding, LLC, Harold Hamm, Chairman of the
Hiland Companies, Joseph L. Griffin, Chief Executive Officer and
President of the Hiland Companies, and Matthew S. Harrison,
Chief Financial Officer, Vice President Finance and
Secretary of the Hiland
44
Companies will file Amendment No. 7 to their Transaction
Statement on
Schedule 13E-3
with the SEC and (ii) the Partnership, our general partner,
HH GP Holding, LLC, HPGP MergerCo, LLC, Continental Gas
Holdings, Inc. (an affiliate of Mr. Hamm) and
Messrs. Hamm, Griffin and Harrison will file Amendment
No. 7 to their Transaction Statement on
Schedule 13E-3
with the SEC.
The definitive joint proxy statement on Schedule 14A was
filed with the SEC on September 11, 2009 and first mailed
to unitholders on or around September 16, 2009.
Distributions.
We and Hiland Partners have
suspended quarterly cash distributions on common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margins and cash flows
combined with future required levels of capital expenditures and
the outstanding indebtedness under ours and Hiland
Partners senior secured revolving credit facilities. Under
the terms of Hiland Partners partnership agreement, Hiland
Partners common units will carry an arrearage of $1.35 per
unit, representing the minimum quarterly distribution to its
common units for the first three quarters of 2009 that must be
paid before Hiland Partners can make distributions to the
subordinated units.
Credit Facility.
Pursuant to the terms of our
existing credit agreement, we elected to reduce the commitment
level on the credit facility from $10.0 million to
$3.0 million on August 7, 2009. Concurrently with the
reduction of the commitment level to $3.0 million, the
existing lenders under the credit facility assigned their
interests in the facility to a new lender and we entered into a
first amended and restated senior secured credit agreement with
The Security National Bank of Enid. The credit facility is
secured by all of our ownership interests in Hiland Partners and
its general partner, other than the 2% general partner interest
and the incentive distribution rights. The credit facility will
mature on December 31, 2009, at which time the
$3.0 million outstanding amount thereunder becomes due and
payable.
Historical
Results of Operations
Our historical results of operations for the periods presented
may not be comparable, either from period to period or going
forward primarily due to significantly decreased natural gas and
NGL sales prices, volumes at the North Dakota Bakken gathering
system, which commenced operations in April 2009, and increased
volumes and operating expenses at the Woodford Shale and
Badlands gathering systems.
Our
Results of Operations
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the
core profitability of our operations because it is directly
related to our volumes and commodity price changes. We review
total segment margin monthly for consistency and trend analysis.
We define midstream segment margin as midstream revenue less
midstream purchases. Midstream revenue includes revenue from the
sale of natural gas, NGLs and NGL products resulting from Hiland
Partners gathering, treating, processing and fractionation
activities and fixed fees associated with the gathering of
natural gas and the transportation and disposal of saltwater.
Midstream purchases include the cost of natural gas, condensate
and NGLs purchased by Hiland Partners from third parties, the
cost of natural gas, condensate and NGLs purchased by Hiland
Partners from affiliates, and the cost of crude oil purchased by
Hiland Partners from third parties. We define compression
segment margin as the revenue derived from Hiland Partners
compression segment. Total segment margin may not be comparable
to similarly titled measures of other companies as other
companies may not calculate total segment margin in the same
manner.
The results of our operations discussed below principally
reflect the activities of Hiland Partners. Because our
consolidated financial statements include the results of Hiland
Partners, our financial statements are substantially similar to
the financial statements of Hiland Partners. However, the
noncontrolling partners interest in income (loss) of
Hiland Partners is reflected as an equity amount of consolidated
net income (loss) attributable to the noncontrolling limited
partners interest on our consolidated statements of
operations and
45
the ownership interests of the noncontrolling partners
interest in Hiland Partners is presented within the equity
section of our consolidated balance sheets. The noncontrolling
partners interest in Hiland Partners is not reflected on
Hiland Partners consolidated financial statements.
Set forth in the tables below are certain financial and
operating data for the periods indicated.
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|
|
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|
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
53,641
|
|
|
$
|
114,548
|
|
Midstream purchases
|
|
|
30,266
|
|
|
|
81,895
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
23,375
|
|
|
|
32,653
|
|
Compression revenues(1)
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
24,580
|
|
|
$
|
33,858
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
53,641
|
|
|
$
|
114,548
|
|
Compression revenues
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
54,846
|
|
|
|
115,753
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
30,266
|
|
|
|
81,895
|
|
Operations and maintenance
|
|
|
7,736
|
|
|
|
7,881
|
|
Depreciation, amortization and accretion
|
|
|
10,758
|
|
|
|
9,842
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
(7,799
|
)
|
General and administrative
|
|
|
3,217
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
72,477
|
|
|
|
94,416
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(17,631
|
)
|
|
|
21,337
|
|
Other income (expense), net
|
|
|
(2,900
|
)
|
|
|
(3,349
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(20,531
|
)
|
|
|
17,988
|
|
Less: Noncontrolling partners interest in income of Hiland
Partners
|
|
|
(8,152
|
)
|
|
|
6,800
|
|
Limited partners interest in net (loss) income
|
|
$
|
(12,379
|
)
|
|
$
|
11,188
|
|
|
|
|
|
|
|
|
|
|
Hiland Partners Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
257,950
|
|
|
|
261,345
|
|
Natural gas sales (MMBtu/d)
|
|
|
86,979
|
|
|
|
95,889
|
|
NGL sales (Bbls/d)
|
|
|
7,115
|
|
|
|
6,036
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
153,658
|
|
|
$
|
319,058
|
|
Midstream purchases
|
|
|
88,481
|
|
|
|
238,586
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
65,177
|
|
|
|
80,472
|
|
Compression revenues(1)
|
|
|
3,615
|
|
|
|
3,615
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
68,792
|
|
|
$
|
84,087
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
153,658
|
|
|
$
|
319,058
|
|
Compression revenues
|
|
|
3,615
|
|
|
|
3,615
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
157,273
|
|
|
|
322,673
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
88,481
|
|
|
|
238,586
|
|
Operations and maintenance
|
|
|
23,216
|
|
|
|
22,201
|
|
Depreciation, amortization and accretion
|
|
|
31,841
|
|
|
|
28,513
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
11,649
|
|
|
|
7,615
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
176,637
|
|
|
|
297,219
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(19,364
|
)
|
|
|
25,454
|
|
Other income (expense), net
|
|
|
(8,211
|
)
|
|
|
(10,132
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(27,575
|
)
|
|
|
15,322
|
|
Less: Noncontrolling partners interest in (loss) income of
Hiland Partners
|
|
|
(9,762
|
)
|
|
|
4,402
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net (loss) income
|
|
$
|
(17,813
|
)
|
|
$
|
10,920
|
|
|
|
|
|
|
|
|
|
|
Hiland Partners Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (MCF/d)
|
|
|
268,937
|
|
|
|
245,098
|
|
Natural gas sales (MMBTU/d)
|
|
|
88,703
|
|
|
|
89,615
|
|
NGL sales (Bbls/d)
|
|
|
7,141
|
|
|
|
5,763
|
|
|
|
|
(1)
|
|
Compression revenues and compression segment margin are the
same. There are no compression purchases associated with the
compression segment.
|
|
(2)
|
|
Reconciliation of total segment margin to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Loss
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(17,631
|
)
|
|
$
|
21,337
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
7,736
|
|
|
|
7,881
|
|
Depreciation, amortization and accretion
|
|
|
10,758
|
|
|
|
9,842
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
(7,799
|
)
|
General and administrative
|
|
|
3,217
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
24,580
|
|
|
$
|
33,858
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating (loss)
Income
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(19,364
|
)
|
|
$
|
25,454
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
23,216
|
|
|
|
22,201
|
|
Depreciation, amortization and accretion
|
|
|
31,841
|
|
|
|
28,513
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
11,649
|
|
|
|
7,615
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
68,792
|
|
|
$
|
84,087
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2009 Compared with Three Months
Ended September 30, 2008
Revenues.
Total revenues (midstream and
compression) were $54.8 million for the three months ended
September 30, 2009 compared to $115.8 million for the
three months ended September 30, 2008, a decrease of
$60.9 million, or (52.6%). This $60.9 million decrease
was primarily due to significantly lower average realized
natural gas and NGL sales prices for all of our gathering
systems combined with decreased natural gas and NGL sales
volumes in all but three of our gathering systems. As a result
of significant reduced drilling activity in 2009 at our
mid-continent areas of operations, natural gas sales volumes
decreased by 3,906 MMBtu/d (MMBtu per day), or (17.4%) at
the Eagle Chief gathering system, 4,654 MMBtu/d, or (29.3%)
at the Matli gathering system and 5,113 MMBtu/d, or (23.1%)
at the Woodford Shale gathering systems for the three months
ended September 30, 2009 compared to the same period in
2008. Additionally, NGL sales volumes decreased by
72 Bbls/d (Bbls per day), or (7.2%) at the Eagle Chief
gathering system and 136 Bbls/d, or (39.4%) at the Matli
gathering system for the three months ended September 30,
2009 compared to the same period in 2008. The North Dakota
Bakken gathering system, which commenced operations in April
2009, contributed natural gas sales volumes of
4,005 MMBtu/d and NGL sales volumes of 370 Bbls/d
during the three months ended September 30, 2009. Natural
gas sales volumes increased by 429 MMBtu/d, or 4.2% at the
Montana Bakken gathering system and NGL sales volumes increased
by 277 Bbls/d, or 25.8% at the Badlands gathering systems
for the three months ended September 30, 2009 compared to
the same period in 2008. Revenues from compression assets were
the same for both periods.
Midstream revenues were $53.6 million for the three months
ended September 30, 2009 compared to $114.5 million
for the three months ended September 30, 2008, a decrease
of $60.9 million, or (53.2%). Of this $60.9 million
decrease in midstream revenues, approximately $61.2 million
was attributable to significantly lower average realized natural
gas and NGL sales prices for all of our gathering systems,
approximately $6.7 million was attributable to revenues
from overall decreases in natural gas sales volumes, offset by
approximately $7.0 million attributable to revenues from
increased NGL sales volumes for the three months ended
September 30, 2009 as compared to the same period in 2008.
The North Dakota Bakken gathering system, which commenced
operations in April 2009, contributed $2.2 million in
midstream revenues for the three months ended September 30,
2009.
