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Hiland Holdings GP, LP 10-Q 2008

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

Table of Contents

 

 

 

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 JUNE 30, 2008

 

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)

 

(580) 242-6040

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

 

Large accelerated filer o

 

Non-accelerated filer o

 

Accelerated filer x

 

Smaller reporting company o

 

 

 

 

(Do not check if a smaller

 

 

 

 

 

 

 

 

reporting company)

 

 

 

 

 

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

 

The number of the registrant’s outstanding equity units as of August 6, 2008 was 21,603,000 common units.

 

 

 



Table of Contents

 

HILAND HOLDINGS GP, LP

INDEX

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited, except December 31, 2007 Balance Sheet)

 

Consolidated Balance Sheets

2

Consolidated Statements of Operations

3

Consolidated Statements of Cash Flows

4

Consolidated Statement of Changes in Partners’ Equity and Comprehensive Income (Loss)

5

Condensed Notes to Consolidated Financial Statements

6

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

26

Item 3. Quantitative and Qualitative Disclosures About Market Risks

42

Item 4. Controls and Procedures

43

PART II. OTHER INFORMATION

43

Item 1. Legal Proceedings

43

Item 1A. Risk Factors

44

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

44

Item 3. Defaults Upon Senior Securities

45

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

45

Item 5. Other Information

45

Item 6. Exhibits

45

SIGNATURES

46

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



Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Balance Sheets

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

(in thousands, except unit amounts)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

13,793

 

$

10,602

 

Accounts receivable:

 

 

 

 

 

Trade-net of allowance for doubtful accounts of $8,103 in 2008

 

45,728

 

31,842

 

Affiliates

 

2,951

 

1,178

 

 

 

48,679

 

33,020

 

Fair value of derivative assets

 

1,483

 

2,718

 

Other current assets

 

2,371

 

1,420

 

Total current assets

 

66,326

 

47,760

 

 

 

 

 

 

 

Property and equipment, net

 

326,005

 

323,073

 

Intangibles, net

 

43,859

 

46,937

 

Fair value of derivative assets

 

 

418

 

Other assets, net

 

2,266

 

2,098

 

 

 

 

 

 

 

Total assets

 

$

438,456

 

$

420,286

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

34,024

 

$

24,713

 

Accounts payable-affiliates

 

15,411

 

7,957

 

Fair value of derivative liabilities

 

11,785

 

8,238

 

Accrued liabilities and other

 

3,162

 

2,075

 

Total current liabilities

 

64,382

 

42,983

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Long-term debt

 

245,150

 

226,459

 

Fair value of derivative liabilities

 

2,045

 

141

 

Asset retirement obligation

 

2,322

 

2,159

 

Minority interests

 

117,241

 

126,409

 

 

 

 

 

 

 

Partners’ equity

 

 

 

 

 

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

 

13,803

 

25,560

 

Accumulated other comprehensive loss

 

(6,487

)

(3,425

)

Total partners’ equity

 

7,316

 

22,135

 

 

 

 

 

 

 

Total liabilities and partners’ equity

 

$

438,456

 

$

420,286

 

 

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

 

3



Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Statements of Operations

For the Three and Six Months Ended (unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in thousands, except per unit amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Midstream operations

 

 

 

 

 

 

 

 

 

Third parties

 

$

112,214

 

$

64,664

 

$

201,467

 

$

123,523

 

Affiliates

 

2,022

 

747

 

3,043

 

1,736

 

Compression services, affiliate

 

1,205

 

1,205

 

2,410

 

2,410

 

Total revenues

 

115,441

 

66,616

 

206,920

 

127,669

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

51,191

 

34,908

 

93,642

 

66,789

 

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

 

36,882

 

13,008

 

63,049

 

24,742

 

Operations and maintenance

 

7,551

 

4,980

 

14,320

 

9,950

 

Depreciation, amortization and accretion

 

9,456

 

7,326

 

18,671

 

14,352

 

Bad debt

 

8,103

 

 

8,103

 

 

General and administrative expenses

 

2,333

 

2,285

 

5,018

 

4,330

 

Total operating costs and expenses

 

115,516

 

62,507

 

202,803

 

120,163

 

Operating income (loss)

 

(75

)

4,109

 

4,117

 

7,506

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and other income

 

73

 

93

 

177

 

219

 

Amortization of deferred loan costs

 

(168

)

(110

)

(324

)

(220

)

Interest expense

 

(3,130

)

(2,314

)

(6,636

)

(4,405

)

Other income (expense), net

 

(3,225

)

(2,331

)

(6,783

)

(4,406

)

Income (loss) before minority interest in loss (income) of Hiland Partners, LP

 

(3,300

)

1,778

 

(2,666

)

3,100

 

Minority interest in loss (income) of Hiland Partners, LP

 

2,192

 

(639

)

2,398

 

(1,213

)

Net income (loss)

 

$

(1,108

)

$

1,139

 

$

(268

)

$

1,887

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per limited partners’ unit - basic

 

$

(0.05

)

$

0.05

 

$

(0.01

)

$

0.09

 

Net income (loss) per limited partners’ unit - diluted

 

$

(0.05

)

$

0.05

 

$

(0.01

)

$

0.09

 

Weighted average limited partners’ units outstanding - basic

 

21,603

 

21,600

 

21,603

 

21,600

 

Weighted average limited partners’ units outstanding - diluted

 

21,603

 

21,606

 

21,603

 

21,606

 

 

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

 

4



Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Statements of Cash Flows

For the Six Months Ended (unaudited)

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(268

)

