Annual Reports

 
Quarterly Reports

 
8-K

 
Other

Hiland Holdings GP, LP 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2007

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM          TO         

 

Commission file number:  000-51120

 

Hiland Holdings GP, LP

(Exact name of Registrant as specified in its charter)

 

DELAWARE

 

76-0828238

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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

 

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

 

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 o

Non-accelerated filer x

 

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

 

The number of the registrant’s outstanding equity units at November 2, 2007 was 21,603,000 common units.

 

 



 

HILANDHOLDINGS GP, LP

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited, except December 31, 2006 Balance Sheet)

 

Consolidated Balance Sheets

 

Consolidated Statements of Operations

 

Consolidated Statements of Cash Flows

 

Consolidated Statement of Changes in Owners’ Equity and Comprehensive Income

 

Condensed Notes to Consolidated Financial Statements

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3. Quantitative and Qualitative Disclosures About Market Risks

 

Item 4. Controls and Procedures

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3. Defaults Upon Senior Securities

 

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

 

Item 5. Other Information

 

Item 6. Exhibits

 

SIGNATURES

 

Certification of CEO under Section 302

 

Certification of CFO under Section 302

 

Certification of CEO under Section 906

 

Certification of CFO under Section 906

 

 

2



 

HILAND HOLDINGS GP, LP

 

Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(unaudited)

 

 

 

 

 

(in thousands, except unit amounts)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8,928

 

$

10,569

 

Accounts receivable:

 

 

 

 

 

Trade

 

23,213

 

23,702

 

Affiliates

 

905

 

1,284

 

 

 

24,118

 

24,986

 

Fair value of derivative assets

 

4,144

 

4,707

 

Other current assets

 

861

 

945

 

Total current assets

 

38,051

 

41,207

 

 

 

 

 

 

 

Property and equipment, net

 

313,093

 

257,003

 

Intangibles, net

 

48,477

 

53,094

 

Fair value of derivative assets

 

1,177

 

1,955

 

Other assets, net

 

2,233

 

1,939

 

Total assets

 

$

403,031

 

$

355,198

 

 

 

 

 

 

 

LIABILITIES AND OWNERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

22,115

 

$

19,161

 

Accounts payable—affiliates

 

5,087

 

4,412

 

Fair value of derivative liabilities

 

3,660

 

1,902

 

Accrued liabilities and other

 

2,259

 

1,459

 

Total current liabilities

 

33,121

 

26,934

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Long-term debt

 

206,608

 

147,318

 

Fair value of derivative liabilities

 

347

 

291

 

Asset retirement obligation

 

2,573

 

2,196

 

Minority interests

 

131,036

 

137,302

 

 

 

 

 

 

 

Owners’ equity

 

 

 

 

 

Common unitholders (21,603,000 units issued and outstanding)

 

28,933

 

38,590

 

Accumulated other comprehensive income

 

413

 

2,567

 

Total owners’ equity

 

29,346

 

41,157

 

 

 

 

 

 

 

Total liabilities and owners’ equity

 

$

403,031

 

$

355,198

 

 

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

 

3



 

HILAND HOLDINGS GP, LP

 

Consolidated Statements of Operations

 

For the Three and Nine Months Ended (Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

Predecessor

 

 

 

Predecessor

 

 

 

(in thousands, except per unit amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Midstream operations

 

 

 

 

 

 

 

 

 

Third parties

 

$

65,777

 

$

55,137

 

$

189,301

 

$

156,606

 

Affiliates

 

654

 

925

 

2,390

 

3,194

 

Compression services, affiliate

 

1,205

 

1,205

 

3,615

 

3,615

 

Total revenues

 

67,636

 

57,267

 

195,306

 

163,415

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

31,267

 

26,480

 

98,056

 

78,389

 

Midstream purchases -affiliate (exclusive of items shown separately below)

 

14,522

 

13,129

 

39,264

 

39,576

 

Operations and maintenance

 

6,157

 

4,569

 

16,108

 

11,140

 

Depreciation, amortization and accretion

 

7,870

 

6,462

 

22,222

 

16,256

 

General and administrative expenses

 

2,054

 

1,397

 

6,383

 

3,695

 

Total operating costs and expenses

 

61,870

 

52,037

 

182,033

 

149,056

 

Operating income

 

5,766

 

5,230

 

13,273

 

14,359

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and other income

 

105

 

68

 

325

 

221

 

Amortization of deferred loan costs

 

(136

)

(170

)

(357

)

(402

)

Interest expense

 

(3,133

)

(2,387

)

(7,538

)

(4,649

)

Other income (expense), net

 

(3,164

)

(2,489

)

(7,570

)

(4,830

)

 

 

 

 

 

 

 

 

 

 

Income before minority interest in income of Hiland Partners, LP

 

2,602

 

2,741

 

5,703

 

9,529

 

Minority interest in income of Hiland Partners, LP

 

(867

)

(2,765

)

(2,080

)

(8,991

)

Net income (loss)

 

1,735

 

(24

)

3,623

 

538

 

 

 

 

 

 

 

 

 

 

 

Less income (loss) attributable to predecessor

 

 

(155

)

 

407

 

Limited partners’ interest in net income

 

$

1,735

 

$

131

 

$

3,623

 

$

131

 

 

 

 

 

 

 

 

 

 

 

Net income per limited partners’ unit - basic

 

$

0.08

 

$

0.01

 

$

0.17

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

Net income per limited partners’ unit - diluted

 

$

0.08

 

$

0.01

 

$

0.17

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partners’ units outstanding - basic

 

21,600

 

21,600

 

21,600

 

21,600

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partners’ units outstanding - diluted

 

21,609

 

21,600

 

21,610

 

21,600

 

 

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

 

4



 

HILAND HOLDINGS GP, LP

 

Consolidated Statements of Cash Flows

 

For the Nine Months Ended (Unaudited)

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

 

 

 

 

Predecessor

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,623

 

$

538

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

22,141

 

16,209

 

Accretion of asset retirement obligation

 

81

 

47

 

Amortization of deferred loan cost

 

357

 

402

 

Gain on derivative transactions

 

(510

)

(133

)

Unit based compensation

 

1,033

 

364

 

Minority interest in income of Hiland Partners, LP

 

2,080

 

8,991

 

(Increase) decrease in current assets:

 

 

 

 

 

Accounts receivable—trade

 

489

 

4,057

 

Accounts receivable—affiliates

 

379

 

864

 

Other current assets

 

84

 

(94

)

Increase (decrease) in current liabilities:

 

 

 

 

 

Accounts payable—trade

 

(2,543

)

692

 

Accounts payable—affiliates

 

675

 

(1,658

)

Accrued liabilities and other

 

286

 

231

 

Increase in other assets

 

 

(144

)

Net cash provided by operating activities

 

28,175

 

30,366

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(61,940

)

(47,989

)

Payments for businesses acquired, less cash received

 

 

(96,400

)

Proceeds from disposals of property and equipment

 

 

111

 

Net cash used in investing activities

 

(61,940

)

(144,278

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from public offering-net of underwriters discount

 

 

139,617

 

Proceeds from long-term borrowings

 

54,100

 

135,535

 

Payments on long-term borrowings

 

 

(35,000

)

Payments on capital lease obligations

 

(178

)

 

Debt issuance costs

 

(494

)

(1,280

)

Offering costs

 

(157

)

(1,772

)

Cash distribution to controlling members for net assets of Hiland Partners GP, LLC

 

 

(101,812

)

Capital Contributions

 

 

501

 

Proceeds from Hiland Partners, LP unit options exercise

 

1,024

 

1,094

 

Minority interest cash distribution to unitholders of Hiland Partners, LP

 

(8,447

)

(16,509

)

Cash distribution to members of Hiland Partners GP, LLC

 

 

(1,750

)

Cash distribution to unitholders

 

(13,724

)

 

Net cash provided by financing activities

 