Inlet natural gas was 257,950 Mcf/d (Mcf per day) for the
three months ended September 30, 2009 compared to
261,345 Mcf/d for the three months ended September 30,
2008, a decrease of 3,395 Mcf/d, or (1.3%). This decrease
is primarily attributable to mid-continent volume declines
totaling 13,378 Mcf/d, or (17.9%) at the Eagle Chief, Matli
and Woodford Shale gathering systems offset by volumes of
4,194 Mcf/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, and volume increases
totaling 5,930 Mcf/d, or 3.7% at the Badlands and Kinta
Area gathering systems.
Natural gas sales volumes were 86,979 MMBtu/d for the three
months ended September 30, 2009 compared to
95,889 MMBtu/d for the three months ended
September 30, 2008, a decrease of 8,910 MMBtu/d,
48
or (9.3%). This 8,910 MMBtu/d decrease in natural gas sales
volumes was attributable to decreased
mid-continent
natural gas sales volumes of 13,673 MMBtu/d, or (22.6%) at
the Eagle Chief, Matli and Woodford Shale gathering systems,
offset by natural gas sales volumes of 4,005 MMBtu/d at the
North Dakota Bakken gathering system, which commenced operations
in April 2009, and increased natural gas sales volumes totaling
1,108 MMBtu/d, or 3.7% at our Bakken and Kinta Area
gathering systems.
NGL sales volumes were 7,115 Bbls/d for the three months
ended September 30, 2009 compared to 6,036 Bbls/d for
the three months ended September 30, 2008, an increase of
1,079 Bbls/d, or 17.9%. This 1,079 Bbls/d increase in
NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 984 Bbls/d, or 43.6% at the Woodford
Shale and Badlands gathering systems and NGL sales volumes of
370 Bbls/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, offset by reduced NGL
sales volumes totaling 266 Bbls/d, or (7.4%) at our Bakken,
Eagle Chief and Matli gathering systems.
Average realized natural gas sales prices were $3.25 per MMBtu
for the three months ended September 30, 2009 compared to
$7.57 per MMBtu for the three months ended September 30,
2008, a decrease of $4.32 per MMBtu, or (57.1%). Average
realized NGL sales prices were $0.76 per gallon for the three
months ended September 30, 2009 compared to $1.55 per
gallon for the three months ended September 30, 2008, a
decrease of $0.79 per gallon or (51.0%). The decrease in our
average realized natural gas and NGL sales prices was primarily
a result of significantly lower index prices for natural gas and
posted prices for NGLs during the three months ended
September 30, 2009 compared to the three months ended
September 30, 2008.
Net cash received from our counterparty on cash flow swap
contracts for natural gas sales and natural gas purchase
derivative transactions that closed during the three months
ended September 30, 2009 totaled $2.5 million compared
to $1.1 million for the three months ended
September 30, 2008. The $2.5 million gain for the
three months ended September 30, 2009 increased averaged
realized natural gas prices to $3.25 per MMBtu from $2.94 per
MMBtu, an increase of $0.31 per MMBtu, or 10.5%. The
$1.1 million net gain for the three months ended
September 30, 2008 increased averaged realized natural gas
prices to $7.57 per MMBtu from $7.44 per MMBtu, an increase of
$0.13 per MMBtu, or 1.7%. We had no cash flow swap contracts for
NGLs during the three months ended September 30, 2009. Cash
paid to our counterparty on cash flow swap contracts for NGL
derivative transactions that closed during the three months
ended September 30, 2008 totaled $2.5 million. The
$2.5 million loss for the three months ended
September 30, 2008 reduced averaged realized NGL prices to
$1.55 per gallon from $1.65 per gallon, a decrease of $0.10 per
gallon, or (6.1%).
Compression revenues were $1.2 million for the each of the
three months ended September 30, 2009 and 2008.
Midstream Purchases.
Midstream purchases were
$30.3 million for the three months ended September 30,
2009 compared to $81.9 million for the three months ended
September 30, 2008, a decrease of $51.6 million, or
(63.0%). This $51.6 million decrease is primarily due to
significantly reduced natural gas and NGL purchase prices,
resulting in decreased midstream purchases for all of our
gathering systems compared to the same period in 2008, offset by
$1.2 million of midstream purchases at the North Dakota
Bakken gathering system, which commenced operations in April
2009.
Midstream Segment Margin.
Midstream segment
margin was $23.4 million for the three months ended
September 30, 2009 compared to $32.7 million for the
three months ended September 30, 2008, a decrease of
$9.3 million, or (28.4%). The decrease is primarily due to
unfavorable gross processing spreads, significantly lower
average realized natural gas and NGL prices, an overall decrease
in natural gas sales volumes, offset by an overall increase in
NGL sales volumes. As a percent of midstream revenues, midstream
segment margin was 43.6% for the three months ended
September 30, 2009 compared to 28.5% for the three months
ended September 30, 2008, an increase of 15.1%. This
increase is attributable to (i) the positive impact of
fixed fee arrangement contracts which are not affected by
realized natural gas and NGL selling prices,
(ii) improvements in third party processing arrangements at
the Woodford Shale gathering system, (iii) increased
volumes under favorable
percentage-of-proceeds
contracts at the North Dakota Bakken and Badlands gathering
systems and (iv) gains on closed/settled derivative
transactions and unrealized non-cash gains on open derivative
49
transactions for the three months ended September 30, 2009
totaling $2.2 million compared to net losses of
$1.4 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the three months ended September 30, 2008, offset by an
unrealized non-cash gain of $5.6 million related to a
non-qualifying
mark-to-market
cash flow hedge for forecasted sales in 2010.
Operations and Maintenance.
Operations and
maintenance expense totaled $7.7 million for the three
months ended September 30, 2009 compared with
$7.9 million for the three months ended September 30,
2008, a net decrease of $0.1 million, or (1.8%). The net
decrease in operations and maintenance of $0.2 million
compared to the same period in 2008 includes decreases totaling
$0.8 million attributable to all gathering systems with the
exception of insignificant increases in the Montana Bakken and
Badlands gathering systems and a decrease of $0.1 million
related to compression operations, offset by $0.5 million
attributable to the North Dakota Bakken gathering system, which
commenced operations in April 2009.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $10.8 million for the three
months ended September 30, 2009 compared with
$9.8 million for the three months ended September 30,
2008, an increase of $0.9 million, or 9.3%. This
$0.9 million increase was primarily attributable to
depreciation of $0.3 million on the North Dakota Bakken
gathering system, which commenced operations in April 2009,
increased depreciation of $0.3 million on the Kinta Area
gathering system and increases of $0.1 million each on the
Badlands and Woodford Shale and gathering systems.
Property Impairments.
As a result of recent
volume declines and projected future volume declines at Hiland
Partners Kinta Area gathering system located in
southeastern Oklahoma, Hiland Partners recognized impairment
charges of $20,500 in September 2009. Hiland Partners had no
property impairments during the three months ended
September 30, 2008.
Bad Debt.
Neither we nor Hiland Partners had
bad debt expense for the three months ended September 30,
2009. For the three months ended September 30, 2008, Hiland
Partners recorded a reversal of an uncollectible trade accounts
receivable of $7.8 million related to a receivable from a
significant customer in which Hiland Partners had previously
reserved an allowance for uncollectible accounts of
$8.1 million during the second quarter of 2008.
Accordingly, we decreased our reserve for doubtful accounts to
$0.3 million.
General and Administrative.
General and
administrative expense totaled $3.2 million for the three
months ended September 30, 2009 compared with
$2.6 million for the three months ended September 30,
2008, a net increase of $0.6 million, or 23.9%. General and
administrative expenses of a recurring nature decreased by
$0.5 million compared to the same period in 2008, but were
offset by $1.1 million of expenses attributable to the
going private proposals incurred in the three months ended
September 30, 2009.
Other Income (Expense).
Other income (expense)
totaled $(2.9) million for the three months ended
September 30, 2009 compared with $(3.3) million for
the three months ended September 30, 2008, a decrease in
expense of $0.5 million, or (13.4%). The decrease is
primarily attributable lower interest rates incurred on Hiland
Partners credit facility during the three months ended
September 30, 2009 compared to interest rates incurred
during the three months ended September 30, 2008, offset by
interest expense of $0.5 million related to Hiland
Partners interest rate swap during the three months ended
September 30, 2009 which did not exist in 2008.
Noncontrolling Partners Interest in Income of Hiland
Partners.
The noncontrolling partners
interest in income of Hiland Partners, which represents the
allocation of Hiland Partners earnings to its limited partner
interests not owned by us, was a loss of $(8.2) million for
the three months ended September 30, 2009 compared to
earnings of $6.8 million for the three months ended
September 30, 2008, a decrease in earnings attributable to
noncontrolling partners of $15.0 million.
Nine
Months Ended September 30, 2009 Compared with Nine Months
Ended September 30, 2008
Revenues.
Total revenues (midstream and
compression) were $157.3 million for the nine months ended
September 30, 2009 compared to $322.7 million for the
nine months ended September 30, 2008, a decrease of
$165.4 million, or (51.3%). This $165.4 million
decrease was primarily due to significantly lower average
realized natural gas and NGL sales prices for all of our
gathering systems combined with decreased natural
50
gas and NGL sales volumes in all but three of our gathering
systems. As a result of significant reduced drilling activity in
2009 at our mid-continent areas of operations, natural gas sales
volumes decreased by 4,046 MMBtu/d, or (17.5%) at the Eagle
Chief gathering system and 1,954 MMBtu/d, or (13.5%) at the
Matli gathering system for the nine months ended
September 30, 2009 compared to the same period in 2008. NGL
sales volumes decreased by 100 Bbls/d, or (9.9%) at the
Eagle Chief gathering system for the nine months ended
September 30, 2009 compared to the same period in 2008.
Conversely, due to a 36.5% increase in inlet Mcf/d at the
Woodford Shale gathering system for the nine months ended
September 30, 2009, natural gas sales volumes increased by
3,011 MMBtu/d, or 18.1% and NGL sales volumes increased by
917 Bbls/d, or 80.5% compared to the same period in 2008.
Due to a 44.4% increase in inlet Mcf/d at the Badlands gathering
system for the nine months ended September 30, 2009, NGL
sales volumes increased by 451 Bbls/d, a 50.4% increase
compared to the same period in 2008. The North Dakota Bakken
gathering system, which commenced operations in April 2009,
contributed natural gas sales volumes of 1,791 MMBtu/d and
NGL sales volumes of 193 Bbls/d during the nine months
ended September 30, 2009. Revenues from compression assets
were the same for both periods.
