Annual Reports

 
Quarterly Reports

 
8-K

 
Other

Hiland Holdings GP, LP 10-K 2009

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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


o


 


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

For the fiscal year ended December 31, 2008

Commission file number: 001-33018

Hiland Holdings GP, LP
(Exact name of Registrant as specified in its charter)

DELAWARE   76-0828238
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

205 West Maple, Suite 1100
Enid, Oklahoma

 

73701
(Address of principal executive offices)   (Zip code)

Registrant's telephone number including area code (580) 242-6040

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

Title of each class   Name of each exchange on which registered
Common Limited Partner Units   The NASDAQ Stock Market, LLC

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. Yes o    No ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of Act. Yes o    No ý

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of common limited partner units held by non-affiliates of the registrant was approximately $226.7 million on June 30, 2008 based on the closing price of $26.97 on the NASDAQ National Market.

        The number of the registrant's outstanding equity units at March 5, 2009 was 21,607,500 common units.

DOCUMENTS INCORPORATED BY REFERENCE: None


Table of Contents


TABLE OF CONTENTS

 
   
 
PAGE

 

PART I

   

ITEMS 1 AND 2.

 

BUSINESS AND PROPERTIES

  3

ITEM 1A.

 

RISK FACTORS

  26

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

  52

ITEM 3.

 

LEGAL PROCEEDINGS

  52

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  52

 

PART II

   

ITEM 5.

 

MARKET FOR THE REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  53

ITEM 6.

 

SELECTED FINANCIAL DATA

  57

ITEM 7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  61

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  91

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  93

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  93

ITEM 9A.

 

CONTROLS AND PROCEDURES

  93

ITEM 9B.

 

OTHER INFORMATION

  94

 

PART III

   

ITEM 10.

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  95

ITEM 11.

 

EXECUTIVE COMPENSATION

  101

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS

  116

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  118

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

  120

 

PART IV

   

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

  122

2


Table of Contents


PART I

Items 1. and 2.    Business and Properties

        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.

Our Formation and Public Offering

        Hiland Holdings GP, LP is a Delaware limited partnership formed in May 2006 to own Hiland Partners GP, LLC, the general partner of Hiland Partners, LP, ("Hiland Partners") and certain other common and subordinated units in Hiland Partners, LP. Hiland Partners, LP a publicly traded Delaware limited partnership (NASDAQ: HLND) formed in October 2004, is principally engaged in gathering, compressing, dehydrating, treating, processing and marketing natural gas, fractionating natural gas liquids and providing air compression and water injection services for oil and gas secondary recovery operations. The operations of Hiland Partners, LP are primarily located in the Mid-Continent and Rocky Mountain regions of the United States.

Overview

        Our cash generating assets consist of our ownership interests in Hiland Partners. Our aggregate ownership interests in Hiland Partners consist of the following: the 2% general partner interest in Hiland Partners, all of the incentive distribution rights in Hiland Partners, and 2,321,471 common units and 3,060,000 subordinated units of Hiland Partners, representing a 57.4% limited partner interest in Hiland Partners.

        Our primary objective is to increase our cash distributions to our unitholders by actively assisting Hiland Partners in executing its business strategy. We support Hiland Partners in implementing its business strategy by assisting in identifying, evaluating and pursuing growth opportunities. We may support the growth of Hiland Partners through the use of our capital resources, including purchasing Hiland Partners units or lending funds to Hiland Partners to provide funding for the acquisition of a business or an asset or for an internal growth project. In addition, we may provide Hiland Partners with other forms of credit support, such as guarantees relating to financing a project or other types of support related to a merger or acquisition transaction.

        Hiland Partners is a midstream energy partnership engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas, and fractionating, or separating, and marketing of natural gas liquids, or NGLs. Hiland Partners also provides air compression and water injection services to Continental Resources, Inc. ("CLR"), a publicly traded exploration and production company controlled by affiliates of our general partner, for use in its oil and gas secondary recovery operations. Hiland Partners' operations are primarily located in the Mid-Continent and Rocky Mountain regions of the United States. In Hiland Partners' midstream segment, it connects the wells of natural gas producers in its market areas to its gathering systems, treats natural gas to remove impurities, processes natural gas for the removal of NGLs, fractionates NGLs into NGL products and provides an aggregate supply of natural gas and NGL products to a variety of natural gas transmission pipelines and markets. In Hiland Partners compression segment, it provides compressed air and water to CLR. CLR uses the compressed air and water in its oil and gas secondary recovery operations in North Dakota by injecting them into its oil and gas reservoirs to increase oil and gas production from those reservoirs. This increased production of natural gas flows through Hiland Partners' Badlands gathering system.

3


Table of Contents

        Hiland Partners' midstream assets consist of 14 natural gas gathering systems with approximately 2,111 miles of gas gathering pipelines, five 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.

Recent Developments

        Going Private Proposals.    On January 15, 2009, the board of directors of the general partner of each of Hiland Holdings and Hiland Partners received a proposal from Harold Hamm to acquire all of the outstanding common units of each of Hiland Holdings and Hiland Partners that are not owned by Mr. Hamm, his affiliates or the Hamm family trusts. Consummation of each transaction is conditioned upon the consummation of the other. The proposals contemplate a merger of each of Hiland Holdings and Hiland Partners with a separate new acquisition vehicle to be formed by Mr. Hamm and the Hamm family trusts. Under the terms proposed by Mr. Hamm, Hiland Holdings unitholders would receive $3.20 in cash per common unit and Hiland Partners unitholders would receive $9.50 in cash per common unit. Mr. Hamm is the Chairman of the board of directors of the general partner of each of Hiland Holdings and Hiland Partners. Mr. Hamm, either individually or together with his affiliates or the Hamm family trusts, beneficially owns 100% of Hiland Partners GP Holdings, LLC, our general partner, and approximately 61% of the outstanding common units of Hiland Holdings. Hiland Holdings owns 100% of Hiland Partners' general partner and approximately 37% of Hiland Partners' outstanding common units.

        It is anticipated that the conflicts committee of the boards of directors of the general partner of each of Hiland Holdings and Hiland Partners will consider the proposals. In reviewing the proposals, each conflicts committee has retained its own financial advisers and legal counsel to assist in its work. The board of directors of the general partners of each of Hiland Holdings and Hiland Partners caution our unitholders and the unitholders of Hiland Partners respectively, and others considering trading in the securities of Hiland Holdings and Hiland Partners, that each conflicts committee of the board of directors is reviewing its respective proposal and no decisions have been made by either conflicts committee of either board of directors with respect to the response of either us or Hiland Partners to the proposals. There can be no assurance that any agreement will be executed or that any transaction will be approved or consummated.

        On February 26, 2009, a unitholder of Hiland Holdings and Hiland Partners filed a complaint alleging claims relating to Mr. Hamm's proposal on behalf of a purported class of common unitholders of Hiland Holdings and Hiland Partners against Hiland Holdings, Hiland Partners, the general partner of each of Hiland Holdings and Hiland Partners, and certain members of the board of directors of each of Hiland Holdings and Hiland Partners in the Court of Chancery of the State of Delaware. For additional information, please see Item 3. "Legal Proceedings."

        On January 27, 2009, we received a Deficiency Letter from NASDAQ indicating that we no longer comply with the audit committee composition requirements as set forth in Marketplace Rule 4350(d), which requires Hiland Partners GP Holdings, LLC, our general partner, to have an audit committee of at least three independent members. Following the resignation of Shelby E. Odell from the board of directors of our general partner on January 21, 2009, the audit committee of our general partner consists of only two independent members. Mr. Odell resigned from the board of directors of our general partner so that he would be eligible to serve as a member of the conflicts committee of the board of directors of Hiland Partners' general partner. In accordance with Marketplace Rule 4350(d)(4), NASDAQ has provided us a cure period to regain compliance until the earlier of our next annual unitholders' meeting or January 21, 2010, or, if the next annual unitholders' meeting is held before July 20, 2009, then we must evidence compliance no later than July 20, 2009.

4


Table of Contents

Midstream Segment

        Hiland Partners' midstream operations consist of the following:

    gathering and compressing natural gas to facilitate its transportation to Hiland Partners' processing plants, third party pipelines, utilities and other consumers;

    dehydrating natural gas to remove water from the natural gas stream to meet pipeline quality specifications;

    treating natural gas to remove or reduce impurities such as carbon dioxide, nitrogen, hydrogen sulfide and other contaminants to ensure that the natural gas meets pipeline quality specifications;

    processing natural gas to extract NGLs and selling the resulting residue natural gas and, in most cases, the NGLs; and

    fractionating a portion of NGLs into a mix of NGL products, including propane, butanes and natural gasoline or various combinations of these NGLs, and selling these NGL products to third parties.

        Hiland Partners' midstream assets include the following:

    Bakken Gathering System.  The Bakken gathering system is a 374-mile gas gathering system located in eastern Montana that gathers compresses, dehydrates and processes natural gas, and fractionates NGLs. This system includes the Bakken processing plant, three compressor stations and one fractionation facility, and has approximately 11,050 horsepower installed. Hiland Partners acquired the Bakken gathering system and the Bakken processing plant in September 2005. Hiland Partners' Bakken gathering system has capacity of 25,000 Mcf/d and average throughput was 22,687 Mcf/d of natural gas which produced approximately 2,264 Bbls/d of NGLs for the year ended December 31, 2008. The system represented approximately 33.5% of our total segment margin for the year ended December 31, 2008.

    Badlands Gathering System.  The Badlands gathering system is a 221-mile gas gathering system primarily located in southwest North Dakota that gathers, compresses, dehydrates, treats and processes natural gas, and fractionates NGLs. The system includes the Badlands processing plant, seven compressor stations, one treating facility and one fractionation facility, and has approximately 18,550 horsepower installed. Hiland Partners constructed the original Badlands gathering system and processing plant in 1997. Hiland Partners' Badlands gathering system has capacity of 46,000 Mcf/d and average throughput was 22,930 Mcf/d of natural gas which produced approximately 962 Bbls/d of NGLs for the year ended December 31, 2008. The system represented approximately 17.5% of our total segment margin for the year ended December 31, 2008.

    Eagle Chief Gathering System.  The Eagle Chief gathering system is a 609-mile gas gathering system located in northwest Oklahoma that gathers, compresses, dehydrates and processes natural gas. The system includes the Eagle Chief processing plant and eight compressor stations and has approximately 17,500 horsepower installed. Hiland Partners constructed the Eagle Chief gathering system in 1990 and constructed the Eagle Chief processing plant in 1995. Hiland Partners acquired the Carmen gathering system in August 2003, which consists solely of gathering lines to expand the Eagle Chief gathering system. Hiland Partners' Eagle Chief gathering system has a capacity of 35,500 Mcf/d and average throughput was 25,259 Mcf/d of natural gas which produced approximately 980 Bbls/d of NGLs for the year ended December 31, 2008. The system represented approximately 12.6% of our total segment margin for the year ended December 31, 2008.

5


Table of Contents

    Kinta Area Gathering Systems.  The Kinta Area gathering system was acquired by Hiland Partners on May 1, 2006 and is a 601-mile gathering system located in southeastern Oklahoma that includes five separate low pressure natural gas gathering systems. The systems are comprised of four 10,000 Mcf/d capacity amine treating facilities and thirteen compressor stations with an aggregate of approximately 43,750 horsepower. Hiland Partners' Kinta Area gathering systems have an aggregate capacity of 200,000 Mcf/d and average throughput was 133,755 Mcf/d for the year ended December 31, 2008. The systems represented approximately 12.5% of our total segment margin for the year ended December 31, 2008.

    Woodford Shale Gathering System.  The Woodford Shale gathering system is a 55-mile gathering system located in southeastern Oklahoma and is designed to provide low-pressure gathering, compression and dehydrating services. The system includes four compressor stations and has approximately 17,400 horsepower installed. Natural gas gathered on the Woodford Shale gathering system is processed at third party processing facilities. Hiland Partners' Woodford Shale gathering system has a capacity of 65,000 Mcf/d and average throughput was 27,447 Mcf/d of natural gas which produced approximately 1,214 Bbls/d of NGLs for the year ended December 31, 2008. The system represented approximately 9.2% of our total segment margin for the year ended December 31, 2008.

    Matli Gathering System.  The Matli gathering system is a 58-mile gas gathering system located in northcentral Oklahoma that gathers, compresses, dehydrates, treats and processes natural gas. The system includes the Matli processing plant, three compressor stations and one treating facility which combined have approximately 9,450 horsepower. Hiland Partners constructed the Matli gathering system in 1999, and in December 2006 Hiland Partners completed the construction of a new processing plant. Hiland Partners' Matli gathering system has a capacity of 25,000 Mcf/d and average throughput was 15,627 Mcf/d of natural gas which produced approximately 343 Bbls/d of NGLs for the year ended December 31, 2008. The system represented approximately 5.7% of our total segment margin for the year ended December 31, 2008.

    Worland Gathering System.  The Worland gathering system is a 153-mile gas gathering system located in central Wyoming that gathers, compresses, dehydrates, treats and processes natural gas, and fractionates NGLs. The system includes the Worland processing plant, seven compressor stations, one treating facility and one fractionation facility, and has approximately 5,700 horsepower installed. The Worland gathering system and the Worland processing plant were contributed to Hiland Partners on February 15, 2005 in connection with Hiland Partners' formation and its initial public offering. Hiland Partners' Worland gathering system has a capacity of 8,000 Mcf/d and average throughput was 2,603 Mcf/d of natural gas which produced approximately 157 Bbls/d of NGLs for the year ended December 31, 2008. The system represented approximately 4.3% of our total segment margin for the year ended December 31, 2008.

    Other Systems.  Hiland Partners also owns three other natural gas gathering systems located in Texas, Mississippi and Oklahoma. These systems represented approximately 0.4% of our total segment margin for the year ended December 31, 2008.

    North Dakota Bakken Gathering System.  The North Dakota Bakken gathering system presently consists of a 23-mile gathering system located in northwestern North Dakota that will gather natural gas associated with crude oil produced from the Bakken shale and Three Forks / Sanish formations. The gathering system, associated compression and treating facilities and a processing plant are currently under construction by Hiland Partners with an expected start up in the second quarter of 2009. Construction of the processing plant and gathering system commenced

6


Table of Contents

      in October 2008. As of December 31, 2008, Hiland Partners has invested approximately $9.2 million in the project.

        Hiland Partners midstream revenues represented 98.8%, 98.3% and 97.8% of total revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

        The table set forth below contains certain information regarding Hiland Partners' gathering systems as of or for the year ended December 31, 2008:

Asset
  Type   Length
(Miles)
  Receipt
Points
  Throughput
Capacity(1)
  Throughput
Average(1)
  Capacity
Utilization
  Percent
of Total
Segment
Margin
 

Bakken gathering system

 

Gathering pipelines

    374     292     25,000     22,687     90.8 %      

 

Refrigeration Plant

                                     

 

    Constructed in 2004

            25,000     22,687     90.8 %      

 

Fractionation facility (Bbls/d)

            6,500     3,354     51.6 %   33.5 %

Badlands gathering system

 

Gathering pipelines

   
221
   
44
   
46,000
   
22,930
   
49.9

%
     

 

Cryogenic and Refrigeration

                                     

 

    Plant—Constructed in 2007

            40,000     22,930     57.3 %      

 

Treating facility

            40,000     22,930     57.3 %      

 

Fractionation facility (Bbls/d)

            4,000     836     20.9 %   17.5 %

Eagle Chief gathering
system

 

Gathering pipelines

   
609
   
447
   
35,500
   
25,259
   
71.2

%
     

 

Mix Refrigeration/JT Plant

                                     

 

    Constructed in 1995

            35,000     25,259     72.2 %   12.6 %

Kinta Area gathering systems(2)

 

Gathering pipelines

   
601
   
710
   
200,000
   
133,755
   
66.9

%
     

 

Treating facilities

                40,000     21,116     52.9 %   12.5 %

Woodford Shale gathering system

 

Gathering pipelines

   
55
   
53
   
65,000
   
27,447
   
42.2

%
 
9.2

%

Matli gathering system

 

Gathering pipelines

   
58
   
57
   
25,000
   
15,627
   
62.5

%
     

 

Mix Refrigeration Plant

                                     

 

    Constructed in 2006

            25,000     15,627     62.5 %      

 

Treating facility

            20,000     11,336     56.7 %   5.7 %

Worland gathering system

 

Gathering pipelines

   
153
   
24
   
8,000
   
2,603
   
32.5

%
     

 

Refrigeration Plant—Constructed in mid 1980's

            8,000     2,603     32.5 %      

 

Treating facility

            8,000     2,603     32.5 %      

 

Fractionation facility (Bbls/d)

            650     260     40.0 %   4.3 %

Other systems(3)

 

Gathering pipelines

   
17
   
21
   
7,000
   
2,362
   
33.7

%
 
0.4

%

North Dakota Bakken gathering System(4)

 

Gathering pipelines

   
23
   
   
   
   
   
 
                                     

 

Total

    2,111     1,648                       95.7 %
                                     

(1)
Throughput capacity and average throughput are measured in Mcf/d for the gathering pipelines, processing plants and treating facilities and in Bbls/d for the fractionation facilities shown on this chart.

(2)
The Kinta Area gathering systems includes five separate natural gas gathering systems.

(3)
Other systems include three natural gas gathering systems located in Texas, Mississippi and Oklahoma.

(4)
The North Dakota Bakken natural gas gathering system is currently under construction.

7


Table of Contents

Compression Segment

        Hiland Partners provides air and water compression services to CLR for use in its oil and gas secondary recovery operations under a four-year, monthly fixed-fee contract (which Hiland Partners entered into in connection with its initial public offering) that expired on January 28, 2009 and now automatically renews for additional one-month terms at its Cedar Hills compression facility, its Horse Creek compression facility and its water injection plant located next to Hiland Partners' Cedar Hills compression facility. These assets are located in North Dakota in close proximity to Hiland Partners' Badlands gathering system. At the compression facilities, Hiland Partners compresses air to pressures in excess of 4,000 pounds per square inch, and at the water injection plant, Hiland Partners pumps water to pressures in excess of 2,000 pounds per square inch. The air and water are delivered at the tailgate of Hiland Partners' facilities into pipelines operated by CLR and are ultimately utilized by CLR in its oil and gas secondary recovery operations. The natural gas produced by CLR flows through Hiland Partners Badlands gathering system. Our compression segment represented approximately 4.3% of our total segment margin for the year ended December 31, 2008. Our compression revenues represented 1.2%, 1.7% and 2.2% of our total revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

Financial Information About Segments

        See Part II, Item 8—Financial Statements and Supplementary Data.

Business Strategies

        Multiple events during 2008 and early 2009 involving numerous financial institutions have effectively restricted current liquidity with 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. Additionally, Hiland Partners' cash flows are impacted by the price of natural gas, crude oil and natural gas liquids. During 2008, Hiland Partners experienced extreme swings in its average realized natural gas and NGL sales prices. Hiland Partners' average realized natural gas sales price increased from $6.44/MMBtu in January 2008 to a high sales price of $10.05/MMBtu in July 2008, then decreased to a low sales price of $3.38/MMBtu in November 2008. Hiland Partners' average realized NGL sales price increased from $1.42 per gallon in January 2008 to a high sales price of $1.74 per gallon in June 2008, then decreased to a low sales price of $0.61 per gallon in December 2008. The current pricing environment, particularly in combination with the constrained capital and credit markets and overall economic downturn, resulted in a decline in drilling activity by some producers. Sustained declines in drilling activity could have a negative impact on the natural gas volumes Hiland Partners gathers and processes. In the near term, we and Hiland Partners' management team are committed to managing costs and expenditures during this difficult commodity price and capital markets cycle. For the longer term, and assuming the financial and energy markets stabilize, we and Hiland Partners' management team continue to be committed to increasing the amount of cash available for distribution per unit by executing the following strategies:

    Engaging in construction and expansion opportunities.  Hiland Partners intends to leverage its existing infrastructure and customer relationships by constructing and expanding systems to meet any new or increased demand for Hiland Partners' midstream services. These projects may include expansion of existing systems and construction of new facilities.

    Pursuing complementary acquisitions.  Hiland Partners intends to evaluate making complementary acquisitions of midstream assets in its operating areas that provide opportunities to expand or increase the utilization of its existing assets. Hiland Partners would consider acquisitions that it believes will allow Hiland Partners to capitalize on its existing infrastructure, personnel, and

8


Table of Contents

      producer and customer relationships to provide an integrated package of natural gas midstream services. In addition, Hiland Partners would consider selected acquisitions in new geographic areas to the extent they present growth opportunities similar to those Hiland Partners is pursuing in its existing areas of operations.

    Increasing volumes on Hiland Partners' existing assets.  Hiland Partners' gathering systems have excess capacity, which provides Hiland Partners with opportunities to increase throughput volume with minimal incremental operating costs and thereby increase cash flow. Hiland Partners intends to aggressively market Hiland Partners' services to producers in order to connect new supplies of natural gas, increase volumes and more fully utilize its capacity.

    Taking measures that reduce Hiland Partners' exposure to commodity price risk. Because of the significant volatility of natural gas, crude oil and NGL prices, Hiland Partners attempts to operate its business in a manner that allows Hiland Partners to mitigate the impact of fluctuations in commodity prices. In order to reduce Hiland Partners' exposure to commodity price risk, Hiland Partners intends to pursue fee-based arrangements, where market conditions permit, and to enter into forward sales contracts or hedging arrangements to cover a portion of its operations that are not conducted under fee-based arrangements. In addition, when processing margins (or the difference between NGL sales prices and the cost of natural gas) are unfavorable, Hiland Partners can elect not to process natural gas at its Eagle Chief processing plant and third parties processors providing processing services on Hiland Partners' behalf downstream of the Woodford Shale system can reject ethane or elect not to process natural gas.

Midstream Assets

        Hiland Partners' natural gas gathering systems include approximately 2,111 miles of pipeline. A substantial majority of revenues are derived from purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas that flows through gathering pipelines and from fractionating and marketing of NGLs resulting from the processing of natural gas into NGL products. Hiland Partners' principal systems are described below.

Bakken Gathering System

        General.    The Bakken gathering system is located in eastern Montana and consists of approximately 374 miles of natural gas gathering pipelines, ranging from three inches to twelve inches in diameter, and the Bakken processing plant, which includes seven compressors and a fractionation facility. The gathering system has a capacity of approximately 25,000 Mcf/d, and average throughput was approximately 22,687 Mcf/d for the year ended December 31, 2008. There are three compressor stations located within the gathering system. The compressor stations and plant combined have approximately 11,050 horsepower.

        The Bakken processing plant processes natural gas that flows through the Bakken gathering system to produce residue gas and NGLs. The plant has processing capacity of approximately 25,000 Mcf/d. For the year ended December 31, 2008, the facility processed approximately 22,687 Mcf/d of natural gas and produced approximately 2,264 Bbls/d of NGLs.

        The Bakken gathering system also includes a fractionation facility that separates NGLs into propane, butane and natural gasoline. The fractionation facility has a current capacity to fractionate approximately 6,500 Bbls/d of NGLs. For the year ended December 31, 2008, the facility fractionated an average of approximately 3,354 Bbls/d which included volumes from Hiland Partners' Badlands processing plant. In the third quarter of 2007, Hiland Partners completed the expansion of its NGL fractionation facilities at Hiland Partners' Bakken processing plant to fractionate NGL volumes from both the Bakken processing plant and the Badlands processing plant.

9


Table of Contents

        Natural Gas Supply.    As of December 31, 2008, 292 receipt points were connected to Hiland Partners' Bakken gathering system. The wells behind these receipt points, which are located in the Williston Basin of Montana, primarily produce crude oil from the Bakken formation. The associated natural gas produced from these wells flows through Hiland Partners' Bakken gathering system. The primary suppliers of natural gas to the Bakken gathering system are Enerplus Resources (USA) Corporation, CLR and ConocoPhillips Company, which represented approximately 55%, 34% and 10%, respectively, of the Bakken gathering system's natural gas supply for the year ended December 31, 2008.

        Substantially all of the natural gas supplied to the Bakken gathering system is dedicated to Hiland Partners under three individually negotiated percentage-of-proceeds contracts. Two of these contracts have an initial term of ten years, expiring in 2014, and one is for the life of the lease. Under these contracts, natural gas is purchased at the wellhead from the producers. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

        Markets for Sale of Natural Gas and NGLs.    Residue gas derived from Hiland Partners' processing operations is sold at the tailgate of the Bakken processing plant on the Williston Basin Interstate Pipeline to third parties. Depending on prevailing market prices at each delivery point, Hiland Partners either sells its NGLs produced by Hiland Partners' fractionation facility to SemStream, L.P. at the tailgate of the plant or transport the same NGLs through a pipeline to a rail terminal and then sell to SemStream, L.P. From July 18, 2008 through September 30, 2008, Hiland Partners sold NGLs to other third parties, including CLR. Prior to July 18, 2008 and since October 2008 Hiland Partners has sold NGLs to SemStream, L.P., who is fully performing under these contracts.

        Hiland Partners' primary purchasers of residue gas and NGLs on the Bakken gathering system were SemStream, L.P., Montana-Dakota Utilities Co. and Rainbow Gas Company, which represented approximately 37%, 29% and 19% respectively, of the revenues from such sales for the year ended December 31, 2008.

Badlands Gathering System and Air Compression and Water Injection Facilities

        General.    The Badlands gathering system is located primarily in southwestern North Dakota and consists of approximately 221 miles of natural gas gathering pipelines, ranging from two inches to twelve inches in diameter, the Badlands processing plant, natural gas treating facilities, a fractionation facility and seven compressor stations. The total horsepower for the system was approximately 18,550 at December 31, 2008. The gathering system has a capacity of approximately 46,000 Mcf/d and average throughput was approximately 22,930 Mcf/d for the year ended December 31, 2008.

        In order to fulfill Hiland Partners' obligations under an agreement with CLR to gather, treat and process additional natural gas, produced as a by-product of CLR's secondary oil recovery operations, in the areas specified by the contract, Hiland Partners expanded its Badlands gas gathering system and processing plant located in Bowman County, North Dakota. Hiland Partners completed the expansion of its Badlands gathering system, the associated field gathering infrastructure, processing plant and treating facilities, which included the completion of Hiland Partners' 40,000 Mcf/d nitrogen rejection plant, and amine and hydrogen sulfide treating facilities during the third quarter of 2007. As a result, gathering pipelines, processing plant, treating facility and fractionation facility throughput capacities increased significantly.

        Hiland Partners completed construction and commenced operation of the Badlands gathering system, including the original Badlands processing plant, in 1997. The Badlands processing plant processes natural gas that flows through the Badlands gathering system to produce residue gas and NGLs. The natural gas gathered in this system must be processed and treated for high levels of

10


Table of Contents


contaminates, including carbon dioxide, hydrogen sulfide and nitrogen, in order to meet pipelines quality specifications. The plant has processing capacity of approximately 40,000 Mcf/d. During the year ended December 31, 2008, the facility processed approximately 22,930 Mcf/d of natural gas and produced approximately 962 Bbls/d of NGLs.

        The Badlands gathering system also includes a fractionation facility that separates NGLs into propane and a mixture of butane and natural gasoline. At December 31, 2008, the fractionation facility had a capacity to fractionate approximately 4,000 Bbls/d of NGLs. For the year ended December 31, 2008, the facility fractionated an average of approximately 836 Bbls/d.

        Natural Gas Supply.    As of December 31, 2008, 44 receipt points were connected to Hiland Partners' Badlands gathering system. The wells behind these receipt points are located in the Williston Basin of southwestern North Dakota and northwestern South Dakota and primarily produce crude oil from the Red River formation. The associated natural gas produced from these wells flows through Hiland Partners' Badlands gathering system. The primary supplier of natural gas to the Badlands gathering system is CLR, which represented approximately 97% of the Badlands gathering system's natural gas supply for the year ended December 31, 2008.

        The natural gas supplied to the Badlands gathering system is generally dedicated to Hiland Partners under individually negotiated long-term contracts. Hiland Partners' agreement with CLR has an initial term of 15 years, expiring in August 2022. Under this agreement, Hiland Partners receives 50% of the proceeds attributable to residue gas and natural gas liquids sales as well as certain fixed fees associated with gathering and treating the natural gas, including a $0.60 per Mcf fee for the first 36.0 Bcf of natural gas gathered. As of December 31, 2008, Hiland Partners has gathered approximately 9.8 Bcf of natural gas since inception of the agreement. This agreement replaced Hiland Partners' prior agreement with CLR in the area as the new plant and treating facilities became operational in August 2007. Following the initial term of the contracts, they generally continue on a year to year basis, unless terminated by one of the parties. For the other agreements, natural gas is purchased at the wellhead from the producers under percentage-of-proceeds arrangements. For a more complete discussion of natural gas purchase and gathering contracts, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

        Air Compression and Water Injection Facilities.    In order to enhance the production of natural gas that flows through Hiland Partners' Badlands gathering system, Hiland Partners currently provides air compression and water injection services to CLR at its Cedar Hills compression facility, its Horse Creek compression facility and its water injection plant, all of which are located in North Dakota in close proximity to Hiland Partners' Badlands gathering system.

        Markets for Sale of Natural Gas and NGLs.    Residue gas derived from Hiland Partners' processing operations is sold at the tailgate of the Badlands processing plant primarily to CLR for their secondary recovery operations or on the Williston Basin Interstate Pipeline to third parties. Hiland Partners sells the propane produced by its fractionation facility at the tailgate of the plant to SemStream, L.P. The remaining NGL products are either sold to SemStream, L.P. at the tailgate of the plant, or trucked to the Bakken fractionation facility for further fractionation, and then sold to SemStream, L.P. From July 18, 2008 through September 30, 2008, Hiland Partners sold NGLs to other third parties, including CLR. Prior to July 18, 2008 and since October 2008 Hiland Partners has sold NGLs to SemStream, L.P., who is fully performing under these contracts.

        Hiland Partners' primary purchasers of the residue gas and NGLs from the Badlands gathering system were SemStream, L.P. and CLR, which represented approximately 73% and 10%, respectively, of the revenues from such sales for the year ended December 31, 2008.

11


Table of Contents

Eagle Chief Gathering System

        General.    The Eagle Chief gathering system is located in northwest Oklahoma and consists of approximately 609 miles of natural gas gathering pipelines, ranging from two inches to sixteen inches in diameter, and the Eagle Chief processing plant. The gathering system has a capacity of approximately 35,500 Mcf/d, and average throughput was approximately 25,259 Mcf/d for the year ended December 31, 2008. There are eight gas compressor stations located within the gathering system, comprised of fifteen units. The plant and compressor stations combined have an aggregate of approximately 17,500 horsepower.

        Hiland Partners completed construction and commenced operation of the Eagle Chief gathering system in 1990 and constructed the Eagle Chief processing plant in 1995. Since its construction, Hiland Partners has expanded the size of the Eagle Chief gathering system through the acquisition of approximately 377 miles of gathering pipelines in five separate acquisitions, including Hiland Partners' acquisition of the Carmen gathering system, and the construction of approximately 232 miles of gathering pipelines. In the first quarter of 2007, Hiland Partners completed the installation of additional pipelines and compression facilities at Hiland Partners' Eagle Chief gathering system and increased its system capacity from 30,000 Mcf/d to 35,500 Mcf/d.

        The Eagle Chief processing plant processes natural gas that flows through the Eagle Chief gathering system to produce residue gas and NGLs. The natural gas gathered in this system, depending on delivery points, may not be required to be processed to meet pipeline quality specifications when Hiland Partners sells into interstate markets. The plant has processing capacity of approximately 35,000 Mcf/d. During the year ended December 31, 2008, the facility processed approximately 25,259 Mcf/d of natural gas and produced approximately 980 Bbls/d of NGLs.

        Natural Gas Supply.    As of December 31, 2008, 447 receipt points were connected to Hiland Partners' Eagle Chief gathering system. The wells behind these receipt points are located in the Anadarko Basin of northwestern Oklahoma and primarily produce natural gas from the Chester, Mississippi, Hunton and Manning formations. The primary suppliers of natural gas to the Eagle Chief gathering system are various subsidiaries of Chesapeake Energy Corporation and CLR, which represented approximately 64% and 10%, respectively, of the Eagle Chief gathering system's natural gas supply for the year ended December 31, 2008.

        The natural gas supplied to the Eagle Chief gathering system is generally dedicated to Hiland Partners under individually negotiated long-term contracts. Some of Hiland Partners' contracts have an initial term of five years. Following the initial term, these contracts generally continue on a year-to-year basis unless terminated by one of the parties. In addition, some of Hiland Partners' contracts are for the life of the lease. Natural gas is purchased at the wellhead from the producers under percentage-of-proceeds contracts, percentage-of-index contracts or index-minus-fees contracts. For the year ended December 31, 2008, approximately 67%, 30% and 3% of Hiland Partners' total wellhead volumes at the Eagle Chief gathering system was derived from percentage-of-proceeds, percentage-of-index and index-minus-fees contracts, respectively. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

        Markets for Sale of Natural Gas and NGLs.    The residue gas can be either delivered at the tailgate of the Eagle Chief processing plant on the ONEOK Gas Transportation, L.L.C. pipeline to intrastate markets or on the Panhandle Eastern Pipeline Company, L.P. pipeline to interstate markets. Hiland Partners is able to bypass its Eagle Chief processing plant by selling into the interstate markets when processing margins are unfavorable. The NGLs extracted from the gas at the Eagle Chief processing are sold to ONEOK Hydrocarbon, L.P. at the tailgate of Hiland Partners' plant.

12


Table of Contents

        Hiland Partners' primary purchasers of residue gas and NGLs on the Eagle Chief gathering system were BP Energy Company, ONEOK Hydrocarbon, L.P. and OGE Energy Resources, Inc., which represented approximately 40%, 26% and 17%, respectively, of the revenues from such sales for the year ended December 31, 2008.

Kinta Area Gathering Systems

        General.    The Kinta Area gathering systems, which Hiland Partners acquired from Enogex Gas Gathering, L.L.C. on May 1, 2006, are located in southeastern Oklahoma and consist of five separate natural gas gathering systems with 601 miles of natural gas gathering pipelines ranging from four inches to twelve inches in diameter and 13 compressor stations with an aggregate of approximately 43,750 horsepower. Some of the natural gas supplied to the Kinta Area gathering systems has high carbon dioxide content; consequently, during the first quarter of 2007, Hiland Partners installed four 10,000 Mcf/d capacity amine-treating facilities on two of the five sub-systems to remove excess carbon dioxide levels from the gas gathered by these gathering systems. The gathering systems have a combined capacity of approximately 200,000 Mcf/d, and average throughput was 133,755 Mcf/d for the year ended December 31, 2008. Hiland Partners' operations include gathering, dehydration, compression and treating of the natural gas supplied to the Kinta Area gathering systems and the redelivery of such natural gas primarily for a fixed fee. In the third quarter of 2008, Hiland Partners completed the installation of additional compression facilities on these gathering systems to increase the capacity by approximately 20,000 Mcf/d from 180,000 Mcf/d. During 2008, Hiland Partners treated 21,166 Mcf/d of natural gas.