$

1,887

 

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

 

 

 

 

 

Depreciation and amortization

 

18,605

 

14,299

 

Accretion of asset retirement obligation

 

66

 

53

 

Amortization of deferred loan cost

 

324

 

220

 

Loss (gain) on derivative transactions

 

1,935

 

(171

)

Unit based compensation

 

840

 

756

 

Bad debt

 

8,103

 

 

Increase in other assets

 

(146

)

 

Minority interest in income (loss) of Hiland Partners, LP

 

(2,398

)

1,213

 

(Increase) decrease in current assets:

 

 

 

 

 

Accounts receivable – trade-net

 

(21,989

)

(1,709

)

Accounts receivable - affiliates

 

(1,773

)

345

 

Other current assets

 

(951

)

(232

)

Increase (decrease) in current liabilities:

 

 

 

 

 

Accounts payable – trade

 

11,218

 

1,962

 

Accounts payable - affiliates

 

7,454

 

563

 

Accrued liabilities and other

 

1,013

 

5

 

Net cash provided by operating activities

 

22,033

 

19,191

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(20,276

)

(36,715

)

Proceeds from disposals of property and equipment

 

6

 

 

Net cash used in investing activities

 

(20,270

)

(36,715

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from long-term borrowings

 

19,000

 

30,601

 

Increase in deferred offering cost

 

(7

)

(142

)

Debt issuance costs

 

(339

)

(2

)

Proceeds from Hiland Partners, LP unit options exercise

 

1,031

 

1,024

 

Redemption of vested phantom units

 

(35

)

 

Payments on capital lease obligations

 

(235

)

 

Minority interest cash distributions to unitholders of Hiland Partners, LP

 

(6,421

)

(5,565

)

Cash distributions to unitholders

 

(11,566

)

(8,969

)

Net cash provided by financing activities

 

1,428

 

16,947

 

 

 

 

 

 

 

Increase (decrease) for the period

 

3,191

 

(577

)

Beginning of period

 

10,602

 

10,569

 

End of period

 

$

13,793

 

$

9,992

 

Supplementary information

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

6,437

 

$

4,397

 

 

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

 

5



Table of Contents

 

Hiland Holdings GP, LP

Consolidated Statement of Changes in Partners’ Equity and Comprehensive Income (Loss)

For the Six Months Ended June 30, 2008 (unaudited)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

Other

 

 

 

Total

 

 

 

Unitholders

 

Comprehensive

 

 

 

Comprehensive

 

 

 

Interest

 

Income (loss)

 

Total

 

Income (Loss)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2008

 

$

25,560

 

$

(3,425

)

$

22,135

 

 

 

 

 

 

 

 

 

 

 

 

 

Periodic cash distributions

 

(11,566

)

 

(11,566

)

 

 

 

 

 

 

 

 

 

 

 

 

Unit based compensation

 

77

 

 

77

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income reclassified to income on closed derivative transactions

 

 

3,043

 

3,043

 

$

3,043

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

 

(6,105

)

(6,105

)

(6,105

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(268

)

 

(268

)

(268

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

$

(3,330

)

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2008

 

$

13,803

 

$

(6,487

)

$

7,316

 

 

 

 

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

 

6


 


Table of Contents

 

HILAND HOLDINGS GP, LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

(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 purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and fractionating and marketing of 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,  Bakken and Woodford Shale 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. Hiland Partners began construction of the Woodford Shale gathering system in the first quarter of 2007.  As of June 30, 2008, Hiland Partners has invested approximately $29.4 million in the gathering system.

 

The unaudited financial statements for the three and six months ended June 30, 2008 and 2007 included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which in the opinion of our management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2008.  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, 2007.

 

7



 

Table of Contents

 

Principles of Consolidation

 

Because we own the general partner of Hiland Partners, the consolidated financial statements include our accounts, the accounts of Hiland Partners GP, LLC and the accounts of Hiland Partners and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

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

 

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 (“SFAS 133”). Fair value of our derivative instruments is determined based on management estimates through utilization of market data including forecasted forward natural gas and NGL prices as a function of forward New York Mercantile Exchange (“NYMEX”) natural gas and light crude prices. 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 an accounting hedge, the price movements in the commodity derivatives must be highly correlated with the underlying hedged commodity. Gains and losses related to commodity derivatives that qualify as accounting hedges are recognized in income when the underlying hedged physical transaction closes and are included in the consolidated statements of operations as revenues from midstream operations. Gains and losses related to commodity derivatives that are not designated as accounting hedges or do not qualify as accounting hedges are recognized in income immediately, and are included in revenues from midstream operations in the consolidated statement of operations.

 

SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 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 (loss) 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 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 sales contract in which we have contracted to sell natural gas quantities at a fixed price is designated as a normal sale. This forward sales contract expires on December 31, 2008.

 

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 (loss) in partners’ 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.