Midstream revenues were $153.7 million for the nine months
ended September 30, 2009 compared to $319.1 million
for the nine months ended September 30, 2008, a decrease of
$165.4 million, or (51.8%). Of this $165.4 million net
decrease in midstream revenues, approximately
$188.1 million was attributable to significantly lower
average realized natural gas and NGL sales prices for all of our
gathering systems, approximately $2.0 million attributable
to revenues from overall decreases in natural gas sales volumes,
offset by approximately $24.7 million attributable to
increases in NGL sales volumes for the nine months ended
September 30, 2009 as compared to the same period in 2008.
The North Dakota Bakken gathering system, which commenced
operations in April 2009, contributed $3.2 million in
midstream revenues for the three months ended September 30,
2009.
Inlet natural gas was 268,937 Mcf/d for the nine months
ended September 30, 2009 compared to 245,098 Mcf/d for
the nine months ended September 30, 2008, an increase of
23,839 Mcf/d, or 9.7%. This increase is primarily
attributable to volume growth totaling 28,544 Mcf/d, or
16.2% at the Kinta Area, Badlands and Woodford Shale gathering
systems, volumes of 2,137 Mcf/d at the North Dakota Bakken
gathering system, which commenced operations in April 2009,
primarily offset by volume declines totaling 6,530 Mcf/d,
or (15.8%) at the Eagle Chief and Matli gathering systems.
Natural gas sales volumes were 88,703 MMBtu/d for the nine
months ended September 30, 2009 compared to
89,615 MMBtu/d for the nine months ended September 30,
2008, a net decrease of
912 MMBtu/d,
or (1.0%). This 912 MMBtu/d net increase in natural gas
sales volumes was attributable to decreased natural gas sales
volumes totaling 6,000 MMBtu/d, or (15.9%) at the Eagle
Chief and Matli gathering systems, offset by natural gas sales
volumes of 1,791 MMBtu/d at the North Dakota Bakken
gathering system, which commenced operations in April 2009, and
increased natural gas sales volumes totaling 3,402 MMBtu/d,
or 13.2% at the Woodford Shale and Kinta Area gathering systems.
NGL sales volumes were 7,141 Bbls/d for the nine months
ended September 30, 2009 compared to 5,763 Bbls/d for
the nine months ended September 30, 2008, a net increase of
1,378 Bbls/d, or 23.9%. This 1,378 Bbls/d net increase
in NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 1,368 Bbls/d, or 67.3% at our
Woodford Shale and Badlands gathering systems, NGL sales volumes
of 193 Bbls/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, offset by reduced NGL
sales volumes totaling 177 Bbls/d, or (5.4%) at our Eagle
Chief and Montana Bakken gathering systems.
Average realized natural gas sales prices were $3.32 per MMBtu
for the nine months ended September 30, 2009 compared to
$8.00 per MMBtu for the nine months ended September 30,
2008, a decrease of $4.68 per MMBtu, or (58.5%). Average
realized NGL sales prices were $0.67 per gallon for the nine
months ended September 30, 2009 compared to $1.53 per
gallon for the nine months ended September 30, 2008, a
decrease of $0.86 per gallon or (56.2%). The decrease in our
average realized natural gas and NGL sales prices was primarily
a result of significantly lower index prices for natural gas and
posted prices for NGLs during the nine months ended
September 30, 2009 compared to the nine months ended
September 30, 2008.
51
Net cash received from our counterparty on cash flow swap
contracts for natural gas sales and natural gas purchase
derivative transactions that closed during the nine months ended
September 30, 2009 totaled $7.3 million compared to
$1.4 million for the nine months ended September 30,
2008. The $7.3 million gain for the nine months ended
September 30, 2009 increased averaged realized natural gas
prices to $3.32 per MMBtu from $3.02 per MMBtu, an increase of
$0.30 per MMBtu, or 9.9%. The $1.4 million net gain for the
nine months ended September 30, 2008 increased averaged
realized natural gas prices to $8.00 per MMBtu from $7.95 per
MMBtu, an increase of $0.05 per MMBtu, or 0.6%. We had no cash
flow swap contracts for NGLs during the nine months ended
September 30, 2009. Cash paid to our counterparty on cash
flow swap contracts for NGL derivative transactions that closed
during the nine months ended September 30, 2008 totaled
$7.9 million. The $7.9 million loss for the nine
months ended September 30, 2008 reduced averaged realized
NGL prices to $1.53 per gallon from $1.64 per MMBtu, a decrease
of $0.11 per gallon, or (6.7%).
Compression revenues were $3.6 million for the each of the
nine months ended September 30, 2009 and 2008.
Midstream Purchases.
Midstream purchases were
$88.5 million for the nine months ended September 30,
2009 compared to $238.6 million for the nine months ended
September 30, 2008, a decrease of $150.1 million, or
(62.9%). This $150.1 million decrease is primarily due to
significantly reduced natural gas and NGL purchase prices,
resulting in decreased midstream purchases for all of our
gathering systems compared to the same period in 2008, with the
exception of $1.7 million of midstream purchases at the
North Dakota Bakken gathering system, which commenced operations
in April 2009.
Midstream Segment Margin.
Midstream segment
margin was $65.2 million for the nine months ended
September 30, 2009 compared to $80.5 million for the
nine months ended September 30, 2008, a decrease of
$15.3 million, or (19.0%). The decrease is primarily due to
unfavorable gross processing spreads and significantly lower
average realized natural gas and NGL prices, an overall decrease
in natural gas sales volumes, offset by an overall increase in
NGL sales volumes, and additionally offset by approximately
$2.3 million of foregone margin as a result of the nitrogen
rejection plant at the Badlands gathering system being taken out
of service due to equipment failure during the three months
ended March 31, 2008. As a percent of midstream revenues,
midstream segment margin was 42.4% for the nine months ended
September 30, 2009 compared to 25.2% for the nine months
ended September 30, 2008, an increase of 17.2%. This
increase is attributable to (i) the positive impact of
fixed fee arrangement contracts which are not affected by
realized natural gas and NGL selling prices,
(ii) improvements in third party processing arrangements at
the Woodford Shale gathering system, (iii) increased
volumes under favorable
percentage-of-proceeds
contracts at the North Dakota Bakken and Badlands gathering
systems and (iv) gains on closed/settled derivative
transactions and unrealized non-cash gains on open derivative
transactions for the nine months ended September 30, 2009
totaling $7.1 million compared to net losses of
$6.4 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the nine months ended September 30, 2008, offset by an
unrealized non-cash gain of $3.6 million related to a
non-qualifying
mark-to-market
cash flow hedge for forecasted sales in 2010.
Operations and Maintenance.
Operations and
maintenance expense totaled $23.2 million for the nine
months ended September 30, 2009 compared with
$22.2 million for the nine months ended September 30,
2008, a net increase of $1.0 million, or 4.6%. The net
increase in operations and maintenance of $0.9 million
compared to the same period in 2008 includes (i) increases
of $1.0 million at the Badlands gathering system,
(ii) $1.0 million attributable to the North Dakota
Bakken gathering system, which commenced operations in April
2009, (iii) decreases totaling $0.9 million at the
Kinta Area, Worland, Eagle Chief, Matli and Woodford Shale
gathering systems and (iv) a decrease of $0.2 million
related to compression operations.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $31.8 million for the nine months
ended September 30, 2009 compared with $28.5 million
for the nine months ended September 30, 2008, an increase
of $3.3 million, or 11.7%. This $3.3 million increase
was primarily attributable to increased depreciation of
$1.1 million on the Kinta Area gathering system,
$0.9 million on the Woodford Shale gathering system,
$0.6 million on the Badlands gathering system and
$0.5 million attributable to the North Dakota Bakken
gathering system, which commenced operations in April 2009.
52
Property Impairments.
As a result of recent
volume declines and projected future volume declines at Hiland
Partners Kinta Area gathering system located in
southeastern Oklahoma, Hiland Partners recognized impairment
charges of $20.5 million in September 2009. Additionally,
as a result of volume declines at Hiland Partners natural
gas gathering systems located in Texas and Mississippi, combined
with significantly reduced natural gas prices, Hiland Partners
recognized impairment charges of $1.0 million in March
2009. Hiland Partners had no property impairments during the
nine months ended September 30, 2008.
Bad Debt.
Neither we nor Hiland Partners had a
bad debt for the nine months ended September 30, 2009. For
the nine months ended September 30, 2008, Hiland Partners
recorded an uncollectible trade accounts receivable of
$0.3 million from a significant customer. Hiland Partners
initially reserved an allowance for uncollectible accounts of
$8.1 million from this customer during the second quarter
of 2008, but reversed $7.8 million in the third quarter of
2008 upon determination that the trade receivable was
collectible.
General and Administrative.
General and
administrative expense totaled $11.6 million for the nine
months ended September 30, 2009 compared with
$7.6 million for the nine months ended September 30,
2008, an increase of $4.0 million, or 53.0%. Expenses
related to the going private proposals were $4.3 million
for the nine months ended September 30, 2009. All other
general and administrative expenses decreased by
$0.2 million during the nine months ended
September 30, 2009 as compared to the nine months ended
September 30, 2008.
Other Income (Expense).
Other income (expense)
totaled $(8.2) million for the nine months ended
September 30, 2009 compared with $(10.1) million for
the nine months ended September 30, 2008, a decrease in
expense of $1.9 million, or (19.0%). The decrease is
primarily attributable lower interest rates incurred during the
nine months ended September 30, 2009 compared to interest
rates incurred during the nine months ended September 30,
2008, offset by interest expense of $1.4 million related to
an interest rate swap during the nine months ended
September 30, 2009 which did not exist in 2008.
Noncontrolling Partners Interest in Income (Loss) of
Hiland Partners.
The noncontrolling
partners interest in income (loss) of Hiland Partners,
which represents the allocation of Hiland Partners earnings or
loss to its limited partner interests not owned by us, totaled a
loss of $9.8 million for the nine months ended
September 30, 2009 compared to $4.4 million in
earnings for the nine months ended September 30, 2008, a
decrease in earnings of $14.2 million.
LIQUIDITY
AND CAPITAL RESOURCES
U.S.