        Natural Gas Supply.    As of December 31, 2008, approximately 710 receipt points were connected to Hiland Partners' Kinta Area gathering systems. The wells behind these receipt points, which are located in the Arkoma Basin of southeastern Oklahoma, primarily produce natural gas from the Atoka, Cromwell, Booch, Hartshorne, Spiro, Fanshaw and Red Oak formations. The primary suppliers of natural gas to these gathering systems are BP America Production Company, various subsidiaries of Chesapeake Energy Corporation. and Chevron North America Exploration and Production Co., which represented approximately 52%, 13% and 6%, respectively, of the Kinta Area gathering system's natural gas supply for the year ended December 31, 2008.

        Hiland Partners does not take title on the majority of the natural gas gathered on the systems and Hiland Partners generally receives fixed-fees for its services under fixed fee gathering arrangements. A small amount of the natural gas gathered on the systems is purchased at the wellhead under percentage of index contract arrangements. The initial term of the Kinta agreements generally range from monthly to ten years. Following the initial term, these contracts generally continue on a month-to-month basis unless terminated by one of the parties. For the year ended December 31, 2008, approximately 93% and 7% of Hiland Partners' total inlet wellhead volumes at the Kinta gathering system was derived from fixed fee gathering contract arrangements and index-minus-fees contract arrangements, respectively. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

Woodford Shale Gathering System

        General.    The Woodford Shale gathering system is located in southeastern Oklahoma, just to the west of Hiland Partners' Kinta Area gathering systems. As of December 31, 2008 Hiland Partners had installed 55 miles of gathering pipelines and the gathering system had a capacity of approximately 65,000 Mcf/d. Average throughput for the year ended December 31, 2008 was approximately 27,447 Mcf/d of natural gas, which produced approximately 1,214 Bbls/d of NGLs. Hiland Partners' current operations provide only gathering and compression services. The gathering infrastructure consists of field gathering, four compressor stations and associated equipment, which includes approximately

13


Table of Contents

17,400 horsepower of compression. Initial production from this gathering system commenced in April 2007.

        Natural Gas Supply.    As of December 31, 2008, 53 receipt points were connected to Hiland Partners' Woodford Shale gathering system, which primarily produce natural gas from the Woodford shale formation. Presently, the suppliers of natural gas to this gathering system are CLR and Antero Resources Midstream Corporation, which provided all of the Woodford Shale gathering system's natural gas supply for the year ended December 31, 2008.

        Natural gas is purchased at the wellhead from CLR under index-minus-fees contract arrangements. Hiland Partners receives a fixed gathering fee for natural gas supplied by Antero Resources Midstream Corporation under a fixed fee gathering contract arrangement. The initial term of the Woodford Shale agreements is ten years. Following the initial term, these contracts generally continue on a year-to-year basis unless terminated by one of the parties. For the year ended December 31, 2008, approximately 77% and 23% of Hiland Partners' total inlet wellhead volumes at the Woodford Shale gathering system was derived from index-minus-fees contract arrangements and fixed fee gathering contract arrangements, respectively. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

        Markets for Sale of Natural Gas and NGLs.    The Woodford Shale gathering system has numerous market outlets for the residue natural gas and NGLs that Hiland Partners produce on the system. The residue gas can be sold at the tailgate of three different processing plants and can be delivered to Enogex, Inc. or CenterPoint Energy Gas Transmission Company. The third parties processors providing processing services on behalf of the Partnership downstream of the Woodford Shale system can reject ethane or elect not to process natural gas.

        Hiland Partners' primary purchasers of residue gas and NGLs on the Woodford Shale gathering system were OGE Energy Corp (and affiliates), Tenaska Marketing Ventures, Devon Gas Services, L.P. and ConocoPhillips Company, which represented approximately 24%, 20%, 14% and 10%, respectively, of the revenues from such sales for the year ended December 31, 2008.

Matli Gathering System

        General.    The Matli Gathering System is located in central Oklahoma and consists of approximately 58 miles of natural gas gathering pipelines, ranging from three inches to twelve inches in diameter, the Matli processing plant, a natural gas treating facility and three compressor stations, all totaling approximately 9,450 horsepower. The gathering system has a capacity of approximately 25,000 Mcf/d, and average throughput was approximately 15,627 Mcf/d for the year ended December 31, 2008.

        Hiland Partners commenced operation of the Matli gathering system in 1999. During the fourth quarter of 2006, Hiland Partners completed the construction of a 25,000 Mcf/d natural gas processing facility along Hiland Partners' existing gas gathering system, which replaced its 10,000 Mcf/d processing facility it had constructed in 2003. The Matli processing plant processes natural gas on the Matli gathering system to produce residue gas and NGLs. The natural gas gathered in this system must be processed in order to meet pipeline quality specifications. The current plant has processing capacity of approximately 25,000 Mcf/d. During the year ended December 31, 2008, the facilities processed approximately 15,627 Mcf/d of natural gas and produced approximately 343 Bbls/d of NGLs. The 10,000 Mcf/d natural gas processing facility constructed in 2003 is currently idle.

        The Matli gathering system includes a natural gas treating facility that uses a liquid chemical to remove hydrogen sulfide from natural gas that is gathered into Hiland Partners' system before the natural gas is introduced to transportation pipelines to ensure it meets pipeline quality specifications. The throughput capacity on Hiland Partners' Matli treating facility is approximately 20,000 Mcf/d.

14


Table of Contents


During the year ended December 31, 2008, the facility treated approximately 11,336 Mcf/d of natural gas.

        Natural Gas Supply.    As of December 31, 2008, 57 receipt points were connected to Hiland Partners' Matli gathering system. The wells behind these receipt points are located in the Anadarko Basin of northcentral Oklahoma and produce natural gas from the Morrow and Springer formations. The primary suppliers of natural gas to the Matli gathering system are CLR and Range Resources Corporation, which represented approximately 62% and 23%, respectively, of the Matli gathering system's natural gas supply for the year ended December 31, 2008.

        The natural gas supplied to the Matli gathering system is generally dedicated to Hiland Partners under individually negotiated long-term contracts. The initial term of such agreements is generally from life of lease to five years. Following the initial term, these contracts usually continue on a year-to-year basis, unless terminated by one of the parties. Natural gas is purchased at the wellhead from the producers under index-minus-fees contract arrangements. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

        Markets for Sale of Natural Gas and NGLs.    Residue gas resulting from Hiland Partners' processing operations is sold at the tailgate of the plant on the ONEOK Gas Transportation, L.L.C. intrastate pipeline. As part of Hiland Partners' expansion project completed in late 2006, it converted an existing natural gas pipeline into a NGL pipeline and now transport NGLs to a ONEOK Hydrocarbon, L.P. pipeline.

        Hiland Partners' primary purchasers of residue gas and NGLs on the Matli gathering system were ONEOK Hydrocarbon, L.P., OGE Energy Resources, ConocoPhillips Company and BP Energy Company, which represented approximately 25%, 25%, 17 and 14%, respectively, of the revenues from such sales for the year ended December 31, 2008.

Worland Gathering System

        General.    The Worland gathering system is located in central Wyoming and consists of approximately 153 miles of natural gas gathering pipelines, ranging from two inches to eight inches in diameter, the Worland processing plant, a natural gas treating facility and a fractionation facility. The gathering system has a capacity of approximately 8,000 Mcf/d, and average throughput was approximately 2,603 Mcf/d for the year ended December 31, 2008. There are seven compressor stations located within the gathering system. The plant and compressor stations have approximately 5,700 horsepower installed.

        The Worland gathering system and the Worland processing plant were contributed to Hiland Partners on February 15, 2005 in connection with Hiland Partners' formation and its initial public offering. This gathering system, including the Worland processing plant, was originally built in the mid 1980s. A substantial portion of the equipment on the Worland gathering system, including portions of the Worland processing plant and the fractionation facility, was replaced in 1997.

        The Worland processing plant processes natural gas that flows through the Worland gathering system to produce residue gas and NGLs. The natural gas gathered in this system is rich gas that must be processed in order to meet pipeline quality specifications. The plant has processing capacity of approximately 8,000 Mcf/d. During the year ended December 31, 2008, the facility processed approximately 2,603 Mcf/d of natural gas and produced approximately 157 Bbls/d of NGLs.

15


Table of Contents

        The Worland gathering system includes a natural gas amine treating facility that removes carbon dioxide and hydrogen sulfide from natural gas that is gathered into Hiland Partners' system before the natural gas is introduced to transportation pipelines to ensure that it meets pipeline quality specifications. Generally, the natural gas gathered in this system contains a high concentration of hydrogen sulfide, a highly toxic and corrosive chemical that must be removed prior to transporting the gas via pipeline.

        The Worland gathering system also includes a fractionation facility that separates NGLs into propane and a mixture of butane and natural gasoline. The fractionation facility has a capacity to fractionate approximately 650 Bbls/d of NGLs. For the year ended December 31, 2008, the facility fractionated an average of 260 Bbls/d.

        Natural Gas Supply.    As of December 31, 2008, 24 receipt points were connected to Hiland Partners' Worland gathering system. The wells behind these receipt points are located in the Bighorn Basin of central Wyoming and produce crude oil primarily from the Frontier formation. The associated natural gas produced from these wells flows through Hiland Partners' Worland gathering system. The primary suppliers of natural gas to the Worland gathering system are CLR and Saga Petroleum Corp., which represented approximately 50% and 43%, respectively, of the Worland gathering system's natural gas supply for the year ended December 31, 2008.

        The natural gas supplied to the Worland gathering system is generally dedicated to Hiland Partners under individually negotiated long-term contracts. Following the initial term of the contracts, they generally continue on a year to year basis, unless terminated by one of the producers. Natural gas is purchased at the wellhead from the producers under percentage-of-index contracts, percentage-of-proceeds contracts and index-minus-fees contracts. For the year ended December 31, 2008, approximately 67%, 29% and 4% of Hiland Partners' total system inlet wellhead volumes at the Worland gathering system was derived from percentage-of-index contracts, percentage-of-proceeds contracts and index-minus-fees contracts, respectively. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Natural Gas Purchase and Gathering Contracts."

        Markets for Sale of Natural Gas and NGLs.    Residue gas derived from Hiland Partners' processing operations is sold at the tailgate of the Worland processing plant on the Williston Basin Interstate Pipeline to third parties. Hiland Partners sells the NGLs to KM Upstream LLC and Kinder Morgan Operating, L.P. "A", subsidiaries of Kinder Morgan Energy Partners, LP, at the tailgate of the plant.

        Hiland Partners' primary purchasers of residue gas and NGLs on the Worland gathering system were Rainbow Gas Company, KM Upstream LLC and Kinder Morgan Operating, L.P. "A", subsidiaries of Kinder Morgan Energy Partners, LP, and CLR, which represented approximately 43%, 41% and 16%, respectively, of revenues from such sales on the Worland gathering system for the year ended December 31, 2008.

Other Systems

        In addition to the midstream assets described above, Hiland Partners owns two gathering systems located in Texas and Mississippi and a gathering pipeline system in Oklahoma. These assets do not provide Hiland Partners with material cash flows and consist of the following:

    Driscoll Gathering System.  Hiland Partners' Driscoll gathering system is located in south Texas and consists of approximately 4 miles of natural gas gathering pipeline and a compressor station.

    Stovall Gathering System.  Hiland Partners' Stovall gathering system is located in northern Mississippi and consists of approximately 8 miles of natural gas gathering pipeline and a compressor station.

16


Table of Contents

    Enid Gathering Pipeline System.  Hiland Partners' Enid gathering pipeline system is located in northern Oklahoma and consists of approximately 5 miles of pipeline.

North Dakota Bakken Gathering System

        Hiland Partners' North Dakota Bakken gathering system presently consists of a 23-mile gathering system located in northwestern North Dakota that will gather natural gas associated with crude oil produced from the Bakken shale and Three Forks / Sanish formations. The gathering system, associated compression and treating facilities and a processing plant are currently under construction with an expected start up in the second quarter of 2009. Construction of the processing plant and gathering system commenced in October 2008. As of December 31, 2008, Hiland Partners has invested approximately $9.2 million in the project.

Compression Assets

        Hiland Partners provides air and water compression services to CLR for use in its oil and gas secondary recovery operations under a four-year, monthly fixed-fee contract (which Hiland Partners entered into in connection with its initial public offering) that expired on January 28, 2009 and now automatically renews for additional one-month terms at its Cedar Hills compression facility, its Horse Creek compression facility and its water injection plant located next to its Cedar Hills compression facility. Hiland Partners completed construction of its Cedar Hills compression facility and acquired the Horse Creek compression facility in 2002. The Horse Creek compression facility is comprised of two units with an aggregate of approximately 5,300 horsepower. The Cedar Hills compression facility is comprised of ten units with an aggregate of approximately 40,000 horsepower. Hiland Partners' water injection plant has six pumps with a total of 1,800 horsepower.

        At the compression facilities, Hiland Partners compresses air to pressures in excess of 4,000 pounds per square inch. At Hiland Partners' water injection plant, water is produced from source wells located near the water plant site. Produced water is run through a filter system to remove impurities and is then cooled prior to being pumped to pressures in excess of 2,000 pounds per square inch. The air and water are delivered at the tailgate of Hiland Partners' facilities into pipelines owned by CLR and are ultimately utilized by CLR in its oil and gas secondary recovery operations. For a description of the services agreement Hiland Partners entered into with CLR in connection with its initial public offering, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Hiland Partners' Contracts—Compression Services Agreement."

Credit Risk

        Counterparties pursuant to the terms of their contractual obligations expose Hiland Partners to potential losses as a result of nonperformance. SemStream, L.P., BP Energy Company, OGE Energy Resources, Inc. and ONEOK Energy Services Company, LP were Hiland Partners' largest customers for the year ended December 31, 2008, accounting for approximately 16%, 14%, 11% and 10%, respectively, of Hiland Partners' revenues. Consequently, changes within one or more of these customers' operations have the potential to impact, both positively and negatively, Hiland Partners' credit exposure and make us subject to risks of loss resulting from nonpayment or nonperformance by these or any of Hiland Partners' customers. Any material nonpayment or nonperformance by such key customers could materially and adversely affect Hiland Partners' business, financial condition or results of operations and reduce Hiland Partners' ability to make distributions to its unitholders. Additionally, Hiland Partners derives its revenues primarily from customers in the energy industry. This industry concentration has 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, including changing commodities prices. Furthermore, some of Hiland Partners' customers may be highly leveraged and subject to their own operating and regulatory risks, which

17


Table of Contents


increases the risk that they may default on their obligations to Hiland Partners. Hiland Partners' counterparties to its commodity based derivative instruments as of December 31, 2008 were BP Energy Company and Bank of Oklahoma, N.A. Hiland Partners' counterparty to its interest rate swap is Wells Fargo Bank, N.A.

Competition

        The natural gas gathering, treating, processing and marketing industries are highly competitive. Hiland Partners faces strong competition in acquiring new natural gas supplies. Hiland Partners' competitors include other natural gas gatherers that gather, compress, treat, process and market natural gas. Competition for natural gas supplies is primarily based on the reputation, efficiency, flexibility and reliability of the gatherer, the pricing arrangements offered by the gatherer and the location of the gatherer's pipeline facilities. Hiland Partners provides flexible services to natural gas producers, including natural gas gathering, compression, dehydrating, treating and processing. Hiland Partners believes its ability to furnish these services gives it an advantage in competing for new supplies of natural gas because Hiland Partners can provide the services that producers, marketers and others require to connect their natural gas quickly and efficiently. In addition, using centralized treating and processing facilities, Hiland Partners can in most cases attract producers that require these services and at a lower initial capital cost. For natural gas that exceeds the maximum contaminant levels and NGL specifications for interconnecting natural gas pipelines and downstream markets, Hiland Partners believe that it offers treating and other processing services on competitive terms. In addition, with respect to natural gas suppliers attached to its pipeline systems, Hiland Partners provides such natural gas supplies on a flexible basis.

        Hiland Partners believes that its producers prefer a midstream energy company with the flexibility to accept natural gas not meeting typical industry standard gas quality requirements. The primary difference between Hiland Partners and its competitors is that Hiland Partners provides an integrated and responsive package of midstream services, while most of its competitors typically offer only a few select services. Hiland Partners believes that offering an integrated package of services, while remaining flexible in the types of contractual arrangements that it offers producers, allows Hiland Partners to compete more effectively for new natural gas supplies.

        Many of Hiland Partners' competitors have capital resources and control supplies of natural gas greater than the supplies controlled by Hiland Partners. Hiland Partners' primary competitors on the Eagle Chief gathering system are Atlas Pipeline Partners, Mustang Fuel Corporation, Duke Energy Field Services and SemGas, L.P. Hiland Partners' primary competitor on the Bakken gathering system and the Badlands gathering system is Bear Paw Energy, and on the Matli gathering system, Hiland Partners' competitor is Enogex, Inc. Hiland Partners' primary competitors on the Kinta Area gathering systems are CenterPoint Energy Field Services and Superior Pipeline Company. Hiland Partners' primary competitors on the Woodford Shale gathering system are MarkWest Energy Partners, Enogex, Inc., Antero Resources Midstream Corporation and Copano Energy, L.L.C. Hiland Partners does not have a major competitor on the Worland gathering system.

Regulation

        Regulation by the FERC of Interstate Natural Gas Pipelines.    Hiland Partners does not own any interstate natural gas pipelines, so the Federal Energy Regulatory Commission, or the FERC, does not directly regulate any of Hiland Partners' operations. However, the FERC's regulation influences certain aspects of Hiland Partners' business and the market for its products and services. In general, the FERC has authority over natural gas companies that provide natural gas pipeline transportation services in interstate commerce, and its authority to regulate those services includes:

    the certification and construction of new facilities;

18


Table of Contents

    the extension or abandonment of services and facilities;

    the maintenance of accounts and records;

    the acquisition and disposition of facilities;

    the initiation and discontinuation of services; and

    various other matters.

        In recent years, the FERC has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, Hiland Partners can provide no assurance that the FERC will continue this approach as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity.

        Regulation of Intrastate Natural Gas Transportation Pipelines.    Hiland Partners does not own any pipelines that provide intrastate natural gas transportation, so state regulation of non-gathering pipeline transportation does not directly affect its operations. As with FERC regulation described above, however, state regulation of pipeline transportation may influence certain aspects of Hiland Partners' business and the market for its products.

        Gathering Pipeline Regulation.    Section 1(b) of the Natural Gas Act of 1938, or NGA, exempts natural gas gathering from the jurisdiction of the FERC. Hiland Partners owns a number of natural gas pipelines that it believes would meet the traditional tests the FERC has used to establish a pipeline's status as a gatherer not subject to the FERC jurisdiction. However, there is no bright-line distinction between FERC-regulated natural gas transportation services and federally unregulated gathering services. Moreover, this distinction is the subject of regular litigation. Thus, the classification and regulation of some of Hiland Partners' gathering facilities may be subject to change based on future determinations by the FERC and the courts.

        In the states in which Hiland Partners operates, regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirement and complaint-based rate regulation. For example, Hiland Partners is subject to state ratable take and common purchaser statutes. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. In certain circumstances, such laws will apply even to gatherers like Hiland Partners that do not provide third party, fee-based gathering service and may require Hiland Partners to provide such third party service at a regulated rate. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes are designed to prohibit discrimination in favor of one producer over another producer or one source of supply over another source of supply. These statutes have the effect of restricting Hiland Partners' right as an owner of gathering facilities to decide with whom it will contract to purchase or gather natural gas.

        Natural gas gathering may receive greater regulatory scrutiny at both the state and federal levels now that the FERC has taken a less stringent approach to regulation of the gathering activities of interstate pipeline transmission companies and a number of such companies have transferred gathering facilities to unregulated affiliates.

        Hiland Partners' gathering operations could be adversely affected should they be subject in the future to the application of state or federal regulation of rates and services. Hiland Partners' gathering operations also may be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. Hiland Partners cannot predict what effect, if any, such changes might have on its operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.

19


Table of Contents

        Sales of Natural Gas, NGLs and Other Products.    The price at which Hiland Partners buys and sells natural gas currently is not subject to federal regulation and, for the most part, is not subject to state regulation. The price at which Hiland Partners buys and sells NGLs and other products is not subject to regulation. Hiland Partners' sales of natural gas, NGLs and other products are affected by the availability, terms and cost of pipeline transportation. Pipeline rates, terms of access and terms and conditions of service are subject to extensive federal and state regulation. The FERC is continually proposing and implementing new rules and regulations affecting those segments of the natural gas industry, most notably interstate natural gas transmission companies that remain subject to the FERC's jurisdiction. These initiatives also may affect the intrastate transportation of natural gas under certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry, and these initiatives generally reflect more light-handed regulation. Hiland Partners cannot predict the ultimate impact of these regulatory changes to its natural gas marketing operations. Hiland Partners does not believe that it will be affected by any such FERC action materially differently than other natural gas marketers with whom it competes.

        Under the Energy Policy Act of 2005, FERC possesses regulatory oversight over natural gas markets, including the purchase, sale and transportation activities of non-interstate pipelines and other natural gas market participants. The Commodity Futures Trading Commission, or the CFTC, also holds authority to monitor certain segments of the physical and futures energy commodities market pursuant to the Commodity Exchange Act. With regard to physical purchases and sales of natural gas, NGLs and other products, Hiland Partners' gathering services related to these energy commodities, and any related hedging activities that it undertakes, Hiland Partners is required to observe these anti-market manipulation laws and related regulations enforced by FERC and/or the CFTC. These agencies hold substantial enforcement authority, including the ability to assess civil penalties of up to $1 million per day per violation, to order disgorgement of profits and to recommend criminal penalties. FERC has continued to impose additional regulations intended to prevent market manipulation and to promote price transparency. For example, new FERC rules require wholesale purchasers and sellers of natural gas to report to FERC certain aggregated volume and other purchase and sales data for the previous calendar year. Should Hiland Partners violate the anti-market manipulation laws and regulations, it could also be subject to related third party damage claims by, among others, sellers, royalty owners and taxing authorities.

Environmental Matters

        The operation of pipelines, plants and other facilities for gathering, compressing, dehydrating, treating, and processing of natural gas and fractionating NGLs and other products is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of these facilities, Hiland Partners must comply with these laws and regulations at the federal, regional, state and local levels. These laws and regulations can restrict or impact Hiland Partners' business activities in many ways, such as:

    requiring the acquisition of permits or other approvals to conduct regulated activities;

    restricting the way Hiland Partners can handle or dispose of its wastes;

    limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions, or areas inhabited by endangered species;

    requiring remedial action to mitigate pollution conditions caused by Hiland Partners' operations, or attributable to former operations; and

    enjoining the operations of facilities deemed in non-compliance with permits issued pursuant to such environmental laws and regulations.

20


Table of Contents

        Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict and, under certain circumstances, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of substances or other waste products into the environment.

        The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation. Actual future expenditures may be different from the amounts Hiland Partners currently anticipates. Hiland Partners tries to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance. While Hiland Partners believe that they are in substantial compliance with current applicable federal and state environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its results of operations or financial condition, there is no assurance that this trend of compliance will continue in the future. Moreover, while Hiland Partners believes that the various environmental activities in which it is presently engaged will not affect its operational ability to gather, compress, dehydrate, treat and process natural gas or fractionate NGLs, Hiland Partners cannot assure you that future events, such as changes in existing laws, the promulgation of new laws, or the development or discovery of new facts or conditions will not cause Hiland Partners to incur significant costs.

        The following is a summary of the more significant existing environmental laws to which Hiland Partners business operations is subject and with which compliance may have a material adverse effect on its capital expenditures, earnings or competitive position.

        Air Emissions.    Hiland Partners' operations are subject to the federal Clean Air Act, as amended and comparable state laws. These laws regulate emissions of air pollutants from various industrial sources, including processing and treatment plants, fractionation facilities and compressor stations, and also impose various monitoring and reporting requirements. Such laws may require Hiland Partners to obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and comply with air permits containing various emissions and operational limitations, or utilize specific emission control technologies to limit emissions. Hiland Partners' failure to comply with these requirements could subject it to monetary penalties, injunctions, conditions or restrictions on operations, and potentially criminal enforcement actions. Hiland Partners will be required to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions. Hiland Partners believes, however, that its operations will not be materially adversely affected by such requirements, and the requirements are not expected to be any more burdensome to Hiland Partners than to other similarly situated companies.

        Hazardous Waste.    Hiland Partners' operations generate wastes, including hazardous wastes that are subject to the federal Resource Conservation and Recovery Act, as amended, or RCRA and comparable state laws, which impose detailed requirements for the handling, storage, treatment and disposal of hazardous and solid waste. While RCRA currently excludes from the definition of hazardous waste produced waters and other wastes associated with the exploration, development, or production of crude oil and natural gas, these oil and gas exploration and production wastes may still be regulated under state law or the less stringent solid waste requirements of RCRA. Moreover, ordinary industrial wastes such as paint wastes, waste solvents, laboratory wastes, and waste compressor

21


Table of Contents


oils may be regulated as hazardous waste. The transportation of natural gas in pipelines may also generate wastes that are subject to RCRA or comparable state law requirements.

        Site Remediation.    The Comprehensive Environmental Response, Compensation and Liability Act, as amended, or CERCLA, also known as "Superfund," and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the environment. Such classes of persons include the current and past owners or operators of sites where a hazardous substance was released, and companies that disposed or arranged for disposal of hazardous substances at offsite locations such as landfills. Although petroleum as well as natural gas is excluded from CERCLA's definition of "hazardous substance," in the course of Hiland Partners' ordinary operations Hiland Partners will generate wastes that may fall within the definition of a "hazardous substance." CERCLA authorizes the Environmental Protection Agency, or EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. Under CERCLA, Hiland Partners could be subject to joint and several liability for the costs of cleaning up and restoring sites where hazardous substances have been released, for damages to natural resources, and for the costs of certain health studies.

        Hiland Partners currently owns or leases, and in the past have owned or leased, properties that have been used for natural gas and NGL gathering, treating, processing, and fractionating activities for many years. Although Hiland Partners believes that they have utilized operating and waste disposal practices that were standard in the industry at the time, hazardous substances, wastes, or hydrocarbons may have been released on or under the properties owned or leased by them, or on or under other locations where such substances have been taken for recycling or disposal. In addition, some of Hiland Partners properties have been operated by third parties whose treatment and disposal of hazardous substances, wastes, or hydrocarbons was not under its control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA, and analogous state laws. Under such laws, Hiland Partners could be required to remove previously disposed hazardous substances, wastes and hydrocarbons or remediate contaminated property.

        Water Discharges.    Hiland Partners' operations are subject to the Federal Water Pollution Control Act, as amended, also known as the Clean Water Act, and analogous state laws. These laws impose detailed requirements and strict controls regarding the discharge of pollutants into state waters and waters of the United States. The unpermitted discharge of pollutants, including discharges resulting from a spill or leak incident, is prohibited by the U.S. Environmental Protection Agency, or EPA, or analogous state agencies. The Clean Water Act and regulations implemented thereunder also prohibit discharges of dredged and fill material into wetlands and other waters of the United States unless authorized by an appropriately issued permit. Any unpermitted release of pollutants from pipelines or facilities could result in administrative civil and criminal penalties as well as significant remedial obligations.

        Global Warming and Climate Change.    In response to public concerns suggesting that emissions of certain gases, referred to as "greenhouse gases" and including carbon dioxide and methane, may be contributing to warming of the Earth's atmosphere, President Obama has expressed support for, and it is anticipated that the current session of the U.S. Congress will consider climate change-related legislation to reduce greenhouse gas emissions. In addition, at least one-third of the states, either individually or through multistate regional initiatives, already have taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or greenhouse gas cap and trade programs. As an alternative to reducing emissions of greenhouse gases under cap and trade programs, the Congress may consider the implementation of a program to tax the emission of carbon dioxide and other greenhouse gases. The cap and trade programs could require major sources of emissions, such as electric power plants, or major producers

22


Table of Contents


of fuels, such as refineries or gas processing plants, to acquire and surrender emission allowances. Depending on the particular cap and trade program, Hiland Partners could be required to purchase and surrender allowances, either for greenhouse gas emissions resulting from its operations (e.g., compressor stations) or from combustion of fuels (e.g., natural gas or NGLs) it processes. Similarly, depending on the design and implementation of a program to tax emissions or greenhouse gases, Hiland Partners' operations could face additional taxes and higher cost of doing business. Although Hiland Partners would not be impacted to a greater degree than other similarly situated gatherers and processors of natural gas or NGLs, a stringent greenhouse gas control or taxing program could have an adverse effect on its cost of doing business and could reduce demand for the natural gas and NGLs it gathers and processes.

        Also, as a result of the U.S. Supreme Court's decision in 2007 in Massachusetts, et al. v. EPA, the EPA may regulate carbon dioxide and other greenhouse gas emissions from mobile sources such as cars and trucks, even if Congress does not adopt new legislation specifically addressing emissions of greenhouse gases. The Court's holding in Massachusetts that greenhouse gases including carbon dioxide fall under the federal Clean Air Act's definition of "air pollutant" may also result in future regulation of carbon dioxide and other greenhouse gas emissions from stationary sources under certain Clean Air Act programs. In July 2008, EPA released an "Advance Notice of Proposed Rulemaking" regarding possible future regulation of greenhouse gas emissions under the Clean Air Act, in response to the Supreme Court's decision in Massachusetts. In the notice, EPA evaluated the potential regulation of greenhouse gases under the Clean Air Act and other potential methods of regulating greenhouse gases. Although the notice did not propose any specific, new regulatory requirements for greenhouse gases, it indicates that federal regulation of greenhouse gas emissions could occur in the near future even if Congress does not adopt new legislation specifically addressing emissions of greenhouse gases. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact Hiland Partners' business, any such new federal, regional or state restrictions on or taxing of emissions of carbon dioxide in areas of the United States in which Hiland Partners conducts business could adversely affect its cost of doing business and demand for the natural gas and NGLs it gathers and processes.

        Pipeline Safety.    Some of Hiland Partners' pipelines are subject to regulation by the U.S. Department of Transportation, or the DOT, under the Natural Gas Pipeline Safety Act of 1968, as amended, or the NGPSA, pursuant to which the DOT has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. The NGPSA covers the pipeline transportation of natural gas and other gases, and the transportation and storage of liquefied natural gas and requires any entity that owns or operates pipeline facilities to comply with the regulations under the NGPSA, to permit access to and allow copying of records and to make certain reports and provide information as required by the Secretary of Transportation. Hiland Partners believes its natural gas pipeline operations are in substantial compliance with applicable NGPSA requirements; however, due to the possibility of new or amended laws and regulations or reinterpretation of existing laws and regulations, future compliance with the NGPSA could result in increased costs that, at this time, cannot reasonably be quantified.

        The DOT, through the Pipeline and Hazardous Materials Safety Administration, adopted regulations to implement the Pipeline Safety Improvement Act of 2002, as amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006, which requires pipeline operators to, among other things, develop integrity management programs for gas transmission pipelines that, in the event of a failure, could affect "high consequence areas." "High consequence areas" are defined as areas with specified population densities, buildings containing populations of limited mobility, and areas where people gather that are located along the route of a pipeline. States in which Hiland Partners operates have adopted similar regulations applicable to intrastate gathering and transmission lines. Hiland Partners' pipeline systems are largely excluded from these regulations and are not generally

23


Table of Contents


situated within areas that would be designated "high consequence. "Therefore, compliance with these regulations has not had a significant impact on Hiland Partners' operations.

        Employee Health and Safety.    Hiland Partners is subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in Hiland Partners' operations and that this information be provided to employees, state and local government authorities and citizens.

        Hydrogen Sulfide.    Exposure to gas containing high levels of hydrogen sulfide, referred to as sour gas, is harmful to humans, and exposure can result in death. The gas handled at Hiland Partners' Worland gathering system contains high levels of hydrogen sulfide, and Hiland Partners employs numerous safety precautions at the system to ensure the safety of its employees. There are various federal and state environmental and safety requirements for handling sour gas, and Hiland Partners is in substantial compliance with all such requirements.

        Anti-Terrorism Measures.    The federal Department of Homeland Security Appropriations Act of 2007 required the Department of Homeland Security, or DHS, to issue regulations establishing risk-based performance standards for the security of chemical and industrial facilities, including oil and gas facilities that are deemed to present "high levels of security risk." The DHS issued an interim final rule in April 2007 regarding risk-based performance standards to be attained pursuant to the act and, on November 20, 2007, further issued an Appendix A to the interim rule that established chemicals of interest and their respective threshold quantities that will trigger compliance with the interim rule. Facilities possessing greater than threshold levels of these chemicals of interest were required to prepare and submit to the DHS in January 2008 initial screening surveys that the agency would use to determine whether the facilities presented a high level of security risk. Covered facilities that are determined by DHS to pose a high level of security risk will be notified by DHS and will be required to prepare and submit Security Vulnerability Assessments and Site Security Plans as well as comply with other regulatory requirements, including those regarding inspections, audits, recordkeeping, and protection of chemical-terrorism vulnerability information. In January 2008, Hiland Partners prepared and submitted to the DHS initial screening surveys five certain facilities operated by them that possess regulated chemicals of interest in excess of the Appendix A threshold levels. In June 2008, the DHS advised Hiland Partners that these five facilities were determined by the agency not to present high levels of security risk and thus did not require further assessment under the interim rules.

Title to Properties

        Substantially all of Hiland Partners' pipelines are constructed on rights-of-way granted by the apparent record owners of the property. Lands over which pipeline rights-of-way have been obtained may be subject to prior liens that have not been subordinated to the right-of-way grants. Hiland Partners has obtained, where necessary, license or permit agreements from public authorities and railroad companies to cross over or under, or to lay facilities in or along, waterways, county roads, municipal streets, railroad properties and state highways, as applicable. In some cases, property on which pipelines were built was purchased in fee.

        Some Hiland Partners' leases, easements, rights-of-way, permits, licenses and franchise ordinances require the consent of the current landowner to transfer these rights, which in some instances is a governmental entity. Hiland Partners believes that it has obtained or will obtain sufficient third party consents, permits and authorizations for the transfer of the assets necessary for it to operate its business in all material respects. With respect to any consents, permits or authorizations that have not been obtained, Hiland Partners believes that these consents, permits or authorizations will be obtained reasonably soon, or that the failure to obtain these consents, permits or authorizations will have no material adverse effect on the operation of its business.