 

8



Table of Contents

 

Comprehensive Income (loss)

 

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which includes, but is not limited to, changes in the fair value of derivative financial instruments. Pursuant to SFAS 133, for derivatives qualifying as accounting hedges, the effective portion of changes in fair value are recognized in partners’ equity as accumulated other comprehensive income (loss) and reclassified to earnings when the underlying hedged physical transaction closes, to the extent of our interest in Hiland Partners. Our comprehensive income (loss) for the three and six months ended June 30, 2008 and 2007 is presented in the table below:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net income (loss)

 

$

3,183

 

$

1,139

 

$

4,023

 

$

1,887

 

Closed derivative transactions reclassified to income

 

1,810

 

(503

)

3,043

 

(835

)

Change in fair value of derivatives

 

(4,605

)

39

 

(6,105

)

(793

)

Comprehensive income (loss)

 

$

388

 

$

675

 

$

961

 

$

259

 

 

Net Income (loss) per Limited Partners’ Unit

 

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

 

Minority Interests

 

The minority interest on our consolidated balance sheets as of June 30, 2008 and December 31, 2007 reflects the outside ownership interest of Hiland Partners. Minority interest in income (loss) 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 (loss). Hiland Partners’ net income (loss) is allocated to its limited partners and its general partner based on the proportionate share of the cash distributions declared for the period, with adjustments made for incentive distributions 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 is required 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 Holdings was required to contribute $11 and $3 for the three months ended June 30, 2008 and 2007, respectively, and was required to contribute $23 and $21 for the six months ended June 30, 2008 and 2007, respectively.

 

Recent Accounting Pronouncements

 

On March 19, 2008, the Financial Accounting Standards Board (“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”

 

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(“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 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 do not expect SFAS 160 will 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

 

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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. See Note 5 “Fair Value Measurements of Financial Instruments.”

 

Note 2: Property and Equipment and Asset Retirement Obligations

 

Property and equipment consisted of the following for the periods indicated:

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

Land

 

$

298

 

$

295

 

Construction in progress

 

7,395

 

12,030

 

Midstream pipeline, plants and compresors

 

378,982

 

356,491

 

Compression and water injection equipment

 

19,310

 

19,258

 

Other

 

4,502

 

3,958

 

 

 

410,487

 

392,032

 

Less: accumulated depreciation and amortization

 

84,482

 

68,959

 

 

 

$

326,005

 

$

323,073

 

 

During the three and six months ended June 30, 2008, we capitalized interest of $24 and $155, respectively. We capitalized $784 and $1,453 interest during the three and six months ended June 30, 2007, respectively.

 

In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), 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 SFAS 143 primarily apply to dismantlement and site restoration of certain of our plants and pipelines. We have evaluated our asset retirement obligations as of June 30, 2008 and have determined that revisions in the carrying values are not necessary at this time.

 

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

 

Asset retirement obligation, January 1, 2008

 

$

2,159

 

Add: additions on leased locations

 

97

 

Add: accretion expense

 

66

 

Asset retirement obligation, June 30, 2008

 

$

2,322

 

 

Note 3:   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 three and six months ended June 30, 2008 or 2007.

 

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Intangible assets consisted of the following for the periods indicated:

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

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

 

17,712

 

14,634

 

Intangible assets, net

 

$

43,859

 

$

46,937

 

 

During each of the three months ended June 30, 2008 and 2007, we recorded $1,540 of amortization expense.  During each of the six months ended June 30, 2008 and 2007, we recorded $3,078 of amortization expense.  Estimated aggregate amortization expense for the remainder of 2008 is $3,079 and $6,157 for each of the four succeeding fiscal years from 2009 through 2012 and a total of $16,152 for all years thereafter.

 

Note 4: Derivatives

 

Hiland Partners has entered into certain derivative contracts that are classified as cash flow hedges in accordance with SFAS 133 and relate to forecasted sales in 2008, 2009, and a non-qualifying mark-to-market cash flow hedge that relates to forecasted sales in 2010. Hiland Partners entered into these financial swap instruments to hedge forecasted natural gas and natural gas liquids (NGLs) sales or purchases against the variability in expected future cash flows attributable to changes in commodity prices. Under these contractual swap agreements with Hiland Partners’ counterparty, Hiland Partners receives a fixed price and pays a floating price or 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 sold or purchased or NGL is sold.

 

Hiland Partners formally documents all relationships between hedging instruments and the items being hedged, including its risk management objective and strategy for undertaking the hedging transactions. This includes matching the natural gas 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 partners’ equity as accumulated other comprehensive loss 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 recorded in income (loss) while the hedge contract is open and may increase or decrease until settlement of the contract. Realized cash gains and losses on closed/settled instruments and hedge ineffectiveness are reflected in the contract month being hedged as an adjustment to our midstream revenue.

 

On May 27, 2008 Hiland Partners entered into a financial swap instrument related to forecasted natural gas sales in 2010 whereby Hiland Partners receives a fixed price and pays a floating price based on NYMEX Henry Hub pricing for the relevant contract period as the underlying natural gas is sold. This financial swap instrument does not qualify for hedge accounting as there is inadequate correlation between NYMEX Henry Hub natural gas prices and actual prices received for the natural gas sold. It is Hiland Partners’ management’s intent to swap a fixed and pay a floating Colorado Interstate Gas (“CIG”) basis differential to the contract NYMEX price in a future period.  Until, and if, this hedge position qualifies for hedge accounting treatment, increases or decreases in the fair value of the derivative will be recorded directly to midstream revenues as gains or losses.

 

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Presented in the table below is information related to Hiland Partners’ derivatives for the indicated periods:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net gains (losses) on closed/settled transactions reclassified from (to) accumulated other comprehensive income (loss)

 

$

(1,810

)

$

503

 

$

(3,043

)

$

835

 

Increases (decreases) in fair values of open derivatives recorded to (from) accumulated other comprehensive income (loss)

 

$

(4,605

)

$

39

 

$

(6,105

)

$

(793

)

Unrealized non-cash gains (losses) on ineffective portions of qualifying derivative transactions

 

$

(13

)

$

2

 

$

(3

)

$

(6

)

Unrealized non-cash gains (losses) on non-qualifying derivatives

 

$

(900

)

$

59

 

$

(1,139

)

$

107

 

 

At June 30, 2008, our accumulated other comprehensive loss related to qualifying derivatives was $(6,487). Of this amount, we anticipate $6,170 will be reclassified from earnings during the next twelve months and $317 will be reclassified from earnings in subsequent periods.