Natural Gas, Crude Oil and NGL Supplies and
Outlook
The drop in demand for natural gas, crude oil and NGL products
since the third quarter of 2008 continues to impact the price
for natural gas, crude oil and NGLs. Natural gas prices have
declined significantly since the peak NYMEX Henry Hub last day
settle price of $13.11/MMBtu in July 2008 to the NYMEX Henry Hub
last day settle price of $3.73 in October 2009, a 72% decline.
Natural gas storage levels have recently approached 3.7 Tcf,
which surpassed the November 2007 record working gas storage of
3.5 Tcf. We believe that current natural gas prices will
continue to result in reduced natural gas-related drilling in
Hiland Partners service areas until the economic
environment in the United States improves and increases the
demand for natural gas. WTI crude oil pricing has declined from
a peak of $134.62/bbl in July 2008 to a low of $33.87/Bbl in
January 2009, a 75% decline, increasing to $71.55/Bbl in October
2009, a 47% decline from July 2008. Conway NGL basket pricing,
which historically has correlated to WTI crude oil pricing, has
dropped since the peak Conway NGL basket pricing of $1.97/gallon
in June 2008 to a low of $0.61/gallon in December 2008, a 69%
decline, increasing to $0.99/gallon in September 2009, a 50%
decline from June 2008. In addition, current pricing and the
forward curve pricing for WTI crude oil and the Conway NGL
basket has recently improved.
A number of the areas in which Hiland Partners operates are
experiencing a significant decline in drilling activity as a
result of this years decline in natural gas and crude oil prices
as compared to last year. Excluding Hiland Partners North Dakota
Bakken gathering system, which commenced operations in April
2009, Hiland Partners connected 26 wells during the first
nine months of 2009 as compared to 83 wells connected
during
53
the same period in 2008, a 69% decrease. At the North Dakota
Bakken gathering system, Hiland Partners connected 41 wells
during the nine months ended September 30, 2009. Currently,
there are two rigs drilling along Hiland Partners
dedicated acreage company wide, both of which are located at the
North Dakota Bakken gathering system. Hiland Partners
anticipates that the dedicated rig count will increase during
the remainder of 2009 and into 2010. While Hiland Partners
anticipates continued exploration and production activities in
the areas in which it operates, albeit at depressed levels,
fluctuations in energy prices can greatly affect production
rates and investments by third parties in the development of
natural gas and crude oil reserves. Drilling activity generally
decreases as natural gas and crude oil prices decrease. Neither
we nor Hiland Partners have control over the level of drilling
activity in the areas of Hiland Partners operations.
Disruption
to Functioning of Capital Markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained,
particularly for non-investment grade midstream companies like
Hiland. We expect that our ability to issue debt and equity at
prices that are similar to offerings in recent years will be
limited over the next three to six months and possibly longer
should capital markets remain constrained. Although Hiland
Partners intends to move forward with its planned capital
expenditures attributable to its existing facilities, Hiland
Partners may revise the timing and scope of these projects as
necessary to adapt to existing economic conditions and the
benefits expected to accrue to our and Hiland Partners
unitholders from Hiland Partners capital expenditures may
be muted by substantial cost of capital increases during this
period.
Overview
Hiland Partners senior secured revolving credit facility
requires Hiland Partners to meet certain financial tests,
including a maximum consolidated funded debt to EBITDA covenant
ratio of 4.0 to 1.0 as of the last day of any fiscal quarter;
provided that in the event that Hiland Partners makes certain
permitted acquisitions or capital expenditures, this ratio may
be increased to 4.75 to 1.0 for the three fiscal quarters
following the quarter in which such permitted acquisition or
capital expenditure occurs. Hiland Partners met the permitted
capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the ratio to
4.75 to 1.0 on March 31, 2009 for the quarters ended
March 31, 2009, June 30, 2009 and September 30,
2009. During this
step-up
period, the applicable margin with respect to loans under the
credit facility increases by 35 basis points per annum and
the unused commitment fee increases by 12.5 basis points
per annum. The ratio will revert back to 4.0 to 1.0 for the
quarter ended December 31, 2009. If commodity prices and
inlet natural gas volumes do not improve above the current
forward prices and expected inlet natural gas volumes for the
fourth quarter of 2009, the Partnership could be in violation of
the maximum consolidated funded debt to EBITDA covenant ratio as
early as December 31, 2009, unless this ratio is amended,
Hiland Partners receives an infusion of equity capital, Hiland
Partners debt is restructured or Hiland Partners is able
to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, Hiland Partners expects that any solution will
require the assessment of fees and increased rates, the infusion
of additional equity capital or the incurrence of subordinated
indebtedness by Hiland Partners and the suspension of
distributions for a certain period of time. There can be no
assurance that any such agreement will be reached with the
lenders, that any required equity or debt financing will be
available to Hiland Partners, or that Hiland Partners will have
sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
We rely on distributions from Hiland Partners to fund cash
requirements for our operations. Cash generated from operations,
borrowings under Hiland Partners credit facility and funds
from private or public equity and future debt offerings have
historically been Hiland Partners primary sources of
liquidity. We believe that funds from these sources should be
sufficient to meet both Hiland Partners short-term working
capital requirements and its long-term capital expenditure
requirements. Hiland Partners ability to pay
54
distributions to unitholders, to fund planned capital
expenditures and to make acquisitions depends upon Hiland
Partners future operating performance and, more broadly,
on the availability of equity and debt financing, which will be
affected by prevailing economic conditions in Hiland
Partners industry and financial, business and other
factors, many of which are beyond Hiland Partners control.
Due to (i) the impact of lower commodity prices and
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margin and cash flows;
(ii) future required levels of capital expenditures and
(iii) the level of Hiland Partners indebtedness
relative to its projections, Hiland Partners may be in violation
of the maximum consolidated funded debt to EBITDA covenant ratio
contained in its senior secured credit facility as early as
December 31, 2009, unless the ratio is amended, Hiland
Partners receives an infusion of equity capital, Hiland
Partners debt is restructured or Hiland Partners is able
to monetize
in-the-money
hedges positions. Hiland Partners has suspended quarterly cash
distributions on common and subordinated units beginning with
the first quarter distribution of 2009.
Cash
Flows from Operating Activities
Cash flows from operating activities increased by
$10.1 million to $35.7 million for the nine months
ended September 30, 2009 from $25.5 million for the
nine months ended September 30, 2008. During the nine
months ended September 30, 2009 we received cash flows from
customers of approximately $165.7 million attributable to
significantly lower average realized natural gas and NGL sales
prices, partially offset by increased natural gas and NGLs
volumes, received $3.2 million from early settlements of
derivative contracts, made cash payments to our suppliers and
employees of approximately $125.2 million and made payments
of interest expense of $8.0 million, net of amounts
capitalized, resulting in cash received from operating
activities of $35.7 million. During the same nine month
period in 2008, we received cash flows from customers of
approximately $303.7 million attributable to increased
natural gas and NGLs volumes and significantly higher average
realized natural gas and NGL sales prices, had cash payments to
our suppliers and employees of approximately $268.5 million
and payment of interest expense of $9.7 million, net of
amounts capitalized, resulting in cash received from operating
activities of $25.5 million.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods.
Hiland Partners collects and pays large receivables and payables
at the end of each calendar month. The timing of these payments
and receipts may vary by a day or two between month-end periods
and cause fluctuations in cash received or paid. Working capital
items, exclusive of cash, provided $5.3 million of cash
flows from operating activities during the nine months ended
September 30, 2009. Working capital items, exclusive of
cash, used $16.6 million of cash flows from operating
activities during the nine months ended September 30, 2008.
Net loss for the nine months ended September 30, 2009 was
$(27.6) million, a decrease in net income of
$42.9 million from a income of $15.3 million for the
nine months ended September 30, 2008. Depreciation,
amortization, accretion and property impairments increased by
$24.8 million to $53.3 million for the nine months
ended September 30, 2009 from $28.5 million for the
nine months ended September 30, 2008.
Cash
Flows Used for Investing Activities
Cash flows used for investing activities, which represent
investments in property and equipment decreased by
$4.9 million to $32.3 million for the nine months
ended September 30, 2009 from $37.1 million for the
nine months ended September 30, 2008 primarily due to
reduced capital expenditures in nearly all of Hiland Partners
gathering systems, offset by cash flows invested related to the
construction of the North Dakota Bakken gathering system.
Cash
Flows from Financing Activities
Cash flows used in financing activities was $1.2 million
for the nine months ended September 30, 2009, a decrease of
$14.8 million from $13.6 million provided by financing
activities for the nine months ended September 30, 2008.
During the nine months ended September 30, 2009, Hiland
Partners (i) borrowed $12.0 million under its credit
facility to fund its internal expansion projects,
(ii) repaid $11.0 million on its
55
credit facility, (iii) distributed $1.8 million to its
noncontrolling partners and (iv) made $0.5 million
payments on capital lease obligations. During the nine months
ended September 30, 2009, we borrowed $2.3 million on
our new credit facility and made distributions of
$2.2 million to our unitholders.
During the nine months ended September 30, 2008, Hiland
Partners (i) borrowed $41.0 million under its credit
facility to fund its internal expansion projects,
(ii) received capital contributions of $1.0 million as
a result of issuing Hiland Partners common units due to the
exercise of 40,705 vested unit options, (iii) incurred debt
issuance costs of $0.4 million associated with the fourth
amendment to its credit facility amended in February 2008,
(iv) distributed $9.9 million to its minority interest
unitholders and (v) made $0.4 million payments on
capital lease obligations. During the nine months ended
September 30, 2008, we made distributions of
$18.2 million to our unitholders.
Capital
Requirements
Hiland Partners midstream energy business is capital
intensive, requiring significant investment to maintain and
upgrade existing operations. Hiland Partners capital
requirements have consisted primarily of, and we anticipate will
continue to be:
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maintenance capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of Hiland
Partners assets and to extend their useful lives, or other
capital expenditures that are incurred in maintaining existing
system volumes and related cash flows; and
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expansion capital expenditures such as those to acquire
additional assets to grow Hiland Partners business, to
expand and upgrade gathering systems, processing plants,
treating facilities and fractionation facilities and to
construct or acquire similar systems or facilities.
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We believe that cash generated from the operations of Hiland
Partners business will be sufficient to meet its
anticipated maintenance capital expenditures for the next twelve
months. We anticipate that Hiland Partners expansion
capital expenditures will be funded through long-term borrowings
or other debt financings
and/or
equity offerings. See Credit Facility below for
information related to our and Hiland Partners credit
agreements.