24


Table of Contents

        Hiland Partners leases the majority of the surface land on which its gathering systems operate. With respect to Hiland Partners' Bakken gathering system, Hiland Partners owns the land on which the processing plant is located and the land on which the three compressor stations are located. With respect to Hiland Partners' Badlands gathering system, Hiland Partners owns the land on which the Badlands processing plant is located and leases the land on which the seven compressor sites are located. With respect to Hiland Partners' Eagle Chief gathering system, Hiland Partners leases the surface land on which the Eagle Chief processing plant, seven of the eight compressor stations, a produced water dumping station and the three pumping stations are located. Hiland Partners leases the surface lands on which twelve of the thirteen Kinta Area compressors are located. At Hiland Partners' Woodford Shale gathering system, Hiland Partners owns the land on which one compressor station is located and leases the surface land on three compressor station locations. Hiland Partners leases the surface lands on which its Matli processing plant and three compressor stations are located and at Hiland Partners' Worland gathering system, Hiland Partners leases the surface land on which the Worland processing plant and the seven compressor stations are located. Hiland Partners owns the land on which the North Dakota Bakken processing plant is being constructed.

        Hiland Partners believes that it holds satisfactory title to all of its assets. Record title to some of Hiland Partners' assets may continue to be held by its affiliates until Hiland Partners has made the appropriate filings in the jurisdictions in which such assets are located and obtained any consents and approvals that are not obtained prior to transfer. Title to property may be subject to encumbrances. Hiland Partners believes that none of these encumbrances will materially detract from the value of its properties or from its interest in these properties, nor will they materially interfere with the use of these properties in the operation of Hiland Partners' business.

        Hiland Partners believes that it either owns in fee or holds leases, easements, rights-of-way or licenses and has obtained the necessary consents, permits and franchise ordinances to conduct its operations in all material respects.

Office Facilities

        We occupy approximately 12,358 square feet of space at our executive offices in Enid, Oklahoma, under leases expiring April 30, 2011. While we may require additional office space as our business expands, we believe that our existing facilities are adequate to meet our needs for the immediate future and that additional facilities will be available on commercially reasonable terms as needed.

Employees

        We have no employees. Prior to September 25, 2006, all of Hiland Partners' employees were employees of Hiland Partners GP, LLC, its general partner. On September 25, 2006, concurrent with our initial public offering, Hiland Partners GP Holdings, LLC, our general partner became the employer of all employees. As of December 31, 2008, Hiland Partners GP Holdings, LLC had 121 full-time employees who provide services to us and Hiland Partners. We are not a party to any collective bargaining agreements, and we have not had any significant labor disputes in the past. We believe we have good relations with the employees of Hiland Partners GP Holdings, LLC.

Address, Internet Web site and Availability of Public Filings

        We maintain our principal corporate offices at 205 West Maple, Suite 1100 Enid, Oklahoma 73701. Our telephone number is (580) 242-6040. Our Internet address is www.hilandpartners.com. We make the following information available free of charge on our Internet Web site:

    Annual Report on Form 10-K;

    Quarterly Reports on Form 10-Q;

25


Table of Contents

    Current Reports on Form 8-K;

    Amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

    Charters for our Audit, Conflicts, and Compensation Committees;

    Code of Business Conduct and Ethics;

    Code of Ethics for Chief Executive Officer and Senior Financial Officers; and

    Environmental, Health and Safety Policy Statements.

        We make our SEC filings available on our Web site as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. The above information is available in print to anyone who requests it.

Item 1A.    Risk Factors

        Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. The following risks could materially and adversely affect our business, the business of Hiland Partners, our financial condition or results of operations. In that case, the amount of the distributions on our common units could be materially and adversely affected, and the trading price of our common units could decline.

Risks Inherent in an Investment in Us

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 and our ability to make distributions are therefore completely dependent upon the ability of Hiland Partners to make cash distributions to its partners, including us.

        The amount of cash that Hiland Partners can distribute to its partners each quarter, including us, principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on several factors, some of which are beyond Hiland Partners' control, including:

    the amount of natural gas gathered on Hiland Partners' pipelines;

    the throughput volumes at Hiland Partners' processing, treating and fractionation plants;

    the price of natural gas and crude oil;

    the price of NGLs;

    the relationship between natural gas and NGL prices;

    the level of Hiland Partners' operating costs;

    the weather in Hiland Partners' operating areas;

    the level of competition from other midstream energy companies;

    the fees Hiland Partners charges and the margins Hiland Partners realizes for its services; and

    our continued success in our operation and management of Hiland Partners through our ownership of its general partner.

26


Table of Contents

        In addition, the actual amount of cash Hiland Partners will have available for distribution will depend on other factors, some of which are beyond its control, including:

    the level of capital expenditures it makes;

    the availability, if any, and cost of acquisitions;

    debt service requirements;

    the ability to access capital markets and borrow money

    fluctuations in working capital needs;

    restrictions on distributions contained in Hiland Partners' credit facility;

    Hiland Partners' ability to make working capital borrowings under its credit facility to pay distributions;

    prevailing economic conditions; and

    the amount, if any, of cash reserves established by the board of directors of Hiland Partners' general partner in its sole discretion for the proper conduct of Hiland Partners' business.

        Because of these factors, Hiland Partners may not have sufficient available cash each quarter to pay distributions at the current level, or any other amount. You should also be aware that the amount of cash that Hiland Partners has available for distribution depends primarily upon its cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, Hiland Partners may be able to make cash distributions during periods when Hiland Partners records losses and may not be able to make cash distributions during periods when Hiland Partners records net income, which could adversely affect our ability to pay distributions on our common units.

If we are presented with certain business opportunities, Hiland Partners will have the first right to pursue such opportunities. As a result, any expansion of our operations beyond our current ownership interests in Hiland Partners will require us to engage in activities falling outside the purview of the non-competition agreement and in which we may have little or no operational experience.

        We are party to a non-competition agreement with Hiland Partners and its general partner pursuant to which we and our general partner will not engage in (subject to certain exceptions), whether by acquisition, construction, investment in debt or equity interests of any person or otherwise, the business of gathering, treating, processing and transportation of natural gas in North America, the transportation and fractionation of NGLs in North America and constructing, buying or selling any assets related to the foregoing businesses other than through our interests in Hiland Partners. These non-competition obligations will not terminate unless we no longer control Hiland Partners. If an acquisition opportunity in respect of any of the above businesses is presented to us, then we must notify Hiland Partners of such opportunity and Hiland Partners will have the first right to acquire such assets. If we desire to construct assets related to the foregoing businesses, we must first offer to sell those assets to Hiland Partners at our actual construction costs. As a result, any expansion of our operations beyond our current ownership interests in Hiland Partners will require us to engage in activities falling outside the purview of the non-competition agreement and in which we may have little or no operational experience.

27


Table of Contents


A substantial portion of our partnership interests in Hiland Partners are subordinated to Hiland Partners' common units, which would result in decreased distributions to us if Hiland Partners is unable to meet its minimum quarterly distribution.

        We own, directly or indirectly, 5,381,471 units representing limited partner interests in Hiland Partners, of which approximately 75.8% are subordinated units and 24.2% 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 until the minimum quarterly distribution has been paid on all outstanding Hiland Partners 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' general partner, with our consent, may limit or modify the incentive distributions we are entitled to receive in order to facilitate Hiland Partners' growth strategy without the consent of our unitholders. If these distributions were reduced, the total amount of cash distributions we would receive from Hiland Partners, and therefore the amount of cash distributions we could pay to our unitholders, would be reduced.

        We indirectly own the incentive distribution rights in Hiland Partners that entitle us to receive increasing percentages, up to a maximum of 48%, of any cash distributed by Hiland Partners as certain target distribution levels are reached in excess of $0.495 per Hiland Partners unit in any quarter. A substantial portion of the cash flow we receive from Hiland Partners is provided by these incentive distribution rights. The board of directors of Hiland Partners' general partner may reduce the level of the incentive distribution rights payable to us with our consent, which we may provide without the approval of our unitholders if our general partner determines that such reduction does not adversely affect our limited partners in any material respect. For example, the board of directors of Hiland Partners may elect to limit the incentive distribution we are entitled to receive with respect to a particular acquisition or unit issuance by Hiland Partners. This situation could arise if a potential acquisition might not be accretive to Hiland Partners' unitholders if a significant portion of that acquisition's cash flows would be paid as incentive distributions to us. By limiting the level of incentive distributions in connection with a particular acquisition or issuance of Hiland Partners' units, the cash flows associated with such acquisition could be accretive to Hiland Partners' unitholders as well as substantially beneficial to us. Prior to approving such a reduction, the board of directors of Hiland Partners' general partner would be required to consider its fiduciary obligations to Hiland Partners' common unitholders as well as to us. Our partnership agreement specifically permits our general partner to authorize the general partner of Hiland Partners to limit or modify the incentive distribution rights held by us if our general partner determines that such reduction does not adversely affect our limited partners in any material respect. These reductions may be permanent reductions in the incentive distribution rights or may be reductions with respect to cash flows from the potential acquisition. If these distributions were reduced, the total amount of cash distributions we would receive from Hiland Partners, and therefore the amount of cash distributions we could pay to our unitholders, would be reduced.

28


Table of Contents


A reduction in Hiland Partners' distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

        Our ownership of the incentive distribution rights in Hiland Partners entitles us to receive our pro rata share of specified percentages of total cash distributions made by Hiland Partners with respect to any particular quarter only in the event that Hiland Partners distributes more than $0.495 per Hiland Partners unit for such quarter. As a result, the holders of Hiland Partners' common units have a priority over the holders of Hiland Partners' incentive distribution rights to the extent of cash distributions by Hiland Partners up to and including $0.45 per unit for any quarter. Our incentive distribution rights entitle us to receive increasing percentages, up to 48%, of all cash distributed by Hiland Partners. The distribution of $0.45 per limited partner unit declared by Hiland Partners for the quarter ended December 31, 2008 entitles us to receive the minimum quarterly distribution in respect to our 2,321,471 common units and 3,060,000 subordinated units. At the current distribution rate, we are not entitled to incentive distributions.

Our ability to meet our financial needs may be adversely affected by our cash distribution policy and our lack of operational assets.

        Our partnership agreement requires us to distribute all of our available cash quarterly. Our only cash generating assets are our direct and indirect ownership interests in Hiland Partners, and we currently have no independent operations separate from those of Hiland Partners. Moreover, as discussed above, a reduction in Hiland Partners' distributions will disproportionately affect the amount of cash distributions we receive. Given that our cash distribution policy is to distribute available cash and not retain it and that our only cash generating assets are direct and indirect ownership interests in Hiland Partners, we may not have enough cash to meet our needs if any of the following events occur:

    an increase in general and administrative expenses;

    an increase in principal and interest payments on our outstanding debt; or

    an increase in cash needs of Hiland Partners or its subsidiaries that reduces Hiland Partners distributions.

The occurrence of any of these events would reduce our available cash and adversely affect our ability to make cash distributions to our unitholders.

Our rate of growth may be reduced to the extent we purchase additional units from Hiland Partners, which will reduce the percentage of the cash we receive from the incentive distribution rights.

        Our business strategy includes supporting the growth of Hiland Partners through the use of our capital resources, including purchasing Hiland Partners units or lending funds to Hiland Partners to provide funding for the acquisition of a business or an asset or for an internal growth project. To the extent we purchase common or subordinated units or securities not entitled to a current distribution from Hiland Partners, the rate of our distribution growth may be reduced, at least in the short term, as less of our cash distributions will come from our ownership of Hiland Partners incentive distribution rights, whose distributions increase at a faster rate than those of our other securities.

Our unitholders do not elect our general partner or vote on our general partner's directors, and affiliates of our general partner own a sufficient number of our common units to allow them to block any attempt to remove our general partner. As a result of these provisions, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

        Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management's decisions regarding our business. Our unitholders did not elect our general partner or the directors of

29


Table of Contents


our general partner and will have no right to elect our general partner or the directors of our general partner on an annual or other continuing basis in the future. Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner cannot be removed except upon the vote of the holders of at least 662/3% of the outstanding units voting together as a single class. Affiliates of our general partner own 60.6% of our common units. This ownership level will enable our general partner and its affiliates to prevent our general partner's involuntary removal. Our unitholders' voting rights are further restricted by the provision in our partnership agreement stating that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of the 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 the ability of our unitholders to influence the manner or direction of our management. As a result of these provisions, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

Restrictions in our credit facility could limit our ability to make distributions to our unitholders, borrow additional funds or capitalize on business opportunities.

        Our credit facility contains various operating and financial restrictions and covenants. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we are unable to comply with these restrictions and covenants, a significant portion of any future indebtedness under our credit facility may become immediately due and payable, and our lenders' commitment to make further loans to us under our credit facility may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, our obligations under our credit facility will be secured by substantially all of our assets, and if we are unable to repay any future indebtedness under our credit facility, the lenders could seek to foreclose on such assets. Our payment of principal and interest on any future indebtedness will reduce our cash available for distribution on our units. Our credit facility will limit our ability to pay distributions to our unitholders if we are not in compliance with our financial covenants, during an event of default or if an event of default would result from the distribution.

        In addition, any future levels of indebtedness may:

    adversely affect our ability to obtain additional financing for future operations or capital needs;

    limit our ability to pursue acquisitions and other business opportunities; or

    make our results of operations more susceptible to adverse economic or operating conditions.

        Various limitations in our credit facility and any future financing agreements may reduce our ability to incur additional indebtedness, to engage in some transactions or to capitalize on business opportunities.

We may issue an unlimited number of limited partner interests without the consent of our unitholders, which will dilute your ownership interest in us and may increase the risk that we will not have sufficient available cash to maintain or increase our per unit distribution level.

        At any time we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders on terms and conditions established by our general partner. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

    our unitholders' proportionate ownership interest in us will decrease;

30


Table of Contents

    the amount of cash available for distribution on each unit may decrease;

    the relative voting strength of each previously outstanding unit may be diminished;

    the ratio of taxable income to distributions may increase; and

    the market price of the common units may decline.

The control of our general partner may be transferred to a third party without unitholder consent. The new owner of our general partner could implement different business strategies, which could have an adverse impact on our growth or future prospects.

        Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of Harold Hamm or the owners of our general partner to transfer their ownership interests in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner and the general partner of Hiland Partners and to control the decisions taken by the board of directors and officers. The new owner of our general partner could implement different business strategies, which could have an adverse impact on our growth or future prospects.

Hiland Partners' unitholders have the right to remove Hiland Partners' general partner with the approval of 662/3% of all units, which would cause us to lose our general partner interest and incentive distribution rights in Hiland Partners and the ability to manage Hiland Partners.

        We currently manage Hiland Partners through Hiland Partners GP our wholly-owned subsidiary. Hiland Partners' partnership agreement, however, gives unitholders of Hiland Partners the right to remove the general partner of Hiland Partners upon the affirmative vote of holders of 662/3% of Hiland Partners' outstanding units. If Hiland Partners GP, LLC were removed as general partner of Hiland Partners, it would receive cash or common units in exchange for its 2% general partner interest and the incentive distribution rights and would lose its ability to manage Hiland Partners. While the common units or cash we would receive are intended under the terms of Hiland Partners' partnership agreement to fully compensate us in the event such an exchange is required, the value of these common units or investments we make with the cash over time may not be equivalent to the value of the general partner interest and the incentive distribution rights had we retained them.

You may not have limited liability if a court finds that unitholder action constitutes control of our business.

        As a limited partner in a partnership organized under Delaware law, you could be held liable for our obligations to the same extent as a general partner if a court determined that the right or the exercise of the right by our unitholders as a group to remove or replace our general partner, to approve some amendments to the partnership agreement or to take other action under our partnership agreement constituted participation in the "control" of our business. Our general partner generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. Additionally, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions. Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, neither we nor Hiland Partners may make a distribution to our unitholders if the distribution would cause our or Hiland Partners' respective liabilities to exceed the fair value of our respective assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partnership interest and

31


Table of Contents


liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

If in the future we cease to manage and control Hiland Partners through our ownership of the general partner interest in Hiland Partners, we may be deemed to be an investment company under the Investment Company Act of 1940.

        If we cease to manage and control Hiland Partners and are deemed to be an investment company under the Investment Company Act of 1940 because of our ownership interests in Hiland Partners, we would either have to register as an investment company under the Investment Company Act of 1940, obtain exemptive relief from the Commission or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates. The occurrence of all or some of these events would adversely affect the price of our common units.

Hiland Partners may issue additional common units or other equity securities, which may increase the risk that Hiland Partners will not have sufficient available cash to maintain or increase its cash distribution level.

        Hiland Partners has wide latitude to issue additional Hiland Partners common units on the terms and conditions established by Hiland Partners' general partner. The payment of distributions on these additional Hiland Partners common units may increase the risk that Hiland Partners will be unable to maintain or increase its quarterly cash distribution per unit, which in turn may reduce the amount of incentive distributions we receive and the available cash that we have to distribute to our unitholders.

If Hiland Partners' general partner is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of Hiland Partners, it may not be able to satisfy its obligations, and its cash flows will be reduced, which will in turn reduce distributions to you.

        The general partner of Hiland Partners and its affiliates may make expenditures on behalf of Hiland Partners for which they will seek reimbursement from Hiland Partners. In addition, under Delaware partnership law, the general partner, in its capacity as the general partner of Hiland Partners, has unlimited liability for the obligations of Hiland Partners, such as its debts and environmental liabilities, except for those contractual obligations of Hiland Partners that are expressly made without recourse to the general partner. For example, Hiland Partners' credit facility and certain of its gas purchase agreements do not contain such an express non-recourse contractual provision, and Hiland Partners may, from time to time, enter into other agreements that do not contain such provisions. To the extent Hiland Partners GP, LLC incurs obligations on behalf of Hiland Partners, it is entitled to be reimbursed or indemnified by Hiland Partners. If Hiland Partners does not reimburse or indemnify its general partner, Hiland Partners GP, LLC may be unable to satisfy these liabilities or obligations, which would reduce its cash flows, which will in turn reduce distributions to you.

Increases in interest rates could increase our borrowing costs, adversely impact our unit price and our ability to issue additional equity, which could have an adverse effect on our cash flows and our ability to fund our growth.

        Due to the recent volatility and decline in the credit markets, the interest rate on our credit facility could increase, which would reduce our cash flows. In addition, interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, the market price for our units will be affected by the level of our cash distributions and implied distribution yield. The distribution yield is often used by

32


Table of Contents


investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse effect on our unit price and our ability to issue additional equity in order to make acquisitions, to reduce debt or for other purposes.

Our cash flow is affected by the volatility of natural gas and NGL product prices, which could adversely affect its ability to make distributions to its unitholders.

        Hiland Partners is subject to significant risks due to frequent and often substantial fluctuations in commodity prices. In the past, the prices of natural gas and NGLs have been extremely volatile, and Hiland Partners expect this volatility to continue. For the year ended December 31, 2008, Hiland Partners' average realized natural gas sales price increased from $6.44/MMBtu in January to a high sales price of $10.05/MMBtu in July, then decreased to a low sales price of $3.38/MMBtu in November. Hiland Partners' average realized NGL sales price increased from $1.42 per gallon in January 2008 to a high sales price of $1.74 per gallon in June 2008, then decreased to a low sales price of $0.61 per gallon in December 2008. The markets and prices for natural gas and NGLs depend upon factors beyond Hiland Partners' control. These factors include demand for oil, natural gas and NGLs, which fluctuate with changes in market and economic conditions and other factors, including:

    the impact of weather on the demand for oil and natural gas;

    the level of domestic oil and natural gas production;

    the availability of imported oil and natural gas;

    actions taken by foreign oil and gas producing nations;

    the availability of local, intrastate and interstate transportation systems;

    the availability and marketing of competitive fuels;

    the impact of energy conservation efforts; and

    the extent of governmental regulation and taxation.

        Hiland Partners operates under three types of contractual arrangements under which its total segment margin is exposed to increases and decreases in the price of natural gas, NGLs and the relationship between natural gas and NGL prices: percentage-of-proceeds, percentage-of-index and index-minus-fees arrangements. Under percentage-of-proceeds arrangements, Hiland Partners generally purchases natural gas from producers for an agreed percentage of proceeds or upon an index related price, and then sells the resulting residue gas and NGLs or NGL products at index related prices. Under percentage-of-index arrangements, Hiland Partners purchases natural gas from producers at a fixed percentage of the index price for the natural gas they produce and subsequently sells the residue gas and NGLs or NGL products at market prices. Under index- minus-fees arrangements, we purchase natural gas from producers at an expected index related price less fees to gather, dehydrate, compress, treat and/or process the natural gas. Under these types of contracts our revenues and total segment margin increase or decrease, whichever is applicable, as the price of natural gas and NGLs fluctuates.

Risks Inherent in Hiland Partners' Business

        Because we are substantially dependent on the distributions we receive from Hiland Partners, risks to Hiland Partners' operations are also risks to us. We have set forth below risks to Hiland Partners' business and operations, the occurrence of which could negatively impact its financial performance and decrease the amount of cash it is able to distribute to us.

33


Table of Contents


If commodity prices do not significantly improve above the expected prices for 2009, Hiland Partners may be in violation of the maximum consolidated funded debt to EBITDA ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or it receives an infusion of equity capital. Failure to comply with the covenants could cause an event of default under Hiland Partners' credit facility.

        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 December 31, 2008, Hiland Partners was in compliance with each of these ratios, which are tested quarterly. Hiland Partners' EBITDA to interest expense ratio was 5.0 to 1.0 and its consolidated funded debt to EBITDA ratio was 3.7 to 1.0. Hiland Partners intends to elect to increase the ratio to 4.75:1.0 on March 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 Hiland Partners' operations and events or circumstances beyond Hiland Partners' control. If commodity prices do not significantly improve above the expected prices for 2009, Hiland Partners may be in violation of the maximum consolidated funded debt to EBITDA ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or it receives an infusion of equity capital.

        Hiland Partners' failure to comply with any of the restrictions and covenants under its revolving credit facility could lead to an event of default and the acceleration of Hiland Partners 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. Hiland Partners cannot assure that it 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 Hiland Partners 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. Hiland Partners 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.

        For additional information about the restrictions under our credit facility, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility."

34


Table of Contents

Hiland Partners may not have sufficient cash after the establishment of cash reserves and payment of its general partner's fees and expenses to enable Hiland Partners to pay distributions at the current level, or at all.

        Hiland Partners may not have sufficient available cash each quarter to pay distributions at the current level, or at all. Under the terms of Hiland Partners' partnership agreement, Hiland Partners must pay its general partner's fees and expenses and set aside any cash reserve amounts before making a distribution to its unitholders. The amount of cash Hiland Partners can distribute on its units principally depends upon the amount of cash Hiland Partners generates from its operations, which will fluctuate from quarter to quarter based on several factors, some of which are beyond Hiland Partners' control, including:

    the amount of natural gas gathered on its pipelines;

    the throughput volumes at its processing, treating and fractionation plants;

    the price of natural gas and crude oil;

    the price of NGLs;

    the relationship between natural gas and NGL prices;

    the level of Hiland Partners' operating costs;

    the weather in its operating areas;

    the level of competition from other midstream energy companies; and

    the fees Hiland Partners charges and the margins it realizes for its services.

        In addition, the actual amount of cash Hiland Partners will have available for distribution will depend on other factors, some of which are beyond its control, including:

    the level of capital expenditures Hiland Partners makes;

    the availability, if any, and cost of acquisitions;

    Hiland Partners' debt service requirements;

    Hiland Partners' ability to access capital markets and borrow money;

    fluctuations in Hiland Partners' working capital needs;

    restrictions on distributions contained in Hiland Partners' credit facility;

    restrictions on Hiland Partners' ability to make working capital borrowings under its credit facility to pay distributions;

    prevailing economic conditions; and

    the amount, if any, of cash reserves established by Hiland Partners' general partner's board of directors in its sole discretion for the proper conduct of its business.

Hiland Partners' cash flow is affected by the volatility of natural gas and NGL product prices, which could adversely affect its ability to make distributions to its unitholders.

        Hiland Partners is subject to significant risks due to frequent and often substantial fluctuations in commodity prices. In the past, the prices of natural gas and NGLs have been extremely volatile, and Hiland Partners expects this volatility to continue. For the year ended December 31, 2008, Hiland Partners' average realized natural gas sales price increased from $6.44/MMBtu in January to a high sales price of $10.05/MMBtu in July, then decreased to a low sales price of $3.38/MMBtu in November.

35


Table of Contents


Hiland Partners' average realized NGL sales price increased from $1.42 per gallon in January 2008 to a high sales price of $1.74 per gallon in June 2008, then decreased to a low sales price of $0.61 per gallon in December 2008. The markets and prices for natural gas and NGLs depend upon factors beyond Hiland Partners' control. These factors include demand for oil, natural gas and NGLs, which fluctuate with changes in market and economic conditions and other factors, including:

    the impact of weather on the demand for oil and natural gas;

    the level of domestic oil and natural gas production;

    the availability of imported oil and natural gas;

    actions taken by foreign oil and gas producing nations;

    the availability of local, intrastate and interstate transportation systems;

    the availability and marketing of competitive fuels;

    the impact of energy conservation efforts; and

    the extent of governmental regulation and taxation.

        Hiland Partners operates under three types of contractual arrangements under which its total segment margin is exposed to increases and decreases in the price of natural gas, NGLs and the relationship between natural gas and NGL prices: percentage-of-proceeds, percentage-of-index and index-minus-fees arrangements. Under percentage-of-proceeds arrangements, Hiland Partners generally purchases natural gas from producers for an agreed percentage of proceeds or upon an index related price, and then sells the resulting residue gas and NGLs or NGL products at index related prices. Under percentage-of-index arrangements, Hiland Partners purchases natural gas from producers at a fixed percentage of the index price for the natural gas they produce and subsequently sells the residue gas and NGLs or NGL products at market prices. Under index- minus-fees arrangements, Hiland Partners purchases natural gas from producers at an expected index related price less fees to gather, dehydrate, compress, treat and/or process the natural gas. Under these types of contracts Hiland Partners' revenues and total segment margin increase or decrease, whichever is applicable, as the price of natural gas and NGLs fluctuates.

Because of the natural decline in production from existing wells, Hiland Partners' success depends on its ability to obtain new supplies of natural gas, which involves factors beyond its control. Any decrease in supplies of natural gas in Hiland Partners' areas of operation could adversely affect Hiland Partners' business and operating results and reduce its ability to make distributions to its unitholders, including us, or to service its debt.

        Hiland Partners' gathering systems and processing plants are dependent on the level of production from oil and natural gas wells that supply its systems with natural gas and from which production will naturally decline over time. As a result, Hiland Partners' cash flows associated with these wells will also decline over time. In order to maintain or increase throughput volume levels on Hiland Partners' gathering systems and the asset utilization rates at its natural gas processing plants, Hiland Partners must continually obtain new supplies of natural gas. The primary factors affecting Hiland Partners' ability to obtain new supplies of natural gas and attract new customers to its assets are the level of successful drilling activity near Hiland Partners' gathering systems and its ability to compete with other gathering and processing companies for volumes from successful new wells.

        The level of drilling activity is dependent on economic and business factors beyond Hiland Partners' control. Fluctuations in energy prices can greatly affect production rates and investments by third parties in the development of new oil and natural gas reserves. Drilling activity generally decreases as oil and natural gas prices decrease. Natural gas, crude oil and NGL prices have been high

36


Table of Contents


in recent years compared to historical periods, but have decreased significantly during the fourth quarter of 2008 and thus far in 2009. This decline in natural gas prices coupled with the effect of illiquid capital markets has led to a decrease in drilling activity in Hiland Partners' areas of operation.

        In addition, producers may decrease their drilling activity levels due to the current deterioration in the credit markets. Many of Hiland Partners' customers finance their drilling activities though cash flow from operations, the incurrence of debt or the issuance of equity. Recently, there has been a significant decline in the credit markets and the availability of credit. Additionally, many of Hiland Partners' customers' equity values have substantially declined. The combination of a reduction of cash flow resulting from declines in commodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in the spending of Hiland Partners' customers. For example, a number of Hiland Partners' customers have announced reduced capital expenditure budgets for 2009.

        Other factors that impact production decisions include producers' capital budget limitations, the ability of producers to obtain necessary drilling and other governmental permits and regulatory changes. Because of these factors, even if additional crude oil or natural gas reserves were discovered in areas served by Hiland Partners' assets, producers may choose not to develop those reserves. If Hiland Partners was not able to obtain new supplies of natural gas to replace the natural decline in volumes from existing wells due to reductions in drilling activity or competition, throughput volumes on Hiland Partners' pipelines and the utilization rates of its processing facilities would decline, which could have a material adverse effect on its business, results of operations and financial condition.

If Hiland Partners fails to obtain new sources of natural gas supply, its revenues and cash flow may be adversely affected, and its ability to make distributions to its unitholders, including us, may be reduced.

        Hiland Partners faces competition in acquiring new natural gas supplies. Competition for natural gas supplies is primarily based on the location of pipeline facilities, pricing arrangements, reputation, efficiency, flexibility and reliability. Hiland Partners' major competitors for natural gas supplies and markets include (1) Atlas Pipeline Partners, Mustang Fuel Corporation, Duke Energy Field Services, LLC and SemGas, L.P. at its Eagle Chief gathering system, (2) Enogex, Inc. at its Matli gathering system, (3) Bear Paw Energy, a subsidiary of ONEOK Partners, L.P., at its Badlands and Bakken gathering systems, (4) CenterPoint Energy Field Services and Superior Pipeline Company, L.L.C., a subsidiary of Unit Corporation, at its Kinta Area gathering system and (5) MarkWest Energy Partners, Enogex, Inc., Antero Resources Midstream Corporation and Copano Energy, L.L.C. at its Woodford Shale gathering system. Many of Hiland Partners' competitors have greater financial resources than Hiland Partners does, which may better enable them to pursue additional gathering and processing opportunities than Hiland Partners.

Hiland Partners depends on certain key producers for a significant portion of its supply of natural gas and the loss of any of these key producers could reduce Hiland Partners' supply of natural gas and adversely affect its financial results.

        For the year ended December 31, 2008, CLR, Chesapeake Energy Corporation and Enerplus Resources (USA) Corporation supplied Hiland Partners with approximately 49%, 13% and 10%, respectively, of its total natural gas volumes purchased. BP America Production Company and Chesapeake Energy Corporation supplied Hiland Partners with approximately 52% and 13%, respectively, of its natural gas volumes gathered. Certain of Hiland Partners' natural gas gathering systems is dependent on one or more of these producers. To the extent that these producers reduce the volumes of natural gas that they supply as a result of competition or otherwise, Hiland Partners would be adversely affected unless it was able to acquire comparable supplies of natural gas on comparable terms from other producers, which may not be possible in areas where the producer that reduces its volumes is the primary producer in the area.

37


Table of Contents


Hiland Partners' ability to grow depends in part on its ability to make acquisitions that result in an increase in the cash generated from operations per unit. If Hiland Partners does not make acquisitions on economically acceptable terms, its future growth may be limited.

        Hiland Partners' ability to grow depends in part on its ability to make acquisitions that result in an increase in the cash generated from operations per unit. If Hiland Partners is unable to make these accretive acquisitions either because it is: (1) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them, (2) unable to obtain financing for these acquisitions on economically acceptable terms, or (3) outbid by competitors, then Hiland Partners' future growth and ability to increase distributions may be limited. Furthermore, even if Hiland Partners does make acquisitions that it believes will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations per unit and reduce our cash available to pay distributions. Any acquisition involves potential risks, including, among other things:

    mistaken assumptions about revenues and costs, including synergies;

    an inability to integrate successfully the businesses acquired;

    the assumption of unknown liabilities;

    limitations on rights to indemnity from the seller;

    the diversion of management's attention from other business concerns;

    unforeseen difficulties operating in new product areas or new geographic areas; and

    customer or key employee losses at the acquired businesses.

        If Hiland Partners consummates any future acquisitions, its capitalization and results of operations may change significantly, and you will not have the opportunity to evaluate the economic, financial and other relevant information that Hiland Partners will consider in determining the application of these funds and other resources.

        Hiland Partners' acquisition strategy is based, in part, on its expectation of ongoing divestitures of midstream assets by large industry participants. A material decrease in such divestitures would limit Hiland Partners' opportunities for future acquisitions and could adversely affect its operations and cash flows available for distribution to unitholders.

Hiland Partners' ability to engage in construction projects and to make acquisitions will require access to a substantial amount of capital. The inability of Hiland Partners to obtain adequate sources of financing on economically acceptable terms may limit Hiland Partners' growth opportunities, which could have a negative impact on our cash available to pay distributions.

        Hiland Partners' ability to engage in construction projects or to make acquisitions is dependent on obtaining adequate sources of outside financing, including commercial borrowings and other debt and equity issuances. While the initial funding of Hiland Partners' acquisitions may consist of debt financing, Hiland Partners' financial strategy is to finance acquisitions approximately equally with equity and debt, and Hiland Partners would expect to repay such debt with proceeds of equity issuances to achieve this relatively balanced financing ratio.

        Global market and economic conditions have been, and continue to be, disruptive and volatile. The debt and equity capital markets have been adversely affected by significant write-offs in the financial services sector relating to subprime mortgages, and the re-pricing of credit risk in the broadly syndicated market, among other things. These events have led to worsening general economic conditions. In particular, the cost of capital in the debt and equity capital markets has increased substantially, while the availability of funds from those markets has diminished significantly. Also, concerns about the stability of financial markets generally and the solvency of counterparties specifically

38


Table of Contents


have led to increases in the cost of obtaining money from the credit markets as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced funding and, in some cases, ceased to provide funding to borrowers.

        If Hiland Partners is unable to finance its growth through external sources or is unable to achieve its targeted debt/equity ratios, or if the cost of such financing is higher than expected, Hiland Partners may be required to forgo certain construction projects or acquisition opportunities or such construction projects or acquisition opportunities may not result in expected increases in distributable cash flow. Accordingly, Hiland Partners' inability to obtain adequate sources of financing on economically acceptable terms may limit its growth opportunities, which could have a negative impact on its cash available to pay distributions.

        For additional information on our access to capital markets, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Hiland Partners generally does not obtain independent evaluations of natural gas reserves dedicated to it gathering systems; therefore, volumes of natural gas gathered on its gathering systems in the future could be less than anticipated. A decline in the volumes of natural gas gathered on its gathering systems would have an adverse effect on Hiland Partners' results of operations, financial condition and ability to make distributions.

        Hiland Partners generally does not obtain independent evaluations of natural gas reserves connected to its gathering systems due to the unwillingness of producers to provide reserve information as well as the cost of such evaluations. Accordingly, Hiland Partners does not have estimates of total reserves dedicated to its systems or the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to Hiland Partners' gathering systems is less than anticipated and Hiland Partners is unable to secure additional sources of natural gas, then the volumes of natural gas gathered on its gathering systems in the future could be less than anticipated. A decline in the volumes of natural gas gathered on its gathering systems would have an adverse effect on Hiland Partners' results of operations, financial condition and ability to make distributions.

Hiland Partners is exposed to the credit risks of its key customers, and any material nonpayment or nonperformance by these key customers could reduce Hiland Partners' ability to make distributions to its unitholders or to service its debt.