 

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

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

Fair value of derivative assets - current

 

$

1,483

 

$

2,718

 

Fair value of derivative assets - long term

 

 

418

 

Fair value of derivative liabilities - current

 

(11,785

)

(8,238

)

Fair value of derivative liabilities - long term

 

(2,045

)

(141

)

Net fair value of derivatives

 

$

(12,347

)

$

(5,243

)

 

The terms of Hiland Partners’ derivative contracts currently extend out as far as December 2010. Hiland Partners’ counterparties to its derivative contracts are BP Energy Company and Bank of Oklahoma, N.A. Set forth below is the summarized notional amount and terms of all instruments held for price risk management purposes at June 30, 2008.

 

 

 

 

 

Average

 

Fair Value

 

 

 

 

 

Fixed

 

Asset

 

Description and Production Period

 

Volume

 

Price

 

(Liability)

 

 

 

(MMBtu)

 

(per MMBtu)

 

 

 

Natural Gas - Sold Fixed for Floating Price Swaps

 

 

 

 

 

 

 

July 2008 - June 2009

 

2,058,000

 

$

7.56

 

$

(4,188

)

July 2009 - December 2009

 

1,068,000

 

$

7.30

 

(533

)

January 2010 - December 2010

 

2,136,000

 

$

10.50

 

(1,512

)

 

 

 

 

 

 

$

(6,233

)

 

 

 

(MMBtu)

 

(per MMBtu)

 

 

 

Natural Gas - Buy Fixed for Floating Price Swaps

 

 

 

 

 

 

 

July 2008 - December 2008

 

360,576

 

$

6.93

 

$

1,483

 

 

 

 

(Bbls)

 

(per Gallon)

 

 

 

Natural Gas Liquids - Sold Fixed for Floating Price Swaps

 

 

 

 

 

 

 

July 2008 - December 2008

 

220,884

 

$

1.31

 

$

(7,597

)

 

Note 5:   Fair Value Measurements of Financial Instruments

 

We adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) beginning in the first quarter of 2008. 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 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

 

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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.

 

We use the fair value methodology outlined in SFAS 157 to value assets and liabilities for our outstanding fixed price cash flow swap derivative contracts. Valuations of our natural gas and propane derivative contracts are based on published forward price curves for natural gas and propane and, as such, are defined as Level 2 fair value hierarchy assets and liabilities. There are no published forward price curves for butanes or natural gasoline, and therefore, our butanes and natural gasoline derivative contracts are defined as Level 3 fair value hierarchy assets and liabilities. We value our butanes and natural gasoline derivative contracts based on calibrated model parameters relative to forward published price curves for crude oil and comparative mark-to-market values received from our counterparty.  The following table represents the fair value hierarchy for Hiland Partners’ assets and liabilities at June 30, 2008:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Commodity -based derivative assets

 

$

 

$

1,483

 

$

 

$

1,483

 

Commodity -based derivative liabilities

 

 

(9,295

)

(4,535

)

(13,830

)

Total

 

$

 

$

(7,812

)

$

(4,535

)

$

(12,347

)

 

The following table provides a summary of changes in the fair value of Hiland Partners’ Level 3 commodity-based derivatives for the six months ended June 30, 2008:

 

 

 

Fixed Price

 

 

 

Cash Flow

 

 

 

Swaps

 

Balance January 1, 2008

 

$

(4,489

)

Cash settlements from other comprehensive income (loss)

 

3,353

 

Net change in other comprehensive income (loss)

 

(3,399

)

Balance June 30, 2008

 

$

(4,535

)

 

Note 6: Long-Term Debt

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

Hiland Partners Credit Facility

 

$

240,064

 

$

221,064

 

Hiland Holdings Credit Facility

 

355

 

355

 

Capital lease obligations

 

5,350

 

5,585

 

 

 

245,769

 

227,004

 

Less current portion of capital lease obligations

 

619

 

545

 

Long-term debt

 

$

245,150

 

$

226,459

 

 

Hiland Partners Credit Facility

 

On February 6, 2008, Hiland Partners entered into a fourth amendment to its credit facility dated 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 February 15, 2005 was first amended in September 2005, amended a second time in June 2006 and amended a third time in July 2007.

 

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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, the fourth 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 $50 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 HIiland 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.  The credit facility will mature in May 2011. At that time, the agreement will terminate and all outstanding amounts thereunder will be due and payable.

 

Hiland Partners’ 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 its ratio of consolidated funded debt to EBITDA. The Alternate Base Rate is a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the Federal Funds effective rate in effect on such day plus 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 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 June 30, 2008, the interest rate on outstanding borrowings from Hiland Partners’ credit facility was 4.78%.

 

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

 

The credit facility defines EBITDA as Hiland Partners’ consolidated net income (loss), plus income tax expense, interest expense, depreciation, amortization and accretion expense, amortization of intangibles and organizational costs, non-cash unit based compensation expense, and adjustments for non-cash gains and losses on specified derivative transactions and for other extraordinary or non-recurring items.

 

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 June 30, 2008, Hiland Partners had $240.1 million outstanding under this credit facility and was in compliance with all of the financial covenants contained in the credit facility.