Hiland Partners suspended quarterly cash distributions on common
and subordinated units beginning with the first quarter
distribution of 2009. As our only cash-generating assets are our
2% general partner interest, all of the incentive distribution
rights and a 57.5% limited partner interest in Hiland Partners,
our cash flow is completely dependent upon the ability of Hiland
Partners to make cash distributions to its partners, including
us. Our first amended and restated senior secured credit
agreement credit dated August 7, 2009 and the term
promissory note we entered into on November 3, 2009 both
mature on December 31, 2009, at which time all outstanding
amounts thereunder will become due and payable. We believe the
current availability on these credit facilities will allow us to
meet our current obligations and future expenses through
maturity. We cannot assure that any refinancing of our credit
facility can be successfully completed or, if completed, that
the terms will be favorable to us. If we are unable to obtain
refinancing of our outstanding debt obligations and Hiland
Partners does not resume paying quarterly cash distributions in
amounts necessary to satisfy our obligations, we may need to
issue new equity or sell common units in Hiland Partners to
satisfy our outstanding debt obligations and any current
liabilities that we may incur in the operation of our business
in the future.
North
Dakota Bakken
Hiland Partners North Dakota Bakken gathering system
presently consists of a
68-mile
gathering system located in northwestern North Dakota that
gathers natural gas associated with crude oil produced from the
Bakken shale and Three Forks/Sanish formations. Construction of
the gathering system, associated compression and treating
facilities and a processing plant commenced in October 2008 and
became fully operational in May 2009. As of September 30,
2009, Hiland Partners has invested approximately
$24.0 million in the project.
56
Financial
Derivatives and Commodity Hedges
Hiland Partners has entered into certain financial derivative
instruments that are classified as cash flow hedges and relate
to forecasted sales in 2009 and 2010. Hiland Partners entered
into these financial swap instruments to hedge the forecasted
natural gas sales against the variability in expected future
cash flows attributable to changes in commodity prices. Under
these swap agreements, Hiland Partners receives a fixed price
and pays a floating price based on certain indices for the
relevant contract period as the underlying natural gas is sold.
The following table provides information about Hiland Partners
commodity based derivative instruments at September 30,
2009:
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Average
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Fair Value
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Fixed
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Asset
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|
Description and Production Period
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Volume
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Price
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(Liability)
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(MMBtu)
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(per MMBtu)
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Natural Gas Sold Fixed for Floating Price Swaps
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October 2009 September 2010
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2,136,000
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$
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6.87
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$
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3,537
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October 2010 December 2010
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534,000
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$
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6.73
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341
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$
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3,878
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Hiland Partners has entered into a financial derivative
instrument that is classified as a cash flow hedge and relates
to forecasted interest payments under its credit facility in
2009. Hiland Partners entered into this financial swap
instrument to hedge forecasted interest payments against the
variable interest payments under its credit facility. Under this
contractual swap agreement, Hiland Partners pays a fixed
interest rate and receives a floating rate based on one month
LIBOR on the notional amount for the contract period. The
following table provides information about Hiland Partners
interest rate swap at September 30, 2009 for the periods
indicated:
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Fair Value
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Notional
|
|
Interest
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Asset
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Description and Period
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Amount
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|
Rate
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(Liability)
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Interest Rate Swap
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|
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|
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|
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October 2009 December 2009
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$
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100,000
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2.245
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%
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$
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(512
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)
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Off-Balance
Sheet Arrangements
Neither we nor Hiland Partners had any significant off-balance
sheet arrangements as of September 30, 2009.
Available
Credit
Credit markets in the United States and around the world remain
constrained due to a lack of liquidity and confidence in a
number of financial institutions. Investors continue to seek
perceived safe investments in securities of the United States
government rather than corporate issues. As non-investment grade
midstream companies, we and Hiland Partners are currently
experiencing difficulty accessing bank credit markets.
Additionally, existing constraints in the credit markets may
increase the rates we and Hiland Partners is charged for
utilizing these markets.
Credit
Facilities
Hiland
Holdings Credit Facility
On September 25, 2006, concurrently with the closing of our
initial public offering, we entered into a three-year
$25.0 million senior secured credit facility. Pursuant to
the terms of the agreement, we elected to reduce the commitment
level on the credit facility to $10.0 million effective
May 15, 2009 and we elected to further reduce the
commitment level on the credit facility to $3.0 million on
August 7, 2009. Concurrently with the reduction of the
commitment level to $3.0 million, the existing lenders
under the credit facility assigned their interests in the
facility to a new lender and we entered into a first amended and
restated senior
57
secured credit agreement with The Security National Bank of
Enid. The credit facility is secured by all of our ownership
interests in Hiland Partners and its general partner, other than
the 2% general partner interest and the incentive distribution
rights. The credit facility will mature on December 31,
2009, at which time all outstanding amounts thereunder become
due and payable.
Indebtedness under the credit facility bears interest at the
prime rate plus 1% per annum, but in no event less than 5% per
annum, to be adjusted as changes occur in the prime rate. At
September 30, 2009, the interest rate on outstanding
borrowings from our credit facility was 5.0%.
The credit facility contains several covenants that, among other
things, require the maintenance of a
debt-to-worth
ratio not to be greater than 1.25 to 1 and require financial
reports to be submitted periodically. The credit facility also
contains various covenants that limit, among other things,
subject to certain exceptions, our ability to grant liens, enter
into agreements restricting our ability to grant liens on our
assets or amend the credit facility, make certain loans,
acquisitions and investments or enter into a merger,
consolidation or sale of assets.
The amount we may borrow under the credit facility is limited to
the lesser of: (i) 50% of the sum of the value of the
Hiland Partners common and subordinated units and (ii) the
maximum available amount of the credit facility (currently
$3.0 million). For purposes of this calculation, the value
of (i) the Hiland Partners common units on any date shall
be the closing price for such units as reflected on the NASDAQ
National Market on any date and (ii) the Hiland Partners
subordinated units on any date shall be deemed to equal 85% of
the value of the Hiland Partners common units on such date. At
September 30, 2009, the borrowing base was
$3.0 million.
As of September 30, 2009, we had $3.0 million
outstanding under this credit facility and were in compliance
with our
debt-to-worth
ratio covenant. The $3.0 million outstanding under this
credit facility matures on December 31, 2009 and is
included in accrued liabilities and other in the balance sheet.
Our
debt-to-worth
covenant ratio was 0.80 to 1.0 at September 30, 2009.
On November 3, 2009, we entered into a $1.5 million
term promissory note agreement with Harold Hamm, Chairman of our
general partner and, together with affiliates of Mr. Hamm,
majority owner of the Partnership. The note agreement matures on
December 31, 2009, at which time all outstanding amounts
thereunder become due and payable. The note agreement is secured
by all of our ownership interests in Hiland Partners and its
general partner, other than the 2% general partner interest and
the incentive distribution rights, but is subordinate in
security to the first amended and restated senior secured credit
agreement. Indebtedness under the note agreement bears interest
at the prime rate plus 1% per annum, but in no event less than
5% per annum.
Hiland
Partners Credit Facility
Hiland Partners borrowing capacity under its senior secured
revolving credit facility, as amended, is $300.0 million
consisting of a $291.0 million senior secured revolving
credit facility to be used for funding acquisitions and other
capital expenditures, issuance of letters of credit and general
corporate purposes (the Acquisition Facility) and a
$9.0 million senior secured revolving credit facility to be
used for working capital and to fund distributions (the
Working Capital Facility).
In addition, Hiland Partners senior secured revolving credit
facility provides for an accordion feature, which permits Hiland
Partners, if certain conditions are met, to increase the size of
the Acquisition Facility by up to $50.0 million and allows
for the issuance of letters of credit of up to
$15.0 million in the aggregate. The credit facility will
mature in May 2011. At that time, the agreement will terminate
and all outstanding amounts thereunder will be due and payable.
Hiland Partners senior secured revolving credit facility
requires Hiland Partners to meet certain financial tests,
including a maximum consolidated funded debt to EBITDA covenant
ratio of 4.0 to 1.0 as of the last day of any fiscal quarter;
provided that in the event that Hiland Partners makes certain
permitted acquisitions or capital expenditures, this ratio may
be increased to 4.75 to 1.0 for the three fiscal quarters
following the quarter in which such permitted acquisition or
capital expenditure occurs. Hiland Partners met the permitted
capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the
58
ratio to 4.75 to 1.0 on March 31, 2009 for the quarters
ended March 31, 2009, June 30, 2009 and
September 30, 2009. During this
step-up
period, the applicable margin with respect to loans under the
credit facility increases by 35 basis points per annum and
the unused commitment fee increases by 12.5 basis points
per annum. The ratio will revert back to 4.0 to 1.0 for the
quarter ended December 31, 2009. If commodity prices and
inlet natural gas volumes do not improve above the current
forward prices and expected inlet natural gas volumes for the
fourth quarter of 2009, the Partnership could be in violation of
the maximum consolidated funded debt to EBITDA covenant ratio as
early as December 31, 2009, unless this ratio is amended,
Hiland Partners receives an infusion of equity capital, Hiland
Partners debt is restructured or Hiland Partners is able
to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, Hiland Partners expects that any solution will
require the assessment of fees and increased rates, the infusion
of additional equity capital or the incurrence of subordinated
indebtedness by Hiland Partners and the suspension of
distributions for a certain period of time. There can be no
assurance that any such agreement will be reached with the
lenders, that any required equity or debt financing will be
available to Hiland Partners, or that Hiland Partners will have
sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
Hiland Partners obligations under the credit facility are
secured by substantially all of its assets and guaranteed by
Hiland Partners, and all of its subsidiaries, other than Hiland
Operating, LLC, its operating company, which is the borrower
under the credit facility.
Indebtedness under Hiland Partners credit facility will
bear interest, at its option, at either (i) an Alternate
Base Rate plus an applicable margin ranging from 50 to
125 basis points per annum or (ii) LIBOR plus an
applicable margin ranging from 150 to 225 basis points per
annum based on its ratio of consolidated funded debt to EBITDA.
The Alternate Base Rate is a rate per annum equal to the
greatest of (a) the Prime Rate in effect on such day,
(b) the base CD rate in effect on such day plus 1.50% and
(c) the Federal Funds effective rate in effect on such day
plus
1
/2
of 1%. Hiland Partners has elected for the indebtedness to bear
interest at LIBOR plus the applicable margin. A letter of credit
fee will be payable for the aggregate amount of letters of
credit issued under the credit facility at a percentage per
annum equal to 1.0%. An unused commitment fee ranging from 25 to
50 basis points per annum based on Hiland Partners
ratio of consolidated funded debt to EBITDA will be payable on
the unused portion of the credit facility. During the
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At September 30, 2009,
the interest rate on outstanding borrowings from Hiland
Partners credit facility was 2.87%.