        Hiland Partners is subject to risks of loss resulting from nonpayment or nonperformance by its customers. Any material nonpayment or nonperformance by Hiland Partners' key customers could reduce its 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.

        Additionally, Hiland Partners derives its revenues primarily from customers in the energy industry. This industry concentration has 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, including changing commodities prices.

Hiland Partners may not successfully balance its purchases of natural gas and its sales of residue gas and NGLs, which increases its exposure to commodity price risks.

        Hiland Partners may not be successful in balancing its purchases and sales. In addition, a producer could fail to deliver promised volumes or deliver in excess of contracted volumes, or a purchaser could purchase less than contracted volumes. Any of these actions could cause Hiland Partners' purchases and sales not to be balanced. If Hiland Partners' purchases and sales are not balanced, it will face increased exposure to commodity price risks and could have increased volatility in its operating income.

39


Table of Contents


Hiland Partners' construction of new assets or the expansion of existing assets may not result in revenue increases and is subject to regulatory, environmental, political, legal and economic risks, which could adversely affect its results of operations and financial condition.

        One of the ways Hiland Partners may grow its business is through the construction of new midstream assets or the expansion of existing systems. The construction of additions or modifications to existing systems, and the construction of new midstream assets involve numerous regulatory, environmental, political and legal uncertainties beyond Hiland Partners' control and require the expenditure of significant amounts of capital. If Hiland Partners undertakes these projects, they may not be completed on schedule at the budgeted cost, or at all. Moreover, revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if Hiland Partners expands a new pipeline, the construction may occur over an extended period of time, and Hiland Partners will not receive any material increases in revenues until the project is completed. Moreover, Hiland Partners may construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize. Since Hiland Partners is not engaged in the exploration for and development of oil and natural gas reserves, it often does not have access to estimates of potential reserves in an area prior to constructing facilities in such area. To the extent Hiland Partners relies on estimates of future production in its decision to construct additions to its systems, such estimates may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not be able to attract enough throughput to achieve expected investment return, which could adversely affect Hiland Partners' results of operations, financial condition and ability to make distributions.

A change in the characterization of some of Hiland Partners' assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of Hiland Partners' assets, which may cause its revenues to decline and operating expenses to increase.

        Hiland Partners' gathering facilities are exempt from FERC regulation under the Natural Gas Act of 1938, or NGA, but FERC jurisdiction still affects Hiland Partners' business and the market for its products. FERC's policies and practices affect a wide range of activities bearing directly or indirectly on Hiland Partners' business and operations, including, for example, FERCs regulations and policies related to open access transportation, ratemaking, capacity release, market center promotion, intrastate transportation, and market transparency. In recent years, FERC has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, Hiland Partners cannot assure you that FERC will continue this approach as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity. In addition, there is no bright-line distinction between FERC-regulated transmission service and federally unregulated gathering services. Moreover, this distinction is the subject of regular litigation. Consequently, the classification and regulation of some of Hiland Partners' gathering facilities may be subject to change based on future determinations by the FERC and the courts. A change in jurisdictional characterization may cause the affected facility's revenues to decline and its operating expenses to increase.

        Other state and local regulations also affect Hiland Partners' business. Hiland Partners' gathering lines are subject to ratable take and common purchaser statutes in states in which it operates. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes restrict Hiland Partners' right as an owner of gathering facilities to decide with whom it contracts to purchase or transport natural gas. Federal law leaves any economic regulation of natural gas gathering to the states. States in which Hiland Partners operates have adopted complaint based regulation of natural gas gathering activities, which allows natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to natural gas gathering

40


Table of Contents


access and rate discrimination. While Hiland Partners' proprietary gathering lines currently are subject to limited state regulation, there is a risk that state laws will be changed, which may give producers a stronger basis to challenge proprietary status of a line, or the rates, terms and conditions of a gathering line providing transportation service.

Hiland Partners may incur significant costs and liabilities in the future resulting from a failure to comply with new or existing environmental laws and regulations or an accidental release of hazardous substances, wastes or hydrocarbons into the environment. These costs could have an adverse effect on Hiland Partners' ability to make distributions to its unitholders.

        Hiland Partners' operations are subject to stringent and complex federal, regional, state and local environmental laws and regulations governing the discharge of substances into the environment and environmental protection. These laws and regulations require Hiland Partners to acquire permits to conduct regulated activities, to incur capital expenditures to limit or prevent releases of substances from its facilities, and to respond to liabilities for pollution resulting from its operations. Governmental authorities enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly actions. Failure to comply with these laws and regulations or newly adopted laws or regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict and, under certain circumstances, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, wastes or hydrocarbons into the environment.

        There is inherent risk of the incurring significant environmental costs and liabilities in Hiland Partners' business due to its handling of natural gas, NGLs and wastes, the release of water discharges or air emissions related to its operations, and historical industry operations and waste disposal practices conducted by Hiland Partners or predecessor operators. For example, an accidental release from one of Hiland Partners' pipelines or processing facilities could subject it to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property or natural resource damage, and fines or penalties for related violations of environmental laws or regulations. Moreover, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase Hiland Partners' compliance costs and the cost of any remediation that may become necessary. Hiland Partners may not be able to recover some or any of these costs from insurance.

If Hiland Partners is unable to obtain new rights-of-way or the cost of renewing existing rights-of-way increases, then it may be unable to fully execute its growth strategy and its cash flows and ability to make distributions could be adversely affected.

        The construction of additions to Hiland Partners' existing gathering assets may require it to obtain new rights-of-way prior to constructing new pipelines. Hiland Partners may be unable to obtain such rights-of-way to connect new natural gas supplies to its existing gathering lines or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for Hiland Partners to obtain new rights-of-way or to renew existing rights-of-way. If the cost of obtaining new rights-of-way, or renewing existing rights-of-way increases, Hiland Partners' cash flows and cash available for distribution could be adversely affected.

41


Table of Contents

If Hiland Partners fails to renew any of its significant contracts as they expire under the terms of the particular agreement, its revenues and cash flow may be adversely affected and its ability to make distributions to its unitholders or service its debt may be reduced.

        If Hiland Partners fails to renew any of its significant natural gas sales contracts, NGL sales arrangements, hedging contracts, natural gas purchase and gathering contracts or its compression services agreement as they expire under the terms of the particular agreement, Hiland Partners would be adversely affected unless it was able to replace such contract with a contract containing similar terms. For example, Hiland Partners' compression services agreement with CLR had an initial term that ended on January 28, 2009 and now automatically renews for one-month terms unless terminated by either party by giving notice at least 15 days prior to the end of the then current term. If CLR elects to terminate the monthly agreement and Hiland Partners fails to renew the monthly agreement with CLR, Hiland Partners would be adversely affected unless it was able to provide air and water compression services to other parties in the area where its air and compression facilities are located.

Hiland Partners' business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs that is not fully insured, its operations and financial results could be adversely affected.

        Hiland Partners' operations are subject to the many hazards inherent in the gathering, treating, processing and fractionation of natural gas and NGLs, including:

    damage to pipelines, related equipment and surrounding properties caused by tornadoes, floods, fires and other natural disasters and acts of terrorism;

    inadvertent damage from construction and farm equipment;

    leaks of natural gas, NGLs and other hydrocarbons or losses of natural gas or NGLs as a result of the malfunction of measurement equipment or facilities at receipt or delivery points;

    fires and explosions; and

    other hazards, including those associated with high-sulfur content, or sour gas, that could also result in personal injury and loss of life, pollution and suspension of operations.

        These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or suspension of Hiland Partners' related operations. A natural disaster or other hazard affecting the areas in which Hiland Partners operates could have a material adverse effect on its operations. Hiland Partners is not fully insured against all risks incident to its business. In accordance with typical industry practice, Hiland Partners does not have any property insurance on any of its underground pipeline systems that would cover damage to the pipelines. Hiland Partners is not insured against all environmental accidents that might occur, other than those considered to be sudden and accidental. In addition, Hiland Partners does not have business interruption insurance. If a significant accident or event occurs that is not fully insured, it could adversely affect Hiland Partners' operations and financial condition.

Restrictions in Hiland Partners' credit facility limits its ability to make distributions and may limit its ability to capitalize on acquisition and other business opportunities.

        Hiland Partners' credit facility contains various covenants limiting its ability to incur indebtedness, grant liens, engage in transactions with affiliates, make distributions to its unitholders and capitalize on acquisition or other business opportunities. It also contains covenants requiring Hiland Partners to maintain certain financial ratios and tests. Hiland Partners is prohibited from making any distribution to unitholders if such distribution would cause a default or an event of default under its credit facility.

42


Table of Contents


Any subsequent refinancing of Hiland Partners' current indebtedness or any new indebtedness could have similar or greater restrictions. As of December 31, 2008, Hiland Partners' total outstanding long-term indebtedness was approximately $252.1 million, all under its senior secured revolving credit facility. Payments of principal and interest on the indebtedness will reduce the cash available for distribution on Hiland Partners' units.

        For additional information about the restrictions under our credit facility, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility."

Due to Hiland Partners' lack of asset diversification, adverse developments in its midstream operations would reduce its ability to make distributions to its unitholders.

        Hiland Partners relies exclusively on the revenues generated from its gathering, dehydration, treating, processing, fractionation and compression services businesses, and as a result, its financial condition depends upon prices of, and continued demand for, natural gas and NGLs. Due to Hiland Partners' lack of diversification in asset type, an adverse development in one of these businesses would have a significantly greater impact on Hiland Partners' financial condition and results of operations than if it maintained more diverse assets.

Hiland Partners' hedging activities may not be as effective as intended in reducing the volatility of its cash flows, and in certain circumstances may actually increase the volatility of its cash flows, which could adversely affect its ability to make distributions to unitholders, including us.

        Hiland Partners utilizes derivative financial instruments related to the future price of natural gas and the future price of NGLs with the intent of reducing volatility in its cash flows due to fluctuations in commodity prices. While Hiland Partners' hedging activities are designed to reduce commodity price risk, Hiland Partners remains exposed to fluctuations in commodity prices to some extent.

        The extent of Hiland Partners' commodity price exposure is related largely to the effectiveness and scope of its hedging activities. For example, the derivative instruments Hiland Partners utilizes are based on posted market prices, which may differ significantly from the actual natural gas prices or NGLs prices that Hiland Partners realizes in its operations. Furthermore, Hiland Partners' hedges relate to only a portion of the volume of its expected sales and, as a result, Hiland Partners will continue to have direct commodity price exposure to the unhedged portion. Hiland Partners' actual future sales may be significantly higher or lower than estimated at the time it entered into derivative transactions for such period. If the actual amount is higher than estimated, Hiland Partners will have greater commodity price exposure than intended. If the actual amount is lower than the amount that is subject to Hiland Partners' derivative financial instruments, Hiland Partners might be forced to satisfy all or a portion of its derivative transactions without the benefit of the cash flow from its sale or purchase of the underlying physical commodity, resulting in a substantial diminution of liquidity.

        As a result of these factors, Hiland Partners' hedging activities may not be as effective as intended in reducing the volatility of its cash flows, and in certain circumstances may actually increase the volatility of its cash flows, which could adversely affect its ability to make distributions to unitholders, including us. In addition, Hiland Partners' hedging activities are subject to the risks that a counterparty may not perform its obligation under the applicable derivative instrument, the terms of the derivative instruments are imperfect, and Hiland Partners' hedging procedures may not be properly followed. Hiland Partners cannot assure you that the steps it takes to monitor its derivative financial instruments will detect and prevent violations of its risk management policies and procedures, particularly if deception or other intentional misconduct is involved.

43


Table of Contents


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.

        Hiland Partners plans to fund its expansion capital expenditures, including any future expansions it may undertake, with proceeds from sales of its debt and equity securities and borrowings under its revolving credit facility; however, Hiland Partners cannot be certain that it will be able to issue its debt and equity securities on terms or in the proportions that it expects, or at all, and Hiland Partners may be unable refinance its revolving credit facility when it expires. In addition, Hiland Partners may be unable to obtain adequate funding under its current revolving credit facility because its lending counterparties may be unwilling or unable to meet their funding obligations.

        Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been exceedingly distressed. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions have made, and will likely continue to make, it difficult to obtain funding.

        The cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to our current debt and reduced and, in some cases, ceased to provide funding to borrowers.

        A significant increase in Hiland Partners' indebtedness, or an increase in Hiland Partners' indebtedness that is proportionately greater than its issuances of equity, as well as the credit market and debt and equity capital market conditions discussed above could negatively impact Hiland Partners' ability to remain in compliance with the financial covenants under its revolving credit agreement which could have a material adverse effect on its financial condition, results of operations and cash flows. If Hiland Partners is unable to finance its expansion projects as expected, it could be required to seek alternative financing, the terms of which may not be attractive to Hiland Partners, or to revise or cancel its expansion plans. If Hiland Partners is unable to finance its expansion projects as expected, this could have a material adverse effect on Hiland Partners' operations, which could reduce Hiland Partners' ability to make distributions to its unitholders, including us.

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.

        Due to the recent volatility and decline in the credit markets, the interest rate on Hiland Partners' credit facility could increase, which would reduce its cash flows. In addition, interest rates on future credit facilities and debt offerings could be higher than current levels, causing Hiland Partners' financing costs to increase accordingly. As with other yield-oriented securities, the market price for Hiland Partners' units will be affected by the level of its cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in Hiland Partners' units, and a rising interest rate environment could have an adverse effect on Hiland Partners' unit price and its ability to issue additional equity in order to make acquisitions, to reduce debt or for other purposes.

44


Table of Contents

Risks Related to Conflicts of Interest

Harold Hamm and his affiliates control our general partner, which has sole responsibility for conducting our business and managing our operations. Affiliates of Harold Hamm and our general partner have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to your detriment.

        Harold Hamm and the Hamm family trusts directly or indirectly own a 60.8% limited partner interest in us. In addition, Harold Hamm controls our general partner. Conflicts of interest may arise between Harold Hamm and the Hamm family trusts and their affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

    Harold Hamm and his affiliates control CLR; neither our partnership agreement nor any other agreement requires CLR to pursue a business strategy that favors us;

    our general partner is allowed to take into account the interests of parties other than us, in resolving conflicts of interest;

    our general partner has limited its liability and reduced its fiduciary duties, and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

    our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional limited partner securities, and reserves, each of which can affect the amount of cash that is distributed to unitholders;

    our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

    our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;

    our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates; and

    our general partner decides whether to retain separate counsel, accountants, or others to perform services for us.

Although we control and manage Hiland Partners through our ownership of its general partner, Hiland Partners' general partner owes fiduciary duties to Hiland Partners and Hiland Partners' unitholders, which may conflict with our interests.

        Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including Hiland Partners' general partner, on the one hand, and Hiland Partners and its limited partners, on the other hand. The directors and officers of Hiland Partners' general partner have fiduciary duties to manage Hiland Partners in a manner beneficial to us, its owner. At the same time, Hiland Partners' general partner has a fiduciary duty to manage Hiland Partners in a manner beneficial to Hiland Partners and its limited partners. The board of directors of Hiland Partners' general partner will resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For example, conflicts of interest may arise in the following situations:

    the allocation of shared overhead expenses to Hiland Partners and us;

45


Table of Contents

    the terms and conditions of any contractual agreements between us and our affiliates, on the one hand, and Hiland Partners, on the other hand;

    the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and Hiland Partners, on the other hand;

    the determination of the amount of cash to be distributed to Hiland Partners' unitholders and the amount of cash to be reserved for the future conduct of Hiland Partners' business;

    the decision whether Hiland Partners should make acquisitions and on what terms; and

    the determination of whether Hiland Partners should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital projects, repay indebtedness, meet working capital needs, pay distributions to Hiland Partners' unitholders or otherwise.

The fiduciary duties of our general partner's officers and directors may conflict with those of Hiland Partners GP, LLC, Hiland Partners' general partner.

        Conflicts of interest may arise because of the relationships between Hiland Partners' general partner, Hiland Partners and us. Our general partner's directors and officers have fiduciary duties to manage our business in a manner beneficial to us, our unitholders and the owners of our general partner. Some of our general partner's directors and all of its officers are also directors and officers of Hiland Partners' general partner, and have fiduciary duties to manage the business of Hiland Partners in a manner beneficial to Hiland Partners and Hiland Partners' unitholders. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

Our partnership agreement limits our general partner's fiduciary duties to us and our unitholders and restricts the remedies available to our unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

        Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

    permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of our general partner's limited call right, its rights to vote or transfer the units it owns, its registration rights and its determination whether or not to consent to any merger or consolidation of our partnership or amendment to our partnership agreement;

    provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decisions were in the best interests of our partnership;

    generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be "fair and reasonable" to us and that, in determining whether a transaction or resolution is "fair and reasonable," our general partner may consider the totality of the relationships among the parties involved, including other transactions that may be particularly advantageous or beneficial to us;

    provides that in resolving conflicts of interest, it will be presumed that in making its decision the general partner acted in good faith, and in any proceeding brought by or on behalf of any

46


Table of Contents

      limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption; and

    provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person's conduct was criminal.

        In order to become a limited partner of our partnership, our unitholders are required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above.

Our general partner's affiliates may compete with us.

        Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. While Harold Hamm and his affiliates, including CLR, are prohibited through February 2010, subject to certain exceptions, from engaging in, whether by acquisition, construction, investment in debt or equity interests of any person or otherwise, the business of gathering, treating, processing and transportation of natural gas in North America, the transportation and fractionation of NGLs in North America, and constructing, buying or selling any assets related to the foregoing businesses, nothing prohibits Harold Hamm or his affiliates, including CLR, from competing with us in other business opportunities. If Harold Hamm and his affiliates compete with us or Hiland Partners, our results of operations and cash available for distribution may be adversely affected.

Our ability to obtain debt financing will be affected by Hiland Partners' and Hiland Holdings GP's credit ratings.

        If we decide to obtain our own credit rating, any future downgrading of Hiland Partners' or Hiland Holdings GP's credit rating would likely also result in a downgrading of our credit rating. Regardless of whether we have our own credit rating, a downgrading of Hiland Partners' or Hiland Holdings GP's credit rating could limit our ability to obtain financing in the future upon favorable terms, if at all.

All of our executive officers face conflicts in the allocation of their time to our business.

        Our general partner shares officers and administrative personnel with Hiland Partners' general partner to operate both our business and Hiland Partners' business. Our general partner's officers, who are also the officers of Hiland Partners' general partner, will allocate the time they and our general partner's other employees spend on our behalf and on behalf of Hiland Partners. These officers face conflicts regarding the allocation of their and our other employees' time, which may adversely affect our or Hiland Partners' results of operations, cash flows and financial condition. These allocations may not necessarily be the result of arm's-length negotiations between Hiland Partners' general partner and our general partner.

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

        If at any time more than 80% of our outstanding common units are owned by our general partner and its affiliates, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on

47


Table of Contents


your investment. You may also incur a tax liability upon a sale of your common units. As of March 5, 2009, affiliates of our general partner owned 60.8% of our common units.

Tax Risks to Our Common Unitholders

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity-level taxation by individual states. If we or Hiland Partners were to be treated as a corporation for federal income tax purposes, or we were to become subject to additional amounts of entity level taxation for state tax purposes, taxes paid, if any, would reduce the amount of cash available for distribution to you.

        The value of our investment in Hiland Partners depends largely on Hiland Partners being treated as a partnership for federal income tax purposes, which requires that 90% or more of Hiland Partners' gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Internal Revenue Code. Hiland Partners may not meet this requirement or current law may change so as to cause, in either event, Hiland Partners to be treated as a corporation for federal income tax purposes or otherwise subject Hiland Partners to federal income tax. Moreover, the anticipated after-tax benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Services, or IRS, on this or any other matter affecting us.

        Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe based upon our current operations that we are so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

        If Hiland Partners were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate, which is currently a maximum of 35%and would likely pay state income tax at varying rates. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow and distributions to you, likely causing a substantial reduction in the value of our units. If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Thus, treatment of us as a corporation would result in a material reduction in our anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

        Current law may change, causing us or Hiland Partners to be treated as a corporation for federal income tax purposes or otherwise subjecting us or Hiland Partners to entity level taxation. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. For example, Hiland Partners is required to pay Texas franchise tax at a maximum effective rate of 0.7% of its gross income apportioned to Texas in the prior year. Imposition of this tax on us or Hiland Partners by Texas, or similar taxes by any other state, will reduce our cash available for distribution to you.

        Hiland Partners' partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects Hiland Partners to taxation as a corporation or otherwise subjects Hiland Partners to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect

48


Table of Contents


the impact of that law on Hiland Partners. Likewise, our cash distributions will be reduced if we or Hiland Partners are subjected to any form of an entity-level taxation.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

        The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress have recently considered substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships, including us. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively. Although the considered legislation would not have appeared to have affected our tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will be introduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

If the IRS contests the federal income tax positions we or Hiland Partners take, the market for our common units or Hiland Partners' limited partner units may be adversely impacted, and the costs of any contest will reduce cash available for distribution to our unitholders.

        We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter that affects us. Moreover, Hiland Partners has not requested any ruling from the IRS with respect to its treatment as a partnership for federal income tax purposes or any other matter that affects it. The IRS may adopt positions that differ from the positions we or Hiland Partners take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or Hiland Partners take. A court may disagree with some or all of the positions we or Hiland Partners take. Any contest with the IRS may materially and adversely impact the market for our common units or Hiland Partners units and the price at which they trade. In addition, the cost of any contest between Hiland Partners and the IRS will result in a reduction in cash available for distribution to Hiland Partners unitholders and thus indirectly by us, as a unitholder and as the owner of the general partner of Hiland Partners. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.

You may be required to pay taxes on income from us even if you do not receive any cash distributions from us.

        Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than the cash we distribute, you will be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the tax liability that results from the taxation of your share of our taxable income.

Tax gain or loss on the disposition of our common units could be more or less than expected.

        If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount

49


Table of Contents


realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder's share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

        Investment in units by tax-exempt entities, including employee benefit plans and individual retirement accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to such a unitholder. Distributions to non-U.S. persons will be reduced by withholding taxes imposed at the highest effective applicable tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. If you are a tax exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

We treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.

        Because we cannot match transferors and transferees of common units and because of other reasons, we have adopted depreciation and amortization positions that may not conform with all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of common units and could have a negative impact on the value of our common units or result in audits of and adjustments to our unitholders' tax returns.

We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first business day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, and, if successful, we would be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

        We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations. If the IRS were to successfully challenge this method or new Treasury Regulations were issued, we could be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

A unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

        Because a unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of the loaned units, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and

50


Table of Contents


avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We have adopted certain valuation methodologies that could result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may successfully challenge this treatment, which could adversely affect the value of the common units.

        When we or Hiland Partners issue additional units or engage in certain other transactions, Hiland Partners determines the fair market value of its assets and allocates any unrealized gain or loss attributable to such assets to the capital accounts of Hiland Partners' unitholders and us. Although Hiland Partners may from time to time consult with professional appraisers regarding valuation matters, including the valuation of its assets, Hiland Partners makes many of the fair market value estimates of its assets itself using a methodology based on the market value of its common units as a means to measure the fair market value of its assets. Hiland Partners' methodology may be viewed as understating the value of Hiland Partners' assets. In that case, there may be a shift of income, gain, loss and deduction between certain Hiland Partners unitholders and us, which may be unfavorable to such Hiland Partners unitholders. Moreover, under our current valuation methods, subsequent purchasers of our common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to Hiland Partners' intangible assets and a lesser portion allocated to Hiland Partners' tangible assets. The IRS may challenge Hiland Partners' valuation methods, or our or Hiland Partners' allocation of Section 743(b) adjustment attributable to Hiland Partners' tangible and intangible assets, and allocations of income, gain, loss and deduction between us and certain of Hiland Partners' unitholders.

        A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders' sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders' tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests, or the capital and profits interests in Hiland Partners during any twelve-month period will result in the termination of our partnership or Hiland Partners for federal income tax purposes.

        We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same unit will be counted only once. Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1) for one fiscal year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred.

You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.

        In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are

51


Table of Contents


imposed by the various jurisdictions in which we or Hiland Partners conduct business or own property now or in the future, even if our unitholders do not reside in any of those jurisdictions. Our unitholders likely will be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. Hiland Partners currently does business or owns property in various states, most of which impose income tax on individuals, corporations and other entities. As Hiland Partners makes acquisitions or expand its business, it may own assets or conduct business in additional states that impose similar income taxes. It is the responsibility of each unitholder to file all United States federal, foreign, state and local tax returns that may be required of such unitholder.

Item 1B.    Unresolved Staff Comments

        None.

Item 3.    Legal Proceedings

        On February 26, 2009, a unitholder of Hiland Holdings and Hiland Partners filed a complaint alleging claims on behalf of a purported class of common unitholders of Hiland Holdings and Hiland Partners against Hiland Holdings, Hiland Partners, the general partner of each of Hiland Holdings and Hiland Partners, and certain members of the board of directors of each of Hiland Holdings and Hiland Partners in the Court of Chancery of the State of Delaware. The complaint challenges a proposal made by Harold Hamm to acquire all of the outstanding common units of each of Hiland Holdings and Hiland Partners that are not owned by Mr. Hamm, his affiliates or Hamm family trusts. The complaint alleges, among other things, that the consideration offered is unfair and grossly inadequate, that the conflicts committee of the board of directors of the general partner of each of Hiland Holdings and Hiland Partners cannot be expected to act independently, and that the management of Hiland Holdings and Hiland Partners has manipulated its public statements to depress the price of the common units of Hiland Holdings and Hiland Partners. The plaintiffs seek to enjoin Hiland Partners, Hiland Holdings, and their respective board members from proceeding with any transaction that may arise from Mr. Hamm's going private proposal, along with compensatory damages. For more information on the going private proposal, please see Items 1. and 2. "Business and Properties—Recent Developments—Going Private Proposal." We cannot predict the outcome of this lawsuit, or others, nor can we predict the amount of time and expense that will be required to resolve the lawsuit.

        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.

Item 4.    Submission of Matters to a Vote of Security Holders

        None.

52


Table of Contents


Part II

Item 5.    Market for Registrant's Common Units and Related Unitholder Matters and Issuer Purchases of Equity Securities

        Our limited partner common units began trading on the NASDAQ National Market under the symbol "HPGP" commencing with our initial public offering on September 20, 2006 at an initial public offering price of $18.50 per common unit. As of March 5, 2009, the market price for the common units was $2.48 per unit and there were approximately 2,700 common unitholders, including beneficial owners of common units held in street name. Common units and Class B units represent limited partner interests in the Partnership that entitle the holders to the rights and privileges specified in the Partnership Agreement.

        We consider cash distributions to unitholders on a quarterly basis, although there is no assurance as to the future cash distributions since they are dependent upon future earnings, cash flows, capital requirements, financial condition and other factors. Our ability to distribute available cash is contractually restricted by the terms of our credit facility. Our credit facility contains covenants requiring us to maintain certain financial ratios. We are prohibited from making any distributions to unitholders if the distribution would cause an event of default, or an event of default exists, under our credit facility. Please read "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness—Credit Facility."

        The following table shows the high and low prices per common unit, as reported by the NASDAQ National Market, for the periods indicated. Cash distributions shown below were paid within 50 days after the end of each quarter.

 
  Common Unit
Price Ranges
   
 
 
  Cash Distribution
Paid Per Unit
 
 
  High   Low  

Year Ended December 31, 2008

                   

Quarter Ended December 31

  $ 21.87   $ 1.90   $ 0.1000  

Quarter Ended September 30

  $ 27.22   $ 18.51   $ 0.3175  

Quarter Ended June 30

  $ 28.08   $ 22.12   $ 0.3050  

Quarter Ended March 31

  $ 28.90   $ 21.08   $ 0.2800  

Year Ended December 31, 2007

                   

Quarter Ended December 31

  $ 31.50   $ 22.49   $ 0.2550  

Quarter Ended September 30

  $ 42.22   $ 25.81   $ 0.2300  

Quarter Ended June 30

  $ 35.95   $ 27.35   $ 0.2200  

Quarter Ended March 31

  $ 31.50   $ 26.65   $ 0.2075  

        Common Units.    As of December 31, 2008, we had 21,607,500 common units outstanding, of which 8,359,544 were held by the public and 13,247,956 were held by affiliates, including our general partners' directors. Our common units are registered under the Securities Exchange Act of 1934, as amended and are listed for trading on the NASDAQ. Each holder of a common unit is entitled to one vote per unit on all matters presented to the limited partners for a vote. The common units are entitled to distributions of Available Cash as described below under "Cash Distribution Policy." The common units represent limited partner interests in the Partnership. The holders of the units are entitled to participate in partnership distributions and exercise the rights and privileges available to limited partners under the partnership agreement of the Partnership. Partnership income or loss is allocated to limited partners in accordance with their percentage interest.

53


Table of Contents

Our Cash Distribution Policy.

        Within 50 days after the end of each quarter, we will distribute all of our available cash (as defined in our partnership agreement) to unitholders of record on the applicable record date. The amount of available cash generally is all cash on hand at the date of the determination of available cash with respect to such quarter: less the amount of cash reserves established by our general partner to provide for the proper conduct of our business; comply with applicable law, any of our debt instruments, or other agreements; or provide funds for distributions to our unitholders for any one or more of the next four quarters.

        Cash received for available distributions to the limited partners is derived from distributions on common units and general partner units, including incentive distributions, of Hiland Partners. There are no minimum or guaranteed partnership distributions. Partnership distributions are allocated to limited partners in accordance with their percentage interest. Our general partner has no right to receive distributions in respect of its general partner interest, and accordingly does not participate in allocations of income or loss or distributions.

        Our distributions will not be cumulative. Consequently, if we do not pay distributions on our common units with respect to any fiscal quarter at the anticipated initial quarterly distribution rate, our unitholders will not be entitled to receive such payments in the future. We will pay our distributions within 50 days after the end of each quarter ending March, June, September and December to holders of record. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date.

        The equity compensation plan information required by Item 201(d) of Regulation S-K in response to this item is incorporated by reference into "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters," of this annual report on Form 10-K.

Hiland Partners' Cash Distribution Policy

        Hiland Partners' limited partner common units began trading on the NASDAQ National Market under the symbol "HLND" commencing with its initial public offering on February 10, 2005 at an initial public offering price of $22.50 per common unit. As of March 5, 2009, the market price for Hiland Partners' common units was $7.40 per unit and there were approximately 3,700 common unitholders, including beneficial owners of common units held in street name and one record holder of our subordinated units. There is no established public trading market for Hiland Partners' subordinated units. Hiland Partners considers cash distributions to unitholders on a quarterly basis, although there is no assurance as to the future cash distributions since they are dependent upon future earnings, cash flows, capital requirements, financial condition and other factors. Hiland Partners' ability to distribute available cash is contractually restricted by the terms of its credit facility. Hiland Partners' credit facility contains covenants requiring them to maintain certain financial ratios which are tested quarterly, and, as of December 31, 2008, Hiland Partners was in compliance with each of those covenants. 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 its operations and events or circumstances beyond Hiland Partners' control. If commodity prices do not significantly improve above the expected prices for 2009, Hiland Partners may be in violation of the maximum consolidated funded debt to EBITDA ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or it receives an infusion of equity capital. Hiland Partners is prohibited from making any distributions to unitholders if the distribution would cause an event of default, or an event of default exists, under its credit facility. Please read "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness—Credit Facility."

54


Table of Contents

        The following table shows the high and low prices per common unit for Hiland Partners, as reported by the NASDAQ National Market, for the periods indicated. Cash distributions shown below were paid within 45 days after the end of each quarter.

 
  Common Unit
Price Ranges
   
 
 
  Cash Distribution
Paid Per Unit(a)
 
 
  High   Low  

Year Ended December 31, 2008

                   

Quarter Ended December 31

  $ 36.49   $ 3.64   $ 0.4500  

Quarter Ended September 30

  $ 50.44   $ 33.95   $ 0.8800  

Quarter Ended June 30

  $ 52.00   $ 43.11   $ 0.8625  

Quarter Ended March 31

  $ 51.23   $ 41.83   $ 0.8275  

Year Ended December 31, 2007

                   

Quarter Ended December 31

  $ 53.00   $ 41.60   $ 0.7950  

Quarter Ended September 30

  $ 60.50   $ 46.02   $ 0.7550  

Quarter Ended June 30

  $ 61.75   $ 52.05   $ 0.7325  

Quarter Ended March 31

  $ 58.49   $ 52.54   $ 0.7125  

      (a)
      For each quarter, an identical per unit cash distribution was paid on all outstanding subordinated units

        Within 45 days after the end of each quarter, Hiland Partners will distribute all of its available cash (as defined in its partnership agreement) to unitholders of record on the applicable record date. The amount of available cash generally is all cash on hand at the end of the quarter plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter less the amount of cash reserves established by Hiland Partners GP, LLC, its general partner to provide for the proper conduct of its business, to comply with applicable law, any debt instrument or other agreement or to provide funds for distributions to unitholders and its general partner in respect of any one or more of the next four quarters. Working capital borrowings are generally borrowings that are made under the working capital portion of Hiland Partners' credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.

        Upon the closing of Hiland Partners' initial public offering, affiliates of Harold Hamm, the Hamm Trusts and an affiliate of Randy Moeder, our past Chief Executive Officer, received an aggregate of 4,080,000 subordinated units. The subordinated units were contributed to Hiland Holdings GP, LP, a publicly owned limited partnership on the date of its initial public offering, September 25, 2006. During the subordination period, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.45 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units. 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 its 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

55


Table of Contents


arrearages in payment of the minimum quarterly distribution on the common units. If the unitholders remove the general partner without cause, the subordination period may end before March 31, 2010.

        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 16, 2008 these tests were met and accordingly, 1,020,000, or 25%, of the subordinated units converted into an equal number of common units. Similarly, if those tests are also satisfied for any three consecutive four-quarter periods ending on or after March 31, 2009, an additional 25% of the subordinated units will convert into an equal number of common units. The second early conversion of subordinated units may not occur, however, until at least one year following the end of the period for the first early conversion of subordinated units.

        Hiland Partners will make distributions of available cash from operating surplus for any quarter during any subordination period in the following manner: first, 98% to the common unitholders, pro rata, and 2% to Hiland Partners GP, LLC, its general partner until Hiland Partners distributes for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter; second, 98% to the common unitholders, pro rata, and 2% to Hiland Partners GP, LLC, its general partner, until Hiland Partners distributes for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; third, 98% to the subordinated unitholders, pro rata, and 2% to Hiland Partners GP, LLC, its general partner, until Hiland Partners distributes for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and thereafter, cash in excess of the minimum quarterly distributions is distributed to the unitholders and its general partner based on the percentages below.