 

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Hiland Holdings Credit Facility

 

On September 25, 2006, concurrently with the closing of our initial public offering, we entered into a three-year $25.0 million secured revolving credit facility. The credit facility will permit us, if certain conditions are met, to increase borrowing capacity by up to an additional $25.0 million. The credit facility is secured by all of our ownership interests in Hiland Partners and its general partner, other than the 2% general partner interest and the incentive distribution rights.

 

The credit facility will mature on September 25, 2009, at which time all outstanding amounts thereunder become due and payable.

 

Indebtedness under the credit 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 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. At June 30, 2008, the interest rate on outstanding borrowings from our credit facility was 4.48%.

 

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).

 

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 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 credit 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 June 30, 2008, we had $0.4 million outstanding under this credit facility and were in compliance with our financial covenants.

 

Capital Lease Obligations

 

During the third quarter of 2007, Hiland Partners incurred two separate capital lease obligations at the Bakken and Badlands gathering systems. Under the terms of a capital lease agreement for a rail loading facility and an associated products pipeline at the Bakken gathering system, Hiland Partners has agreed to repay a counterparty a predetermined amount over a period of eight years. Once fully paid, title to the leased assets will transfer to Hiland Partners no later than the end of the eight-year period commencing from the inception date of the lease. Hiland Partners also incurred a capital lease obligation to a counterparty for the aid to construct several electric substations at Hiland Partners’ Badlands gathering system which, by agreement, will be repaid in equal monthly installments over a period of five years.

 

During the three and six months ended June 30, 2008, Hiland Partners made principal payments of $128 and $235, respectively, on the above described capital lease obligations.  The current portion of the capital lease obligations presented in the table above is included in accrued liabilities and other in the balance sheet.

 

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Note 7:  Share-Based Compensation

 

Hiland Holdings GP, LP Long Term Incentive Plan

 

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

 

The board of directors of our general partner and the compensation committee of the board may terminate or amend the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Our board of directors and the compensation committee of the board also have the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted subject to unitholder approval as may be required by applicable law or stock exchange rules. However, no change in any outstanding grant may be made that would materially reduce the benefits of the participant without the consent of the participant. Restricted common units granted vest and become exercisable in one-fourth increments on the anniversary of the grant date over four years. A restricted unit is a common unit that is subject to forfeiture, and upon vesting, the grantee receives a common unit that is not subject to forfeiture. Distributions on unvested restricted common units are held in trust by our general partner until the units vest, at which time the distributions are distributed to the grantee.

 

As provided for in the long-term incentive plan, each non-employee board member of Hiland Partners GP Holdings, LLC on each anniversary date of the initial award is entitled to receive an additional 1,000 restricted common units. We issued no restricted units during the three and six months ended June 30, 2008. As of June 30, 2008 and December 31, 2007, we had 15,000 restricted common units outstanding with a weighted average fair value at grant date of $23.30 per restricted unit. Non-cash unit based compensation expense related to the 15,000 restricted units issued is to be recognized over their respective four-year vesting period on the graded vesting attribution method. We recorded non-cash compensation expense related to the restricted units of $38 and $77 for the three and six months ended June 30, 2008, respectively, and $32 and $63 for the three and six months ended June 30, 2007, respectively. We will record additional non-cash unit based compensation expense of $168 over the next four years.

 

Hiland Partners, LP Long Term Incentive Plan

 

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

 

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, however, that would materially impair the rights of the participant without the consent of the participant. Under the unit option grant agreement, granted options of common units vest and become exercisable in one-third increments on the anniversary of the grant date over three years. Vested options are exercisable within the option’s contractual life of ten years after the grant date. Restricted common units granted vest and become exercisable in one-fourth increments on the anniversary of the grant date over four years. A restricted unit is a common unit that is subject to forfeiture, and upon vesting, the grantee receives a common unit that is not subject to forfeiture. Distributions on unvested restricted

 

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common units are held in trust by Hiland Partners’ general partner until the units vest, at which time the distributions are distributed to the grantee. Granted phantom common units are generally more flexible than restricted units and vesting periods and distribution rights may vary with each grant. A phantom unit is a common unit that is subject to forfeiture and is not considered issued until it vests. Upon vesting, holders of phantom units will receive (i) a common unit that is not subject to forfeiture, cash in lieu of the delivery of such unit equal to the fair market value of the unit on the vesting date, or a combination thereof, at the discretion of our general partner’s board of directors and (ii) the distributions held in trust, if applicable, related to the vested units.

 

Phantom Units.   On June 19, 2008, 2,500 of Hiland Partners’ phantom units awarded to its Chief Executive Officer in June 2007 vested and were converted to common units.  On the same date, Hiland Partners redeemed 693 of the vested phantom units for $50.00 per unit, the closing price on that day to pay for tax withholding obligations on the vested phantom units.

 

The following table summarizes information about Hiland Partners’ phantom units for the six months ended June 30, 2008:

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Fair Value

 

Fair Value At

 

 

 

 

 

At Grant

 

Redemption

 

 

 

Units

 

Date

 

Date

 

Unvested January 1, 2008

 

42,825

 

$

50.12

 

 

 

Granted

 

10,000

 

$

49.36

 

 

 

Vested and converted

 

(1,807

)

$

54.50

 

 

 

Vested and redeemed

 

(693

)

$

54.50

 

$

50.00

 

Forfeited

 

(5,000

)

$

48.80

 

 

 

Unvested June 30, 2008

 

45,325

 

$

49.85

 

 

 

 

During the three and six months ended June 30, 2008, Hiland Partners incurred non-cash unit based compensation expense of $301 and $580, respectively, related to phantom units. During the three and six months ended June 30 2007, Hiland Partners incurred $9 of non-cash unit based compensation expense related to phantom units. Hiland Partners will recognize additional expense of $1,580 over the next four years, and the additional expense is to be recognized over a weighted average period of 3.2 years.