Hiland Partners is subject to interest rate risk on its credit
facility and has entered into an interest rate swap to reduce
this risk. See Note 5 Derivatives for a
discussion of Hiland Partners interest rate swap.
The credit facility prohibits Hiland Partners from making
distributions to unitholders if any default or event of default,
as defined in the credit facility, has occurred and is
continuing or would result from such distributions. In addition,
the credit facility contains various covenants that limit, among
other things, subject to certain exceptions and negotiated
baskets, Hiland Partners ability to incur
indebtedness, grant liens, make certain loans, acquisitions and
investments, make any material changes to the nature of its
business, amend its material agreements, including its Omnibus
Agreement, which contains non-compete and indemnity provisions
with affiliates, or enter into a merger, consolidation or sale
of assets.
The credit facility defines EBITDA as Hiland Partners
consolidated net income (loss), plus income tax expense,
interest expense, depreciation, amortization and accretion
expense, amortization of intangibles and organizational costs,
non-cash unit based compensation expense, and adjustments for
non-cash gains and losses on specified derivative transactions
and for other extraordinary or non-recurring items.
59
The credit facility limits distributions to Hiland
Partners unitholders to available cash, as defined by the
agreement, and borrowings to fund such distributions are only
permitted under the revolving working capital facility. The
revolving working capital facility is subject to an annual
clean-down period of 15 consecutive days in which
the amount outstanding under the revolving working capital
facility is reduced to zero.
As of September 30, 2009, Hiland Partners had
$253.1 million outstanding under this credit facility and
was in compliance with its financial covenants. Hiland
Partners EBITDA to interest expense ratio was 4.93 to 1.0
and its consolidated funded debt to EBITDA ratio was 4.50 to 1.0.
Impact
of Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the periods presented.
Recent
Accounting Pronouncements
In September 2009, the FASB issued new authoritative accounting
guidance, effective for financial statements issued for interim
and annual periods ending after September 15, 2009, which
identifies the FASB Accounting Standards Codification
(Codification) as the authoritative source of GAAP
in the United States. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative
GAAP for SEC registrants. Codification is not intended to change
GAAP. The adoption of this new accounting guidance had no impact
on our financial statements and disclosures therein.
In May 2009, the FASB issued new authoritative accounting
guidance on subsequent events that establishes general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. This new accounting guidance is
effective for interim or annual periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB issued new authoritative accounting
guidance on interim disclosures about fair value of financial
instruments which expands the fair value disclosures required
for all financial instruments to interim periods. This new
guidance also requires entities to disclose in interim periods
the methods and significant assumptions used to estimate the
fair value of financial instruments. This new accounting
guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB revised the authoritative guidance
related to the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. Generally, assets acquired and liabilities assumed
in a business combination that arise from contingencies must be
recognized at fair value at the acquisition date. This guidance
was adopted January 1, 2009. As this guidance is applied
prospectively to business combinations with an acquisition date
on or after the date the guidance became effective, the impact
cannot be determined until the transactions occur. No such
transactions have occurred during 2009.
In April 2008, the FASB issued amended guidance on the factors
that an entity should consider in developing renewal or
extension assumptions used in determining the useful life of
recognized intangible assets, including goodwill. In determining
the useful life of an acquired intangible asset, this guidance
removes the requirement for an entity to consider whether
renewal of the intangible asset requires significant costs or
material modifications to the related arrangement and replaces
the previous useful life assessment criteria with a requirement
that an entity considers its own experience or market
participant assumptions in renewing similar arrangements. This
guidance was adopted effective January 1, 2009, and will
apply to future intangible assets acquired. We dont
believe the adoption will have a material impact on our
financial position, results of operations or cash flows.
In March 2008, the FASB amended and expanded the disclosure
requirements related to derivative instruments and hedging
activities to improve transparency in financial reporting by
requiring enhanced disclosures of an entitys derivative
instruments and hedging activities and their effects on the
entitys financial
60
position, financial performance, and cash flows. The revised
guidance requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. This guidance was
adopted effective January 1, 2009 and did not have a
material impact on our financial statements and disclosures
therein.
In March 2008, the FASB issued authoritative accounting guidance
which requires the calculation of a Master Limited
Partnerships (MLPs) net earnings per limited
partner unit for each period presented according to
distributions declared and participation rights in undistributed
earnings as if all of the earnings for that period had been
distributed. In periods with undistributed earnings above
specified levels, the calculation per the two-class method
results in an increased allocation of such undistributed
earnings to the general partner and a dilution of earnings to
the limited partners. This guidance was adopted effective
January 1, 2009 and did not have a significant impact on
our financial statements and disclosures therein.
In December 2007, the FASB revised the authoritative guidance
for business combinations which provides guidance for how the
acquirer recognizes and measures goodwill acquired in the
business combination or a gain from a bargain purchase, the
identifiable assets acquired, liabilities assumed and any
noncontrolling interest in the acquiree. This guidance also
determines what information to disclose to enable users to be
able to evaluate the nature and financial effects of the
business combination. This guidance was adopted effective
January 1, 2009 and will apply to future business
combinations.
In December 2007, the FASB issued authoritative guidance
clarifying that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.
This guidance requires the equity amount of consolidated net
income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the
consolidated income statement and that changes in a
parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted
for consistently and similarly as equity transactions.
Consolidated net income and comprehensive income are now
determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, this guidance establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. This guidance is effective for
fiscal years beginning on or after December 15, 2008, was
adopted effective January 1, 2009 and did not have a
material impact on our financial position, results of operations
or cash flows. Certain adjustments have been made to prior
period information to conform to current period presentation
related to our adoption of this guidance.
In February 2007, the FASB expanded guidance on fair value
measurements which expands opportunities to use fair value
measurement in financial reporting and permits entities to
choose to measure many financial instruments and certain other
items at fair value. This guidance was adopted effective
January 1, 2008, at which time no financial assets or
liabilities, not previously required to be recorded at fair
value by other authoritative literature, were designated to be
recorded at fair value. The adoption of this guidance did not
have any impact on our financial position, results of operations
or cash flows.
In September 2006, the FASB issued new authoritative accounting
guidance for fair value measurements, which defines fair value
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework
for measuring fair value in generally accepted accounting
principles (GAAP) such as fair value hierarchy used
to classify the source of information used in fair value
measurements (i.e., market based or non-market based) and
expands disclosure about fair value measurements based on their
level in the hierarchy. This guidance establishes a fair value
hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value and defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable
61
prices and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
This guidance was adopted effective January 1, 2009 and did
not have a material impact on our financial statements or
disclosures therein.
Significant
Accounting Policies and Estimates
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
There have been no material changes in our significant
accounting policies and estimates during the three months ended
September 30, 2009. See our disclosure of significant
accounting policies and estimates in Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations on our Annual Report
on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
March 9, 2009.
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Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which
Hiland Partners is exposed is commodity price risk for natural
gas and NGLs. Hiland Partners also incurs, to a lesser extent,
risks related to interest rate fluctuations. Hiland Partners
does not engage in commodity energy trading activities.
Commodity Price Risks.
Hiland Partners
profitability is affected by volatility in prevailing NGL and
natural gas prices. Historically, changes in the prices of most
NGL products have generally correlated with changes in the price
of crude oil. NGL and natural gas prices are volatile and are
impacted by changes in the supply and demand for NGLs and
natural gas, as well as market uncertainty. Hiland
Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
our ability to make distributions to unitholders. To illustrate
the impact of changes in prices for natural gas and NGLs on our
operating results, we have provided the table below, which
reflects, for the three months ended September 30, 2009 and
September 30, 2008, respectively, the impact on our
midstream segment margin of a $0.01 per gallon change (increase
or decrease) in NGL prices coupled with a $0.10 per MMBtu change
(increase or decrease) in the price of natural gas.
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|
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|
|
|
|
|
|
|
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|
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Natural Gas Price Change ($/MMBtu)
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Three Months Ended September 30,
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|
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2009
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|
2008
|
|
NGL Price Change ($/gal)
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|
|
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$
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0.10
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|
$
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(0.10
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)
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|
$
|
0.10
|
|
|
$
|
(0.10
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)
|
|
|
$
|
0.01
|
|
|
$
|
177,000
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|
|
$
|
159,000
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|
|
$
|
130,000
|
|
|
$
|
156,000
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|
|
|
$
|
(0.01
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)
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|
$
|
(159,000
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)
|
|
$
|
(177,000
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)
|
|
$
|
(159,000
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)
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|
$
|
(134,000
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)
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The increase in commodity exposure is the result of increased
NGL product sales volumes offset by decreased natural gas sales
volumes during the three months ended September 30, 2009
compared to the three months ended September 30, 2008 and
the increased exposure to NGL product prices in 2009 as the
result of no NGL hedging contracts in 2009 compared to NGL
products hedged during the three months ended September 30,
2008. The magnitude of the impact on total segment margin of
changes in natural gas and NGL sales prices presented may not be
representative of the magnitude of the impact on total segment
margin for different commodity prices or contract portfolios.
Natural gas and crude oil prices can also affect our
profitability indirectly by influencing the level of drilling
activity and related opportunities for our services.
We manage this commodity price exposure through an integrated
strategy that includes management of our contract portfolio,
optimization of our assets and the use of derivative contracts.
As a result of these derivative swap contracts, we have hedged a
portion of our expected exposure to natural gas prices in 2009
62
and 2010. We continually monitor our hedging and contract
portfolio and expect to continue to adjust our hedge position as
conditions warrant. The following table provides information
about our commodity-based derivative instruments at
September 30, 2009 for the periods indicated:
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Average
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Fair Value
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|
|
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Fixed
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Asset
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Description and Production Period
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Volume
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Price
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(Liability)
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(MMBtu)
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(per MMBtu)
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Natural Gas Sold Fixed for Floating Price Swaps
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October 2009 September 2010
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2,136,000
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$
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6.87
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$
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3,537
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October 2010 December 2010
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534,000
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$
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6.73
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341
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$
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3,878
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Interest Rate Risk.