        Since we own Hiland Partners GP, LLC, Hiland Partners' general partner, we are entitled to incentive distributions if the amount Hiland Partners distributes with respect to any quarter exceeds the specified target levels as shown below:

 
   
  Marginal Percentage
Interest in Distributions
 
 
  Total Quarterly Distribution  
 
   
  General Partner  
 
  Target Amount   Unitholders  

Minimum Quarterly Distribution

  $0.45     98 %   2 %

First Target Distribution

  Up to $0.495     98 %   2 %

Second Target Distribution

  Above $0.495 up to $0.5625     85 %   15 %

Third Target Distribution

  Above $0.5625 up to $0.675     75 %   25 %

Thereafter

  Above $0.675     50 %   50 %

Equity Compensation Plans Information

        The following table presents information about the unit options contained in our long-term incentive plan:

Plan Category
  Number of Units to
be Issued upon Exercise
of Outstanding Options
and Rights
  Weighted-Average Price
of Outstanding Options
and Rights
  Number of Units
Remaining Available for
Future Issuance under
Equity Compensation Plan
(Excluding Securities
Reflected in Column (a))
 
 
  (a)
  (b)
  (c)
 

Equity Compensation Plans Approved By Security Holders

    N/A     N/A     N/A  

Equity Compensation Plans Not Approved By Security Holders

    0     N/A     2,136,000  

56


Table of Contents

        Our general partner has adopted and maintains a long term incentive plan for employees and directors of our general partner and employees of its affiliates. The plan currently provides for issuance of a total of 2,160,000 common units to be issued with respect to unit options, restricted units and phantom units granted under the plan. For a more complete description of our long-term incentive plan, please read Note 9 of the accompanying Notes to Financial Statements.

        The following table presents information about the unit options and restricted units contained in Hiland Partners' long-term incentive plan:

Plan Category
  Number of Units to
be Issued upon Exercise
of Outstanding Options
and Rights
  Weighted-Average Price
of Outstanding Options
and Rights
  Number of Units
Remaining Available for
Future Issuance under
Equity Compensation Plan
(Excluding Units
Reflected in Column (a))
 
 
  (a)
  (b)
  (c)
 

Equity Compensation Plans Approved By Security Holders

    N/A     N/A     N/A  

Equity Compensation Plans Not Approved By Security Holders

    33,336 (1) $ 37.92 (2)   386,375  

(1)
Hiland Partners' general partner has adopted and maintains a long term incentive plan for employees and directors of its general partner and employees of its affiliates. The plan currently provides for issuance of a total of 680,000 common units to be issued with respect to unit options, restricted units and phantom units granted under the plan. For a more complete description of Hiland Partners' long-term incentive plan, please read Note 9 of the accompanying Notes to Financial Statements.

(2)
The exercise prices for outstanding options under Hiland Partners' plan as of December 31, 2008 range from $22.50 to $40.70 per unit

Issuer Purchases of Equity Securities

        We did not repurchase any of our common units during the fourth quarter of fiscal 2008.

Item 6.    Selected Historical Financial and Operating Data

        We were formed in May, 2006 and therefore do not have any historical financial statements prior to that date. Since we own Hiland Partners GP, LLC, the general partner of Hiland Partners, the historical financial data presented below is of Hiland Partners GP, LLC on a consolidated basis, including Hiland Partners, and the predecessor of Hiland Partners GP, LLC. Our historical financial data for periods prior to February 15, 2005 is the historical financial data of Continental Gas, Inc. (CGI) and Hiland Partners GP, LLC (Hiland Partners' predecessors). The selected historical financial data for the year ended December 31, 2004 is derived from the audited financial statements of CGI.

        The following table includes the non-GAAP financial measure of total segment margin, which consists of midstream segment margin and compression segment margin. 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 following costs and expenses: cost of natural gas and NGLs purchased by Hiland Partners from third parties, cost of natural gas and

57


Table of Contents


NGLs purchased by Hiland Partners from affiliates, and costs of crude oil purchased by Hiland Partners from third parties. We define compression segment margin as the payments received under Hiland Partners' compression services agreement with CLR which was restructured as described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Items Impacting Comparability of Our Financial Results—Restructuring of Compression Facilities Lease." For a reconciliation of this non-GAAP financial measure to its most directly comparable financial measure calculated and presented in accordance with GAAP, please refer to the reconciliation following the table below.

        Maintenance capital expenditures represent 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. Expansion capital expenditures represent capital expenditures made to expand or increase the efficiency of the existing operating capacity of Hiland Partners' assets. Expansion capital expenditures include expenditures that facilitate an increase in volumes within Hiland Partners' operations, whether through construction or acquisition. Expenditures that reduce Hiland Partners' operating costs will be considered expansion capital expenditures only if the reduction in operating expenses exceeds cost reductions typically resulting from routine maintenance. Hiland Partners treats costs that (i) are incurred for the repair and minor renewal of facilities to maintain the facilities in operating condition and that (ii) do not extend the useful life of existing assets, as operations and maintenance expenses as they are incurred.

58


Table of Contents

        The following table sets forth our selected historical financial data, which has been derived from our audited historical financial statements. The table should also be read together with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
   
   
   
  Predecessor  
 
  Hiland Holdings GP, LP   Hiland
Partners
GP, LLC
  Continental
Gas, Inc.
 
 
  Year Ended December 31,  
 
  2008   2007   2006   2005   2004  
 
  (in thousands, except per unit and operating data)
 

Summary of Operations Data:

                               

Total revenues

  $ 387,999   $ 278,043   $ 219,686   $ 166,601   $ 98,296  

Operating costs and expenses:

                               

Midstream purchases (exclusive of items shown separately below)

    276,600     195,212     156,193     133,089     82,532  

Operations and maintenance

    30,526     23,279     16,071     7,359     4,933  

Depreciation, amortization and accretion

    38,650     31,002     22,863     11,112     4,127  

Gain on asset sales

                    (19 )

Bad Debt

    304                  

General and administrative

    10,337     9,321     5,299     2,542     1,082  
                       

Total operating costs and expenses

    356,417     258,814     200,426     154,102     92,655  
                       

Operating income

    31,582     19,229     19,260     12,499     5,641  

Other income (expense):

                               

Interest and other income

    357     445     323     192     40  

Amortization of deferred loan costs

    (663 )   (499 )   (513 )   (484 )   (102 )

Interest expense

    (13,674 )   (11,371 )   (6,543 )   (1,942 )   (702 )
                       

Total other income (expense), net:

    (13,980 )   (11,425 )   (6,733 )   (2,234 )   (764 )
                       

Income before minority interest

    17,602     7,804     12,527     10,265     4,877  

Affiliate minority interest in Hiland Partners

            (6,494 )   (5,993 )    

Non-affiliate minority interest in Hiland Partners

    (5,902 )   (2,638 )   (3,670 )   (3,387 )    
                       

Income from continuing operations

    11,700     5,166     2,363     885     4,877  

Discontinued operations, net

                    35  
                       

Net income from continuing operations

  $ 11,700   $ 5,166   $ 2,363   $ 885   $ 4,912  
                             

Less loss attributable to predecessor

            (407 )            
                           

Net income

  $ 11,700   $ 5,166   $ 1,956              
                           

Net income per limited partner unit—basic(1)

  $ 0.54   $ 0.24   $ 0.09              
                           

Net income per limited partner unit—diluted(1)

  $ 0.54   $ 0.24   $ 0.09              
                           

Cash distributions per limited partner unit(2)

  $ 1.00   $ 0.91   $ 0.22              
                           

Balance Sheet Data (at end of period):

                               

Property and equipment, at cost, net

    349,159   $ 323,073   $ 257,003   $ 120,715   $ 37,075  

Total assets

    435,560     420,286     355,198     194,085     49,175  

Accounts payable—affiliates

    7,823     7,957     4,412     5,819     2,998  

Long-term debt, net of current maturities

    256,466     226,459     147,318     33,784     12,643  

Minority interests

    125,851     126,409     137,302          

Net equity

    15,497     22,135     41,157     2,791     24,510  

Cash Flow Data:

                               

Net cash flow provided by (used in):

                               

Operating activities

  $ 52,484   $ 39,379   $ 38,476   $ 8,159   $ 7,957  

Investing activities

    (54,342 )   (83,408 )   (158,426 )   (74,888 )   (5,290 )

Financing activities

    (7,011 )   44,062     124,201     72,830     (2,946 )

59


Table of Contents

 
   
   
   
  Predecessor  
 
  Hiland Holdings GP, LP   Hiland
Partners
GP, LLC
  Continental
Gas, Inc.
 
 
  Year Ended December 31,  
 
  2008   2007   2006   2005   2004  
 
  (in thousands, except per unit and operating data)
 

Other Financial Data:

                               

Midstream segment margin

  $ 106,580   $ 78,012   $ 58,674   $ 29,295   $ 15,764  

Compression segment margin

    4,819     4,819     4,819     4,217      
                       

Total segment margin

  $ 111,399   $ 82,831   $ 63,493   $ 33,512   $ 15,764  
                       

Maintenance capital expenditures

  $ 5,994   $ 3,423   $ 3,434   $ 2,225   $ 1,693  

Expansion capital expenditures

    52,275     87,530     155,103     72,723     3,474  

Discontinued operations

                    159  
                       

Total capital expenditures

  $ 58,269   $ 90,953   $ 158,537   $ 74,948   $ 5,326  
                       

Operating Data:

                               

Inlet natural gas (Mcf/d)

    252,670     215,551     157,556     57,545     50,283  

Natural gas sales (MMBtu/d)

    90,910     80,731     66,947     47,096     40,560  

NGL sales (Bbls/d)

    5,920     4,696     3,347     1,965     1,133  

(1)
Net income per unit is not applicable for periods prior to our initial public offering.

(2)
Includes our cash distribution of $0.10 per unit paid on February 18, 2009 for 2008, $0.255 per unit paid on February 19, 2008 for 2007 and $0.2075 per unit paid on February 19, 2007 for 2006.

Reconciliation of Non-GAAP Financial Measure

        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.

 
   
   
   
  Predecessor  
 
  Hiland Holdings GP, LP   Hiland
Partners
GP, LLC
  Continental
Gas, Inc.
 
 
  Year Ended December 31,  
 
  2008   2007   2006   2005   2004  
 
  (in thousands)
 

Reconciliation of Total Segment Margin to Operating Income (Loss):

                               

Operating income (loss)

  $ 31,582   $ 19,229   $ 19,260   $ 12,499   $ 5,641  

Add:

                               

Operations and maintenance expenses

    30,526     23,279     16,071     7,359     4,933  

Depreciation, amortization and accretion

    38,650     31,002     22,863     11,112     4,127  

Gain on asset sales

                    (19 )

Bad Debt

    304                  

General and administrative expenses

    10,337     9,321     5,299     2,542     1,082  
                       

Total segment margin

  $ 111,399   $ 82,831   $ 63,493   $ 33,512   $ 15,764  
                       

60


Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        You should read the following discussion in conjunction with our Consolidated Financial Statements and notes thereto included elsewhere in this report.

Overview

        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 non-controlling limited partner interest in Hiland Partners is reflected as an expense in our results of operations and as a liability on our consolidated balance sheet.

        Hiland Partners GP, LLC's results of operations, are reported beginning February 15, 2005 through September 24, 2006 and principally reflect the results of operations of Hiland Partners and are adjusted for non-controlling partners' interests in Hiland Partners' net income. Our historical financial information for periods prior to February 15, 2005 reflect the financial results of Hiland Partners' predecessor, CGI. Accordingly, the discussion of our financial position and results of operations in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflects the operating activities and results of operations of us for the period September 25, 2006 to December 31, 2006, Hiland Partners GP, LLC for periods after February 15, 2005 through September 24, 2006 and CGI for periods before February 15, 2005.

        Our cash generating assets consist of our direct or indirect ownership interests in Hiland Partners. Hiland Partners is principally engaged in gathering, compressing, dehydrating, treating, processing and marketing natural gas, fractionating natural gas liquids 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:

    the 2% general partner interest in Hiland Partners;

    100% of the incentive distribution rights in Hiland Partners; and

    2,321,471 common units and 3,060,000 subordinated units of Hiland Partners, representing a 57.4% 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. Until the current fiscal quarter ended December 31, 2008, Hiland Partners had increased its quarterly distribution on its common units by 76.7% since its initial public offering in February 2005 and had increased its quarterly distribution in all but one of the last eight fiscal quarters. Most recently, due to the unexpected descending movement in its market price as a result of significant declines in natural gas index prices and posted prices for NGLs during the fourth quarter of 2008, Hiland Partners reduced its quarterly distribution to its minimum quarterly distribution of $0.45 per unit for the quarter ended December 31, 2008. This distribution was paid on February 13, 2009 to unitholders of record on February 5, 2009.

        Our primary objective is to increase our cash distributions to our unitholders by actively assisting Hiland Partners in executing its business strategy. We intend to support Hiland Partners in implementing its business strategy by assisting in identifying, evaluating and pursuing growth opportunities. In the future, it is possible that we may also support the growth of Hiland Partners through the use of our capital resources, which could involve loans or capital contributions to Hiland Partners to provide funding for the acquisition of a business or an asset or for an internal growth

61


Table of Contents


project. In addition, we may provide Hiland Partners with other forms of credit support, such as guarantees relating to financing a project or other types of support related to a merger or acquisition transaction.

        Cash Distributions.    The following table sets forth the distributions that we have received from Hiland Partners during the periods indicated (in thousands).

 
  Hiland Holdings GP, LP   Hiland Partners
GP, LLC
Predecessor
 
 
  Year Ended December 31,  
Hiland Partner's Distributions
  2008   2007   2006(a)   2006(b)  

Common units

  $ 6,158   $ 3,790   $ 59   $ 1,012  

Subordinated units

    11,952     11,883     186        

Ownership interest in Hiland Partners' general partner

    798     626     9     503  

General partners' incentive distribution rights

    7,656     3,567     42     1,573  
                   

  $ 26,564   $ 19,866   $ 296   $ 3,088  
                   

(a)
Because we own Hiland Partners GP, LLC the distributions to us includes the distributions made to Hiland Partners GP, LLC and to us in 2006 prorated following our initial public offering closing date from September 25, 2006 through December 31, 2006.

(b)
The distributions to our predecessor in 2006 represent the prorated amount for the period January 1, 2006 to September 24, 2006, prior to our initial public offering and our ownership in Hiland Partners GP, LLC.

Overview of Hiland Partners

        Hiland Partners is a Delaware limited partnership formed in October 2004. Hiland Partners is engaged in gathering, compressing, dehydrating, treating, processing and marketing natural gas, fractionating 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 completed its initial public offering of 2,300,000 common units on February 15, 2005, receiving net proceeds of $48.1 million. The proceeds from the public offering were used to (1) pay remaining offering costs of $2.2 million and deferred debt issuance costs of $0.6 million, (2) pay outstanding indebtedness of $22.9 million, (3) redeem $6.3 million of common units from an affiliate of Harold Hamm and the Hamm Trusts, and (4) make a $3.9 million distribution to the previous owners of Hiland Partners, LLC. Hiland Partners retained $12.2 million of the net proceeds to replenish working capital.

        Effective September 1, 2005, Hiland Partners consummated the Bakken acquisition pursuant to which it acquired the outstanding membership interests in Hiland Partners, LLC, an Oklahoma limited liability company, for approximately $92.7 million in cash, $35.0 million of which was used to retire outstanding Hiland Partners, LLC indebtedness. Hiland Partners, LLC's principal asset is the Bakken gathering system located in eastern Montana.

        Hiland Partners completed a follow-on offering of 1,630,000 common units on November 21, 2005, receiving net proceeds of $66.1 million, including a contribution from its general partner of $1.4 million. Hiland Partners used $65.2 million of the proceeds from the public offering to repay borrowings under the credit facility, which were used for the Bakken acquisition.

62


Table of Contents

        On May 1, 2006, Hiland Partners acquired Enogex Gas Gathering, L.L.C.'s eastern Oklahoma Kinta Area gathering assets for $96.4 million. Hiland Partners financed the 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 of 761,714 common units and 15,545 general partner equivalent units at $45.03 per unit. The purchase price was equal to the average closing price of Hiland Partners' common units for the three trading days immediately proceeding May 1, 2006. Hiland Partners GP, LLC entered into a credit agreement under which it borrowed $35.0 million to purchase the Hiland Partner units. The obligation was unsecured and guaranteed by the members of Hiland Partners GP, LLC. Hiland Partners GP, LLC's board of directors, as well as the conflicts committee of the board of directors, consisting of two independent directors, approved the transaction.

        Hiland Partners is engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and 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:

        Midstream Segment, which is engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and the fractionation and marketing of NGLs. Hiland Partners' operations are primarily located in the Mid-Continent and Rocky Mountain regions of the United States. The midstream segment generated 95.7%, 94.2% and 92.4% of the total segment margin for the years ended December 31, 2008, 2007 and 2006, respectively.

        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 4.3%, 5.8% and 7.6% of the total segment margin for the years ended December 31, 2008, 2007 and 2006, respectively.

        Hiland Partners' midstream assets consist of 14 natural gas gathering systems with approximately 2,111 miles of gas gathering pipelines, five 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 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 and the pricing environment for natural gas and NGLs 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.

How Hiland Partners Evaluates Its Operations

        Hiland Partners' management uses a variety of financial and operational measurements to analyze its segment performance. These measurements include the following: (1) natural gas and NGL sales volumes, throughput volumes and fuel consumption by Hiland Partners' facilities; (2) total segment margin; (3) operations and maintenance expenses; (4) general and administrative expenses; and (5) EBITDA.

63


Table of Contents

        Volumes and Fuel Consumption.    Natural gas and NGL sales volumes, throughput volumes and fuel consumption associated with Hiland Partners' business are an important part of its operational analysis. Hiland Partners continually monitors volumes on its pipelines to ensure that there is adequate throughput to meet its financial objectives. It is important that Hiland Partners continually add new volumes to its gathering systems to offset or exceed the normal decline of existing volumes that are connected to those systems. The performance at Hiland Partners' compressing, processing, fractionation and treating facilities is significantly influenced by the volumes of natural gas that flows through those systems. In addition, Hiland Partners monitors fuel consumption, which affects the total segment margin realized from Hiland Partners' midstream operations and compression services operations.

        Total Segment Margin.    Hiland Partners views total segment margin as an important performance measure of the core profitability of its operations because it is directly related to Hiland Partners' volumes and commodity price changes. Hiland Partners reviews total segment margin monthly for consistency and trend analysis.

        With respect to its midstream segment, Hiland Partners defines midstream segment margin as its midstream revenue minus midstream purchases. Midstream revenue includes revenue from the sale of natural gas, NGLs and NGL products resulting from its gathering, treating, processing and fractionation activities and fixed fees associated with its gathering of natural gas and transportation and disposal of saltwater. Midstream purchases include the cost of natural gas, condensate and NGLs purchased from third parties the cost of natural gas, condensate and NGLs purchased by Hiland Partners from affiliates, and the costs of crude oil purchased by Hiland Partners from third parties. Hiland Partners' midstream segment margin is impacted by its midstream contract portfolio, which is described in more detail below.

        With respect to Hiland Partners compression segment, following the restructuring of its lease arrangement to become a service arrangement in connection with Hiland Partners' initial public offering as described in "—Items Impacting Comparability of Our Financial Results," Hiland Partners' compression segment margin equals the fee it earns under the compression services agreement with CLR for providing air compression and water injection services. The fee earned under this agreement is fixed so long as Hiland Partners facilities meet specified availability requirements, regardless of CLR's utilization. As a result, the compression segment margin is dependent on Hiland Partners' ability to meet their utilization levels. For a discussion of this agreement, please read "—Hiland Partners' Contracts—Compression Services Agreement."

        Total segment margin is a Non-GAAP performance measure. For a reconciliation of Total Segment Margin to the most comparable GAAP financial measure, please see "Item 6. Selected Historical Financial and Operating Data."

        Operations and Maintenance Expenses.    Operations and maintenance expenses are costs associated with the operation of a specific asset. Direct labor, insurance, ad valorem taxes, repair and maintenance, utilities and contract services comprise the most significant portion of Hiland Partners' operations and maintenance expenses. These expenses remain relatively stable independent of the volumes through Hiland Partners' systems but fluctuate slightly depending on the activities performed during a specific period.

        General and Administrative Expenses.    General and administrative expenses include the cost of employee and officer compensation and related benefits, office lease and expenses, professional fees, information technology expenses, as well as other expenses not directly associated with field operations.

64


Table of Contents

How Hiland Partners Manages Its Operations

        Hiland Partners' management team uses a variety of tools to manage its business. These tools include: (1) flow and transaction monitoring systems; (2) producer activity evaluation and reporting; and (3) imbalance monitoring and control.

        Flow and transaction monitoring systems.    Hiland Partners uses a customized system that tracks commercial activity on a daily basis at each of its gathering systems, processing plants and treating and fractionation facilities. Hiland Partners tracks and monitors inlet volumes to its facilities, fuel consumption, NGLs and NGL products extracted, condensate volumes and residue sales volumes. Hiland Partners also monitors daily operational throughput at its air compression and water injection facilities.

        Producer activity evaluation and reporting.    The continued connection of natural gas production to Hiland Partners' gathering systems is critical to its business and directly impacts its financial performance. Hiland Partners monitors the producer drilling and completion activity in its primary areas of operation to identify anticipated changes in production and potential well-attachment opportunities. Hiland Partners receives daily summaries of new drilling permits and completion reports filed with the state regulatory agencies that govern these activities on all of its gathering systems. Producers that have dedicated acreage to the Bakken gathering system provide Hiland Partners with their projected annual drilling schedules, which are updated periodically. Additionally, Hiland Partners' field personnel report the locations of new wells in their respective areas and anticipated changes in production volumes to supply representatives and operating personnel at Hiland Partners' corporate offices. These processes enhance Hiland Partners' awareness of new well activity in its operating areas and allow Hiland Partners to be responsive to producers in connecting new volumes of natural gas to its pipelines.

        Imbalance monitoring and control.    Hiland Partners continually monitors volumes it delivers to pipelines and volumes nominated for sale on pipelines to ensure it remains within acceptable imbalance limits during a calendar month. Hiland Partners seeks to reduce imbalances between deliveries and sales of natural gas because of the inherent commodity risk that results when deliveries and sales of natural gas are not balanced concurrently.

Hiland Partners' Contracts

        Because of the significant volatility of natural gas and NGL prices, Hiland Partners' contract mix can have a significant impact on its profitability. In order to reduce its exposure to commodity price risk and where market conditions permit, Hiland Partners pursues arrangements under which it purchases natural gas from the producers at the wellhead at an index based price less a fixed fee to gather, dehydrate, compress, treat and/or process their natural gas, referred to as fee based arrangements or contracts. Actual contract terms are based upon a variety of factors, including natural gas quality, geographical location, the competitive environment at the time the contract is executed and customer requirements. Hiland Partners' contract mix and, accordingly, its exposure to natural gas and NGL prices, may change as a result of producer preferences, its expansion in regions where some types of contracts are more common and other market factors.

Hiland Partners' Natural Gas Sales Contracts

        Hiland Partners sells natural gas on intrastate and interstate pipelines to marketing affiliates of natural gas pipelines, marketing affiliates of integrated oil companies and utilities. Hiland Partners typically sells natural gas on a monthly basis under index-related pricing terms.

        Hiland Partners also uses cash flow hedges to limit its exposure to changing natural gas prices. Under these hedges, Hiland Partners settles monthly on the difference between the sales or purchases

65


Table of Contents


of future production to or from its counterparty at fixed prices and the price that will be established on the date of hedge settlement by reference to a specified index price. These hedges cover periods of up to twenty-four months from the date of the hedge.

Hiland Partners' NGL Sales Arrangements

        Hiland Partners sells NGLs and NGL products at the tailgate of its facilities to ONEOK Hydrocarbon, LP, SemStream, L.P., and a subsidiary of Kinder Morgan Energy Partners, L.P. Hiland Partners typically sells NGLs and NGL products on a monthly basis under index related pricing terms in its Mid-Continent region and at market prices in its Rocky Mountain region. Hiland Partners also uses cash flow hedges to limit its exposure to changing NGL prices. Under these hedges, Hiland Partners settles monthly on the difference between the sales of future production to its counterparty at a fixed price and the price that will be established on the date of hedge settlement by reference to a specified index price. In the past these hedges have covered periods of up to twelve months from the date of the hedge. As of January 1, 2009, Hiland Partners had no NGL hedging contracts outstanding.

Hiland Partners' Hedging Contracts

        To insure that Hiland Partners' financial instruments will be used solely for hedging price risks and not for speculative purposes, Hiland Partners continually reviews its hedges for compliance with its hedging policies and procedures. Hiland Partners recognizes gains and losses from the settlement of its hedges as revenue when it sells the associated physical residue natural gas or NGLs. Any gain or loss realized as a result of hedging is substantially offset in the market when Hiland Partners sells the physical residue natural gas or NGLs. Hiland Partners' hedges that qualify for hedge accounting are characterized as cash flow hedges as defined in Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Hiland Partners determines gains or losses on open and closed hedging transactions based upon the difference between the hedge price and the physical price. For a more detailed discussion on Hiland Partners' hedging activity, please read commodity price risks included in Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."

Hiland Partners' Natural Gas Purchase and Gathering Contracts

        With respect to Hiland Partners' natural gas gathering, compression, dehydrating, treating, processing and marketing activities and its NGL fractionation activities, Hiland Partners contracts under four types of arrangements. Under all contracts except the fixed-fee gathering arrangement, Hiland Partners is required to purchase the supplied gas, subject to the demands of resale purchasers and the operating conditions and capacity of its facilities. Hiland Partners does not guarantee the purchase of any particular quantity of the gas which is available for sale. The supplier delivers the gas to Hiland Partners at the inlet of its gathering systems and Hiland Partners obtains title to the gas at the delivery point. The gas delivered to Hiland Partners is required to meet specified quality requirements. Under the fixed-fee gathering arrangement, Hiland Partners takes custody of, but does not purchase or take title to the gas supplied to them.

        The following is a summary of the four types of natural gas purchase or gathering contract arrangements that account for the largest percentage of volumes purchased for the years ended December 31, 2008, 2007, and 2006.

    Percentage-of-proceeds arrangements.    Under percentage-of-proceeds contracts, Hiland Partners generally purchases natural gas from producers at the wellhead, gathers, treats, and processes the natural gas, in some cases fractionates the NGLs into NGL products, and then sells the resulting residue gas and NGLs or NGL products at index related prices. Hiland Partners remits to the producers an agreed upon percentage of the proceeds for the natural gas and the NGLs.

66


Table of Contents

      Under these types of contracts, Hiland Partners' revenues and total segment margin correlate directly with the price of natural gas and NGLs. For the years ended December 31, 2008, 2007, and 2006 Hiland Partners purchased 51%, 56% and 52% of its total purchased volumes under these types of fee contracts, respectively.

    Percentage-of-index arrangements.    Under percentage-of-index contracts, Hiland Partners purchases natural gas from the producers at the wellhead at a price that is at a fixed percentage of the expected index-related price for the resale of the natural gas they produce. Hiland Partners then gathers, treats and processes the natural gas, in some cases fractionates the NGLs into NGL products and then sells the residue gas and NGLs or NGL products pursuant to natural gas or NGL contracts described above. Because under these types of contracts Hiland Partners' costs to purchase the natural gas from the producer is based on the price of natural gas, Hiland Partners' total segment margin under these contracts increases as the realized price of NGLs increases relative to the expected index-related price of natural gas, and Hiland Partners' total segment margin under these contracts decreases as the expected index-related price of natural gas increases relative to the realized price of NGLs (keep-whole exposure). For the years ended December 31, 2008, 2007 and 2006 Hiland Partners purchased 8%, 12% and 17% of its total purchased volumes under these types of fee contracts, respectively.

    Index-minus-fees arrangements.    Under index-minus-fees contracts, Hiland Partners purchases natural gas from the producers at the wellhead at an expected index related price less fees to gather, dehydrate, compress, treat and/or process their natural gas. These types of contracts typically require Hiland Partners to pay the producer for the value of the wellhead gas less the applicable fees. Because under these types of contracts Hiland Partners' costs to purchase the natural gas from the producer is based on the expected index-related price of natural gas, Hiland Partners' total segment margin under these contracts increases as the realized price of NGLs increases relative to the expected index-related price of natural gas, and Hiland Partners' total segment margin under these contracts decreases as the expected index-related price of natural gas increases relative to the realized price of NGLs (keep-whole exposure). For the years ended December 31, 2008, 2007, and 2006, Hiland Partners purchased 41%, 32% and 31% of its total purchased volumes under these types of fee contracts, respectively.

    Fixed-fee gathering arrangements.    Under fixed-fee gathering contracts, Hiland Partners gathers, dehydrates, compresses and treats natural gas supplied to Hiland Partners' gathering systems and redelivers the compressed natural gas for a fixed fee. Under these contracts, Hiland Partners takes custody of, but does not take title to, the natural gas. Hiland Partners gathered an average of 133,755 MMBtu/d for 2008, 123,008 MMBtu/d for 2007 and from the period May 1, 2006, the date Hiland Partners acquired the Kinta Area gas gathering assets, through December 31, 2006, Hiland Partners gathered an average of 134,140 MMBtu/d.

Compression Services Agreement

        Under the compression services agreement that Hiland Partners entered into with CLR in connection with its initial public offering and effective as of January 28, 2005, CLR pays Hiland Partners a fixed monthly fee to provide compressed air and water at pressures sufficient to allow for the injection of either air or water into underground reservoirs for oil and gas secondary recovery operations. Under the compression services agreement, CLR is responsible for the provision to Hiland Partners of power and water to be utilized in the compression process. If Hiland Partners' facilities do not meet the monthly volume requirements for compressed air and water, and the failure is not attributable to CLR, failure to supply power or water or a force majeure, the fixed monthly payment will be reduced in proportion to the volumes of air or water Hiland Partners was unable to deliver during such month. CLR may terminate the compression services agreement if Hiland Partners is unable to deliver any compressed air and water for a period of more than 20 consecutive days and the

67


Table of Contents


failure is not attributable to CLR's failure to supply power or water or a force majeure. The agreement's initial term ended on January 28, 2009 and the agreement now automatically renews on a month-to-month basis unless terminated by either party by giving notice at least 15 days prior to the end of the then current month.

Items Impacting Comparability of Our Financial Results

        Our historical results of operations for the periods presented may not be comparable, either from period to period or going forward, for the reasons described below.

Hiland Holdings', Hiland Partners GP, LLC's and Hiland Partners' Formation

        We were 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. Hiland Partners GP, LLC and Hiland Partners were formed in October 2004 to own and operate the assets that have historically been owned and operated by CGI Immediately prior to consummation of Hiland Partners' initial public offering, the former owners of CGI and Hiland Partners, LLC contributed to Hiland Partners all of the assets and operations of CGI other than a portion of its working capital assets, and all of the assets and operations of Hiland Partners, LLC, other than a portion of its working capital assets and the assets related to the Bakken gathering system. Effective September 1, 2005, Hiland Partners acquired Hiland Partners, LLC, which owned the Bakken gathering system.

        CGI is Hiland Partners GP, LLC's and Hiland Partners' predecessor for accounting purposes and historically owned all of Hiland Partners' natural gas gathering, processing and fractionation assets other than the Worland and Bakken gathering systems, the Kinta Area gathering systems Hiland Partners acquired on May 1, 2006 and its internally constructed Woodford Shale gathering system, which commenced operations in April 2007. As a result, Hiland Partners GP, LLC's and Hiland Partners' historical financial statements for the periods prior to February 15, 2005 are the financial statements of CGI

        Hiland Partners, LLC historically owned the Worland gathering system, the Horse Creek compression facility, the Cedar Hills water injection plant located next to Hiland Partners' Cedar Hills' compression facility and the Bakken gathering system.

Restructuring of Compression Facilities Lease

        Prior to Hiland Partners' initial public offering, Hiland Partners, LLC owned Hiland Partners' Horse Creek air compression facility and its Cedar Hills water injection facility. In 2002, Hiland Partners, LLC entered into a five year lease agreement with CLR, pursuant to which Hiland Partners, LLC leased the facilities to CLR. CLR used its own personnel to operate the facilities, and Hiland Partners, LLC made no operational decisions. In connection with Hiland Partners' formation and initial public offering, Hiland Partners entered into a four-year services agreement with CLR, effective as of January 28, 2005, that replaced the existing lease. The four year services agreement terminated on January 28, 2009. Hiland Partners is currently operating on a month-to-month basis which can be terminated by either party by giving notice at least 15 days prior to the end of the then current month. Under the services agreement, Hiland Partners owns and operates the facilities and provides air compression and water injection services to CLR for a fee. As part of the restructuring in January 2005, the personnel at CLR that operated the facilities were transferred to Hiland Partners. Under the current services agreement, Hiland Partners receives a fixed payment of approximately $4.8 million per year as compared to $3.8 million per year under the prior lease agreement. In connection with this services arrangement, Hiland Partners incurs approximately $1.0 million per year in additional operating costs. For a description of the restructured agreement, please read "—Hiland Partners' Contracts—Compression Services Agreement."

68


Table of Contents

Construction and Acquisition Activities of Hiland Partners

        Since its inception, Hiland Partners has grown through a combination of building gas gathering and processing assets and acquisitions. For example, Hiland Partners commenced operation of the original Matli gathering system in 1999, constructed the original Matli processing plant in 2003 and completed the construction of a new processing plant in 2006. Additionally, Hiland Partners acquired the Worland gathering system in 2000. Hiland Partners acquired the Carmen gathering system in 2003 as an expansion of the Eagle Chief gathering system. Prior to its acquisition of the Carmen gathering system, Hiland Partners purchased the gas from the previous owner, processed it and returned it to the previous owner pursuant to a keep-whole arrangement. After Hiland Partners acquired the Carmen gathering system, Hiland Partners terminated this keep-whole arrangement and now sells the gas at the tailgate of the Eagle Chief processing plant. More recently, Hiland Partners completed the Bakken acquisition in September 2005 and the acquisition of the Kinta Area gathering assets in May 2006. Hiland Partners' historical acquisitions were completed at different dates and with numerous sellers and were accounted for using the purchase method of accounting. Under the purchase method of accounting, results from such acquisitions are recorded in the financial statements only from the date of acquisition.

        Hiland Partners acquired the Kinta Area gathering assets in May 2006 and operates the gathering assets substantially differently than were operated by the previous owner. Since there was no sufficient continuity of the Kinta Area gathering assets' operations prior to and after the acquisition, disclosure of prior financial information would not be material to an understanding of future operations. Therefore, the acquisition has been recorded as a purchase of assets and not of a business.

        Hiland Partners expanded its processing plant and the existing field-gathering infrastructure and constructed a 40,000 Mcf/d nitrogen rejection plant at its Badlands gas gathering system located in Bowman County, North Dakota. Hiland Partners also entered into a five-year definitive purchase agreement with a producer and has constructed additional compression facilities and expanded its existing Badlands gas gathering system into South Dakota.