32,124

 

118,624

 

 

 

 

 

 

 

Increase (decrease) for the period

 

(1,641

)

4,712

 

Beginning of period

 

10,569

 

6,318

 

End of period

 

$

8,928

 

$

11,030

 

 

 

 

 

 

 

Supplementary information

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

7,489

 

$

4,649

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Property and equipment financed under capital lease obligations

 

$

5,881

 

 

 

 

 

 

 

 

 

May 10, 2006 purchase of limited partner common units of Hiland Partners, LP in excess of proportionate historical financial cost basis of Hiland Partners, LP allocated to property and equipment and intangible assets as follows:

 

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

 

4,488

 

Customer contracts

 

 

 

6,980

 

Excess of cost over proportionate equity interest

 

 

 

$

11,468

 

 

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

 

5



 

Hiland Holdings GP, LP

 

Consolidated Statement of Changes in Owners’ Equity and Comprehensive Income

 

For the Nine Months Ended September 30, 2007 (Unaudited)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Other

 

 

 

Total

 

 

 

Common

 

Comprehensive

 

 

 

Comprehensive

 

 

 

Units

 

Income

 

Total

 

Income

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2007

 

$

38,590

 

$

2,567

 

$

41,157

 

 

 

 

 

 

 

 

 

 

 

 

 

Periodic cash distributions

 

(13,724

)

 

(13,724

)

 

 

 

 

 

 

 

 

 

 

 

 

Unit based compensation

 

444

 

 

444

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income reclassified to income on closed derivative transactions

 

 

(1,346

)

(1,346

)

$

(1,346

)

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

 

(808

)

(808

)

(808

)

 

 

 

 

 

 

 

 

 

 

Net income

 

3,623

 

 

3,623

 

3,623

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

$

1,469

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2007

 

$

28,933

 

$

413

 

$

29,346

 

 

 

 

The accompanying notes are an integral part of this consolidated financial statement.

 

6



 

HILAND HOLDINGS GP, LP

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

 

(in thousands, except unit information or unless otherwise noted)

 

Note 1: Organization, Basis of Presentation and Principles of Consolidation

 

Unless the context requires otherwise, references to “we,” “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.

 

Hiland Holdings GP, LP, a Delaware limited partnership, was formed in May 2006 to own Hiland Partners GP, LLC, the general partner of Hiland Partners, LP and certain other common and subordinated units in Hiland Partners. Hiland Partners GP, LLC was formed in October 2004 to hold the 2% general partner ownership interest in Hiland Partners and serve as its general partner. Hiland Partners GP, LLC manages the operations of Hiland Partners. In connection with the closing of our initial public offering, all of the membership interests in Hiland Partners GP, LLC were contributed to us. Hiland Partners GP, LLC constitutes our predecessor.

 

Our general partner, Hiland Partners GP Holdings, LLC manages our operations and activities, including, among other things, paying our expenses and establishing the quarterly cash distribution levels for our common units and reserves that our general partner determines, in good faith, are necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters.

 

Hiland Partners, a Delaware limited partnership, was formed in October 2004 to acquire and operate certain midstream natural gas plants, gathering systems and compression and water injection assets located in the states of Oklahoma, North Dakota, Wyoming, Texas and Mississippi that were previously owned by Continental Gas, Inc. and Hiland Partners, LLC. Hiland Partners commenced operations on February 15, 2005, and concurrently with the completion of its initial public offering, Continental Gas, Inc. contributed a substantial portion of its net assets to Hiland Partners. The transfer of ownership of net assets from Continental Gas, Inc. to Hiland Partners represented a reorganization of entities under common control and was recorded at historical cost. Continental Gas, Inc. was formed in 1990 as a wholly owned subsidiary of Continental Resources, Inc.

 

Continental Gas, Inc. operated in one segment, midstream, which involved the gathering, compressing, dehydrating, treating, and processing of natural gas and fractionating natural gas liquids, or NGLs. Continental Gas, Inc. historically has owned all of Hiland Partners’ natural gas gathering, processing, treating and fractionation assets other than the Worland and Bakken gathering systems. Hiland Partners, LLC historically owned the Worland gathering system and compression services assets, which Hiland Partners acquired on February 15, 2005, and the Bakken gathering system. Since its initial public offering, Hiland Partners has operated in midstream and compression services segments. On September 26, 2005, Hiland Partners acquired Hiland Partners, LLC, which at such time owned the Bakken gathering system, for $92.7 million, $35.0 million of which was used to retire outstanding Hiland Partners, LLC indebtedness. On May 1, 2006, Hiland Partners acquired the Kinta Area gathering assets from Enogex Gas Gathering, L.L.C., consisting of certain eastern Oklahoma gas gathering assets, for $96.4 million.  Hiland Partners financed this acquisition with $61.2 million of borrowings from its credit facility and $35.0 million of proceeds from the issuance to Hiland Partners GP, LLC, its general partner, of 761,714 common units and 15,545 general partner equivalent units, both at $45.03 per unit.

 

The unaudited financial statements for the three and nine months ended September 30, 2007 and 2006 included herein have been prepared in accordance with the instructions for interim reporting as prescribed by the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which are in the opinion of our management, necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2007.  The accompanying consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2006.

 

Principles of Consolidation

 

Because we own the general partner of Hiland Partners, the consolidated financial statements include our accounts, the accounts of Hiland Partners GP, LLC and the accounts of Hiland Partners and its subsidiaries. All significant intercompany transactions and balances have been eliminated. The consolidated financial statements include the assets of Hiland Partners GP, LLC that were contributed to us concurrently with the completion of our initial public offering on September 25, 2006. Hiland Partners GP, LLC commenced operations on February 15, 2005, therefore amounts presented in these consolidated financial statements and accompanying notes for the period January 1, 2006 to September 25, 2006 relate to the consolidated accounts of Hiland Partners GP, LLC, Hiland Partners and its subsidiaries.

 

7



 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

Our financial instruments, which require fair value disclosure, consist primarily of cash and cash equivalents, accounts receivable, financial derivatives, accounts payable and long-term debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values, due to the short maturity of these instruments. Derivative instruments are reported in the accompanying consolidated financial statements at fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Fair value of our derivative instruments is determined based on management estimates through utilization of market data including forecasted forward natural gas and natural gas liquid (NGL) prices as a function of forward New York Mercantile Exchange (“NYMEX”) natural gas and light crude prices. The fair value of long-term debt approximates its carrying value due to the variable interest rate feature of such debt.

 

Commodity Risk Management

 

We engage in price risk management activities in order to minimize the risk from market fluctuation in the prices of natural gas and NGLs. To qualify as a hedge, the price movements in the commodity derivatives must be highly correlated with the underlying hedged commodity. Gains and losses related to commodity derivatives which qualify as hedges are recognized in income when the underlying hedged physical transaction closes and are included in the consolidated statements of operations as revenues from midstream operations. Gains and losses related to commodity derivatives that are not designated as hedges or do not qualify as hedges are recognized in income immediately, and are included in midstream revenues in the consolidated statement of operations.

 

SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. However, if a derivative does qualify for hedge accounting, depending on the nature of the hedge, changes in fair value can be offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until such time as the hedged item is recognized in earnings. To qualify for cash flow hedge accounting, the cash flows from the hedging instrument must be highly effective in offsetting changes in cash flows due to changes in the underlying item being hedged. In addition, all hedging relationships must be designated, documented, and reassessed periodically. SFAS No. 133 also provides that normal purchases and normal sales contracts are not subject to the statement. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold by the reporting entity over a reasonable period in the normal course of business. Our fixed price physical forward natural gas purchase and sales contracts in which we have contracted to purchase or sell natural gas quantities at fixed prices are designated as normal purchases and sales. Substantially all forward contracts fall within a one to 24 month term.