 

Restricted Units.   Hiland Partners issued no restricted units during the three and six months ended June 30, 2008.  As of June 30, 2008 and December 31, 2007, Hiland Partners had 19,375 restricted common units outstanding with a weighted average fair value at grant date of $46.57 per restricted unit outstanding. Non-cash unit based compensation expense related to restricted units was $83 and $167 for the three and six months ended June 30, 2008, respectively, and was $120 and $239 for the three and six months ended June 30, 2007, respectively. As of June 30, 2008, there was $391 of total unrecognized cost related to unvested restricted units. This cost is to be recognized over a weighted average period of 2.3 years.

 

Unit Options.   Hiland Partners has not granted unit options since March 2006. In October 1995, The FASB issued SFAS No. 123, “Share-Based Payment,” which was revised in December 2004 (collectively, “SFAS 123R”). As a result of adopting SFAS 123R on the modified prospective basis beginning on January 1, 2006, during the three and six months ended June 30, 2008, Hiland Partners incurred non-cash unit based compensation expense of $8 and $16, respectively, related to unit options that were awarded in both 2006 and 2005. During the three and six months ended June 30, 2007, Hiland Partners expensed $39 and $97, respectively, related to the unit options.

 

The following table summarizes information about Hiland Partners’ common unit options for the three and six months ended June 30, 2008:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

Options

 

Units

 

Price

 

Term (Years)

 

Value

 

Outstanding at January 1, 2008

 

75,041

 

$

28.24

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

Exercised

 

(40,705

)

$

25.32

 

 

 

$

975

 

Forfeited or expired

 

(1,000

)

$

40.11

 

 

 

 

 

Outstanding at June 30, 2008

 

33,336

 

$

37.92

 

7.5

 

$

395

 

Exercisable at June 30, 2008

 

17,168

 

$

37.21

 

7.4

 

$

216

 

 

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Note 8: Commitments and Contingencies

 

Hiland Partners has executed a natural gas fixed price physical forward sales contract on 100,000 MMBtu per month for the remainder of 2008 with a fixed price of $8.43 per MMBtu.  This contract has been designated as a normal sale under SFAS 133 and is therefore not marked to market as a derivative.

 

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 June 30, 2008 and 2007 of $80 and $64, respectively, and for the six months ended June 30, 2008 and 2007 was $155 and $126, respectively.

 

We maintain our health and workers’ compensation insurance through third-party providers. Property and general liability insurance is also maintained through third-party providers with a $100 deductible on each policy.

 

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

 

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

 

Hiland Partners leases certain equipment, vehicles and facilities under operating leases, most of which contain annual renewal options. We and Hiland Partners also lease office space from a related entity. See Note 10 “Related Party Transactions.” Under these lease agreements, rent expense was $636 and $495, respectively, for the three months ended June 30, 2008 and 2007 and $1,252 and $1,009 for the six months ended June 30, 2008 and 2007, respectively.

 

Note 9: 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 June 30,

 

For the Six Months
Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Customer 1

 

22

%

15

%

21

%

16

%

Customer 2

 

15

%

14

%

15

%

11

%

Customer 3

 

14

%

7

%

11

%

9

%

Customer 4

 

10

%

10

%

8

%

11

%

Customer 5

 

9

%

25

%

14

%

21

%

 

Collections of trade accounts receivable totaling $8,103 related to midstream sales to customer 1 for the three and six months ended June 30, 2008 are doubtful, and accordingly, Hiland Partners has increased its reserve for doubtful accounts and recorded a bad debt expense for the indicated periods. See Note 14 “Subsequent Event.”

 

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 June 30,

 

For the Six Months
Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Supplier 1 (affiliated company)

 

42

%

27

%

40

%

27

%

Supplier 2

 

18

%

26

%

18

%

26

%

Supplier 3

 

16

%

13

%

16

%

14

%

 

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Table of Contents

 

Note 10: Related Party Transactions

 

Hiland Partners purchases natural gas and NGLs from affiliated companies. Purchases of product from affiliates totaled $36,882 and $13,008 for the three months ended June 30, 2008 and 2007, respectively and totaled $63,049 and $24,742 for the six months ended June 30, 2008 and 2007, respectively. Hiland Partners also sells natural gas and NGLs to affiliated companies. Sales of product to affiliates totaled $2,022 and $747 for the three months ended June 30, 2008 and 2007, respectively and totaled $3,043 and $1,736 for the six months ended June 30, 2008 and 2007, respectively. Compression revenues from affiliates were $1,205 and $2,410 for each of the three and six months ended June 30, 2008 and 2007, respectively.

 

Accounts receivable-affiliates of $2,951 at June 30, 2008 include $2,850 from one affiliate for midstream sales. Accounts receivable-affiliates of $1,178 at December 31, 2007, includes $1,090 from one affiliate for midstream sales.

 

Accounts payable-affiliates of $15,411 at June 30, 2008 include $14,641 due to one affiliate for midstream purchases. Accounts payable-affiliates of $7,957 at December 31, 2007 include $7,094 payable to the same affiliate for midstream purchases

 

Hiland Partners utilizes affiliated companies to provide services to its plants and pipelines and certain administrative services. The total expenditures to these companies were $111 and $180 during the three months ended June 30, 2008 and 2007, respectively, and were $263 and $274 during the six months ended June 30, 2008 and 2007, respectively.