        Hiland Partners has installed additional gathering and compression infrastructure at its Bakken gathering system to increase the system's capacity from approximately 20,000 Mcf/d to 25,000 Mcf/d and in 2007, expanded the existing NGL fractionation facilities at the processing plant to fractionate increased NGL volumes from both the Bakken processing plant and the Badlands processing plant.

        In 2009, Hiland Partners completed the installation of additional pipelines and compression facilities and increased system capacity at its Eagle Chief gathering system from approximately 30,000 Mcf/d to approximately 35,500 Mcf/d due to increased volumes on this system. Hiland Partners has also completed the construction a 25,000 Mcf/d natural gas processing facility along its existing Matli gas gathering system which now provides additional plant processing capacity for increased system volumes.

        In 2007, Hiland Partners installed four 10,000 Mcf/d capacity amine-treating facilities at several of its Kinta Area gathering system locations to remove excess carbon dioxide levels from the natural gas. In the third quarter of 2008, Hiland Partners completed the installation of additional compression facilities on the Kinta Area gathering system to increase the capacity by approximately 20,000 Mcf/d to 200,000 Mcf/d.

        In December 2006, Hiland Partners entered into an agreement to construct and operate gathering pipelines and related facilities associated with the development of a portion of the acreage owned by CLR in the Woodford shale play in the Arkoma Basin of southeastern Oklahoma. Hiland Partners has installed field gathering, compression and associated equipment designed to provide low-pressure gathering, compression and dehydration services. The gathering infrastructure currently includes more than 17,400 horsepower of compression to provide takeaway capacity of approximately 65,000 Mcf/d.

69


Table of Contents

        Hiland Partners' construction of a processing plant and gathering pipeline at its North Dakota Bakken system located in the Bakken Shale play in northwestern North Dakota commenced in October 2008. As of December 31, 2008, the gathering system consisted of 23 miles of natural gas gathering pipelines.

Our Results of Operations

        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 and its predecessor, CGI. However, our consolidated balance sheet includes a minority interest amount that reflects the proportion of Hiland Partners owned by its unitholders other than us. Similarly, the ownership interests in Hiland Partners held by its unitholders other than us are reflected in our consolidated income statement as minority interest. The minority interest amounts are not reflected on Hiland Partners' financial statements.

        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 Hiland Partners' 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 our 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 following costs and expenses: cost of natural gas, condensate and NGLs purchased by us from third parties, cost of natural gas, condensate and NGLs purchased by Hiland Partners from affiliates, and 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. Our 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.

70


Table of Contents

        Set forth in the tables below are financial and operating data for us and our predecessor, Hiland Partners GP, LLC for the periods indicated. Operations from the acquisition of the Kinta Area gathering assets are reflected only from May 1, 2006.

 
  Year Ended December 31  
 
  2008   2007   2006  
 
  Hiland
Holdings
GP, LP
  Hiland
Holdings
GP, LP(1)
  Hiland
Partners,
GP, LLC
Predecessor(2)
  Total  
 
  (in thousands)
 

Total Segment Margin Data:

                               

Midstream revenues

  $ 383,180   $ 273,224   $ 65,489   $ 149,378   $ 214,867  

Midstream purchases

    276,600     195,212     45,921     110,272     156,193  
                       

Midstream segment margin

    106,580     78,012     19,568     39,106     58,674  

Compression revenues

    4,819     4,819     1,440     3,379     4,819  
                       

Total segment margin(3)

  $ 111,399   $ 82,831   $ 21,008   $ 42,485   $ 63,493  
                       

Summary of Operations Data:

                               

Midstream revenues

  $ 383,180   $ 273,224   $ 65,489   $ 149,378   $ 214,867  

Compression revenues

    4,819     4,819     1,440     3,379     4,819  
                       

Total revenues

    387,999     278,043     66,929     152,757     219,686  

Operating costs and expenses:

                               

Midstream purchases (exclusive of items shown separately below)

    276,600     195,212     45,921     110,272     156,193  

Operations and maintenance expenses

    30,526     23,279     5,658     10,413     16,071  

Depreciation and amortization expenses

    38,650     31,002     7,661     15,202     22,863  

Bad Debt

    304                  

General and administrative expenses

    10,337     9,321     1,857     3,442     5,299  
                       

Total operating costs and expenses

    356,417     258,814     61,097     139,329     200,426  
                       

Operating income

    31,582     19,229     5,832     13,428     19,260  

Other income (expense), net

    (13,980 )   (11,425 )   (2,150 )   (4,583 )   (6,733 )
                       

Income from continuing operations before minority interest in Hiland Partners, LP

    17,602     7,804     3,682     8,845     12,527  

Minority interest in income of Hiland Partners, LP

    (5,902 )   (2,638 )   (1,726 )   (8,438 )   (10,164 )
                       

Net income

  $ 11,700   $ 5,166   $ 1,956   $ 407   $ 2,363  
                       

(1)
Amounts presented in the Hiland Holdings GP, LP column include only the consolidated operations beginning on September 25, 2006. These amounts include the contribution of assets and member interest from Hiland Partners GP, LLC at the completion of our initial pubic offering.

(2)
Amounts presented in the Hiland Partners GP, LLC predecessor column include only the consolidated operations for the period beginning January 1, 2006 to September 25, 2006 the date of our initial public offering.

(3)
Compression revenues and compression segment margin are the same. There are no compression purchases associated with the compression segment.

71


Table of Contents

(4)
Reconciliation of total segment margin to operating income:
 
  Year Ended December 31  
 
  2008   2007   2006  
 
  Hiland
Holdings
GP, LP
  Hiland
Holdings
GP, LP(1)
  Hiland
Partners,
GP, LLC
Predecessor(2)
  Total  
 
  (in thousands)
 

Operating income

  $ 31,582   $ 19,229   $ 5,832   $ 13,428   $ 19,260  

Add:

                               

Operations and maintenance expenses

    30,526     23,279     5,658     10,413     16,071  

Depreciation, amortization and accretion

    38,650     31,002     7,661     15,202     22,863  

Bad Debt

    304                  

General and administrative expenses

    10,337     9,321     1,857     3,442     5,299  
                       

Total segment margin

  $ 111,399   $ 82,831   $ 21,008   $ 42,485   $ 63,493  
                       

(1)
Amounts presented in the Hiland Holdings GP, LP column include only the consolidated operations beginning on September 25, 2006. These amounts include the contribution of assets and member interest from Hiland Partners GP, LLC at the completion of our initial pubic offering.

(2)
Amounts presented in the Hiland Partners GP, LLC predecessor column include only the consolidated operations for the period beginning January 1, 2006 to September 25, 2006 the date of our initial public offering.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

        Revenues.    Total revenues (midstream and compression) were $388.0 million for the year ended December 31, 2008 compared to $278.0 million for the year ended December 31, 2007, an increase of $110.0 million, or 39.6%. This $110.0 million increase was primarily due to: (i) increased natural gas sales volumes of 13,852 MMBtu/day (MMBtu per day) and increased NGL sales volumes of 771 Bbls/day (Bbls per day) related to the Woodford Shale gathering system which commenced operation in April 2007, (ii) increased NGL sales volumes of 502 Bbls/day attributable to the expanded Badlands gathering system, including the processing and nitrogen rejection plants and other treating facilities, which commenced operation in August 2007 and (iii) significantly higher average realized natural gas and NGL sales prices for the year ended December 31, 2008 as compared to the year ended December 31, 2007, resulting in increased revenue at all of the gathering systems. Revenues from compression assets were the same for both periods.

        Midstream revenues were $383.2 million for the year ended December 31, 2008 compared to $273.2 million for the year ended December 31, 2007, an increase of $110.0 million, or 40.2%. Of this $110.0 million increase in midstream revenues, approximately $48.5 million was attributable to revenues from increased natural gas and NGL sales volumes at the Woodford Shale, Badlands, Bakken and Matli gathering systems and approximately $61.5 million was attributable to significantly higher average realized natural gas and NGL sales prices for the year ended December 31, 2008 as compared to the same period in 2007, resulting in increased revenues for all of the gathering systems.

        Inlet natural gas was 252,670 Mcf/d (Mcf per day) for the year ended December 31, 2008 compared to 215,551 Mcf/d for the year ended December 31, 2007, an increase of 37,119 Mcf/d, or 17.2%. This increase is primarily attributable to volume growth at the Woodford Shale and Badlands gathering systems, offset by volume declines at the Eagle Chief gathering system.

        Natural gas sales volumes were 90,910 MMBtu/d for the year ended December 31, 2008 compared to 80,731 MMBtu/d for the year ended December 31, 2007, an increase of 10,179 MMBtu/d, or 12.6%.

72


Table of Contents


This 10,179 MMBtu/d net increase in natural gas sales volumes was attributable to increased natural gas sales volumes at the Woodford Shale, Bakken and Matli gathering systems, offset by reduced natural gas sales volumes at the Eagle Chief and Kinta gathering systems.

        NGL sales volumes were 5,920 Bbls/d for the year ended December 31, 2008 compared to 4,696 Bbls/d for the year ended December 31, 2007, a net increase of 1,224 Bbls/d, or 26.1%. This net increase is primarily attributable to volume growth at the Woodford Shale and Badlands gathering systems, offset by reduced NGL sales volumes at the Bakken and Eagle Chief gathering systems.

        During 2008, Hiland Partners experienced extreme swings in its average realized natural gas and NGL sales prices. Average realized natural gas sales price increased from $6.44/MMBtu in January 2008 to a high sales price of $10.05/MMBtu in July 2008, then decreased to a low sales price of $3.38/MMBtu in November 2008. Average realized NGL sales price increased from $1.42 per gallon in January 2008 to a high sales price of $1.74 per gallon in June 2008, then decreased to a low sales price of $0.61 per gallon in December 2008. Consequently, for the year ended December 31, 2008, average realized natural gas sales prices were $7.00 per MMBtu compared to $5.75 per MMBtu for the year ended December 31, 2007, an increase of $1.25 per MMBtu, or 21.7%. Average realized NGL sales prices for the year ended December 31, 2008 were $1.33 per gallon compared to $1.18 per gallon for the year ended December 31, 2007, an increase of $0.15 per gallon or 12.7%. The overall increase in Hiland Partners' average realized natural gas and NGL sales prices was a result of higher index prices for natural gas and posted prices for NGLs during the year ended December 31, 2008 compared to the year ended December 31, 2007.

        Cash received from Hiland Partners' counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the year ended December 31, 2008 totaled $2.8 million compared to $4.8 million for the year ended December 31, 2007. The $2.8 million gain for the year ended December 31, 2008 increased averaged realized natural gas prices to $7.00 per MMBtu from $6.91 per MMBtu, an increase of $0.09 per MMBtu. The $4.8 million gain for the year ended December 31, 2007 increased averaged realized natural gas prices to $5.75 per MMBtu from $5.59 per MMBtu, an increase of $0.16 per MMBtu. Cash paid to Hiland Partners' counterparty on cash flow swap contracts for NGL derivative transactions that closed during the year ended December 31, 2008 totaled $5.9 million compared to $3.0 million for the year ended December 31, 2007. The $5.9 million loss for the year ended December 31, 2008 reduced averaged realized NGL prices to $1.33 per gallon from $1.39 per gallon, a decrease of $0.06 per gallon. The $3.0 million loss for the year ended December 31, 2007 reduced averaged realized NGL prices to $1.18 per gallon from $1.22 per gallon, a decrease of $0.04 per gallon.

        Hiland Partners' compression revenues were $4.8 million for each of the years ended December 31, 2008 and 2007.

        Midstream Purchases.    Midstream purchases were $276.6 million for the year ended December 31, 2008 compared to $195.2 million for the year ended December 31, 2007, an increase of $81.4 million, or 41.7%. The $81.4 million increase is primarily due to volume growth at the Woodford Shale gathering system which commenced operation in April 2007, the expanded Badlands gathering system, including the processing and nitrogen rejection plants and the other treating facilities, which commenced operation in August 2007, increased volume growth at the Matli gathering system and higher natural gas and NGL purchase prices, resulting in increased midstream purchases for all of the gathering systems.

        Midstream Segment Margin.    Midstream segment margin was $106.6 million for the year ended December 31, 2008 compared to $78.0 million for the year ended December 31, 2007, an increase of $28.6 million, or 36.6%. The increase is primarily due to favorable average gross processing spreads, higher average realized natural gas and NGL prices, volume growth at the expanded Badlands gathering system, including the processing and nitrogen rejection plants and the other treating facilities,

73


Table of Contents


which commenced operations in August 2007, volume growth at the Woodford Shale gathering system which commenced operation in April 2007, and volume growth at the Matli gathering system. As a percent of midstream revenues, midstream segment margin was 27.8% and 28.6% for the year ended December 31, 2008 and 2007, respectively, a reduction of 0.8%. This reduction is attributable to net losses on closed/settled derivative transactions and unrealized non-cash losses on derivative transactions for the year ended December 31, 2008 totaling $3.0 million, offset by an unrealized non-cash gain of $6.7 million related to a non-qualifying mark-to-market cash flow derivative for forecasted natural gas sales in 2010, compared to net gains totaling $1.8 million on closed/settled derivative transactions and $0.4 million unrealized non-cash gains on derivative transactions for the year ended December 31, 2007. The increase in midstream segment margin was offset by approximately $2.3 million of forgone margin as a result of the Badlands nitrogen rejection plant being temporarily taken out of service due to equipment failure during the first quarter in 2008.

        Operations and Maintenance.    Operations and maintenance expense totaled $30.5 million for the year ended December 31, 2008 compared with $23.3 million for the year ended December 31, 2007, an increase of $7.2 million, or 31.1%. Of this increase, $4.0 million was attributable to increased operations and maintenance at the expanded Badlands gathering system and $2.0 million was attributable to increased operations and maintenance at the Woodford Shale gathering system.

        Depreciation, Amortization and Accretion.    Depreciation, amortization and accretion expense totaled $38.7 million for the year ended December 31, 2008 compared with $31.0 million for the year ended December 31, 2007, an increase of $7.7 million, or 24.7%. Of this increase, $2.3 million was attributable to increased depreciation on the expanded Badlands gathering system, $2.3 million was attributable to increased depreciation on the Woodford Shale gathering system, $1.3 million was attributable to increased depreciation on the Bakken gathering system and $1.0 million was attributable to increased depreciation on the Kinta Area gathering systems.

        General and Administrative.    General and administrative expense totaled $10.3 million for the year ended December 31, 2008 compared with $9.3 million for the year ended December 31, 2007, an increase of $1.0 million or 10.9%. Salaries increased $1.4 million in the year ended December 31, 2008 as compared to the year ended December 31, 2007 due to increased non-cash unit based compensation and increased staffing during the year ended December 31, 2008 as compared to the year ended December 31, 2007. Additionally, audit, tax and costs of being a public company increased by $0.4 million in the year ended December 31, 2008 as compared to the year ended December 31, 2007. General and administrative expenses included $1.1 million of unsuccessful acquisition costs incurred in the year ended December 31, 2007 compared to only $0.1 million in the year ended December 31, 2008.

        Other Income (Expense).    Other income (expense) totaled $(14.0) million for the year ended December 31, 2008 compared with $(11.4) million for the year ended December 31, 2007, an increase in expense of $2.6 million. The increase is primarily attributable to additional interest expense from borrowings on Hiland Partners' credit facility to fund expansions at the Badlands and Kinta Area gathering systems and to fund internal growth projects at the Woodford Shale and the North Dakota Bakken gathering systems, after being offset by lower interest rates incurred during the year ended December 31, 2008 compared to interest rates incurred during the year ended December 31, 2007.

        Minority Interest.    Minority interest in income of Hiland Partners, which represents the allocation of Hiland Partners earnings to its limited partner interests not owned by us totaled $5.9 million for the year ended December 31, 2008 compared to $2.6 million for the year ended December 31, 2007, an increase of $3.3 million.

74


Table of Contents

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

        Revenues.    Total revenues (midstream and compression) were $278.0 million for the year ended December 31, 2007 compared to $219.7 million for the year ended December 31, 2006, an increase of $58.4 million, or 26.6%. This $58.4 million increase was largely due to (i) revenues associated with natural gas sales volumes related to the Woodford Shale gathering system which commenced production in late April 27, 2007, (ii) a full year of natural gas sales volumes in 2007 related to Hiland Partners' acquisition of the Kinta Area gathering assets effective May 1, 2006, (iii) increased natural gas sales volumes at the Eagle Chief and Bakken gathering systems, (iv) revenues related to increased NGL sales volumes at Hiland Partners' Woodford Shale, Bakken, Badlands and Eagle Chief gathering systems and (v) increased average realized NGL sales prices partially offset by lower average realized natural gas sales prices in 2007 as compared to the same period in 2006. Revenues from compression assets were the same for both periods.

        Midstream revenues were $273.2 million for the year ended December 31, 2007 compared to $214.9 million for the year ended December 31, 2006, a net increase of $58.4 million, or 27.2%. Of this increase in midstream revenues, approximately $57.4 million was attributable to natural gas sales volumes related to the Woodford Shale gathering system, a full year of natural gas sales volumes and gathering fee volumes in 2007 associated with the Kinta Area gathering assets acquisition effective May 1, 2006 and increased natural gas and NGL sales volumes at Hiland Partners' Bakken, Badlands and Eagle Chief gathering systems. Midstream revenues increased by approximately $12.7 million due to increased NGL sales prices offset by $11.7 million as a result of lower natural gas sales prices compared to 2006. The Woodford Shale gathering system, which began production in late April, 2007 accounted for 28.8% of the $58.4 million increase contributing $16.8 million to midstream revenues.

        Inlet natural gas volumes were 215,551 Mcf/d for the year ended December 31, 2007 compared to 157,556 Mcf/d for the year ended December 31, 2006, an increase of 57,995 Mcf/d, or 36.8%. Of the 57,995 Mcf/d increase, 41,915 Mcf/d, or 72.3% was attributable to inlet Mcf/d at the Kinta Area gathering system for a full year in 2007 which Hiland Partners acquired effective May 1, 2006, and the remaining 16,080 Mcf/d increase was primarily attributable to inlet Mcf/d at the Woodford Shale gathering system and increased inlet Mcf/d at Hiland Partners' Eagle Chief, Bakken and Badlands gathering systems. Natural gas sales volumes were 80,731 MMBtu/d for the year ended December 31, 2007 compared to 66,947 MMBtu/d for the year ended December 31, 2006, an increase of 13,784 MMBtu/d, or 20.6%. The increase of 13,784 MMBtu/d was primarily attributable to the increased natural gas volumes as a result of a full year of operations in 2007 at the Kinta Area gathering system which Hiland Partners acquired effective May 1, 2006 and to increased volumes at both the Bakken and Eagle Chief gathering systems and the new Woodford Shale gathering system, which contributed 4,649 MMBtu/d to the increase in natural gas sales volumes. Hiland Partners' NGL sales volumes were 4,696 Bbls/d for the year ended December 31, 2007 compared to 3,347 Bbls/d for the year ended December 31, 2006, an increase of 1,349 Bbls/d, or 40.3%. Of the 1,349 Bbls/d increase, 443 Bbls/d, or 32.8% was attributable to NGL sales volumes at the Woodford Shale gathering system and 834 Bbls/d, or 61.8% was attributable to increased NGL sales volumes at the Bakken, Eagle Chief and Badlands gathering systems.

        Average realized natural gas sales prices were $5.75 per MMBtu for the year ended December 31, 2007 compared to $6.11 per MMBtu for the year ended December 31, 2006, a decrease of $0.36 per MMBtu, or 5.9%. Hiland Partners' average realized NGL sales prices were $1.18 per gallon for the year ended December 31, 2007 compared to $1.02 per gallon for the year ended December 31, 2006, an increase of $0.16 per gallon or 15.7%. The change in its average realized natural gas sales prices was primarily a result of lower index prices due to a softening of supply and demand fundamentals for energy, which caused natural gas prices to fall during the year ended December 31, 2007 compared to the year ended December 31, 2006. The change in its average realized NGL sales prices was primarily a result of higher index prices due to a tightening of supply and demand fundamentals for energy,

75


Table of Contents


which caused NGL prices to rise during the year ended December 31, 2007 compared to the year ended December 31, 2006.

        Net cash received from Hiland Partners' counterparty on cash flow swap contracts that began on May 1, 2006 for natural gas derivative transactions that closed during the year ended December 31, 2007 was $4.8 million and compared to $3.6 million for the year ended December 31, 2006. These receipts increased average realized natural gas sales prices by $0.16 per MMBtu in 2007 and by $0.14 per MMBtu in 2006. Cash paid to Hiland Partners' counterparty on cash flow swap contracts that began on September 1, 2006 for NGL derivative transactions that closed during the year ended December 31, 2007 was $3.0 million. These payments decreased average realized natural gas sales prices by $0.04 per gallon in 2007. Closed NGL derivative transactions during the year ended December 31, 2006 were insignificant.

        Fees earned from 123,008 MMBtu/d of natural gas gathered, in which Hiland Partners does not take title to the gas, related to its Kinta Area gathering assets acquired on May 1, 2006 were $11.1 million for the year ended December 31, 2007. Similar fees earned from May 1, 2006 through December 31, 2006 averaging 127,437 MMBtu/d of natural gas gathered was $7.2 million. The increase of $3.9 million in fees earned was primarily due to a full year of operations in 2007 as compared to eight months of operations in 2006, and partially attributable to treating fees earned related to the four amine treating facilities installed in early 2007. Gathering fees earned during the year ended December 2007 as compared to the eight month period in 2006 were somewhat offset by a 4,429 MMBtu/d reduction in volumes gathered.

        Hiland Partners' compression revenues were $4.8 million for the each of the years ended December 31, 2007 and 2006.

        Midstream Purchases.    Midstream purchases were $195.2 million for the year ended December 31, 2007 compared to $156.2 million for the year ended December 31, 2006, an increase of $39.0 million, or 25.0%. The $39.0 million increase primarily consists of $12.8 million, or 32.8% attributable to purchased natural gas from the Woodford Shale gathering system and $10.8 million, or 27.6%, attributable to purchased natural gas from the Kinta Area gathering assets for a full year of operations in 2007. The remaining increase in midstream purchases was attributable to increased purchased residue gas volumes at Hiland Partners' Bakken, Eagle Chief and Badlands gathering systems. The increase in volumes was offset by reduced payments to producers due primarily to lower natural gas purchase prices, which generally are closely related to fluctuations in natural gas sales prices.

        Midstream Segment Margin.    Midstream segment margin was $78.0 million for the year ended December 31, 2007 compared to $58.7 million for the year ended December 31, 2006, an increase of $19.3 million, or 33.0%. The increase is primarily due to favorable gross processing spreads for the year, higher average realized natural gas and NGL prices for the year, volume growth at the expanded Badlands gathering system, including the processing and nitrogen rejection plants and the other treating facilities, which commenced operations in August 2007, volume growth at the Woodford Shale gathering system which commenced operation in April 2007, volume growth at the Kinta Area gathering system which we acquire in May 2006 and volume growth at the Bakken and Eagle Chief gathering systems. As a percent of midstream revenues, midstream segment margin was 28.6% and 27.3% for the year ended December 31, 2007 and 2006, respectively, an increase of 1.3%. This increase is primarily attributable to increased volumes on gathering systems with more accretive segment margins for the year ended December 31, 2007 as compared to the year ended December 31, 2006. These increases were offset by a decrease of $1.8 million on closed/settled derivative transactions of $1.8 million during the year ended December 31, 2007 compared to $3.6 million on closed/settled derivative transactions during the year ended December 31, 2006.

76


Table of Contents

        Operations and Maintenance.    Operations and maintenance expense totaled $23.3 million for the year ended December 31, 2007 compared with $16.1 million for the year ended December 31, 2006, an increase of $7.2 million, or 44.9%. Of this increase, $2.9 million, or 40.0% was attributable to a full year of operations and maintenance expense at the Kinta Area gathering system. Operations and maintenance expense also increased by $2.5 million, or 35.2% at the Badlands gathering facility largely due to compressor rentals and other related costs associated with its expansion project. Hiland Partners' new Woodford Shale gathering system contributed $0.9 million to the increase in operations and maintenance expense and its Bakken and Eagle Chief gathering systems, as a result of increased volumes, contributed $0.8 million to the increase in operations and maintenance expense.

        Depreciation, Amortization and Accretion.    Depreciation, amortization and accretion expense totaled $31.0 million for the year ended December 31, 2007 compared with $22.9 million for the year ended December 31, 2006, an increase of $8.1 million, or 35.6%. Of this increase, $3.1 million, or 38.1% was attributable to depreciation and amortization on the Kinta Area gathering system for a full year of operations in 2007. The increase is also attributable to additional depreciation related to Hiland Partners' internal organic growth projects completed in 2007 of $2.2 million, or 27.1% at the Bakken gathering system and $1.4 million, or 16.9% at the Badlands gathering system,

        General and Administrative.    General and administrative expense totaled $9.3 million for the year ended December 31, 2007 compared with $5.3 million for the year ended December 31, 2006, an increase of $4.0 million, or 75.9%. The increase is primarily attributable to $1.2 million of acquisition evaluation expenses, $0.9 million of non-cash compensation expense related to unit option awards and restricted and phantom unit awards and $0.06 million due to increased salaries and salary related expenses as a result of additional staffing, including costs of recruitment.

        Other Income (Expense).    Our other income (expense) totaled ($11.4) million for the year ended December 31, 2007 compared with ($6.7) million for the year ended December 31, 2006, an increase in expense of $4.7 million. The increase is primarily attributable to additional interest expense from a full year of borrowings on credit facility for the acquisition of the Kinta Area gathering assets effective May 1, 2006 and to interest expense for Hiland Partners' internal plant and pipeline expansion projects at its Badlands, Woodford Shale and Bakken gathering systems in 2007.

General Trends and Outlook

        We expect Hiland Partners' business to continue to be affected by the following key trends. 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. Gas Supply and Outlook.    Natural gas prices declined dramatically since the peak New York Mercantile Exchange ("NYMEX") Henry Hub last day settle price of $13.11/MMBtu in July 2008 to the low NYMEX Henry Hub last day settle price of $4.48 in February 2009. U.S. natural gas drilling rig counts have declined by approximately 29% to 1,018 as of February 20, 2009, compared to 1,430 natural gas drilling rigs in the comparable period of 2008, and approximately 37% compared to the peak natural gas drilling rig count of 1,606 in August and September 2008. We believe that current natural gas prices will continue to result in reduced natural gas-related drilling activity as producers seek to decrease their level of natural gas production. We also believe that current reduced natural gas drilling activity will persist until the economic environment in the United States improves and increases the demand for natural gas.

        U.S. Crude Oil Supply and Outlook.    The domestic and global recession and resulting drop in demand for crude oil products has significantly impacted the price for crude oil. West Texas

77


Table of Contents


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 74.8% decline. U.S. crude oil drilling rig counts have declined by approximately 19% to 269 as of February 20, 2009, compared to 333 crude oil drilling rigs in the comparable period of 2008, and approximately 39% compared to the peak crude oil drilling rig count of 442 in November 2008. The forward curve for WTI crude oil pricing reflects continued reductions in demand for crude oil. We also believe that current reduced crude oil drilling activity will persist until the economic environment in the United States improves and increases the demand for crude oil.

        U.S. NGL Supply and Outlook.    The domestic and global recession and resulting drop in demand for NGL products has significantly impacted the price for NGLs. NGL prices have dropped dramatically since the peak NGL basket pricing of $2.21/gallon in June 2008 to a January 2009 NGL basket pricing of $0.68/gallon, a 69.2% decline. NGL basket pricing correlates to WTI crude oil pricing. 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 74.8% decline. The forward curve for NGL basket pricing and WTI crude oil pricing reflects continued reductions in demand for NGL products. We also believe that the current reduced NGL products pricing will persist until the economic environment in the United States improves and increases the demand for NGL products.

        A number of the areas in which Hiland Partners operates are experiencing a significant decline in drilling activity as a result of the recent dramatic decline in natural gas and crude oil prices. While we anticipate continued exploration and production activities in the areas in which Hiland Partners 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 oil reserves. Drilling activity generally decreases as natural gas and oil prices decrease. Hiland Partners has no control over the level of drilling activity in the areas of its operations.

        Midstream Segment Margins.    During 2008, Hiland Partners' midstream segment margins were positively impacted by increased natural gas and NGL volumes, increased natural gas and NGL sales prices and increased processing spreads resulting in an increase in our midstream segment margins from 2007. During 2007, Hiland Partners' midstream segment margins were positively impacted due to increased volumes and NGL prices but were negatively impacted due to reduced natural gas prices resulting in a net increase in its midstream segment margins from 2006. During 2006, Hiland Partners' midstream segment margins were positively impacted due to increased volumes but were negatively impacted due to reduced natural gas prices and NGL prices, resulting in a net increase in margins from 2005. Hiland Partners' profitability is dependent upon pricing and market demand for natural gas and NGLs, which are beyond its control and have experienced substantial volatility in 2008.

        Interest Rate Environment.    Interest rates on future credit facility borrowings and debt offerings could be higher than current levels, causing Hiland Partners' financing costs to increase accordingly. Although this could limit Hiland Partners' ability to raise funds in the debt capital markets, Hiland Partners expects to remain competitive with respect to acquisitions and capital projects, as competitors would face similar circumstances. As with other yield-oriented securities, our unit price and Hiland Partners' unit price are impacted by the level of cash distributions and an associated implied distribution yield. The distribution yield is often used by investors to compare and rank related yield oriented securities for investment decision making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our and Hiland Partners' units, and a rising interest rate environment could have an adverse impact on our and Hiland Partners' unit price and our and Hiland Partners' ability to issue additional equity to make acquisitions, reduce debt or for other purposes.

78


Table of Contents

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.

Liquidity and Capital Resources

Overview

        Due to the recent decline in natural gas and NGL prices, we believe that our cash generated from operations will decrease in 2009 relative to comparable periods in 2008. Hiland Partners' senior secured revolving credit facility requires Hiland Partners to meet certain financial tests, including a maximum consolidated funded debt to EBITDA ratio of 4.0:10 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 4.75:1.0 for the three fiscal quarters following the quarter in which such acquisition or capital expenditure occurs. Hiland Partners intends to elect to increase the ratio to 4.75:1.0 on March 31, 2009. During this 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. Additionally, if commodity prices do not significantly improve above the expected prices for 2009, Hiland Partners may be in violation of the maximum consolidated funded debt to EBITDA ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or Hiland Partners receives an infusion of equity capital.

Cash Flows

Year ended December 31, 2008 Compared to Year ended December 31, 2007

        Cash Flows from Operating Activities.    Cash flows from operating activities increased by $13.1 million to $52.5 million for the year ended December 31, 2008 from $39.4 million for the year ended December 31, 2007. During the year ended December 31, 2008 Hiland Partners received cash flows from its customers of approximately $387.5 million, had cash payments to suppliers and employees of approximately $321.3 million and payment of interest expense of $13.7 million, net of amounts capitalized, resulting in cash received from operating activities of $52.5 million. During year ended December 31, 2007, Hiland Partners received cash flows from customers of approximately $269.6 million, had cash payments to our suppliers and employees of approximately $218.8 million and payment of interest expense of $11.4 million, net of amounts capitalized, resulting in cash received from operating activities of $39.4 million. The increase in cash flows for the year ended December 31, 2008, as compared to the year ended December 31, 2007, was attributable to increased natural gas and NGLs volumes and higher average realized natural gas and NGL sales prices.

        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 $0.4 million to cash flows from operating activities during the year ended December 31, 2008 and used $1.0 million of cash flows from operating activities during the year ended December 31, 2007.

        Net income for the year ended December 31, 2008 was $11.7 million, an increase of $6.5 million from a net income of $5.2 million for the year ended December 31, 2007. Depreciation and amortization increased by $7.6 million to $38.5 million for the year ended December 31, 2008 from $30.9 million for the year ended December 31, 2007. Bad debt expense was $0.3 million for the year ended December 31, 2008 compared to zero for the year ended December 31, 2007.

79


Table of Contents

        Cash Flows Used for Investing Activities.    Cash flows used for investing activities, which represent investments in property and equipment decreased by $29.1 million to $54.3 million for the year ended December 31, 2008 from $83.4 million for the year ended December 31, 2007 primarily due to reduced capital investing in the year ended December 31, 2008 related to the Badlands nitrogen rejection plant which was under construction during the first eight months of 2007.

        Cash Flows from Financing Activities.    Cash flows from financing activities decreased to $(7.0) million for the year ended December 31, 2008 from $44.1 million for the year ended December 31, 2007, a decrease of $51.1 million. During the year ended December 31, 2008, Hiland Partners borrowed $41.0 million under its credit facility to fund internal expansion and organic growth projects, made payments of $10.0 million to its credit facility, received capital contributions of $1.0 million as a result of issuing Hiland Partners common units in connection with the exercise of 40,705 vested unit options, incurred debt issuance costs of $0.4 million associated with the fourth amendment to Hiland Partners' credit facility in February 2008 and made $0.5 million payments on capital lease obligations. During the year ended December 31, 2008, we borrowed $0.4 million under our credit facility, made distributions of $25.0 million to our unitholders and Hiland Partners distributed $13.4 million to its minority interest unitholders.

        During the year ended December 31, 2007, Hiland Partners borrowed $74.0 million under its credit facility to fund internal expansion projects, received capital contributions of $1.0 million as a result of issuing common units due to the exercise of 42,660 vested unit options, distributed $31.3 million to unitholders, incurred offering costs of $0.2 million associated with the preparation and filing of a registration statement filed with the SEC on January 23, 2007 and paid debt issuance costs of $0.5 million associated with our third amendment to our credit facility in July 2007. During the year ended December 31, 2007, we made distributions of $18.7 million to our unitholders and Hiland Partners distributed $11.4 million to its minority interest unitholders.

Year ended December 31, 2007 Compared to Year ended December 31, 2006

        Cash Flows from Operating Activities.    Cash flows from operating activities increased by $0.9 million to $39.4 million for the year ended December 31, 2007 from $38.5 million for the year ended December 31, 2006. During the year ended December 31, 2007, Hiland Partners received cash flows from customers of approximately $269.6 million, had cash payments to suppliers and employees of approximately $218.9 million and payment of interest expense of $11.4 million, net of amounts capitalized, resulting in cash received from operating activities of $30.4 million. During the year ended December 31, 2006, Hiland Partners received cash flows from customers of approximately $217.8 million, had cash payments to our suppliers and employees of approximately $172.6 million and payment of interest expense of $6.4 million, net of amounts capitalized, resulting in cash received from our operating activities of $38.5 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. Natural gas and NGL volumes from Hiland Partners' new Woodford Shale gathering system and increased natural gas and NGL volumes from its Bakken, Badlands and Eagle Chief gathering systems combined with increased NGL sales prices, but offset by lower natural gas sales prices contributed to increases in accounts receivable, accrued midstream revenues, accounts payable and accrued midstream purchases during the year ended December 31, 2007. Working capital items, exclusive of cash, used $1.0 million in cash flows from operating activities and contributed $2.3 million to cash flows from operating activities during the years ended December 31, 2007 and 2006, respectively. Net income for the year ended December 31, 2007 was $5.2 million, an increase of $2.8 million from a net income of $2.4 million for the year ended December 31, 2006. Depreciation, amortization and accretion increased

80


Table of Contents

by $8.1 million or 20.9%, to $30.9 million for the year ended December 31, 2007 from $22.8 million for the year ended December 31, 2006.