 

Currently, our derivative financial instruments that qualify for hedge accounting are designated as cash flow hedges. The cash flow hedge instruments hedge the exposure of variability in expected future cash flows that is attributable to a particular risk. The effective portion of the gain or loss on these derivative instruments is recorded in accumulated other comprehensive income in owners’ equity and reclassified into earnings in the same period in which the hedged transaction closes. The asset or liability related to the derivative instruments is recorded on the balance sheet as fair value of derivative assets or liabilities. Any ineffective portion of the gain or loss is recognized in earnings immediately.

 

Comprehensive Income

 

Comprehensive income includes net income and other comprehensive income, which includes, but is not limited to, changes in the fair value of derivative financial instruments. Pursuant to SFAS No. 133, for derivatives qualifying as hedges, the effective portion of changes in fair value are recognized in owners’ equity as accumulated other comprehensive income and reclassified to earnings when the underlying hedged physical transaction closes, to the extent of our interest in Hiland Partners. Our comprehensive income for the three and nine months ended September 30, 2007 and 2006 is presented in the table below:

 

8



 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

1,735

 

$

(24

)

$

3,623

 

$

538

 

Closed derivative transactions reclassified to income

 

(511

)

(1,275

)

(1,346

)

(1,424

)

Change in fair value of derivatives

 

(15

)

3,933

 

(808

)

4,116

 

Comprehensive Income

 

$

1,209

 

$

2,634

 

$

1,469

 

$

3,230

 

 

Net Income per Limited Partners’ Unit

 

Net income per limited partners’ unit is computed based on the weighted-average number of common units outstanding during the period. The computation of diluted net income per limited partner unit further assumes the dilutive effect of restricted units awarded. Net income per limited partners’ unit is computed by dividing net income applicable to limited partners by both the basic and diluted weighted-average number of limited partnership units outstanding.

 

Intangible Assets

 

Intangible assets consist of the acquired value of customer relationships, existing contracts to sell natural gas and other NGLs and compression contracts, which do not have significant residual value. The customer relationships and the contracts are being amortized over their estimated lives of ten years. We review intangible assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. If such a review should indicate that the carrying amount of intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value based on the discounted probable cash flows of the intangible assets. No impairments of intangible assets were recorded during the nine months ended September 30, 2007 or 2006. On May 1, 2006, Hiland Partners acquired the Kinta Area gathering assets and recorded identifiable customer relationships of $10,492. On May 10, 2006, Hiland Partners GP, LLC purchased 761,714 common units and 15,545 general partner units of Hiland Partners for $35.0 million. Hiland Partners GP, LLC recorded an additional $6,979 in contracts to sell natural gas for a portion of the amount that the purchase price exceeded the proportionate interest in the underlying equity of Hiland Partners.

 

Intangible assets consisted of the following for the periods indicated:

 

 

 

As of

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

Gas sales contracts

 

$

32,564

 

$

32,564

 

Compression contracts

 

18,515

 

18,515

 

Customer relationships

 

10,492

 

10,492

 

 

 

61,571

 

61,571

 

Less accumulated amortization

 

13,094

 

8,477

 

Intangible assets, net

 

$

48,477

 

$

53,094

 

 

During the three months ended September 30, 2007 and 2006, we recorded amortization expense of $1,539 and $1,451, respectively, and during the nine months ended September 30, 2007 and 2006, we recorded amortization expense of $4,617 and $3,928, respectively. Estimated aggregate amortization expense for the remainder of 2007 is $1,540 and $6,157 for each of the four succeeding fiscal years from 2008 through 2011 and a total of $22,309 for all years thereafter.

 

Accounting for Asset Retirement Obligations

 

In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” we have recorded the fair value of liabilities for asset retirement obligations in the periods in which they are incurred and corresponding increases in the carrying amounts of the related long-lived assets. The asset retirement costs are subsequently allocated to expense using a systematic and rational method and the liabilities are accreted to measure the change in liability due to the passage of time. The provisions of this standard primarily apply to dismantlement and site restoration of certain of our plants and pipelines. During the nine months ended September 30, 2007, we incurred asset retirement obligations on new and existing plant and compressor locations under lease. We have also evaluated existing asset retirement obligations and have made revisions in the carrying values as of September 30, 2007.

 

9



 

The following table summarizes our activity related to asset retirement obligations for the indicated period:

 

Asset retirement obligation, January 1, 2007

 

$

2,196

 

Add: additions on leased locations

 

588

 

Revisions of prior estimates

 

(292

)

Add: accretion expense

 

81

 

Asset retirement obligation, September 30, 2007

 

$

2,573

 

 

Minority Interests

 

The minority interest on our consolidated balance sheets as of September 30, 2007 and December 31, 2006 reflects the outside ownership interest of Hiland Partners. Minority interest in income is calculated by multiplying the minority interest owners’ proportionate ownership of limited partner units in Hiland Partners by the limited partners’ allocation of Hiland Partners’ net income. Hiland Partners’ net income is allocated to its limited partners and its general partner based on the proportionate share of the contractually-determined cash distributions for the period, with adjustments made for incentive distributions specifically allocated to its general partner. All amounts we have received from Hiland Partners’ issuance and sale of limited partner units have been recorded as increases to the minority interest balance on the consolidated balance sheet.

 

Contributions to Subsidiary

 

The Partnership directly and indirectly owns all of the equity interests in Hiland Partners GP, LLC, the general partner of Hiland Partners. Hiland Partners GP, LLC may elect to make contributions to Hiland Partners each time Hiland Partners issues common units in order to maintain its 2% general partner ownership in Hiland Partners. Hiland Partners GP, LLC contributed to Hiland Partners $6 and $10 for the three months ended September 30, 2007 and 2006, respectively and $27 and $30 for the nine months ended September 30, 2007 and 2006, respectively to maintain its 2% general partner ownership.

 

Share-Based Compensation

 

Hiland Holdings GP, LP Long Term Incentive Plan

 

Hiland Holdings GP, the general partner of Hiland Holdings, adopted the Hiland Holdings GP, LP Long-Term Incentive Plan for its employees and directors of its general partner and employees of its affiliates. The long-term incentive plan consists of three components: unit options, restricted units and phantom units. The long-term incentive plan limits the number of units that be delivered pursuant to awards to 2,160,000 units. The plan is administered by our general partner’s board of directors or its compensation committee. The plan will expire upon the first to occur of its termination by the board of directors or the compensation committee, the date when no units remain available under the plan for awards or the tenth anniversary of the date the plan is approved by our unitholders. Awards then outstanding will continue pursuant to the terms of their grants.

 

Our general partner’s board of directors or the compensation committee may terminate or amend the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Our board of directors and the compensation committee of the board also have the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted subject to unitholder approval as may be required by applicable law or stock exchange rules. However, no change in any outstanding grant may be made that would materially reduce the benefits of the participant without the consent of the participant. Under the unit option grant agreement, granted options of common units will vest and become exercisable in one-third increments on the anniversary of the grant date over three years. Vested options are exercisable within the option’s contractual life of ten years after the grant date.  Our restricted and phantom units vest in one-quarter increments on the anniversary of the grant date over four years.

 

In October 1995, the Financial Accounting Standards Board (“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 effective January 1, 2006 and have used the permitted modified prospective method beginning as of the same date.

 

No options were issued or are outstanding for the three or nine months ended September 30, 2007.

 

No phantom units were issued or are outstanding for the three or nine months ended September 30, 2007.