 

We and Hiland Partners lease office space under operating leases directly or indirectly from an affiliate. Rent expense associated with these leases totaled $37 and $70 for the three months ended June 30, 2008 and 2007, respectively, and totaled $75 and $102 for the six months ended June 30, 2008 and 2007, respectively.

 

Note 11: Reportable Segments

 

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

 

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

 

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

 

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

 

Midstream assets totaled $412,377 at June 30, 2008. Assets attributable to compression operations totaled $26,079. All but $24 of the total capital expenditures of $18,368 for the six months ended June 30, 2008 was attributable to midstream operations. All but $16 of the total capital expenditures of $43,294 for the six months ended June 30, 2007 was attributable to midstream operations.

 

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Table of Contents

 

The tables below present information for the reportable segments for the three and six months ended June 30, 2008 and 2007.

 

 

 

For the Three Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

Midstream

 

Compression

 

 

 

Midstream

 

Compression

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

114,236

 

$

1,205

 

$

115,441

 

$

65,411

 

$

1,205

 

$

66,616

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

88,073

 

 

88,073

 

47,916

 

 

47,916

 

Operations and maintenance

 

7,271

 

280

 

7,551

 

4,783

 

197

 

4,980

 

Depreciation and amortization

 

8,561

 

895

 

9,456

 

6,431

 

895

 

7,326

 

Bad debt

 

8,103

 

 

8,103

 

 

 

 

General and administrative expenses

 

2,314

 

19

 

2,333

 

2,244

 

41

 

2,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

114,322

 

1,194

 

115,516

 

61,374

 

1,133

 

62,507

 

Operating income (loss)

 

$

(86

)

$

11

 

(75

)

$

4,037

 

$

72

 

4,109

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

73

 

 

 

 

 

93

 

Amortization of deferred loan costs

 

 

 

 

 

(168

)

 

 

 

 

(110

)

Interest expense

 

 

 

 

 

(3,130

)

 

 

 

 

(2,314

)

Minority interest in loss (income) of Hiland Partners, LP

 

 

 

 

 

(1,620

)

 

 

 

 

(639

)

Net income (loss)

 

 

 

 

 

$

(1,108

)

 

 

 

 

$

1,139

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

Midstream

 

Compression

 

 

 

Midstream

 

Compression

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

204,510

 

$

2,410

 

$

206,920

 

$

125,259

 

$

2,410

 

$

127,669

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

156,691

 

 

156,691

 

91,531

 

 

91,531

 

Operations and maintenance

 

13,811

 

509

 

14,320

 

9,585

 

365

 

9,950

 

Depreciation and amortization

 

16,881

 

1,790

 

18,671

 

12,563

 

1,789

 

14,352

 

Bad debt

 

8,103

 

 

8,103

 

 

 

 

General and administrative expenses

 

4,969

 

49

 

5,018

 

4,248

 

82

 

4,330

 

Total operating costs and expenses

 

200,455

 

2,348

 

202,803

 

117,927

 

2,236

 

120,163

 

Operating income

 

$

4,055

 

$

62

 

4,117

 

$

7,332

 

$

174

 

7,506

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

177

 

 

 

 

 

219

 

Amortization of deferred loan costs

 

 

 

 

 

(324

)

 

 

 

 

(220

)

Interest expense

 

 

 

 

 

(6,636

)

 

 

 

 

(4,405

)

Minority interest in loss (income) of Hiland Partners, LP

 

 

 

 

 

(1,414

)

 

 

 

 

(1,213

)

Net income (loss)

 

 

 

 

 

$

(268

)

 

 

 

 

$

1,887

 

 

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Note 12: Net Income (loss) per Limited Partners’ Unit

 

The computation of basic net income (loss) per limited partners’ unit is based on the weighted-average number of common units outstanding during the period. The computation of diluted earnings per unit further assumes the dilutive effect of restricted units. Net income (loss) per unit applicable to limited partners is computed by dividing net income (loss) applicable to limited partners by the weighted-average number of limited partnership units outstanding. The following is a reconciliation of the limited partner units used in the calculations of income (loss) per limited partner unit—basic and income (loss) per limited partner unit—diluted assuming dilution for the three and six months ended June 30, 2008 and 2007:

 

 

 

For the Three Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

(Loss)

 

 

 

 

 

Income

 

 

 

 

 

 

 

Available to

 

 

 

 

 

Available to

 

 

 

 

 

 

 

Limited

 

Limited

 

 

 

Limited

 

Limited

 

 

 

 

 

Partners

 

Partner Units

 

Per Unit

 

Partners

 

Partner Units

 

Per Unit

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

 

Income (loss)per limited partner unit -basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) available to limited partners

 

$

(1,108

)

 

 

$

(0.05

)

$

1,139

 

 

 

$

0.05

 

Weighted average limited partner units outstanding

 

 

 

21,603,000

 

 

 

 

 

21,600,000

 

 

 

Income (loss) per limited partner unit -diluted: Restricted units

 

 

 

 

 

 

 

 

6,000

 

 

 

Income (loss) available to limited partners plus assumed conversions

 

$

(1,108

)

21,603,000

 

$

(0.05

)

$

1,139

 

21,606,000

 

$

0.05

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

(Loss)

 

 

 

 

 

Income

 

 

 

 

 

 

 

Available to

 

 

 

 

 

Available to

 

 

 

 

 

 

 

Limited

 

Limited

 

 

 

Limited

 

Limited

 

 

 

 