        Cash Flows Used for Investing Activities.    Cash flows used for investing activities representing internal organic growth investments in property and equipment, increased by $21.3 million to $83.4 million for the year ended December 31, 2007 from $62.1 million for the year ended December 31, 2006. This $21.3 million increase is largely attributable to cash invested at the new Woodford Shale gathering system, the Badlands expansion project and continued growth at the Bakken gathering system. There were no acquisitions in 2007. In May 2006, $96.4 million of cash flows was used for the Kinta Area gathering assets acquisition.

        Cash Flows from Financing Activities.    Our cash flows from financing activities decreased by $80.1 million to $44.1 million for the year ended December 31, 2007 from $124.2 million for the year ended December 31, 2006. During the year ended December 31, 2007, Hiland Partners borrowed $74.0 million under its credit facility to fund internal expansion projects and we borrowed $0.1 million under our credit facility. Hiland Partners received capital contributions of $1.0 million as a result of issuing common units due to the exercise of 42,660 vested unit options, made capital lease obligation payments of $0.3 million, incurred offering costs of $0.2 million associated with its S-3/A registration statement filed with the SEC on January 23, 2007 and paid debt issuance costs of $0.5 million associated with its third amended credit facility. Hiland Partners distributed $11.4 million to its minority interest owners and we distributed $18.7 million to our unitholders. During the year ended December 31, 2006, Hiland Partners borrowed $113.3 million under its credit facility to partially fund the Kinta Area gathering assets acquisition on May 1, 2006 and to fund its internal expansion projects at both its Badlands and Bakken gathering systems. Also during the year ended December 31, 2006, we received capital contributions of $35.0 million from our general partner in exchange for the issuance of 761,714 common units and general partner equivalent units, received $1.3 million as a result of issuing common units due to the exercise of 52,699 vested unit options, paid debt issuance costs of $0.9 million and distributed $25.6 million to our unitholders.

Capital Requirements

        The midstream energy business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate will continue to be:

    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

    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.

81


Table of Contents

        Total Contractual Cash Obligations.    A summary of our contractual cash obligations as of December 31, 2008, including leases renewed and entered into subsequent to year end is presented below:

 
  Payment Due by Period  
Type of Obligation
  Total
Obligation
  Due in
2009
  Due in
2010
  Due in
2011
  Due in
2012
  Due in
2013
  Thereafter  
 
  (in thousands)
 

Senior secured revolving credit facilities

  $ 252,769   $ 705   $   $ 252,064   $   $   $  

Estimated interest expense on credit facilities(1)

    19,650     8,283     8,267     3,100              

Capital lease obligations(2)

    7,378     1,256     1,256     1,256     1,107     1,001     1,502  

Operating leases, service agreements and other

    3,959     1,700     858     465     299     211     426  
                               

Total contractual cash obligations

  $ 283,756   $ 11,944   $ 10,381   $ 256,885   $ 1,406   $ 1,212   $ 1,928  
                               

(1)
Interest rates on the senior secured revolving credit facilities are variable. Estimated interest payments are based on the interest rates and the amounts outstanding as of December 31, 2008. For a discussion of ours and Hiland Partners' senior secured revolving credit facilities, please read "—Credit Facility" below.

(2)
Contractual cash commitments on our capital lease obligations include $2,335 of interest expense.

        Financial Derivatives and Commodity Hedges.    Hiland Partners has entered into certain financial derivative instruments that are classified as cash flow hedges in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, and relate to forecasted sales and purchases in 2008, 2009 and a mark-to-market cash flow derivative which relates to forecasted sales in 2010. Hiland Partners entered into these instruments to hedge the forecasted natural gas sales and NGL sales or purchases 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 or pays a fixed price and receives a floating price based on certain indices for the relevant contract period as the underlying natural gas is sold or purchased or NGL is sold. The following table provides information about the commodity based derivative instruments at December 31, 2008.

Description and Production Period
  Volume   Average
Fixed/Open
Price
  Fair Value
Asset
(Liability)
 
 
  (MMBtu)
  (per MMBtu)
   
 

Natural Gas—Sold Fixed for Floating Price Swaps

                   

January 2009 - December 2009

    2,136,000   $ 7.30   $ 6,851  

January 2010 - December 2010

    2,136,000   $ 10.50     7,141  
                   

              $ 13,992  
                   

        The following table provides information about Hiland Partners' interest rate swap at December 31, 2008:

Description and Period
  Notional
Amount
  Interest
Rate
  Fair Value
Asset
(Liability)
 

Interest Rate Swap

                   

January 2009 - December 2009

  $ 100,000,000     2.245 % $ (1,439 )

82


Table of Contents

        Off-Balance Sheet Arrangements.    We had no significant off-balance sheet arrangements as of December 31, 2008 or December 31, 2007.

Credit Facility

Hiland Partners GP, LLC

        On May 1, 2006, Hiland Partners GP, LLC entered into an unsecured credit agreement under which it borrowed $35.0 million to purchase 761,714 common units and 15,545 general partner units from Hiland Partners. The loan was guaranteed by all Hiland Partners GP, LLC's members and matured and was paid in full upon the completion of our initial public offering on September 25, 2006. Hiland Partners GP, LLC's board of directors, as well as the conflicts committee of its board of directors, consisting of independent directors, approved the transaction.

Hiland Holdings

        On September 25, 2006, concurrently with the closing of our initial public offering, Hiland Holdings entered into a three-year $25.0 million secured revolving credit facility. The facility will permit us, if certain conditions are met, to increase borrowing capacity by up to an additional $25.0 million. The 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 facility will mature on September 25, 2009, at which time all outstanding amounts thereunder become due and payable.

        Indebtedness under the credit facility will bear interest, at our option, at either: (i) an alternate base rate plus an applicable margin ranging from 100 to 150 basis points per annum or (ii) LIBOR plus an applicable margin ranging from 200 to 250 basis points per annum in each case based on our ratio of consolidated funded debt to EBITDA. The alternate base rate is 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%. We have 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 2.0%. A commitment fee ranging from 25 to 50 basis points per annum based on our ratio of consolidated funded debt to EBITDA will be payable on the average daily unused portion of the credit facility for the quarter most recently ended.

        The credit facility contains several covenants that, among other things, require the maintenance of two financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions.

        The credit facility also contains covenants requiring a maximum consolidated funded debt to EBITDA ratio of 3.0:1.0 for the four fiscal quarters most recently ended and a minimum interest coverage ratio of 3.0:1.0.

        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 certain other assets held by us and certain of our subsidiaries at the end of each fiscal quarter and (ii) the maximum available amount of the credit facility (currently $25.0 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.

        The credit facility prohibits us 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 the

83


Table of Contents


distribution. In addition, the credit facility contains various covenants that limit, among other things, subject to certain exceptions and negotiated "baskets," our ability to incur indebtedness, 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 facility limits distributions to our unitholders to our available cash, as defined in our partnership agreement. Restricted payments under the credit facility are subject to an annual "clean-down" period of 15 consecutive days in which the amount outstanding that relates to funding the restricted payments under the credit facility must be reduced to zero.

        As of December 31, 2008, we had $0.7 million outstanding under this credit facility and were in compliance with our financial covenants. The outstanding $0.7 million, which matures on September 25, 2009, is included in accrued liabilities and other in the balance sheet.

Hiland Partners

        On February 6, 2008, Hiland Partners entered into a fourth amendment to its credit facility dated as of February 15, 2005. Pursuant to the fourth amendment, Hiland Partners has among other things, increased its borrowing base from $250 million to $300 million and decreased the accordion feature in the facility from $100 million to $50 million. Hiland Partners original credit facility dated May 2005 was first amended in September 2005, amended a second time in June 2006 and amended a third time in July 2007.

        The fourth amendment increases Hiland Partners borrowing capacity under its senior secured revolving credit facility to $300 million such that the facility now consists of a $291 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' credit facility provides for an accordion feature, which permits Hiland Partners, if certain conditions are met, to increase the size of the revolving acquisition facility by up to an additional $50.0 million and allows for the issuance of letters of credit of up to $15.0 million in the aggregate. The senior secured revolving credit facility also requires us to meet certain financial tests, including a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal quarter; provided that in the event that the Partnership makes certain permitted acquisitions or capital expenditures, this ratio may be increased to 4.75:1.0 for the three fiscal quarters following the quarter in which such acquisition or capital expenditure occurs; and a minimum interest coverage ratio of 3.0:1.0. 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.

        Due to the recent decline in natural gas and NGL prices, we believe our cash flow from operating activities will decrease relative to the level experienced in 2008. Consequently, Hiland Partners anticipates electing to "step up" Hiland Partners' debt covenants on its credit facility to 4:75:1.0 debt to EBITDA at the end of the first quarter 2009. Additionally, given the current natural gas and NGL forward price strips, Hiland Partners may require additional equity as soon as June 30, 2009 to remain in compliance with Hiland Partners' existing debt covenants contained in its 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 the credit facility will bear interest, at Hiland Partners' 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 Hiland

84


Table of Contents


Partners' 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%. 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 any 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 December 31, 2008, the interest rate on outstanding borrowings from our credit facility was 3.28%

        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 the distribution. 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 the Omnibus Agreement or enter into a merger, consolidation or sale of assets.

        The credit facility defines EBITDA as Hiland Partners' consolidated net income, plus income tax expense, interest expense, depreciation and amortization 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 items.

        Upon the occurrence of an event of default 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.

        The credit facility limits distributions to Hiland Partners' unitholders to available cash, 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 December 31, 2008, Hiland Partners had $252.1 million outstanding under the credit facility and were in compliance with its financial covenants.

Recent Accounting Pronouncements

        On April 25, 2008, the Financial Accounting Standards Board ("FASB") FASB issued Staff Position No. FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In determining the useful life of an acquired intangible asset, FSP 142-3 removes the requirement from SFAS 142 for an entity to consider whether renewal of the intangible asset requires significant costs or material modifications to the related arrangement. FSP 142-3 also replaces the previous useful life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. FSP 142-3 will be effective as of January 1, 2009 and will apply only to intangible assets acquired after that date. Retroactive application to previously acquired intangible assets is prohibited. The adoption of FSP 142-3 is not expected to have a material impact on our financial position, results of operations or cash flows.

85


Table of Contents

        On March 19, 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," an amendment of SFAS 133 ("SFAS 161"). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for periods prior to its initial adoption. SFAS 161 amends the current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in SFAS 133 and generally increases the level of aggregation/disaggregation that will be required in an entity's financial statements. We are currently reviewing SFAS 161 to determine the effect it will have on our financial statements and disclosures therein.

        On March 12, 2008, the Emerging Issues Task Force ("EITF") reached consensus opinion on EITF Issue 07-4, "Application of the two-class method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships" ("EITF 07-4"), which the FASB ratified at its March 26, 2008 meeting. EITF 07-4 requires the calculation of a Master Limited Partnership's ("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. EITF 07-4 is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented. Early application is not permitted. We will apply the requirements of EITF 07-4 as it pertains to MLPs upon its adoption during the quarter ended March 31, 2009 and do not expect a significant impact when adopted.

        In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) amends and replaces SFAS 141, but retains the fundamental requirements in SFAS 141 that the purchase method of accounting be used for all business combinations and an acquirer be identified for each business combination. SFAS 141(R) provides for how the acquirer recognizes and measures the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. SFAS 141(R) provides for how the acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS 141(R) also determines what information to disclose to enable users to be able to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141(R) apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and do not allow early adoption. We are evaluating the new requirements of SFAS 141(R) and the impact it will have on business combinations completed in 2009 and thereafter.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent (minority interest) be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent's equity. SFAS 160 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 parent's 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 will be determined without deducting minority interest; however, earnings-per-share information will continue to be calculated on the basis of the net income attributable to the parent's shareholders. Additionally, SFAS 160 establishes a single method for

86


Table of Contents


accounting for changes in a parent's 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. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Early adoption is not permitted. We will apply the requirements of SFAS 160 upon our adoption on January 1, 2009 and do not expect it to have a material impact on our financial position, results of operations or cash flows.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." ("SFAS 159"). SFAS 159 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. SFAS 159 is effective for fiscal years beginning after November 15, 2007. SFAS 159 was adopted by us 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. As such, the adoption of SFAS 159 did not have any impact on our financial position, results of operations or cash flows.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 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. SFAS 157 applies to derivatives and other financial instruments, which SFAS 133 requires be measured at fair value at initial recognition and for all subsequent periods. SFAS 157 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. SFAS 157's 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 management's assumptions are used to derive the fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We elected to implement SFAS 157 prospectively in the first quarter of 2008 with the one-year deferral permitted by FASB Staff Position (FSP) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). The deferral 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. We do not expect any significant impact to our consolidated financial statements when we implement SFAS 157 for these assets and liabilities.

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. For further details on our accounting policies, you should read Note 1 of the accompanying Notes to Financial Statements.

87


Table of Contents

        Revenue Recognition.    Revenues for sales and gathering of natural gas and NGLs product sales are recognized at the time the product is delivered and title, if applicable, is transferred. Revenues for compression services are recognized when the services under the agreement are performed.

        Depreciation and Amortization.    Depreciation of all equipment is determined under the straight-line method using various rates based on useful lives, 10 to 22 years for pipeline and processing plants, and 3 to 10 years for corporate and other assets. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings. Maintenance, repairs and minor replacements are expensed as incurred. Costs of replacements constituting improvement are capitalized. Intangible assets consist of the acquired value of existing contracts to sell natural gas and other NGLs, compression contracts and identifiable customer relationships, which do not have significant residual value. The contracts are being amortized over their estimated lives of ten years.

        Derivatives.    Hiland Partners utilizes derivative financial instruments to reduce commodity price risks. Hiland Partners does not hold or issue derivative financial instruments for trading purposes. Statement of Financial Accounting Standards (or SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was amended in June 2000 by SFAS No. 138 and in May 2003 by SFAS No. 149, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Derivatives that are not designated as hedges are adjusted to fair value through income. If the derivative is designated as a hedge, depending upon the nature of the hedge, changes in the fair value of the derivatives are either offset against the fair value of assets, liabilities or firm commitments through income, or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a derivative's change in fair value is immediately recognized into income. If a derivative no longer qualifies for hedge accounting, the amounts in accumulated other comprehensive income will be immediately charged to operations.

        Asset Retirement Obligations.    SFAS No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method and the liability is accreted to measure the change in liability due to the passage of time. The primary impact of this standard relates to our estimated costs for dismantling and site restoration of certain of Hiland Partners' plants and pipelines. Estimating future asset retirement obligations requires us to make estimates and judgments regarding timing, existence of a liability, as well as what constitutes adequate restoration. Hiland Partners uses the present value of estimated cash flows related to asset retirement obligation to determine the fair value, generally as estimated by third party consultants. The present value calculation requires us to make numerous assumptions and judgments, including the ultimate costs of dismantling and site restoration, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a corresponding adjustment will be required to the related asset. We believe the estimates and judgments reflected in our financial statements are reasonable but are necessarily subject to the uncertainties we have just described. Accordingly, any significant variance in any of the above assumptions or factors could materially affect our cash flows.

        Impairment of Long-Lived Assets.    In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we evaluate long-lived assets, including intangible assets, of identifiable business activities for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of

88


Table of Contents


such assets may not be recoverable. The determination of whether impairment has occurred is based on management's 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 for the assets and recording a provision for loss if the carrying value is greater than fair value. For assets identified to be disposed of in the future, the carrying value of these assets is compared to the 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 re-determined when related events or circumstances change.

        When determining whether impairment of one of Hiland Partners' long-lived assets has occurred, we must estimate the undiscounted cash flows attributable to the asset or asset group. Our estimate of cash flows is based on assumptions regarding the volume of reserves providing asset cash flow and future NGL product and natural gas prices. The amount of reserves and drilling activity are dependent in part on natural gas prices. Projections of reserves and future commodity prices 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 Partnership's products are located;

    the availability and prices of NGL products and competing commodities;

    the availability and prices of raw natural gas supply;

    the ability of Hiland Partners to negotiate favorable marketing agreements;

    the risks that third party oil and gas exploration and production activities will not occur or be successful;

    the dependence of Hiland Partners 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 our cash flows, which could require us to record an impairment of an asset.

        Share Based Compensation.    In October 1995 the FASB issued SFAS No. 123, "Share-Based Payment," which was revised in December 2004 ("SFAS 123R"). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements and that cost be measured based on the fair value of the equity or liability instruments issued. We adopted SFAS 123R September 25, 2006 and Hiland Partners adopted SFAS 123R January 1, 2006. We have applied SFAS 123R using the permitted modified prospective method beginning as of the same date. Hiland Partners had unearned deferred compensation of $289 as of January 1, 2006 which has been eliminated against Hiland Partners common unit equity. Prior to January 1, 2006, Hiland Partners recorded any unamortized compensation related to restricted unit awards as unearned compensation in equity.

        We estimate the fair value of each option granted on the date of grant using the American Binomial option-pricing model. In estimating the fair value of each option, we use our peer group volatility averages as determined on the option grant dates. We calculate expected lives of the options under the simplified method as prescribed by the SEC Staff Accounting Bulletin 107 and have used a risk free interest rate based on the applicable U.S. Treasury yield in effect at the time of grant. Our compensation expense for these awards is recognized on the graded vesting attribution method. Units to be issued under our unit incentive plan may be from newly issued units. Prior to Hiland Partners

89


Table of Contents


adoption of SFAS 123R on January 1, 2006, they applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the unit-based compensation awards.

Disclosure Regarding Forward-Looking Statements

        This annual report on Form 10-K 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.

        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 management's control. Such factors include:

    the ability to comply with the certain covenants in our or Hiland Partners' credit facilities;

    our 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 transported on Hiland Partners' gathering systems;

    the level of throughput in Hiland Partners' natural gas processing and treating facilities;

    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 oil and natural gas production;

    the availability of imported oil and natural gas;

    actions taken by foreign oil and gas producing nations;

    the political and economic stability of petroleum producing nations;

    the weather in Hiland Partners' operating areas;

    the extent of governmental regulation and taxation;

    hazards or operating risks incidental to the transporting, 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;

90


Table of Contents

    the availability and cost of capital and Hiland Partners' ability to access certain capital sources;

    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 the Hiland Partners' financial results; and

    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 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 those described elsewhere in Item 1A.—"Risk Factors." Other unknown or unpredictable factors also could have material adverse effects on our future results. You should not put 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

Item 7A.    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. For a discussion of the volatility of natural gas and NGL prices, please read Item 1A. "Risk Factors—Risk Factors Related to our Business". 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 year ended December 31, 2008 and December 31, 2007, 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.

 
   
  Natural Gas Price Change ($/MMBtu)  
 
   
  2008   2007  
 
   
  $0.10   $(0.10)   $0.10   $(0.10)  

NGL Price Change ($/gal)

  $ 0.01   $ 615,000   $ 548,000   $ 642,000   $ 194,000  

  $ (0.01 ) $ (472,000 ) $ (649,000 ) $ (207,000 ) $ (645,000 )

91


Table of Contents

        The increase in commodity exposure is the result of increased natural gas and NGL product volumes in the year ended December 31, 2008 compared to the year ended December 31, 2007. The magnitude of the impact on total segment margin of changes in natural gas and NGL 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 prices can also affect our profitability indirectly by influencing the level of drilling activity and related opportunities for our services.

        Hiland Partners manages this commodity price exposure through an integrated strategy that includes management of its contract portfolio, optimization of its assets and the use of derivative contracts. As a result of these derivative swap contracts, Hiland Partners has hedged a portion of its expected exposure to natural gas prices in 2009 and 2010. Hiland Partners continually monitors its hedging and contract portfolio and expects to continue to adjust its hedge position as conditions warrant. The following table provides information about Hiland Partners' derivative instruments at December 31, 2008:

Description and Production Period
  Volume   Average
Fixed/Open
Price
  Fair Value
Asset
(Liability)
 
 
  (MMBtu)
  (per MMBtu)
   
 

Natural Gas—Sold Fixed for Floating Price Swaps

                   

January 2009 - December 2009

    2,136,000   $ 7.30   $ 6,851  

January 2010 - December 2010

    2,136,000   $ 10.50     7,141  
                   

              $ 13,992  
                   

        Interest Rate Risk.    We have elected for the indebtedness to bear interest at LIBOR plus the applicable margin. We are exposed to changes in the LIBOR rate as a result of our credit facility and Hiland Partners' credit facility, which is partially subject to floating interest rates. As of December 31, 2008 we had approximately $0.7 million of indebtedness outstanding under our credit facility which was used to finance the costs related to the closing of our $25.0 million secured revolving credit facility. On October 7, 2008, Hiland Partners entered into a floating-to-fixed interest rate swap agreement with an investment grade counterparty whereby they pay a monthly fixed interest rate of 2.245% and receive a monthly variable rate based on the one month posted LIBOR interest rate on a notional amount of $100.0 million. This swap agreement is effective on January 2, 2009 and terminates on January 1, 2010. As of December 31, 2008, Hiland Partners had approximately $252.1 million of indebtedness outstanding under its credit facility, of which $152.1 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 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 December 31, 2008 for the periods indicated:

Description and Period
  Notional
Amount
  Interest
Rate
  Fair Value
Asset
(Liability)
 

Interest Rate Swap

                   

January 2009 - December 2009

  $ 100,000,000     2.245 % $ (1,439 )

        Credit Risk.    Counterparties pursuant to the terms of their contractual obligations expose Hiland Partners to potential losses as a result of nonperformance. SemStream, L.P., BP Energy Company, OGE Energy Resources, Inc., ONEOK Energy Services Company, LP and ConocoPhillips, Inc. were Hiland Partners' largest customers for the year ended December 31, 2008, accounting for approximately 16%, 14%, 11%, 10% and 9%, respectively, of our 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

92


Table of Contents


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. The counterparties to Hiland Partners' commodity based derivative instruments as of December 31, 2008 are BP Energy Company and Bank of Oklahoma, N.A. The counterparty to Hiland Partners' interest rate swap as of December 31, 2008 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. Affiliates of SemGroup, L.P. purchase Hiland Partners NGLs and condensate, primarily at their Bakken and Badlands plants and gathering systems. During the second quarter 2008, Hiland Partners increased their allowance for doubtful accounts and bad debt expense by $8.1 million for related product sales through June 30, 2008. On October 20, 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 NGLs and condensate at our Bakken and Badlands plants and gathering systems. As a result of the assumption, and in accordance with the order, on October 21, 2008, SemStream paid $12.1 million to Hiland Partners, representing amounts owed to Hiland Partners from SemStream for June and July 2008 product sales under the SemStream Agreement. The assumption of the SemStream Agreement restores Hiland Partners and SemStream, L.P. to their pre-bankruptcy contractual relationship.

        Hiland Partners' third quarter results of operations reflect a reversal of $7.8 million of the $8.1 million allowance for doubtful accounts and bad debt expense previously recorded on their income statement in the second quarter of 2008. After receipt of the October 21 payment, Hiland Partners' total pre-petition credit exposure to SemGroup, related to condensate sales to SemCrude, LLC, and outside of the SemStream Agreement, is approximately $0.3 million, which Hiland Partners has reserved as of December 31, 2008.

Item 8.    Financial Statements and Supplementary Data

        See our Financial Statements beginning on page F-1 for the information required by this Item.

Item 9.    Changes in and Disagreements on Accounting and Financial Disclosure

        None.

Item 9A.    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 Annual Report on Form 10-K. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2008, 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

93


Table of Contents

recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

    (b)
    Changes in internal control over financial reporting.

        During the three months ended December 31, 2008, 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.

Internal Control Over Financial Reporting

        See "Management's Report on Internal Control over Financial Reporting" on page F-2.

Item 9B.    Other Information

        There have been no events that occurred in the fourth quarter of 2008 that would need to be reported on Form 8-K that have not been previously reported.

94


Table of Contents


PART III

Item 10.    Directors and Executive Officers of the Registrant

        As is the case with many publicly traded partnerships, we do not have officers, directors or employees. Our operations and activities are managed by our general partner, Hiland Partners GP Holdings, LLC. References to our directors, officers, and employees are references to the officers, directors and employees of Hiland Partners GP Holdings, LLC. Unitholders do not directly or indirectly participate in our management or operation. Our general partner owes a fiduciary duty to our unitholders, as limited by our partnership agreement.

        Directors are elected for one-year terms. The following table shows information regarding the current directors and executive officers of Hiland Partners GP Holdings, LLC.

Name
  Age   Position with Our General Partner

Harold Hamm

    63   Chairman of the Board of Directors

Joseph L. Griffin

    48   Chief Executive Officer, President and Director

Matthew S. Harrison

    38   Chief Financial Officer, Vice President—Finance, Secretary and Director

Robert W. Shain

    58   Chief Commercial Officer, Vice President

Kent C. Christopherson

    51   Chief Operations Officer, Vice President

Michael L. Greenwood

    53   Director

Edward D. Doherty

    73   Director

Rayford T. Reid

    60   Director

Dr. Cheryl L. Evans

    46   Director

Dr. Bobby B. Lyle

    68   Director

        Harold Hamm has been Chairman of the Board of Directors of our general partner since May 2006 and serves as the chairman of the compensation committee of the board of directors of our general partner. Mr. Hamm served as Chairman of the Board of Directors of the general partner of Hiland Partners since October 2004 and serves as a chairman of the compensation committee of the board of directors of Hiland Partners' general partner. In December 1994, Mr. Hamm began serving as President and Chief Executive Officer and as a director of Continental Gas, Inc., and he subsequently served as Chief Executive Officer and a director of Continental Gas, Inc. until 2004. Since its inception in 1967 until October 2005, Mr. Hamm served as President and Chief Executive Officer and a director of Continental Resources, Inc. and currently serves as its Chief Executive Officer and Chairman of its board of directors. Mr. Hamm is also immediate past President of the National Stripper Well Association, a member of the executive board of the Oklahoma Independent Petroleum Association and a member of the executive board of the Oklahoma Energy Explorers. In addition, Mr. Hamm is a director of Complete Production Services, Inc., a publicly traded oilfield service company.

        Joseph L. Griffin was appointed Chief Executive Officer, President and a director of our general partner in June 2007. Mr. Griffin has also served as Chief Executive Officer, President and a director of the general partner of Hiland Partners since June 2007. Mr. Griffin has more than 20 years of experience in the midstream natural gas industry. Mr. Griffin has more than 20 years of experience in the midstream natural gas industry. From 2004 to June 2007, Mr. Griffin served as executive vice president over multiple facets of the business of Lumen Midstream Partnership, a subsidiary of the Southern Ute Indian Tribe, in Tulsa, OK. In 1989, Mr. Griffin co-founded Lumen Midstream, held various senior level management positions and served as a director until Lumen was sold in 2004 to the Southern Ute Indian Tribe. Mr. Griffin holds a Bachelor of Science degree in Business Administration from Oklahoma State University and is also a Certified Public Accountant.

        Matthew S. Harrison was appointed Chief Financial Officer, Vice President—Finance, Secretary and a director of our general partner in April 2008. Mr. Harrison has served as Chief Financial Officer,

95


Table of Contents


Vice President—Finance, Secretary and a director of the general partner of Hiland Partners since April 2008. Mr. Harrison joined Hiland as Vice President of Business Development in February 2008 from Wachovia Securities where he most recently was a director for its Energy & Power Mergers & Acquisitions Group. Prior to joining Wachovia in 2007, Mr. Harrison spent eight years with A.G. Edwards Capital Markets' Mergers & Acquisitions Group, most recently leading its energy mergers & acquisitions effort. Prior to joining A.G. Edwards, Mr. Harrison spent five years with Price Waterhouse as a senior accountant. He holds a B.S. degree in Accounting from the University of Tennessee, a Masters of Business Administration degree from the Kellogg Graduate School of Management at Northwestern University and is a Certified Public Accountant.

        Robert W. Shain was appointed Vice President—Chief Commercial Officer of our general partner in August 2008. Mr. Shain has served as Vice President—Chief Commercial Officer of the general partner of Hiland Partners since August 2008. Prior to August 2008, Mr. Shain served as Vice President—Operations and Engineering of the general partner of Hiland Partners. Mr. Shain has over 30 years of experience in the oil and gas industry. The majority of his experience has been in the engineering and operations of midstream natural gas gathering, compression, processing and treating, along with business development and marketing. From July 2003 until March 2006, Mr. Shain served as Vice President of Operations and Engineering for Seminole Gas Company, LLC (successor to Impact Energy, LTD) in Tulsa, Oklahoma. From May 1995 until July 2003 Mr. Shain served in a variety of commercial roles, most recently of which was Vice President of Commercial Services, for CMS Field Services, LLC (successor to Heritage Gas Services, LLC) also in Tulsa, Oklahoma, in which he was responsible for the development and management of operating and capital budgets. Mr. Shain holds a B.S degree in Mechanical Engineering from Texas A & M University.

        Kent C. Christopherson was appointed Vice President—Chief Operations Officer of our general partner in August 2008. Mr. Christopherson has served as Vice President—Chief Operations Officer of the general partner of Hiland Partners since August 2008. Mr. Christopherson joined Hiland from DCP Midstream Partners, L.P. where he served as Senior Director of Operating Excellence and Reliability Services since 2002. Prior to joining DCP, Mr. Christopherson was employed by Western Gas Resources and Flopetrol—Johnson Schlumberger. Mr. Christopherson earned a B.S. degree in Mining Engineering & Geology from the South Dakota School of Mines and Technology, a Masters of Business Administration degree from Nova Southeastern University and is a Certified Maintenance & Reliability Professional by the Society of Maintenance & Reliability Professionals and a Certified Lubrication Specialist by the Society of Tribologists & Lubrication Engineers.

        Michael L. Greenwood was elected as director of our general partner in September 2006, and serves as chairman of the audit committee of the board of directors of our general partner. Mr. Greenwood has served as a director of the general partner of Hiland Partners since February 2005, and serves as chairman of the audit committee of the board of directors of Hiland Partners' general partner. Mr. Greenwood is founder and managing director of Carnegie Capital LLC, a financial advisory services firm providing investment banking assistance to the energy industry. Mr. Greenwood previously served as Vice President—Finance and Treasurer of Energy Transfer Partners, L.P. until August 2004. Prior to its merger with Energy Transfer, Mr. Greenwood served as Vice President and Chief Financial Officer & Treasurer of Heritage Propane Partners, L.P. from 2002 to 2003. Prior to joining Heritage Propane, Mr. Greenwood was Senior Vice President, Chief Financial Officer and Treasurer for Alliance Resource Partners, L.P. from 1994 to 2002. Mr. Greenwood has over 25 years of diverse financial and management experience in the energy industry during his career with several major public energy companies including MAPCO Inc., Penn Central Corporation, and The Williams Companies. Mr. Greenwood holds a Bachelor of Science in Business Administration degree from Oklahoma State University and a Master of Business Administration degree from the University of Tulsa

        Edward D. Doherty was elected as director of our general partner in September 2006, and serves as a member of the audit committee of the board of directors of our general partner. Mr. Doherty has

96


Table of Contents


served as a director of the general partner of Hiland Partners since February 2005, and serves as a member of the audit committee of the board of directors of Hiland Partners' general partner. Mr. Doherty served as the Chairman and Chief Executive Officer of Kaneb Pipe Line Company LLC, the general partner of Kaneb Pipe Line Partners L.P. since its inception in September 1989 until July 2005. Prior to joining Kaneb, Mr. Doherty was President and Chief Executive Officer of two private companies, which provided restructuring services to troubled companies and was President and Chief Executive Officer of Commonwealth Oil Refining Company, Inc., a public refining and petrochemical company. Mr. Doherty holds a Bachelor of Arts degree from Lafayette College and a Doctor of Jurisprudence from Columbia University School of Law.

        Rayford T. Reid was elected as director of our general partner in September 2006 and serves as a member of the compensation committee of the board of directors of our general partner. Mr. Reid has served as a director of the general partner of Hiland Partners since May 2005, and serves as a member of the compensation committee of the board of directors of Hiland Partners' general partner. Mr. Reid has more than 35 years of investment banking, financial advisory and commercial banking experience, including 30 years focused on the oil and gas industry. Mr. Reid is President of Kentucky Downs Partners, LLC ("KDP"). KDP's principal business is the ownership of a controlling interest in a thoroughbred horse racing track in Franklin, Kentucky. Prior to forming KDP in 2007, Mr. Reid served as President of R. Reid Investments Inc., a private investment banking firm which exclusively serves companies engaged in the energy industry. Mr. Reid holds a Bachelor of Arts degree from Oklahoma State University and a Master of Business Administration degree from the Wharton School of the University of Pennsylvania.

        Dr. Cheryl L. Evans was elected as director of our general partner in September 2006, and serves as a member of the conflicts committee of the board of directors of our general partner. Dr. Evans is in her 13th year of service at Northwestern Oklahoma State University and has been a faculty member since 1994. In 2004, Dr. Evans was appointed Dean of the institution's Enid campus. From 2002 to 2004, Evans chaired the communication department on the Alva campus, and from 1996 to 2002 she chaired the mass communication department. She earned her doctorate at Oklahoma State University in higher education, her Master of Arts in communication degree at Wichita State University and her Bachelor of Arts degree in mass communications/public relations at Northwestern Oklahoma State University. Dr. Evans is a 2004 graduate of Harvard's Management Development Program for academic leaders. In addition to her administrative duties for Northwestern Oklahoma State University, she presently teaches in the Northwestern Oklahoma State University graduate program. Dr. Evans is an active community volunteer and currently serves on numerous civic and charitable boards.

        Dr. Bobby B. Lyle was elected as director of our general partner in September 2006, and he serves as chairman of the conflicts committee and as a member of the compensation committee of the board of directors of our general partner. Dr. Lyle has over 29 years of experience in oil and gas exploration and development. From 1977 to 1981, he was President of Cornell Oil Company. In 1981, he formed Lyco Energy Corporation, and served as its Chairman, President and CEO until the company was sold to Enerplus Resources (USA) Corporation in August 2005. After assisting with the transition of ownership to Enerplus, he formed Lyco Holdings Incorporated in March 2006 and currently serves as its Chairman, President and CEO. Lyco Holdings Incorporated is a private company engaged in private equity investments and ranching. From 1968 - 1976 Dr. Lyle served as Dean ad interim of the Southern Methodist University School of Business and subsequently as Trustee of the University for 18 years. Prior to joining SMU, he worked as a professional engineer with General Dynamics and Geotech, a Teledyne Industries company. He has helped organize and served as director of a number of private companies covering a broad range of industries, including banking, energy software, real estate, retail, and home and industrial insulation. Dr. Lyle has been an active member of numerous industry organizations, including the Independent Petroleum Association of America, where he served as regional Vice President and a member of the Executive Committee, Texas Independent Producers and

97


Table of Contents


Royalty Owners Association and the Texas Alliance for Energy. Dr. Lyle holds a Bachelor of Science degree in Mechanical Engineering from Louisiana Tech University; a Masters in Engineering Administration degree from Southern Methodist University; and a Doctorate in Education, with emphasis on Strategic Planning and Leadership in Higher Education, from the University of Massachusetts.