We are exposed to changes
in the LIBOR rate as a result of Hiland Partners credit
facility, and the prime rate as a result of our credit facility,
which are both subject to floating interest rates. On
October 7, 2008, Hiland Partners entered into a
floating-to-fixed
interest rate swap agreement with an investment grade
counterparty whereby Hiland Partners pays a monthly fixed
interest rate of 2.245% and receives a monthly variable rate
based on the one month posted LIBOR interest rate on a notional
amount of $100.0 million. This swap agreement was effective
on January 2, 2009 and terminates on January 1, 2010.
As of September 30, 2009, Hiland Partners had approximately
$253.1 million of indebtedness outstanding under its credit
facility, of which $153.1 million is exposed to changes in
the LIBOR rate. The impact of a 100 basis point increase in
interest rates on the amount of current debt exposed to variable
interest rates would for the remainder of 2009, result in an
increase in annualized interest expense and a corresponding
decrease in annualized net income of approximately
$1.5 million. The following table provides information
about Hiland Partners interest rate swap at
September 30, 2009 for the periods indicated:
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Fair Value
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Notional
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|
Interest
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Asset
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Description and Period
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Amount
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Rate
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|
(Liability)
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Interest Rate Swap
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|
|
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|
|
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October 2009 December 2009
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$
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100,000
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|
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2.245
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%
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|
$
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(512
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)
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Credit Risk.
Counterparties pursuant to the
terms of their contractual obligations expose Hiland Partners to
potential losses as a result of nonperformance. Hiland
Partners four largest customers for the nine months ended
September 30, 2009 accounted for approximately 21%, 14%,
12% and 9%, respectively, of revenues. Consequently, changes
within one or more of these companies operations have the
potential to impact, both positively and negatively, our credit
exposure and make us subject to risks of loss resulting from
nonpayment or nonperformance by these or any of Hiland
Partners other customers. Any material nonpayment or
nonperformance by its key customers could materially and
adversely affect our business, financial condition or results of
operations and reduce Hiland Partners ability to make
distributions to its unitholders. Furthermore, some of Hiland
Partners customers may be highly leveraged and subject to
their own operating and regulatory risks, which increases the
risk that they may default on their obligations to Hiland
Partners. Hiland Partners counterparties for Hiland
Partners derivative instruments as of September 30,
2009 are BP Energy Company and Bank of Oklahoma, N.A. Our
counterparty to our interest rate swap as of September 30,
2009 is Wells Fargo Bank, N.A.
On July 22, 2008, SemGroup, L.P. and certain subsidiaries
filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. In October
2008, the United States Bankruptcy Court for the District of
Delaware entered an order approving the assumption of a Natural
Gas Liquids Marketing Agreement (the SemStream
Agreement) between SemStream, L.P., an affiliate of
SemGroup, L.P., and Hiland Partners relating to the sale of
natural gas liquids and condensate at our Bakken and Badlands
plants and gathering systems, restoring Hiland Partners and
SemStream, L.P. to its pre-bankruptcy contractual relationship.
Hiland Partners pre-petition credit exposure to SemGroup, L.P.
relating to condensate sales to SemCrude, LLC in our
mid-continent region is approximately $0.3 million, which
continues to be reserved as of September 30, 2009.
63
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Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
|
|
(a)
|
Evaluation
of disclosure controls and procedures.
|
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, we have
evaluated, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this Quarterly Report on
Form 10-Q.
Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures were effective as of September 30,
2009, to ensure that information is accumulated and communicated
to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
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(b)
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Changes
in internal control over financial reporting.
|
During the three months ended September 30, 2009, there
were no changes in our system of internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
64
PART II
OTHER INFORMATION
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|
Item 1.
|
Legal
Proceedings
|
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings
Merger. These lawsuits are as follows: (i)
Robert
Pasternack v. Hiland Partners, LP et al.
, In the Court
of Chancery of the State of Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Partners, the general partner of each of the Partnership and
Hiland Partners, and the members of the board of directors of
each of the Partnership and Hiland Partners. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an Amended
Class Action Complaint and a motion to enjoin the mergers.
This Amended Class Action Complaint alleges, among other
things, that (i) the original consideration and revised
consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Partners that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. On August 13, 2009, the Partnership, Hiland
Partners and certain individual defendants moved to dismiss the
claims added in the July 31, 2009 Amended Class Action
Complaint. The plaintiffs moved to expedite proceedings on
September 4, 2009. On September 4, 2009, the
plaintiffs filed a motion to expedite the proceedings. On
September 9, 2009, the Delaware Chancery Court requested
that the defendants file a response to plaintiffs motion
that same day and set a hearing on plaintiffs motion for
September 11, 2009. Defendants responded to
plaintiffs motion as ordered by the Court, and, following
the hearing on September 11, 2009, plaintiffs motion
to expedite the proceedings was denied.
We cannot predict the outcome of these lawsuits, or others, nor
can we predict the amount of time and expense that will be
required to resolve the lawsuits.
We are not aware of any legal or governmental proceedings
against us, or contemplated to be brought against us, under the
various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts
and with coverage and deductibles as our general partner
believes are reasonable and prudent. However, we cannot assure
you that this insurance will be adequate to protect us from all
material expenses related to potential future claims for
personal and property damage or that these levels of insurance
will be available in the future at economical prices.
The
failure to complete the Hiland Holdings Merger could adversely
affect the price of our common units and otherwise have an
adverse effect on us.
There can be no assurance that the conditions to the completion
of the Hiland Holdings Merger, many of which are out of our
control, will be satisfied by the December 11, 2009
deadline set forth in the amended merger agreement. Among other
things, we cannot be certain that (i) holders of a majority
of our common units (other than Mr. Hamm, certain of his
affiliates and the Hamm family trusts) will vote in favor of the
Hiland Holdings Merger and the merger agreement; (ii) no
injunction will be granted in any of the three
65
pending unitholder lawsuits challenging the Hiland Holdings
Merger (as described elsewhere in this
Form 10-Q);
or (iii) that the Hiland Partners Merger will be completed
concurrently with the Hiland Holdings Merger (the completion of
which is a condition to Harold Hamms obligation to
complete the Hiland Holdings Merger). Additionally, if we do not
receive the required unitholder approval of the Hiland Holdings
Merger Agreement and the Hiland Holdings Merger at a special
meeting held on or before December 4, 2009, pursuant to the
terms of our Partnership Agreement, we will have to set a new
record date and resolicit proxies in connection with a new vote
on the proposals. Whether or not we will be able to hold a
unitholder vote on or before December 4, 2009 is subject to
a variety of risks, including the risk that we will not receive
clearance of the proxy supplement a sufficient amount of time
prior to December 4, 2009 to permit distribution of the
supplement. This could materially delay the completion of the
Hiland Holdings Merger.
If the Hiland Holdings Merger is not completed, the price of our
common units could fall to the extent that the current market
price of our common units reflects an assumption that a
transaction will be completed. Further, a failed transaction may
result in negative publicity
and/or
a
negative impression of us in the investment community and may
affect our relationship with employees, vendors, creditors and
other business partners.
Additionally, we are subject to the following risks related to
the Hiland Holdings Merger:
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|
Certain costs relating to the Hiland Holdings Merger, including
legal, accounting and financial advisory fees, are payable by us
whether or not the Hiland Holdings Merger is completed.
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|
Under circumstances set out in the merger agreement, if the
Hiland Holdings Merger is not completed we may be required to
reimburse up to $1,067,000 availability of Mr. Hamm and his
affiliates expenses associated with the Hiland Holdings
Merger.
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|
Our managements and our employees attention will
have been diverted from our
day-to-day
operations, we may experience unusually high employee attrition
and our business and customer relationships may be disrupted.
|
We are
subject to litigation related to the Hiland Holdings
Merger.
We are actively defending three putative unitholder class action
lawsuits which have been filed relating to the Hiland Partners
Merger and the Hiland Holdings Merger. These lawsuits are as
follows: (i)
Robert Pasternack v. Hiland Partners,
LP et al.
, In the Court of Chancery of the State of
Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Partners, the general partner of each of the Partnership and
Hiland Partners, and the members of the board of directors of
each of the Partnership and Hiland Partners. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an Amended
Class Action Complaint and a motion to enjoin the mergers.
This Amended Class Action Complaint alleges, among other
things, that (i) the original consideration and revised
consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Partners that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an
66
order requiring defendants to supplement the Preliminary Proxy
Statement with certain information. It is possible that
additional claims beyond those that have already been filed will
be brought by the current plaintiffs or by others in an effort
to enjoin the Hiland Holdings Merger or seek monetary relief
from us.
While the Hiland Companies do not believe these lawsuits have
merit and intend to defend themselves vigorously, we cannot
predict the outcome of these lawsuits, or others, nor can we
predict the amount of time and expense that will be required to
resolve the lawsuits. An unfavorable resolution of any such
litigation surrounding the Hiland Holdings Merger could delay or
prevent the consummation of the Hiland Holdings Merger. In
addition, the cost to us of defending the litigation, even if
resolved in our favor, could be substantial. Such litigation
could also divert the attention of our management and our
resources in general from
day-to-day
operations.
If
commodity prices and inlet natural gas volumes do not improve
above the expected prices and inlet natural gas volumes for the
fourth quarter of 2009, Hiland Partners may be in violation of
its maximum consolidated funded debt to EBITDA covenant ratio as
early as December 31, 2009, unless the ratio is amended, its
senior secured revolving credit facility is restructured, Hiland
Partners receives an infusion of equity capital or Hiland
Partners is able to monetize
in-the-money
hedge positions. Failure to comply with the covenants could
cause an event of default under the Hiland Partners credit
facility.