 

10



 

The following table summarizes our information about vesting restricted units for the nine months ended September 30, 2007:

 

Restricted Units

 

Units

 

Weighted Average
Fair Value at
Grant Date ($ )

 

Non-vested at January 1, 2007

 

12,000

 

$

20.00

 

Granted

 

6,000

 

$

28.25

 

Vested

 

(3,000

)

$

20.00

 

Forfeited

 

 

$

 

Non-vested at September 30, 2007

 

15,000

 

$

23.30

 

 

A restricted unit is a common unit that is subject to forfeiture. Upon vesting, the grantee receives a common unit that is not subject to forfeiture. The restricted units vest over a four-year period from the date of issuance. Periodic distributions on the restricted units are held in trust by our general partner until the units vest. As provided for in our long-term incentive plan, each non-employee board member of Hiland Partners GP Holdings, LLC on each anniversary date of their initial reward is entitled to receive an additional 1,000 restricted common units. We granted 1,000 restricted units to each of our six independent directors during the three months ended September 30, 2007. As of September 30, 2007, 3,000 of the restricted units issued in 2006 vested and were converted to common units. Compensation expense related to the restricted units issued is to be recognized over their respective four-year vesting period on the graded vesting attribution method. We recorded compensation expense related to the restricted units issued of $33 and $1 for the three months ended September 30, 2007 and 2006, respectively and $96 and $1 for the nine months ended September 30, 2007 and 2006, respectively and we will record additional compensation expense of $298 over the next four years.

 

On February 15, 2005, Hiland Partners GP, LLC issued member based compensation awards with a fair value of $118 to two of its members, Randy Moeder, our former Chief Executive Officer, President and director of our general partner and Ken Maples, our Chief Financial Officer, Vice President-Finance, Secretary and director of our general partner as compensation for services to be rendered exclusively for Hiland Partners GP, LLC’s benefit. In connection with the closing of our initial public offering, these Class B member interests were exchanged for a calculated number of our Class B common units, which had equal fair value. The Class B common units vest over a three-year period from the date of issuance. The Class B common units have substantially the same rights as the common units and, upon vesting, become convertible at the election of the holder into common units. Member based compensation expense related to the Class B common units was $1 and $8 for three months ended September 30, 2007 and 2006, respectively and $348 and $25 for the nine months ended September 30, 2007 and 2006, respectively.

 

On March 14, 2007, Mr. Moeder announced his intention to resign. In connection with Mr. Moeder’s resignation, we and our general partner entered into a retention agreement with Mr. Moeder that allowed Mr. Moeder to continue his employment for a mutually agreeable period of time, but no longer than nine months. Under the agreement, as long as Mr. Moeder continued his employment, a pro rata portion of his 72,249 unvested Class B common units in us would vest. The Class B common units that did not vest would be forfeited to Hiland Holdings and distributed pro rata to Harold Hamm, The Harold Hamm DST Trust, The Harold Hamm HJ Trust and Ken Maples. Accordingly, as required by SFAS 123R “Share-Based Payment,” as amended, on March 14, 2007 we recalculated the fair value of the remaining unvested Class B common units as a modification of the units awarded to Mr. Moeder on February 15, 2005. We used the American Binomial option pricing model and recalculated the fair value of the unvested Class B common units at $30.32 per unit.

 

On April 16, 2007, Mr. Moeder resigned and 11,877 of his 72,249 unvested Class B common units vested and converted to common units. As a result of the recalculated fair value of $30.32 per unit, we recorded an additional $343 of expense for the period from March 15, 2007 through April 16, 2007. On the same day, Mr. Moeder forfeited the remaining 60,372 unvested Class B common units.

 

Hiland Partners, LP Long Term Incentive Plan

 

Hiland Partners GP, LLC, the general partner of Hiland Partners, adopted the Hiland Partners, LP Long-Term Incentive Plan for its employees and directors of its general partner and employees of its affiliates. The long-term incentive plan currently permits an aggregate of 680,000 of Hiland Partners’ common units to be issued with respect to unit options, restricted units, and phantom units granted under the plan. No more than 225,000 of the 680,000 common units may be issued with respect to vested restricted or phantom units. The plan is administered by the compensation committee of Hiland Partners GP, LLC’s board of directors. The plan will continue in effect until the earliest of (i) the date determined by the board of directors of the general partner; (ii) the date that common units are no longer available for payment of awards under the plan; or (iii) the tenth anniversary of the plan.

 

Hiland Partners GP, LLC’s board of directors or compensation committee may, in their discretion, terminate, suspend or discontinue the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Hiland Partners GP, LLC’s board of directors or its compensation committee also has the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval if required by the exchange upon which the common units are listed at that time. No change in any outstanding grant may be made,

 

11



 

however, that would materially impair the rights of the participant without the consent of the participant. Under the unit option grant agreement, granted options of common units will vest and become exercisable in one-third increments on the anniversary of the grant date over three years. Vested options are exercisable within the option’s contractual life of ten years after the grant date. Restricted and phantom units vest in one-quarter increments on the anniversary of the grant date over four years.

 

On June 19, 2007, Hiland Partners granted 10,000 phantom units under its long-term incentive Plan to the new Chief Executive Officer, Joseph L. Griffin. A phantom unit is a common unit that is subject to forfeiture and is not considered issued until it vests. Upon vesting, Mr. Griffin will receive a common unit that is not subject to forfeiture, cash in lieu of the delivery of such unit equal to the fair market value of the unit on the vesting date, or a combination thereof, at the discretion of Hiland Partners’ general partner’s board of directors. Similar to restricted units, the phantom units vest over a four-year period from the date of issuance and distributions on the phantom units will be held in trust by Hiland Partners general partner until the units vest. During the three and nine months ended September 30, 2007, Hiland Partners incurred compensation expense of $73 and $81 related to the phantom units and will recognize additional expense of $464 over the next four years.  Hiland Partners had not granted any phantom units prior to June 19, 2007.

 

Hiland Partners did not grant any unit options during the nine months ended September 30, 2007. The fair values of each option granted during the nine months ended September 30, 2006 were estimated on the date of grant using the American Binomial option pricing model that used expected volatility ranges from 16.1% to 20.2%, a weighted-average volatility of 18.0%, an expected dividend yield of 5.2% and a risk-free interest rate of 4.5%. Expected and weighted-average volatility was based on peer group volatility averages as determined on the option grant dates. Expected lives of 6.0 years are calculated by the simplified method as prescribed under SEC Staff Accounting Bulletin 107 and represented the period of time that unit options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. The exercise price of the options granted equaled the market price of the units on the grant date.

 

The following table summarizes information about outstanding options with respect to Hiland Partners’ common units for the nine months ended September 30, 2007:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Contractual

 

Value

 

Options

 

Units

 

Price ($ )

 

Term

 

($ )

 

Outstanding at January 1, 2007

 

128,468

 

$

28.24

 

 

 

 

 

Granted

 

 

$

 

 

 

 

 

Exercised

 

(42,362

)

$

24.16

 

 

 

$

1,394

 

Forfeited or expired

 

(10,767

)

$

22.50

 

 

 

 

 

Outstanding at September 30, 2007

 

75,339

 

$

31.08

 

7.9

 

$

1,382

 

Exercisable at September 30, 2007

 

20,005

 

$

33,31

 

8.0

 

$

322

 

 

In connection with Mr. Moeder’s resignation (see also Hiland Holdings GP, LP Long Term Incentive Plan above), his unit option agreement was modified on March 14, 2007, so that  Mr. Moeder’s 10,666 unvested Hiland Partners’ options to purchase Hiland Partners common units would vest pro rata as long as Mr. Moeder continued his employment. Accordingly, as required by SFAS 123R “Share-Based Payment,” as amended, on March 14, 2007, Hiland Partners recalculated the fair value of the remaining unvested options to purchase Hiland partners common units as a modification of the options awarded to Mr. Moeder on February 10, 2005. The recalculated fair value of the options of $33.65 per unit, was determined by using the American Binomial option pricing model.

 

On April 16, 2007, Mr. Moeder resigned and 1,899 of his 10,666 unvested Hiland Partners’ options to purchase Hiland Partners’ common units vested. As a result of the recalculated fair value of $33.65 per unit, Hiland Partners recorded an additional $24 of expense for the period from March 15, 2007 through April 16, 2007. On the same day, Mr. Moeder forfeited his remaining 8,767 unvested Hiland Partners unit options. The forfeiture of Mr. Moeder’s 8,767 unvested unit options reduced compensation expense for the period from April 1, 2007 through April 16, 2007 by $16. On April 19, 2007, Mr. Moeder exercised his 1,899 vested options to purchase Hiland Partners common units.