Board Committees

        The board appoints committees to help carry out its duties. In particular, board committees work on key issues in greater detail than would be possible at full board meetings. Only non-employee directors may serve on the audit, compensation and conflicts committees. Each committee has a written charter. The charters are posted on our Web site and are available free of charge on request to the Secretary at the address given under "Contact Us". The table below shows the current membership of each board committee.

        The table below shows the current membership of each board committee.

Name
  Audit   Conflicts   Compensation

Mr. Hamm

          C

Mr. Greenwood

  C        

Mr. Doherty

  *        

Mr. Reid

          *

Dr. Evans

      *    

Dr. Lyle

      C   *

        C = Chairman

        * = Member

Audit Committee

        The audit committee of our general partner's board of directors is currently comprised of two non-employee members of the board. The committee is appointed by the board of directors to assist the board in fulfilling its oversight responsibilities. Its primary responsibility is to monitor the quality, integrity and reliability of the financial reporting process, review the adequacy of our systems of internal controls for financial reporting, legal compliance and ethics established by management and the board and review procedures for internal auditing. Responsibilities also include the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm engaged to prepare the audit report or perform other audit, review or attest services. The committee reviews proposed audit plans for the year and the coordination of these plans with the independent registered public accounting firm. The committee also reviews the financial statements and other information contained in quarterly and annual Securities and Exchange Commission's (the "SEC") reports with management and the independent registered public accounting firm to determine that the independent registered public accounting firm is satisfied with the disclosure and content of the financial statements. The committee shall have authority to obtain advice and assistance from internal or external legal, financial and other advisors.

        The board has determined that all members of the committee are independent within the meaning of both the SEC rules and NASDAQ listing standards. The board has further determined that all members are financially literate within the meaning of the NASDAQ standards and that Mr. Greenwood is an "audit committee financial expert" as defined in the SEC rules. In making these determinations, the board reviewed information from each of these non-employee directors concerning all of their respective relationships with us and analyzed the materiality of those relationships.

98


Table of Contents

        On January 27, 2009, we received a Deficiency Letter from NASDAQ indicating that we no longer comply with the audit committee composition requirements as set forth in Marketplace Rule 4350(d), which requires Hiland Partners GP Holdings, LLC, our general partner, to have an audit committee of at least three independent members. Following the resignation of Shelby E. Odell from the board of directors of our general partner on January 21, 2009, the audit committee of our general partner consists of only two independent members. Mr. Odell resigned from the board of directors of our general partner so that he would be eligible to serve as a member of the conflicts committee of the board of directors of Hiland Partners' general partner. In accordance with NASDAQ Marketplace Rule 4350(d)(4), NASDAQ has provided us a cure period to regain compliance until the earlier of our next annual unitholders' meeting or January 21, 2010, or, if the next annual unitholders' meeting is held before July 20, 2009, then we must evidence compliance no later than July 20, 2009.

Conflicts Committee

        The conflicts committee of our general partner's board of directors is comprised of two non-employee members of the board. The committee is appointed by the board of directors of our general partner to carry out the duties delegated by the board that relate to specific matters that the board believes may involve conflicts of interests between us and our affiliates, on the one hand and us and any other group member, any partner or any assignee, on the other hand. The committee is composed solely of two independent directors who are not unitholders, officers or employees of us or our general partner, officers, directors or employees of any affiliate or holders of any ownership interest in us other than our common units and who also meet the independence and experience standards established by NASDAQ and any applicable laws and regulations.

        The committee shall advise the board on actions to be taken by us or matters related to us upon request of the board. The committee determines if the resolution of such conflicts of interest is fair and reasonable to us. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our general partner of any duties it may owe to us or to our unitholders. In connection with the committee's resolution of any conflict of interest, the committee is authorized to consider the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest, any customary or accepted industry practices and any customary or historical dealings with a particular person. The committee is also authorized to consider any applicable generally accepted accounting practices or principles and such additional factors as the committee determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.

        With respect to any contribution of assets to the Partnership in exchange for Partnership securities, the committee, in determining whether the appropriate number of Partnership securities are being issued, may take into account, among other things, the fair market value of the assets, the liquidated and contingent liabilities assumed, the tax basis in the assets, the extent to which tax-only allocations to the transferor will protect the existing partners of the Partnership against a low tax basis, and such other factors as the committee deems relevant under the circumstances. The committee shall have authority to obtain advice and assistance from internal or external legal, financial and other advisors.

Compensation Committee

        The compensation committee of our general partner's board of directors is comprised of three non-employee members of the board. The committee has overall responsibility for approving and evaluating the general partner's director and officer compensation plans, policies and programs.

        The committee oversees the compensation for our senior executives, including their salary, bonus, and incentive and equity awards. The committee is responsible primarily for reviewing, approving and reporting to the board on major compensation and benefits plans, policies and programs of the

99


Table of Contents


company; reviewing and evaluating the performance and approving the compensation of senior executive officers; and overseeing management development programs, performance assessment of senior executives and succession planning. Other specific duties and responsibilities include: annually reviewing and approving corporate goals and objectives relevant to the chief executive officer ("CEO") base compensation, incentive-compensation plans and equity-based plans; evaluating the CEO's performance in light of those goals and objectives, and recommending to the board either as a committee or together with the other independent directors, the CEO's compensation levels based on this evaluation; and producing the required annual report on executive compensation.

        The compensation committee has the sole authority to retain, amend the engagement with, and terminate any compensation consultant to be used to assist it in the evaluation of director, CEO or officer compensation. The committee has sole authority to approve the consultant's fees and other retention terms and shall have authority to cause us to pay the fees and expenses of such consultants. The committee shall also have authority to obtain advice and assistance from internal or external legal, accounting or other advisors, to approve the fees and expenses of such outside advisors, and to cause us to pay the fees and expenses of such outside advisors.

Report of the Audit Committee for the Year Ended December 31, 2008

        Our management is responsible for our internal controls and our financial reporting process. Grant Thornton LLP, our Independent Registered Public Accounting Firm for the year ended December 31, 2008, is responsible for performing an integrated audit of the effectiveness of internal control over financial reporting and an independent audit of our consolidated financial statements in accordance with standards of the Public Company Accounting Oversight Board and to issue a report thereon. Our audit committee monitors and oversees these processes. Our audit committee, made up of members of our general partner's Board of Directors, selects our independent registered public accounting firm.

        Our audit committee has reviewed and discussed our audited consolidated financial statements with our management and the independent registered public accounting firm. Our audit committee has discussed with Grant Thornton LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, "Communications with Audit Committees," including that firm's independence.

Members of the Audit Committee:
Michael L. Greenwood
Edward D. Doherty

Code of Ethics

        Our general partner has adopted a Financial Officers Code of Ethics applicable to the Chief Executive Officer and Chief Financial Officer, Controller and all other senior financial and accounting officers (the "Senior Financial Officers") with regard to Partnership-related activities. This Code of Ethics contains the policies that relate to the legal and ethical standards of conduct that the Senior Financial Officers of our general partner are expected to comply with while carrying out their duties and responsibilities on behalf of the Company. The Code of Ethics also incorporates expectations of Senior Financial Officers that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. The Code of Ethics is publicly available on our website under the "Governance" Section (at www.hilandpartners.com) and is also available free of charge on request to the Secretary at the address given under "Contact Us."

Section 16(a) Beneficial Ownership Reporting Compliance

        Based upon our records, except as set forth below, we believe that during 2008 all reporting persons complied with the Section 16(a) filing requirements applicable to them.

100


Table of Contents

Item 11.    Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

        The executive officers of our general partner also serve as executive officers of the general partner of Hiland Partners. Our general partner allocates a portion of the cost of our executive officers' cash compensation to us based on the percentage of their time allocated to our business and allocates the remainder of their compensation to Hiland Partners. Due to the overlapping of our executive officers and compensation committee members our executive compensation plan was established to be substantially the same as that of the general partner of Hiland Partners. The information set forth in this section is generally disclosures of the general partner of Hiland Partners.

Compensation Objectives and Philosophy

        The executive compensation program of our general partner is designed to enable our general partner to execute our business objectives by attracting, retaining, and motivating the highest quality of executive talent and by rewarding superior performance. Performance management focuses on building competencies required for our business and achieving the highest level of contribution from each employee. Our compensation and benefits policies and practices are designed to motivate and reward officers and employees to achieve goals and objectives that are expected to lead to long-term enhancement of unitholder value, provide total compensation that is competitive within the market place and align individual compensation with competency and contribution so that performance, tied to measurable objectives and results, will be rewarded appropriately. We identify our marketplace as the following publicly traded midstream and pipeline master limited partnerships within our peer group: Atlas Pipeline Partners, L.P., Copano Energy, L.L.C., Crosstex Energy, L.P., DCP Midstream Partners, LP, Eagle Rock Energy Partners, L.P., MarkWest Energy Partners, L.P., Quicksilver Gas Services, LP, Regency Energy Partners LP, Targa Resources Partners LP, Western Gas Partners, LP and Williams Partners, L.P. The compensation committee, established in May 2005, believes this definition of our marketplace along with third-party industry compensation surveys provides a good benchmark for analyzing the competitiveness of our executive compensation program.

        In addition to base salary, executive officers are compensated on a performance-oriented basis through the use of incentive compensation linking both annual and longer-term results. The annual incentive cash bonus permits team and individual performance to be recognized and is based, in part, on an evaluation of the contribution made by the officer to our performance. Equity compensation awards are included in the compensation program to reward executive officers for long-term strategic actions that increase our value and thus unitholder value and to link a significant amount of an executive's current and potential future net worth to our success. This use of equity compensation directly relates a portion of each executive officer's long-term remuneration to our unit price, and therefore aligns the executive's compensation with the interests of our unitholders. The discretionary granting of unit options, as well as the use of restricted and phantom units, is used to (1) recognize promotions of executives into positions of significant responsibilities; (2) recognize significant accomplishments of executives, particularly as the accomplishments impact growth, profits and/or competitive positioning; and (3) attract and retain high level executive talent.

Oversight of Executive Compensation Program

        The compensation committee of our general partner administers our executive officer compensation program. The compensation committee is primarily responsible for reviewing, approving and reporting to the board on major compensation and benefits plans, policies and programs of the Partnership; reviewing and evaluating the performance and approving the compensation of senior executive officers; and overseeing management development programs, performance assessment of senior executives and succession planning. Other specific duties and responsibilities include: annually

101


Table of Contents


reviewing and approving corporate goals and objectives relevant to the chief executive officer ("CEO") base compensation, incentive-compensation plans and equity-based plans; evaluating the CEO's performance in light of those goals and objectives, and recommending to the board, either as a committee or together with the other independent directors, the CEO's compensation levels based on this evaluation; and producing the required annual report on executive compensation. The compensation committee annually evaluates the effectiveness of the executive compensation program in meeting its objectives.

        The CEO serves in an advisory role to the compensation committee with respect to executive compensation for the executive officers other than himself. In addition, the compensation committee may request the CEO to provide management feedback and recommendations on changes in the design of the executive compensation programs and executive compensation policies. The CEO does not participate in determining or recommending the form or amount of compensation for himself or for the outside directors. The CEO's recommendations are given significant weight by the compensation committee, but the compensation committee remains responsible for all final decisions regarding compensation levels for the executive officers, the executive compensation policies and executive compensation programs. The CEO is not present during the compensation committee's discussions regarding his own compensation. In the CEO's advisory role to the compensation committee, he does not have the authority to call a meeting of the compensation committee. Only the chairperson of the committee, two or more members of the committee or the Chairman of the Board of Directors may call a committee meeting pursuant to the compensation committee's charter. However, the CEO is involved in the agenda setting for compensation committee meetings and generally attends such meetings (other than the portions of the meetings during which his compensation and performance are discussed).

        The CEO submits annual base compensation, incentive-compensation and equity-based compensation recommendations of senior executive officers below the CEO to the compensation committee based on each executive's contribution to our performance and each executive's responsibilities and management abilities. The compensation committee evaluates compensation with reference to our financial and operating performance, distribution performance, relative unitholder total return for the prior fiscal year, competitive compensation data of executives in our marketplace and each executive's individual performance evaluation, length of service with the company and previous work experience. The compensation committee annually advises the board on the compensation to be paid to the executive officers and approves the compensation for executive officers.

        The compensation committee has the sole authority to retain, amend the engagement with, and terminate any compensation consultant to be used to assist it in the evaluation of director, CEO and executive officer compensation, as appropriate. The committee has sole authority to approve the consultant's fees and other retention terms and shall have authority to cause us to pay the fees and expenses of such consultants. The committee shall also have authority to obtain advice and assistance from internal or external legal, accounting or other advisors, to approve the fees and expenses of such outside advisors, and to cause us to pay the fees and expenses of such outside advisors.

Elements of Compensation

        Our general partner's executive compensation program currently consists of the following elements:

    base salaries;

    annual incentive cash bonuses; and

    long-term incentive compensation.

102


Table of Contents

Base Salaries

        Base salary for each executive officer is determined annually by an assessment of our overall financial and operating performance, each executive officer's performance evaluation, changes in executive officer responsibilities and relevant marketplace data. While many aspects of performance can be measured in financial terms, the compensation committee also evaluates senior management in areas of performance that are more subjective. These areas include the development and execution of strategic plans, the exercise of leadership in the development of management and other employees, innovation and improvement in our business activities, as well as the executive's involvement in industry groups and in the communities that we serve. Our general partner seeks to compensate executives for their performance throughout the year with annual base salaries that are fair and competitive within our marketplace. Our general partner believes that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions and with similar responsibilities in our marketplace and adjusted for financial and operating performance and each executive's performance evaluation, length of service with the company and previous work experience. Individual salaries are generally established in alignment with these considerations to ensure the attraction, development and retention of superior talent, as well as in relation to individual executive performance. Base salaries are reviewed annually to ensure continuing consistency with market levels and our level of financial performance during the previous fiscal year. Future adjustments to base salaries and salary ranges will reflect average movement in the competitive market as well as individual performance. The compensation committee approves annual base salary adjustments, if any, for the CEO, and for each officer below the CEO level based on the CEO's recommendations.

        Base salaries in 2008 for the past Chief Financial Officer ("past CFO") and the Vice President of Operations and Engineering were set based on (1) the latest available financial results of operations; (2) each executive's performance evaluation; and (3) the comparable base salaries of executives within our marketplace and our most recent third-party industry compensation survey. The past CFO's annual base salary was $250,000 for the period of November 2007 through April 2008, upon his resignation. The past CFO's annual base salary, established by the compensation committee in November 2007, approximated the median annual base salaries within our marketplace for 2006 and our most recent third-party industry compensation survey for his position. The Vice President of Operations and Engineering's annual base salary was $190,000 for the period of March 2007 to March 2008. On August 7, 2008, the Vice President of Operations and Engineering was appointed to Vice President—Chief Commercial Officer. The Vice President—Chief Commercial Officer's current annual base salary, established at the compensation committee's meeting in March 2008, is $210,000 and approximated 83% of the median annual base salary within our most recent third-party industry compensation survey for his position. The CEO's annual base salary for the period from November 2007 to present was $290,000 and approximated 83% of the median annual base salary within our marketplace for 2006 for his position. The CEO's current annual base salary was set based on his initial performance evaluation. The Vice President of Business Development's annual base salary, established upon his February 4, 2008 hire date, was $200,000 for the period February 2008 to present. The Vice President of Business Development's annual base salary was primarily determined by the comparable base salaries of similar executives within our marketplace and previous work experience. On April 16, 2008, the Vice President of Business Development was appointed to Chief Financial Officer upon resignation of our past CFO. The Vice President and Chief Operations Officer's annual base salary, established upon his August 4, 2008 hire date, was $205,000 for the period August 2008 to present. The Vice President and Chief Operations Officer's annual base salary was primarily determined by the comparable base salaries of similar executives within our marketplace and previous work experience. Base salaries for our four named executive officers are to be addressed at the compensation committee meeting to be held in March 2009.

103


Table of Contents

Annual Incentive Cash Bonus

        As one way of accomplishing its compensation objectives, the compensation committee of the general partner rewards executive officers for their contribution to our financial and operational success through the award of discretionary annual incentive cash bonuses intended to encourage the attainment of strategic, operational and financial goals and for individual performance measures. The compensation committee approves the annual incentive award, if any, for the CEO, and for each officer below the CEO level based on the CEO's recommendations.

        While target bonuses are initially set at 50% of base salaries, the compensation committee has broad discretion to retain, reduce or increase the award amounts when making its final bonus determinations in March. The awards are also contingent on the executive officer's continued employment with the Partnership at the time of the award in March. Further, bonuses (similar to other elements of the compensation provided to the executive officers) are not based on a prescribed formula or pre-determined goals or performance targets but rather have been determined on a subjective basis and generally have been based on a subjective evaluation of individual, company and industry performance. The compensation committee believes that this approach to assessing performance results in more comprehensive evaluation and fairer compensation decisions.

        From an enterprise-wide perspective and industry perspective, the compensation committee recognized the following factors during its March 2008 meeting (without assigning any particular weighting to any factor):

    financial performance for the prior fiscal year, including EBITDA and distributions, in comparison to guidance provided to the marketplace during the prior fiscal year;

    operating performance for the prior fiscal year, including inlet natural gas volumes, natural gas sales volumes and NGL sales volumes, in comparison to the prior fiscal year's actual results;

    distribution performance for the prior fiscal year compared to the peer group;

    unitholder total return for the prior fiscal year compared to the peer group; and

    competitive compensation data of executive officers in the peer group.

        These factors were selected as the most appropriate measures upon which to base the annual incentive cash bonus decisions because they will most directly result in long-term value to our unitholders.

        The personal performance criteria considered by the compensation committee during its March 2008 meeting related to factors unique to the individual executive officer, including, for example:

    each executive officer's performance evaluation based upon responsibilities unique to each executive officer and leadership/management competencies applicable to all executive officers;

    length of service with the Partnership; and

    the scope, level of expertise and experience required for the executive officer's position.

        These factors were selected as the most appropriate measures upon which to base the annual incentive cash bonus decisions because they help to align individual compensation with competency and contribution.

        EBITDA, distributions per unit, inlet natural gas volumes, natural gas sales, and NGL sales increased approximately 23%, 21%, 40% and 10%, respectively in 2007 as compared to 2006. Our unitholder total return for 2007 was approximately -2% compared to the median for our marketplace of approximately 15%. Discretionary cash bonuses were awarded in March 2008 to our CEO, past CFO, and the Vice President of Operations and Engineering (now our Vice President—Chief

104


Table of Contents


Commercial Officer) in the amounts of $150,000, $125,000 and $95,000, respectively, representing approximately 58%, 102% and 72% of the median incentive cash bonuses for such positions within our marketplace for 2006. The past Vice President of Business Development received a discretionary cash bonus of $42,000 in March 2008. Discretionary cash bonuses for our four named executive officers are to be addressed at the compensation committee meeting to be held in March 2009.

Long-Term Incentive Compensation

        Our general partner, Hiland Partners GP, LLC adopted the Hiland Partners, LP Long-Term Incentive Plan for its employees and directors of our general partner and employees of its affiliates. The compensation plan is administered by the compensation committee of our general partner's board of directors and will continue in effect until the earliest of (i) the date determined by the board of directors of our 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.

        The long-term incentive compensation plan is designed to reward executives and other key employees for the attainment of financial goals and other performance objectives approved annually by the compensation committee and to encourage responsible and profitable growth while taking into account non-routine factors that may be integral to our success. Long-term incentive compensation in the form of equity grants of our common units, such as incentive unit option grants and grants of restricted units and phantom units, are used to incent performance that leads to enhanced unitholder value, encourage retention and closely align the executive's interests with unitholders' long-term interests. Equity grants provide a vital link between the long-term results achieved for our unitholders and the rewards provided to executives and other key employees. The equity grants we adopted upon the formation of our long-term incentive compensation plan were designed to be comparable with long-term incentive plans of other midstream and pipeline master limited partnerships.

        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 unit options are exercisable within the option's contractual life of ten years after the grant date. Restricted units vest in quarterly increments over a four-year period from the date of issuance. Phantom units vest in increments and over a period of time as determined by the compensation committee. Unvested unit options, restricted units and phantom units generally become fully vested upon the disability, death or termination other than for cause of the holder or a change of control of our general partner. If the holder ceases to be an officer or employee of our general partner for any other reason, his or her unvested unit options, restricted units or phantom units are forfeited. Unit option awards are less attractive than restricted units or phantom units to the recipient because the fair value of the unit option at the grant date is generally less than the fair value of the restricted unit or phantom unit at the grant date, which bears no cost to the recipient.

        The size of the unit option, restricted unit and phantom unit grants is determined relative to our size and our market, employee qualifications and position, as well as master limited partnership peer group data. All grants to executive officers require board approval. Neither our general partner nor the compensation committee has a program, plan or practice to time options or grants to its executives in coordination with the release of material nonpublic information. Any unit options, restricted units or phantom units grants made to non-executive employees typically will occur concurrently with grants to named executive officers. All unit options are granted at the fair market value of our units on the date of grant. The compensation committee determines the aggregate amounts, terms and timing of unit option, restricted unit and phantom unit awards. The number of units covered by each award reflects the executive's level of responsibility along with past and anticipated future contributions to us.

        Initially, based on comparable options granted to executives of similar midstream and pipeline master limited partnerships at their respective initial public offerings, the past CEO recommended to

105


Table of Contents


the chairman of the board the number of options to be granted to executive officers and key employees at our initial public offering in February 2005. In November 2005, the compensation committee approved 15,000 and 13,000 unit options to be granted to our Vice President of Operations and Engineering (now our Vice President—Chief Commercial Officer) and our past Vice President of Business Development, respectively, on their hire dates in early 2006. In November 2006, the compensation committee approved 3,000 restricted units to be granted to the Vice President of Operations and Engineering (now our Vice President—Chief Commercial Officer) and 2,000 restricted units to be granted to key employees.

        In June 2007, the compensation committee approved 10,000 phantom units to be granted to our current CEO. In November 2007, the compensation committee approved 5,000 phantom units to be granted to the past CFO, 5,000 phantom units to be granted to the Vice President of Operations and Engineering (now our Vice President—Chief Commercial Officer) and 21,825 phantom units to be granted to key employees. In December 2007, our CEO awarded 1,000 phantom units to a key employee. The compensation committee approved 7,500 phantom units to be granted to our Vice President of Business Development (now our Chief Financial Officer) in February 2008 and approved 7,500 phantom units to be granted to our Vice President—Chief Operations Officer in July 2008. Additionally in 2008, our CEO approved a total of 7,300 phantom units to be granted to four key employees.

Employment, Change in Control and Salary Continuation Agreements

        No employment agreements exist with any employee of our general partner.

        Change in control agreements exist only with respect to all unexercised unit options, restricted units and phantom units held by employees and directors of our general partner which in the event of any of the following change of control events become fully vested and exercisable. A change of control generally shall be deemed to occur upon the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer or disposition of all or substantially all of the assets of the Partnership to any party not affiliated with the Partnership and/or any of our affiliates; (ii) the consolidation, reorganization, merger or other transaction pursuant to which more than 50% of the combined voting power of the outstanding equity interests in the Partnership cease to be directly or indirectly owned by our current majority owner group or their affiliate; or (iii) our general partner ceases to be the general partner of the Partnership. If a qualifying change in control event had occurred as of December 31, 2008, the estimated value of payments and benefits that would inure to the benefit of the executive officers and directors as a group would have been approximately $0.2 million.

        Our general partner currently has no salary continuation agreement, or agreement having similar effect, in place with any employee of our general partner other than the change in control agreements described above.

106


Table of Contents

Summary Compensation Table

        The following table sets forth information regarding compensation earned by our CEO, our CFO and three other most highly compensated executive officers employed in 2008, 2007 and 2006:


SUMMARY COMPENSATION TABLE

 
   
  Annual
Compensation
  Long-Term Compensation    
 
Name and Principal Position
  Year   Salary
($)(1)
  Bonus
($)(2)
  Unit
Awards
($)(3)
  Option Awards
($)(4)
  All Other
Compensation
($)
  Total
($)
 

Joseph Griffin—

    2008   $ 290,000   $ 150,000   $ 208,690   $   $ 12,000   $ 660,690  
 

President and Chief Executive Officer

    2007   $ 144,731   $ 40,000   $ 154,426   $   $ 31,667   $ 370,824  

Matthew Harrison—
Vice President—Finance, Secretary and Chief Financial Officer

   
2008
 
$

173,077
 
$

5,000
 
$

182,976
 
$

 
$

88,847
 
$

449,900
 

Robert Shain—

   
2008
 
$

205,385
 
$

95,000
 
$

150,629
 
$

 
$

11,019
 
$

462,033
 
 

Vice President Chief Commercial

    2007   $ 184,961   $ 88,000   $ 95,217   $ 20,559   $ 9,154   $ 397,891  
 

Officer

    2006   $ 126,151   $ 40,000   $ 4,071   $ 27,858   $ 69,950   $ 268,030  

Kent Christopherson—
Vice President Chief Operating Officer

   
2008
 
$

75,692
 
$

40,000
 
$

61,425
 
$

 
$

76,246
 
$

253,363
 

Ken Maples—

   
2008
 
$

95,531
 
$

125,000
 
$

 
$

 
$

4,995
 
$

225,526
 
 

Past Vice President—Finance,

    2007   $ 229,808   $ 113,750   $ 17,306   $ 11,838   $ 11,250   $ 383,952  
 

Secretary and Chief Financial Officer

    2006   $ 195,385   $ 55,000   $   $ 32,834   $ 9,701   $ 292,920  

Ron Hill—

   
2007
 
$

166,211
 
$

51,000
 
$

2,855
 
$

17,792
 
$

8,250
 
$

246,108
 
 

Past Vice President of Business Development

    2006   $ 147,692   $   $   $ 37,624   $ 3,173   $ 188,489  

Randy Moeder—

   
2007
 
$

106,338
 
$

130,000
 
$

 
$

29,342
 
$

5,871
 
$

271,551
 
 

Past President and Chief Executive Officer

    2006   $ 234,693   $ 85,000   $   $ 52,534   $ 11,000   $ 383,227  

Clint Duty—
Past Vice President of Operations and Engineering

   
2006
 
$

46,577
 
$

 
$

 
$

12,325
 
$

2,598
 
$

61,500
 

(1)
Salary includes base salary and payment in respect of accrued vacation, holidays and sick days. Mr. Christopherson was appointed Vice President—Chief Operations Officer on August 7, 2008. Mr. Harrison was appointed Vice President of Business Development on February 4, 2008 and was later appointed Vice President—Finance, Secretary, Chief Financial Officer and director on April 5, 2008. Mr. Griffin was appointed President, Chief Executive Officer and director on June 19, 2007. Mr. Hill was reassigned in January 2008. Mr. Moeder left our employment in April 2007 and Mr. Duty left our employment in April 2006. Salaries for our CEO and CFO are allocated between us and Hiland Holdings for each of the years presented. Generally, salaries allocated to us represent 5% of total salaries and the remaining 95% is allocated to Hiland Partners.

(2)
Bonuses paid in 2008 to Messrs. Griffin, Maples and Shain were awarded in March 2008. Bonuses paid in 2007 were awarded in March 2007. Bonuses paid in 2006 to Mr. Moeder and Mr. Maples were awarded in March 2006. Mr. Christopherson and Mr. Harrison were awarded sign on bonuses of $40,000 and $5,000, respectively, on their respective dates of hire in 2008 and Mr. Griffin and Mr. Shain were each awarded a sign on bonus of $40,000 on their respective dates of hire in 2007and 2006.

(3)
Mr. Christopherson was awarded 7,500 phantom units on August 7, 2008, which vest equally on the anniversary of the grant date over a four year period. Mr. Harrison was awarded 7,500 phantom units on February 4, 2008, which vest equally on the anniversary of the grant date over a three year period. Mr. Griffin was awarded 10,000 phantom units on June 19, 2007, which vest equally on the anniversary of the grant date over a four year period. Periodic

107


Table of Contents

    distributions on Messrs. Christopherson, Harrison and Griffin's phantom units are held in trust by our general partner until the units vest. On November 6, 2007 Messrs. Maples, Shain and Hill were awarded phantom units that also vest equally on the anniversary of the grant date over a four year period, but do not accumulate distributions. Mr. Maples forfeited 5,000 phantom units when he resigned on April 4, 2008. Mr. Shain was awarded 3,000 restricted units on November 10, 2006. Mr. Shain's restricted units vest in quarterly increments on the anniversary of the grant date over a period of four years and periodic distributions are held in trust by our general partner until the units vest.

(4)
Mr. Moeder, Mr. Maples and Mr. Duty were granted 32,000, 20,000 and 20,000 unit options, respectively, at an exercise price of $22.50 per unit on February 10, 2005. The grant date fair value of $5.11 per unit was determined in accordance with FAS 123R using the American Binomial option-pricing model. Mr. Duty forfeited his remaining unvested 13,333 unit options when he left our employment. Mr. Hill was hired on January 5, 2006 and was awarded 13,000 unit options at a per unit exercise price of $38.72 with a grant date fair value of $4.82 per unit. Mr. Shain was hired on March 20, 2006 and was awarded 15,000 unit options at a per unit exercise price of $40.70 with a grant date fair value of $3.91 per unit. The exercise price of the options granted equaled the market price of the units on the grant date. The fair value of each option granted, as determined in accordance with SFAS 123R, was estimated on the date of grant using the American Binomial option-pricing model. All unit options vest over a three-year period beginning on their respective date of grant.

(5)
All other compensation includes our discretionary contributions to our defined contribution retirement plan under which we make contributions to the plan based on a percentage of eligible employees' compensation. Additionally, in 2008, we paid relocation expenses of $75,965 for Mr. Christopherson and $85,113 for Mr. Harrison. In 2007, we paid relocation expenses of $31,667 for Mr. Griffin and in 2006, $68,104 for Mr. Shain.

Hiland Partners-Grants of Plan Based Awards

        The following table provides information regarding Hiland Partners unit options and restricted and phantom units awarded in 2008:


GRANTS OF PLAN BASED AWARDS

Name
  Grant
Date
  All Other
Unit Awards:
Number of
Units (#)
  Base Price
of Unit
Awards
($/Unit)
  All Other
Option Awards:
Number of
Securities
Underlying
Options (#)
  Exercise or
Base Price
of Option
Awards
($/Unit)
  Grant Date
Fair Value
of Option
Awards
($/Unit)
 

Mr. Harrison

    2/4/2008     7,500   $ 49.45              

Mr. Christopherson

    8/7/2008     7,500   $ 43.87              

        Mr. Christopherson was awarded 7,500 phantom units on August 7, 2008, which vest in equal annual installments on the anniversary of the grant date over a four year period. Mr. Harrison was awarded 7,500 phantom units on February 4, 2008, which vest in equal annual installments on the anniversary of the grant date over a three year period. Quarterly distributions on the phantom units awarded to Mr. Harrison and Mr. Christopherson are held in trust by our general partner until the units vest, at which time they are distributed to the award recipient.

108


Table of Contents

Hiland Partners-Outstanding Equity Awards at Fiscal Year-End Table

        The following table provides information regarding Hiland Partners outstanding awards that have been granted to our executive officers as of December 31, 2008, but the ultimate outcomes of which have not been realized:


OUTSTANDING EQUITY AWARDS AS FISCAL YEAR-END

Name
  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price ($)
  Option
Expiration
Date
  Number of
Restricted
and Phantom
Units That
Have Not
Vested (#)
  Market
Value of
Units and
Options That
Have Not
Vested ($)
 

Mr. Griffin(1)

                    7,500   $ 38,475  

Mr. Harrison(2)

                    7,500   $ 38,475  

Mr. Shain(3)

    10,000     5,000   $ 40.70     03/20/16     5,250   $ 26,933  

Mr. Christopherson(4)

                    7,500   $ 38,475  

(1)
Mr. Griffin's phantom units vest in equal annual increments over three years from his first anniversary date of June 19, 2008.

(2)
Mr. Harrison's phantom units vest in equal annual increments over three years from his February 4, 2008 grant date.

(3)
Mr. Shain's 15,000 unit options awarded on March 20, 2006 vest in one-third annual increments. Mr. Shain's 3,750 phantom units vest in equal annual increments over three years from his first anniversary date of November 6, 2008 and 1,500 of his 3,000 restricted units granted on November 10, 2006 vest in equal annual increments over a two year remaining period beginning on November 10, 2008.

(4)
Mr. Christopherson's phantom units vest in equal annual increments over four years from his August 7, 2008 grant date.

109


Table of Contents

Hiland Partners-Option Exercises and Units Vested Table

        The table presented below provides information of the values realized upon the exercise of options and the vesting of restricted and phantom units of our executive officers during 2008 based on the difference between the market price of the underlying units at exercise and the exercise or base price of the unit options:

OPTION EXERCISES AND UNITS VESTED

 
  Option Awards   Unit Awards  
Name
  Number
of Units
Acquired on
Exercise (#)
  Value
Realized
Upon
Exercise ($)
  Number
of Units
Acquired on
Vesting (#)
  Value
Realized
Upon
Vesting ($)
 

Mr. Griffin

            1,807   $ 132,775  

Mr. Shain

            1,582   $ 50,883  

        On June 19, 2008, 2,500 of the 10,000 phantom units awarded to Mr. Griffin on June 19, 2007 vested. Upon vesting, Mr. Griffin elected to redeem 693 units in cash. On November 6, 2008, 1,250 of the 5,000 phantom units awarded to Mr. Shain on November 6, 2007 vested. Upon vesting, Mr. Shain elected to redeem 418 units in cash. On November 10, 2008, 750 of the restricted units awarded to Mr. Shain on November 10, 2006 vested.

Hiland Partners GP Holdings, LLC-Director Compensation

        Mr. Harold Hamm, the chairman of the board of directors of our general partner and a non-employee director, received no form of director compensation. Mr. Griffin, our CEO and Mr. Harrison our CFO, who are employees of our general partner, are also non-compensated members of the board of directors of our general partner. Mr. Maples, our past CFO was also a non-compensated member of the board of directors of our general partner. The table below shows the total compensation paid in 2008 to each of our current non-employee directors:

DIRECTOR COMPENSATION

Name
  Annual
Base Fee(1)
($)
  Committee
Fees ($)
  Restricted
Unit
Awards(2)
($)
  Restricted
Unit
Distributions(3)
($)
  Total
($)