The Hiland Partners credit facility contains covenants requiring
Hiland Partners to maintain certain financial ratios and comply
with certain financial tests, which, among other things, require
Hiland Partners and its subsidiary guarantors, on a consolidated
basis, to maintain specified ratios or conditions as follows:
|
|
|
|
|
EBITDA to interest expense of not less than 3.0 to 1.0; and
|
|
|
|
consolidated funded debt to EBITDA of not more than 4.0 to 1.0
with the option to increase the consolidated funded debt to
EBITDA ratio to not more than 4.75 to 1.0 for a period of up to
nine months following an acquisition or a series of acquisitions
totaling $40 million in a
12-month
period (subject to an increased applicable interest rate margin
and commitment fee rate).
|
As of September 30, 2009, Hiland Partners was in compliance
with each of these ratios, which are tested quarterly. Hiland
Partners EBITDA to interest expense ratio was 4.93 to 1.0
and its consolidated funded debt to EBITDA covenant ratio was
4.50 to 1.0. Hiland Partners temporarily increased the ratio to
4.75 to 1.0 on March 31, 2009, but such ratio will be
reduced to 4.0 to 1.0 on December 31, 2009. Hiland
Partners ability to remain in compliance with these
restrictions and covenants in the future is uncertain and will
be affected by the levels of cash flow from our operations and
events or circumstances beyond our control. If commodity prices
and inlet natural gas volumes do not improve above the expected
prices and inlet natural gas volumes for the fourth quarter of
2009, Hiland Partners may be in violation of the maximum
consolidated funded debt to EBITDA ratio as early as
December 31, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured, Hiland
Partners receives an infusion of equity capital or Hiland
Partners is able to monetize
in-the-money
hedge positions. Hiland Partners failure to comply with
any of the restrictions and covenants under our revolving credit
facility could lead to an event of default and the acceleration
of our obligations under those agreements. Hiland Partners may
not have sufficient funds to make such payments. If Hiland
Partners is unable to satisfy its obligations with cash on hand,
Hiland Partners could attempt to refinance such debt, sell
assets or repay such debt with the proceeds from an equity
offering. We cannot assure that Hiland Partners will be able to
generate sufficient cash flow to pay the interest on its debt or
that future borrowings, equity financings or proceeds from the
sale of assets will be available to pay or refinance such debt.
The terms of Hiland Partners financing agreements may also
prohibit it from taking such actions. Factors that will affect
Hiland Partners ability to raise cash through an offering
of its common units or other equity, a refinancing of its debt
or a sale of assets include financial market conditions and
Hiland Partners market value and operating performance at
the time of such offering or other financing. We cannot assure
that any such proposed offering, refinancing or sale of assets
can be successfully completed or, if completed, that the terms
will be favorable to Hiland Partners or to us.
67
If the
Hiland Partners Merger is completed and the Hiland Holdings
Merger is not completed, it could create certain conflicts of
interest between us and Harold Hamm, who, with his affiliates,
controls our general partner and the general partner of Hiland
Partners.
Harold Hamm and his affiliates own 100% of our general partner,
which has sole responsibility for conducting our business and
managing our operations. We control the general partner of
Hiland Partners, which has sole responsibility for conducting
the business of Hiland Partners and managing its operations.
If the Hiland Holdings Merger is not completed but the Hiland
Partners Merger is completed, Mr. Hamm, his affiliates and
the Hamm family trusts will acquire all of the outstanding
common units of Hiland Partners not owned by us. We own,
directly or indirectly, a 2% general partner interest, the
incentive distribution rights, 3,060,000 subordinated units and
2,321,471 common units in Hiland Partners. Since the common
units have different rights to distributions than the
subordinated units and the incentive distribution rights,
Mr. Hamms ownership of common units of Hiland
Partners could increase the likelihood that conflicts of
interest may arise between Mr. Hamm and his affiliates,
including our general partner, on the one hand, and us and our
unitholders, on the other hand, particularly with regard to the
amount of cash to be distributed to the Hiland Partners
unitholders and the amount of cash to be reserved for the future
conduct of Hiland Partners business.
A
substantial portion of our partnership interests in Hiland
Partners are subordinated to Hiland Partners common units,
which will result in decreased distributions to us in the future
until Hiland Partners has paid all distribution arrearages on
the Hiland Partners common units. Additionally, if Hiland
Partners is unable to meet its minimum quarterly distribution in
the future, distributions to us could further
decrease.
We own, directly or indirectly, 5,381,471 units
representing limited partner interests in Hiland Partners, of
which approximately 56.9% are subordinated units and 43.1% are
common units. During the subordination period, the subordinated
units will not receive any distributions in a quarter until
Hiland Partners has paid the minimum quarterly distribution of
$0.45 per unit, plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters, on all of
the outstanding Hiland Partners common units. Distributions on
the subordinated units are therefore more uncertain than
distributions on Hiland Partners common units.
Furthermore, no distributions may be made on the incentive
distribution rights for any quarter unless Hiland Partners has
paid that quarters minimum quarterly distribution of $0.45
per unit for all outstanding Hiland Partners common units and
subordinated units, plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters on all the
outstanding Hiland Partners common units. Therefore,
distributions with respect to the incentive distribution rights
are even more uncertain than distributions on the subordinated
units. Neither the subordinated units nor the incentive
distribution rights are entitled to any arrearages from prior
quarters. Generally, the subordination period ends, and the
subordinated units convert into common units of Hiland Partners,
only after March 31, 2010 and only upon the satisfaction of
certain financial tests.
Hiland Partners has suspended quarterly cash distributions on
its common and subordinated units beginning with the first
quarter of 2009. Under the terms of the Hiland Partners
partnership agreement, the Hiland Partners common units now
carry an arrearage of $1.35 per unit, representing the minimum
quarterly distribution to the Hiland Partners common units for
the first three quarters of 2009 that must be paid before Hiland
Partners can make distributions to the Hiland Partners
subordinated units or on the incentive distribution rights. This
decrease in distributions to us could adversely affect our
ability to pay distributions on our common units.
If we
fail to renegotiate our credit facility, we may be required to
sell common units in Hiland Partners to satisfy our outstanding
debt obligations and any current liabilities that we may incur
in the operation of our business in the future.
Hiland Partners suspended quarterly cash distributions on common
and subordinated units beginning with the first quarter
distribution of 2009. As our only cash-generating assets are our
2% general partner interest, all of the incentive distribution
rights and a 57.4% limited partner interest in Hiland Partners,
our cash flow is
68
completely dependent upon the ability of Hiland Partners to make
cash distributions to its partners, including us. Our credit
facility and our note agreement with Harold Hamm mature on
December 31, 2009, at which time all outstanding amounts
thereunder will become due and payable. We cannot assure that
any refinancing of our credit facility can be successfully
completed or, if completed, that the terms will be favorable to
us. If we are unable to obtain a refinancing of our outstanding
debt and Hiland Partners does not resume paying quarterly cash
distributions in amounts necessary to satisfy our obligations,
we may need to issue new units or sell common units in Hiland
Partners to satisfy our outstanding debt obligations and any
current liabilities that we may incur in the operation of our
business in the future. Under the terms of our Support Agreement
with Hiland Partners and affiliates of Harold Hamm, in which we
have agreed to vote our common and subordinated units in Hiland
Partners in favor of the Hiland Partners Merger, our ability to
transfer our common units is restricted until the Support
Agreement terminates.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part I, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended December 31, 2008, which could
materially affect our business, financial condition or future
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing the Partnership. Additional risks
and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition and/ or operating results.
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|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
None.
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Item 3.
|
Defaults
Upon Senior Securities
|
None.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
Item 5.
|
Other
Information
|
EXHIBITS
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|
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|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
|
|
Underwriting Agreement by and between Hiland Holdings GP, LP and
Lehman Brothers Inc., as representative of the underwriters
named therein dated as of September 19, 2006. (incorporated
by reference to Exhibit 1.1 of Registrants Statement
on
Form S-1
(File
No. 333-134491))
|
|
2
|
.1
|
|
|
|
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
2
|
.2
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC, Hiland
Partners, LLC and the members of Hiland Partners, LLC dated as
of September 1, 2005 (incorporated by reference to
Exhibit 2.2 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2005)
|
|
2
|
.3
|
|
|
|
Amendment No. 1 dated September 12, 2006 to
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.3 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
69
|
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.4
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
by reference to Exhibit 2.1 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.5
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.3 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.6
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.5 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.2 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.8
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.4 of the
Registrants
Form 8-K
filed on June 1, 2009).
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|
2
|
.9
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to
Exhibit 2.6 of the Registrants
Form 8-K
filed on June 1, 2009).
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|
2
|
.10
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of Registrants
Form 8-K
filed on October 27, 2009).
|
|
2
|
.11
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Partners
Form 8-K
filed on October 27, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
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|
3
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
70
|
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1
|
|
|
|
First Amended and Restated Senior Secured Credit Agreement
|
|
10
|
.2
|
|
|
|
Term Promissory Note
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on
Form 10-K
filed on March 20, 2007)
|
|
21
|
.1
|
|
|
|
List of Subsidiaries of Hiland Holdings GP, LP (incorporated by
reference to Exhibit 21.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
+
|
|
Denotes a management contract or compensatory plan or
arrangement.
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
71
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in Enid, Oklahoma, on this 9th day of
November, 2009.
HILAND HOLDINGS GP, LP
|
|
|
|
By:
|
Hiland Partners GP Holdings, LLC, its general partner
|
|
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer, President and Director
(principal executive officer)
|
|
|
|
By:
|
/s/ Matthew
S. Harrison
|
Matthew S. Harrison
Chief Financial Officer,
Vice President-Finance, Secretary and Director
(principal financial and accounting officer)
72
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
|
|
Underwriting Agreement by and between Hiland Holdings GP, LP and
Lehman Brothers Inc., as representative of the underwriters
named therein dated as of September 19, 2006. (incorporated
by reference to Exhibit 1.1 of Registrants Statement
on
Form S-1
(File
No. 333-134491))
|
|
2
|
.1
|
|
|
|
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated
by reference to Exhibit 2.1 of Registrants Statement
on
Form S-1
(File
No. 333-134491))
|
|
2
|
.2
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC, Hiland
Partners, LLC and the members of Hiland Partners, LLC dated as
of September 1, 2005 (incorporated by reference to
Exhibit 2.2 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2005)
|
|
2
|
.3
|
|
|
|
Amendment No. 1 dated September 12, 2006 to
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.3 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
2
|
.4
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.5
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.3 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.6
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.5 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.2 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.8
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.4 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.9
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to
Exhibit 2.6 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.10
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC
(incorporated by reference to Exhibit 2.1 of
Registrants
Form 8-K
filed on October 27, 2009).
|
|
2
|
.11
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Partners
Form 8-K
filed on October 27, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
73
|
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
10
|
.1
|
|
|
|
First Amended and Restated Senior Secured Credit Agreement
|
|
10
|
.2
|
|
|
|
Term Promissory Note
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on
Form 10-K
filed on March 20, 2007)
|
|
21
|
.1
|
|
|
|
List of Subsidiaries of Hiland Holdings GP, LP (incorporated by
reference to Exhibit 21.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
+
|
|
Denotes a management contract or compensatory plan or
arrangement.
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
74