 

As a result of adopting SFAS 123R on the modified prospective basis beginning on January 1, 2006, during the three months ended September 30, 2007 and 2006, Hiland Partners expensed $34 and $89, respectively and during the nine months ended September 30, 2007 and 2006, Hiland Partners expensed $131 and $268, respectively all related to unit options that were awarded in both 2006 and 2005.

 

12



 

The following table summarizes information about Hiland Partners restricted common units for the nine months ended September 30, 2007:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Fair Value

 

 

 

 

 

At Grant

 

Restricted Units

 

Units

 

Date ($ )

 

 

 

 

 

 

 

Non-vested at January 1, 2007

 

19,000

 

$

44.12

 

 

 

 

 

 

 

Granted

 

6,000

 

$

51.95

 

 

 

 

 

 

 

Vested

 

(4,000

)

$

42.05

 

 

 

 

 

 

 

Forfeited or expired

 

 

$

 

 

 

 

 

 

 

Non-vested at September 30, 2007

 

21,000

 

$

46.75

 

 

As provided for in Hiland Partners long-term incentive plan, each non-employee board member of its general partner on each anniversary date of the initial award is entitled to receive an additional 1,000 Hiland Partners restricted common units. Accordingly, Hiland Partners issued a total of 6,000 restricted units to its six non-employee board members of its general partner during the three months ended September 30, 2007. Also during the three months ended September 30, 2007, a total of 4,000 restricted units issued to non-employee board members of its general partner in 2005 and 2006 vested and were converted into Hiland Partners common units. Hiland Partners issued no other restricted units during the three and nine months ended September 30, 2007. A restricted unit is a common unit that is subject to forfeiture. The restricted units vest over a four-year period from the date of issuance. Periodic distributions on the restricted units are held in trust by its general partner until the units vest. Upon vesting, the grantee receives a common unit that is not subject to forfeiture.

 

Total compensation expense related to phantom and restricted units was $210 and $31 for the three months ended September 30, 2007 and 2006, respectively and $458 and $70 for the nine months ended September 30, 2007 and 2006, respectively. As of September 30, 2007, there was $1,168 of total unrecognized compensation cost related to Hiland Partners’ unvested phantom and restricted units granted. This cost is to be recognized over a weighted average period of two years.

 

Recent Accounting Pronouncements

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 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 No. 159 is effective for fiscal years beginning after November 15, 2007. We believe we will not choose to measure any eligible financial assets and liabilities at fair value.

 

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.”  SFAS No. 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 No. 157 applies to derivatives and other financial instruments, which Statement 133,  Accounting for Derivative Instruments and Hedging Activities , as amended, requires be measured at fair value at initial recognition and for all subsequent periods. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We will apply the provisions of SFAS No. 157 prospectively in our first interim period in the fiscal year beginning on January 1, 2008, and we do not expect a change in our methodologies of fair value measurements.

 

Note 2: Initial Public Offering

 

On May 26, 2006, a Registration Statement on Form S-1 was filed with the SEC relating to a proposed initial public offering of limited partnership interests in Hiland Holdings. On September 13, 2006, the SEC declared our registration statement on Form S-1 effective. On September 19, 2006, we priced 7,000,000 common units in connection with our initial public offering at a price of $18.50 per unit. On September 20, 2006, our common units began trading on the NASDAQ National Market under the symbol “HPGP.” On September 25, 2006, we closed our initial public offering of 8,050,000 common units, which included 1,050,000 common units issued pursuant to an over-allotment option that was exercised by the underwriters. Total proceeds from the sale of the units were $139.6 million, net of $9.3 million of underwriting commissions.

 

In connection with the closing of our initial public offering, all of the membership interests in Hiland Partners GP, LLC (which

 

13



 

owns the 2% general partner interest and all of the incentive distribution rights in Hiland Partners), 1,301,471 Hiland Partners common units (including 761,714 Hiland Partners common units previously owned by Hiland Partners GP, LLC) and 4,080,000 subordinated units of Hiland Partners were contributed to us, resulting in our ownership of a 57.0% limited partner interest in Hiland Partners. Contributions of Hiland Partners GP, LLC’s assets are reflected at their historical carrying basis because the contributions are from a related party. As consideration for this contribution, substantially all of the net proceeds from our initial public offering, after the retirement of $36.0 million of outstanding debt and accrued interest of Hiland Partners GP, LLC, were distributed to Harold Hamm, The Harold Hamm DST Trust, The Harold Hamm HJ Trust, Randy Moeder and Ken Maples (the “Contributing Parties”) and 13,550,000 common units and Class B common units in us were issued to the Contributing Parties.

 

Note 3: Acquisition

 

Kinta Area Gathering System.   On May 1, 2006, Hiland Partners acquired certain gas gathering assets from Enogex Gas Gathering, L.L.C. for $96.4 million cash, including certain closing costs, financed with borrowings under its credit facility and an additional note payable to a bank. We refer to these assets as the Kinta Area gathering assets. A determination was made by our management of the fair value of these assets and liabilities primarily using current replacement cost for the acquired gas gathering assets and related equipment less estimated accumulated depreciation on such replacement costs and estimated discounted cash flows arising from future renegotiated customer contracts. The acquired assets, which are located in the eastern Oklahoma Arkoma Basin, have approximately 672 wellhead receipt points and include five separate low pressure natural gas gathering systems consisting of 569 miles of natural gas gathering pipelines and 23 compressor units capable of nearly 40,000 horsepower of compression. The natural gas gathering systems operate under contracts with producers that provide for services under fixed-fee arrangements. Hiland Partners operates the Kinta Area gathering assets substantially differently than they 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 a business, and no pro forma financial information is required to be presented.

 

The following table presents the resulting allocation to the net assets acquired and liabilities assumed on May 1, 2006:

 

Pipelines, including right of ways

 

$

56,175

 

Compressors

 

22,221

 

Other equipment and buildings

 

8,618

 

Customer relationships

 

10,492

 

 

 

97,506

 

Asset retirement obligation assumed

 

1,106

 

Net assets acquired

 

$

96,400

 

 

The Kinta Area gathering assets and operations are included in the consolidated financial statements from May 1, 2006 forward.

 

Note 4: Property and Equipment

 

 

 

As of

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

Land

 

$

295

 

$

255

 

Construction in progress

 

26,660

 

48,610

 

Midstream pipeline, plants and compressors

 

324,874

 

230,645

 

Compression and water injection equipment

 

19,267

 

19,270

 

Other

 

3,769

 

2,471

 

 

 

374,865

 

301,251

 

Less: accumulated depreciation and amortization

 

61,772

 

44,248

 

 

 

$

313,093

 

$

257,003

 

 

On May 10, 2006, Hiland Partners GP, LLC purchased 761,714 common units and 15,545 general partner units of Hiland Partners for $35.0 million. Hiland Partners GP, LLC recorded additional pipeline and processing plant cost of $4,488 for a portion of the amount that the unit purchase price exceeded the proportionate interest in the underlying equity of Hiland Partners.

 

During the three and nine months ended September 30, 2007, we capitalized interest of $828 and $2,281, respectively. During the three and nine months ended September 30, 2006, we capitalized interest of $479 and $811, respectively.

 

Note 5: Derivatives

 

Hiland Partners has entered into certain financial swap instruments that are classified as cash flow hedges in accordance with SFAS No. 133, as amended, and relate to forecasted sales in 2007, 2008 and 2009. Hiland Partners entered into these instruments to hedge forecasted natural gas and natural gas liquids (NGLs) sales or purchases against the variability in expected future cash flows

 

14



 

attributable to changes in commodity prices. Under several of these contractual swap agreements with Hiland Partners’ counterparties, Hiland Partners receives a fixed price and pays a floating price based on certain indices for the relevant contract period as the underlying natural gas or NGL is sold. In other agreements, Hiland Partners pays a fixed price and receives a floating price based on certain indices for the relevant contract period as the underlying natural gas is purchased. Hiland Partners has also entered into one financial swap instrument that currently does not qualify for hedge accounting as discussed below.

 

Hiland Partners formally documents all relationships between hedging instruments and the items being hedged, including its risk management objective and strategy for undertaking the hedging transactions. This includes matching the natural gas and NGL futures, the “sold fixed for floating price” or “buy fixed for floating price” contracts, to the forecasted transactions. Hiland Partners assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in the fair value of hedged items. Highly effective is deemed to be a correlation range from 80% to 125% of the change in cash flows of the derivative in offsetting the cash flows of the hedged transaction. If it is determined that a derivative is not highly effective as a hedge or it has ceased to be a highly effective hedge, due to the loss of correlation between changes in natural gas or NGL reference prices under a hedging instrument and actual natural gas or NGL prices, Hiland Partners will discontinue hedge accounting for the derivative and subsequent changes in fair value for the derivative will be recognized immediately into earnings. Hiland Partners assesses effectiveness using regression analysis and ineffectiveness using the dollar offset method.

 

Derivatives are recorded on our consolidated balance sheet as assets or liabilities at fair value. For derivatives qualifying as hedges, the effective portion of changes in fair value are recognized in owners’ equity as accumulated other comprehensive income and reclassified to earnings when the underlying hedged physical transaction closes. Changes in fair value of non-qualifying derivatives and the ineffective portion of qualifying derivatives are recognized in earnings as they occur. Actual amounts that will be reclassified will vary as a result of future changes in prices. Hedge ineffectiveness is recognized as an adjustment to midstream revenue while the hedge contract is open and may increase or decrease until settlement of the contract. Realized cash gains and losses on closed/settled instruments are reflected in the contract month being hedged as an adjustment to midstream revenues.

 

On July 16, 2007, Hiland Partners entered into financial swap instruments with BP Energy Company related to forecasted sales for the periods from August 1, 2007 through calendar year 2008 whereby Hiland Partners receives a fixed price and pays a floating price based on certain indices for the relevant contract period as the underlying natural gas and NGLs are sold. These financial swap instruments are classified as cash flow hedges in accordance with SFAS No. 133, as amended.

 

On May 9, 2007, Hiland Partners entered into a financial swap instrument with BP Energy Company related to forecasted sales in 2008 whereby we receive a fixed price and pay a floating price based on certain indices for the relevant contract period as the underlying natural gas is sold. This financial swap instrument is classified as a cash flow hedge in accordance with SFAS No. 133, as amended.

 

On March 15, 2007, Hiland Partners entered into two separate financial swap instruments with BP Energy Company that relate to forecasted sales in 2009. In one instrument Hiland Partners receives a fixed price and pays a floating price based on certain indices for the relevant contract period as the underlying natural gas is sold. This financial swap instrument is classified as a cash flow hedge in accordance with SFAS No. 133, as amended. In the other instrument, currently designated as an open trade, Hiland Partners receives a NYMEX index price less a basis differential and pays a floating price based on certain indices for the relevant contract period as the underlying natural gas is sold. The open trade financial swap instrument has not been designated as a hedge. The forecasted non-cash unrealized gain on the open trade financial swap instrument has been recorded as an increase in midstream revenues in the current period.

 

During the three and nine months ended September 30, 2007, we reclassified net gains of $511 and $1,346 on closed/settled hedge transactions to midstream revenues out of accumulated other comprehensive income. We also recorded $15 and $808 out of accumulated other comprehensive income for the decrease in fair value of open derivatives for the three and nine months ended September 30, 2007, respectively. Included in minority interest on the balance sheet is $1,511 of the changes in the net fair value of derivatives during the nine months ended September 30, 2007 attributable to minority interest. As of September 30, 2007, our accumulated other comprehensive income related to derivatives was $413. Of this amount we anticipate $256 will be reclassified to earnings during the next 12 months and $157 will be reclassified to earnings in subsequent periods. During the three and nine months ended September 30, 2007, Hiland Partners recorded gains of $305 and $486, respectively on the non-qualifying open trade financial instrument and net gains of $33 and $136, respectively on the ineffective portions of qualifying open derivative transactions.

 

During the three and nine months ended September 30, 2006, we reclassified net gains of $1,275 and $1,424 on closed/settled hedge transactions to midstream revenues out of accumulated other comprehensive income and also recorded $3,933 and $4,116, respectively into accumulated other comprehensive income for the favorable change in fair value of open derivatives. During the nine months ended September 30, 2006, we recorded $2,922 to minority interest on the consolidated balance sheet related to changes in the net fair value of open derivatives. During the three and nine months ended September 30, 2006, As of September 30, 2006, our accumulated other comprehensive income related to derivatives was $2,713. Hiland Partners recorded losses of $31 and gains of $133, respectively, on the ineffective portions of qualifying open derivative transactions.

 

15



 

The fair value of derivative assets and liabilities are as follows for the indicated periods:

 

 

 

As of
September 30,
2007

 

As of
December 31,
2006

 

Fair value of derivative assets—current

 

$

4,144

 

$

4,707

 

Fair value of derivative assets—long term

 

1,177

 

1,955

 

Fair value of derivative liabilities—current

 

(3,660

)

(1,902

)

Fair value of derivative liabilities—long term

 

(347

)

(291

)

Net fair value of derivatives

 

$

1,314

 

$

4,469

 

 

The terms of our derivative contracts currently extend out as far as December 2009. The counterparties to all derivative contracts are BP Energy Company. Set forth below is the summarized notional amount and terms of all instruments held for price risk management purposes at September 30, 2007.

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

Average

 

Asset

 

Description and Production Period

 

Volume

 

Fixed Price

 

(Liability)

 

 

 

 

 

 

 

 

 

Natural Gas—Sold Fixed for Floating Price Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(MMBtu)

 

(per MMBtu)

 

 

 

October 2007 - September 2008

 

1,890,000

 

$

7.88

 

$

4,144

 

October 2008-December 2008

 

495,000

 

7.84

 

485

 

January 2009 - December 2009

 

1,068,000

 

$

7.06

 

186

 

 

 

 

 

 

 

$

4,815

 

 

 

 

 

 

 

 

 

Natural Gas - Sold Open for Floating Price Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(MMBtu)

 

(per MMBtu)

 

 

 

January 2009 - December 2009

 

1,068,000

 

$

7.35

 

$

485

 

 

 

 

 

 

 

 

 

Natural Gas—Buy Fixed for Floating Price Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(MMBtu)

 

(per MMBtu)

 

 

 

October 2007 – September 2008

 

859,986

 

$

7.48

 

$

(963

)

October 2008 – December 2008

 

180,288

 

6.93

 

21

 

 

 

 

 

 

 

(942)

 

 

 

 

 

 

 

 

 

Natural Gas Liquids—Sold Fixed for Floating Price Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Bbls)

 

(per Gallon)

 

 

 

October 2007 – September 2008

 

441,768

 

$

1.29

 

(2,697

)

October 2008 – December 2008

 

110,442

 

$

1.31

 

(347

)

 

 

 

 

 

 

$

(3,044)

 

 

Note 6: Long-Term Debt

 

 

 

As of
September 30,
2007

 

As of
December 31,
2006

 

Hiland Holdings - Credit Facility

 

$

355

 

$

254

 

Hiland Partners - Credit Facility

 

201,064

 

147,064

 

Capital lease obligations

 

5,703

 

 

 

 

207,122

 

147,318

 

Less: current portion of capital lease obligation

 

514

 

 

Long-Term Debt

 

$

206,608

 

$

147,318

 

 

Hiland Holdings

 

 On September 25, 2006, concurrently with the closing of our initial public offering, the Partnership 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

 

16



 

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 facility bears 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%. A letter of credit fee will be payable for the aggregate amount of letters of credit issued under the 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 facility for the quarter most recently ended. At September 30, 2007, the interest rate on outstanding borrowings from our credit facility was 7.80%.

 

The 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 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 facility (currently $25.0 million).

 

The 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 distribution. In addition, the 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 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 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 facility must be reduced to zero.

 

As of September 30, 2007, we had $0.4 million outstanding under this credit facility and were in compliance with our financial covenants.

 

Hiland Partners

 

Credit Facility. On July 13, 2007, Hiland Partners entered into a third amendment to its credit facility dated as of February 15, 2005. Pursuant to the amendment, Hiland Partners may, among other things, increase its borrowing base from $200 million to $250 million and decrease the accordion feature in the facility from $150 million to $100 million.

 

The third amendment increased Hiland Partners’ borrowing capacity under its senior secured revolving credit facility to $250 million such that the facility now consists of a $241 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 distribution (the “Working Capital Facility”).

 

In addition, the third amendment provides for an accordion feature, which permits Hiland Partners if certain conditions are met, to increase the size of the Acquisition Facility by up to $100 million and allows for the issuance of letters of credit of up to $15 million in the aggregate.  The senior secured revolving credit facility also requires Hiland Partners 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 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; and a minimum interest coverage ratio of 3.0:1.0.

 

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 our 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 ½ 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 our ratio of consolidated funded debt to EBITDA will be payable on the unused portion of the credit

 

17



 

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 September 30, 2007, the interest rate on outstanding borrowings from Hiland Partners’ credit facility was 7.75%.

 

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,” our ability to incur indebtedness, grant liens, make certain loans, acquisitions and investments, make any material changes to the nature of its business, amend its material agreements, including its Omnibus Agreement, which contains non-compete and indemnity provisions with affiliates, or enter into a merger, consolidation or sale of assets.

 

The credit facility also contains covenants requiring Hiland Partners to maintain a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0, provided that in the event Hiland Partners makes certain permitted acquisitions or capital expenditures, the credit facility allows this ratio to increase to 4.75:1.0 for the following three fiscal quarters (a “step-up period”) and a minimum interest coverage ratio of 3.0:1.0.

 

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 as defined in the credit facility, the lenders may, among other things, be able to accelerate the maturity of the credit facility and exercise other rights and remedies as set forth in the credit facility.

 

The credit facility limits distributions to Hiland Partners’ unitholders to available cash, as defined by the agreement, and borrowings to fund such distributions are only permitted under the revolving working capital facility. The revolving working capital facility is subject to an annual “clean-down” period of 15 consecutive days in which the amount outstanding under the revolving working capital facility is reduced to zero.

 

As of September 30, 2007, Hiland Partners had $201.1 million outstanding under this credit facility and was in compliance with its financial covenants.

 

Capital Lease Obligation. During the three months ended September 30, 2007, Hiland Partners incurred a $4,836 capital lease obligation at its Bakken gathering system resulting from a NGLs marketing agreement with a business partner whereby they have constructed a rail loading facility and a products pipeline, and Hiland Partners has agreed to repay the business partner a predetermined amount over a period of eight years. As specified in the agreement, once fully paid, title to the rail loading facility and a products pipeline will transfer to Hiland Partners no later than the end of the eight year period.

 

In order to supply adequate electric power supply to Hiland Partners new nitrogen rejection plant at it Badlands gathering system, Hiland Partners incurred a $1,045 capital lease obligation for the aid to construction of several electric substations which, by agreement, will be paid in equal monthly installments over a period of five years.

 

During the three and nine months ended September 30, 2007, Hiland Partners made principal payments of $178 on the above described capital lease obligations. The current portion of the capital lease obligations presented in the table above is included in accrued liabilities and other in the balance sheet.

 

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.

 

18



 

Note 7: Commitments and Contingencies

 

Hiland Partners has executed various natural gas fixed price physical forward sales contracts on approximately 115,000 MMBtu per month for 2007 and 100,000 MMBtu per month for 2008 with fixed prices ranging from $4.49 to $9.13 per MMBtu in 2007 and $8.43 per MMBtu in 2008. These contracts have been designated as normal sales under SFAS No. 133 and are therefore not marked to market as derivatives. A summary of the fixed price physical forward sales contracts is presented in the table below:

 

 

 

 

 

Average

 

 

 

 

 

Fixed Price

 

Production Period

 

(MMBtu)

 

(per MMBtu)

 

 

 

 

 

 

 

October 2007 - September 2008

 

1,245,000

 

$

8.01

 

 

 

 

 

 

 

October 2008 - December 2008

 

300,000

 

$

8.43

 

 

We maintain a defined contribution retirement plan for our employees under which we make discretionary contributions to the plan based on a percentage of eligible employees’ compensation. Contributions to the plan are 5.0% of eligible employees’ compensation and resulted in expense for the three months ended September 30, 2007 and 2006 of $65 and $55, respectively and expense for the nine months ended September 30, 2007 and 2006 was $193 and $141, respectively.

 

Prior to January 1, 2007, we jointly participated with other affiliated companies in a self-insurance pool (the “Pool”) covering health and workers’ compensation claims made by employees up to the first $150 and $500, respectively, per claim. Any amounts paid above these were reinsured through third party providers. Premiums charged to us were based on estimated costs per employee of the Pool. Effective January 1, 2007, we obtained our own health and workers’ compensation insurance through third-party providers Property and general liability insurance is also maintained through third-party providers with a $100 deductible on each policy.

 

The operation of pipelines, plants and other facilities for gathering, compressing, treating, or processing natural gas, NGLs and other products is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. Management believes that compliance with federal, state or local environmental laws and regulations will not have a material adverse effect on our business, financial position or results of operations.

 

Although there are no significant regulatory proceedings in which we are currently involved, periodically we may be a party to regulatory proceedings. The results of regulatory proceedings cannot be predicted with certainty; however, our management believes that we presently do not have material potential liability in connection with regulatory proceedings that would have a significant financial impact on our consolidated financial condition, results of operations or cash flows.

 

Hiland Partners leases office space from a related entity (Please read Note 9). Hiland Partners also leases certain facilities, compressors, vehicles and other equipment under operating leases, most of which contain annual renewal options. Under these lease agreements, rent expense was $532 and $283, for the three months ended September 30, 2007 and 2006, respectively and $,1541 and $725 for the nine months ended September 30, 2007 and 2006, respectively.

 

Note 8: Significant Customers and Suppliers

 

All of Hiland Partners’ revenues are domestic revenues. The following table presents Hiland Partners’ top midstream customers as a percent of total revenue for the periods indicated:

 

 

 

For the Three
Months Ended
September 30,

 

For the Nine
Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Customer 1

 

19

%

14

%

17

%

14

%

Customer 2

 

15

%

5

%

13

%

3

%

Customer 3

 

11

%

3

%

8

%

4

%

Customer 4

 

9

%

8

%

9

%

8

%

Customer 5

 

9

%

11

%

20

%

17

%

 

19



 

All of Hiland Partners’ purchases are from domestic sources. The following table presents Hiland Partners’ top midstream suppliers as a percent of total midstream purchases for the periods indicated:

 

 

 

For the Three
Months Ended
September 30,

 

For the Nine
Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Supplier 1 (affiliated company)

 

32

%

33

%

29

%

34

%

Supplier 2

 

25

%

23

%

26

%

24

%

Supplier 3

 

13

%

13

%

14

%

13

%

 

Note 9: Related Party Transactions

 

Hiland Partners purchases natural gas and NGLs from affiliated companies. Purchases of product from affiliates totaled $14.5 million and $13.1 million for the three months ended September 30, 2007 and 2006, respectively. Purchases of product from affiliates totaled $39.3 million and $39.6 million for the nine months ended September 30, 2007 and 2006, respectively. Hiland Partners also sells natural gas and NGLs to affiliated companies. Sales of product to affiliates totaled $0.7 million and $0.9 million for the three months ended September 30, 2007 and 2006, respectively. Sales of product to affiliates totaled $2.4 million and $3.2 million for the nine months ended September 30, 2007 and 2006, respectively. Compression revenues from affiliates were $1.2 million for each of the three months ended September 30, 2007 and 2006 and $3.6 million for each of the nine months ended September 30, 2007 and 2006.

 

Accounts receivable-affiliates of $905 at September 30, 2007 include $834 from one affiliate for midstream sales. Accounts receivable-affiliates of $1,284 at December 31, 2006, include $1,260 from one affiliate for midstream sales.

 

Accounts payable-affiliates of $5,087 at September 30, 2007 include $4,676 due to one affiliate for midstream purchases. Accounts payable-affiliates of $4,412 at December 31, 2006 include $3,819 payable to the same affiliate for midstream purchases

 

Hiland Partners utilizes affiliated companies to provide services to its plants and pipelines and certain administrative services. The total amount paid to these companies was $78 and $64 during the three months ended September 30, 2007 and 2006, respectively. Amounts paid to these companies during the nine months ended September 30, 2007 and 2006 totaled $352 and $180, respectively.

 

Hiland Partners leases office space under operating leases directly or indirectly from an affiliate. Rents paid associated with these leases totaled $38 and $32 for the three months ended September 30, 2007 and 2006, respectively. Rents paid associated with these leases totaled $140 and $86 for the nine months ended September 30, 2007 and 2006, respectively.

 

Note 10: Reportable Segments

 

Hiland Partners has distinct operating segments for which additional financial information must be reported Hiland Partners’ operations are classified into two reportable segments:

 

(1)   Midstream, which is the gathering, compressing, dehydrating, treating and processing of natural gas and fractionating NGLs.

 

(2)   Compression which is providing air compression and water injection services for Continental Resources, Inc.’s oil and gas secondary recovery operations that are ongoing in North Dakota.

 

These segments reflect the way Hiland Partners manages its operations. Hiland Partners’ operations are conducted in the United States. General and administrative costs, which consist of executive management, accounting and finance, operations and engineering, marketing and business development, are allocated to the individual segments based on revenues.

 

Midstream assets totaled $374,317 at September 30, 2007. Assets attributable to compression operations totaled $28,714. All but $16 of the total capital expenditures of $73,318 for the nine months ended September 30, 2007 was attributable to midstream operations.

 

20



 

The tables below present information for the reportable segments for the three and nine months ended September 30, 2007 and 2006.

 

 

 

For the Three Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

Midstream

 

Compression

 

Total

 

Midstream

 

Compression

 

Total

 

Revenues

 

$

66,431

 

$

1,205

 

$

67,636

 

$

56,062

 

$

1,205

 

$

57,267

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

45,789

 

 

45,789

 

39,609

 

 

39,609

 

Operations and maintenance

 

5,913

 

244

 

6,157

 

4,367

 

202

 

4,569

 

Depreciation and amortization

 

6,975

 

895

 

7,870

 

5,569

 

893

 

6,462

 

General and administrative expenses

 

2,017

 

37

 

2,054

 

1,368

 

29

 

1,397

 

Total operating costs and expenses

 

60,694

 

1,176

 

61,870

 

50,913

 

1,124

 

52,037

 

Operating income

 

$

5,737

 

$

29

 

5,766

 

$

5,149

 

$

81

 

5,230

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

105

 

 

 

 

 

68

 

Amortization of deferred loan costs

 

 

 

 

 

(136

)

 

 

 

 

(170

)

Interest expense

 

 

 

 

 

(3,133

)

 

 

 

 

(2,387

)

Minority interest in income of Hiland Partners, LP

 

 

 

 

 

(867

)

 

 

 

 

(2,765

)

Net income (loss)

 

 

 

 

 

$

1,735

 

 

 

 

 

$

(24

)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

Midstream

 

Compression

 

Total

 

Midstream

 

Compression

 

Total

 

Revenues

 

$

191,691

 

$

3,615

 

$

195,306

 

$

159,800

 

$

3,615

 

$

163,415

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

137,320

 

 

137,320

 

117,965

 

 

117,965

 

Operations and maintenance

 

15,499

 

609

 

16,108

 

10,509

 

631

 

11,140

 

Depreciation and amortization

 

19,539

 

2,683

 

22,222

 

13,577

 

2,679

 

16,256

 

General and administrative expenses

 

6,265

 

118

 

6,383

 

3,614

 

81

 

3,695

 

Total operating costs and expenses

 

178,623

 

3,410

 

182,033

 

145,665

 

3,391

 

149,056

 

Operating income

 

$

13,068

 

$

205

 

13,273

 

$

14,135

 

$

224

 

14,359

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

325

 

 

 

 

 

221

 

Amortization of deferred loan costs

 

 

 

 

 

(357

)

 

 

 

 

(402

)

Interest expense

 

 

 

 

 

(7,538

)

 

 

 

 

(4,649

)

Minority interest in income of Hiland Partners, LP

 

 

 

 

 

(2,080

)

 

 

 

 

(8,991

)

Net income

 

 

 

 

 

$

3,623

 

 

 

 

 

$

538

 

 

Note 11: Net Income per Limited Partners’ Unit

 

The computation of basic net income per limited partner unit is based on the weighted-average number of common units outstanding during the period. The computation of diluted earnings per unit further assumes the dilutive effect of restricted units. Net income per unit applicable to limited partners is computed by dividing net income applicable to limited partners by the weighted-average number of limited partnership units outstanding. The following is a reconciliation of the limited partner units used in the calculations of income per limited partner unit—basic and income per limited partner unit—diluted assuming dilution for the three and nine months ended September 30, 2007and 2006:

 

21



 

 

 

For the Three Months Ended September 30,

 

For the Three Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

Income
Available to
Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Income
Available to
Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Income per limited partner unit—basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to limited unitholder

 

$

1,735

 

 

 

$

0.08

 

$

131

 

 

 

$

0.01

 

Weighted average limited partner units outstanding

 

 

 

21,600

 

 

 

 

 

21,600

 

 

 

Income per limited partner unit—diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted units

 

 

 

9

 

 

 

 

 

 

 

 

Income available to common unitholders

 

$

1,735

 

21,609

 

$

0.08

 

$

131

 

21,600

 

$

0.01

 

 

 

 

For the Nine Months  Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

Income
Available to
Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Income
Available to
Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Income per limited partner unit—basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to limited unitholder

 

$

3,623

 

 

 

$

0.17

 

$

131

 

 

 

$

0.01

 

Weighted average limited partner units outstanding

 

 

 

21,600

 

 

 

 

 

21,600

 

 

 

Income per limited partner unit—diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted units

 

 

 

10

 

 

 

 

 

 

 

 

Income available to common unitholders

 

$

3,623

 

21,610

 

$

0.17

 

$

131

 

21,600

 

$

0.01

 

 

Note 12: Owners’ Capital and Cash Distributions

 

Hiland Holdings

 

Our unitholders (limited partners) have only limited voting rights on matters affecting our operations and activities and, therefore, limited ability to influence our management’s decisions regarding our business. Unitholders did not select our general partner or elect the board of directors of our general partner and effectively have no right to select our general partner or elect its board of directors in the future. Unitholders’ voting rights are further restricted by our partnership agreement, which provides that any units held by a person that owns 20% or more of any class of units then outstanding, other than the general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting a unitholders’ ability to influence the manner or direction of our management.

 

Our partnership agreement requires that we distribute all of our cash on hand at the end of each quarter less reserves established at our general partner’s discretion. We refer to this as “available cash.” Initially our only cash-generating assets are our interests in Hiland Partners from which we receive quarterly