 

Partners

 

Partner Units

 

Per Unit

 

Partners

 

Partner Units

 

Per Unit

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

 

Income (loss)per limited partner unit -basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) available to limited partners

 

$(268

)

 

 

$(0.01

)

$1,887

 

 

 

$0.09

 

Weighted average limited partner units outstanding

 

 

 

21,603,000

 

 

 

 

 

21,600,000

 

 

 

Income (loss) per limited partner unit -diluted: Restricted units

 

 

 

 

 

 

 

 

6,000

 

 

 

Income (loss) available to limited partners plus assumed conversions

 

$(268

)

21,603,000

 

$(0.01

)

$1,887

 

21,606,000

 

$0.09

 

 

For each of the three and six months ended March 31, 2008, approximately 8,000 restricted units were excluded from the computation of diluted earnings attributable to limited partner units because the inclusion of such units would have been anti-dilutive.

 

Note 13: Partners’ Equity 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

 

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are our interests in Hiland Partners from which we receive quarterly distributions. The amount of available cash may be greater than or less than the minimum quarterly distributions.

 

All distributions paid by Hiland Holdings to common unitholders from January 1, 2007 forward, including amounts paid to affiliate owners, were as follows (in thousands, except per unit amounts):

 

Date Cash

 

Per Unit Cash

 

 

 

Distribution

 

Distribution

 

Total Cash

 

Paid

 

Amount

 

Distribution

 

02/19/07

 

 

$

0.2075

 

$

4,484

 

05/18/07

 

 

0.2075

 

4,484

 

08/17/07

 

 

0.2200

 

4,755

 

11/19/07

 

 

0.2300

 

4,972

 

02/19/08

 

 

0.2550

 

5,513

 

05/19/08

 

 

0.2800

 

6,053

 

08/19/08

 (a)

 

0.3050

 

6,594

 

 

 

 

$

1.7050

 

$

36,855

 

 


(a)          This cash distribution was announced on July 25, 2008 and will be paid on August 19, 2008 to all unitholders of record as of August 4, 2008.

 

Hiland Partners

 

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

 

Hiland Partners’ partnership agreement requires that it distribute all of its cash on hand at the end of each quarter, less reserves established at Hiland Partners GP, LLC’s discretion. Hiland Partners refers to this as “available cash.” The amount of available cash may be greater than or less than the minimum quarterly distributions described below. In general, Hiland Partners will pay any cash distribution made each quarter in the following manner:

 

·         first, 98% to the common units, pro rata, and 2% to Hiland Partners GP, LLC, until each common unit has received a minimum quarterly distribution of $0.45 plus any arrearages from prior quarters;

 

·         second, 98% to the subordinated units, pro rata, and 2% to Hiland Partners GP, LLC, until each subordinated unit has received a minimum quarterly distribution of $0.45; and

 

·         third, 98% to all units, pro rata, and 2% to Hiland Partners GP, LLC, until each unit has received a distribution of $0.495.

 

If cash distributions per unit exceed $0.495 in any quarter, Hiland Partners GP, LLC as general partner will receive increasing percentages, up to a maximum of 50% of the cash Hiland Partners distributes in excess of that amount. Hiland Partners refers to these distributions as “incentive distributions.”

 

The distributions on the subordinated units may be reduced or eliminated if necessary to ensure the common units receive their minimum quarterly distribution. Subordinated units will not accrue arrearages. The subordination period will end with respect to certain portions of the subordinated units once Hiland Partners meets certain financial tests, but will not end with respect to all subordinated units before March 31, 2010. These financial tests require Hiland Partners to have earned

 

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and paid the minimum quarterly distribution on all of its outstanding units for three consecutive four-quarter periods. When the subordination period ends, all remaining subordinated units will convert into common units on a one-for-one basis and the common units will no longer be entitled to arrearages. Following Hiland Partners’ distribution on May 14, 2008, these financial tests were met for the immediate preceding three consecutive four-quarter periods, and accordingly, 25%, or 1,020,000, of the subordinated units were converted to common units on May 19, 2008.

 

Presented below are cash distributions to Hiland Partners common and subordinated unitholders, including amounts to affiliate owners and regular and incentive distributions to Hiland Partners GP, LLC paid by Hiland Partners from January 1, 2007 forward (in thousands, except per unit amounts):

 

Date Cash

 

Per Unit Cash

 

 

 

 

 

 

 

 

 

 

 

Distribution

 

Distribution

 

Common

 

Subordinated

 

General Partner

 

Total Cash

 

Paid

 

Amount

 

Units

 

Units

 

Regular

 

Incentive

 

Distribution

 

02/14/07

 

 

$

0.7125

 

$

3,694

 

$

2,907

 

$

150

 

$

749

 

$

7,500

 

05/15/07

 

 

0.7125

 

3,724

 

2,907

 

151

 

752

 

7,534

 

08/14/07

 

 

0.7325

 

3,837

 

2,989

 

158

 

932

 

7,916

 

11/14/07

 

 

0.7550

 

3,959

 

3,080

 

167

 

1,134

 

8,340

 

02/14/08

 

 

0.7950

 

4,169

 

3,243

 

182

 

1,492

 

9,086

 

05/14/08

 

 

0.8275

 

4,364

 

3,376

 

194

 

1,789

 

9,723

 

08/14/08

 (a)

 

0.8625

 

5,443

 

2,640

 

208

 

2,106

 

10,397

 

 

 

 

$

5.3975

 

$

29,190

 

$

21,142

 

$

1,210

 

$

8,954

 

$

60,496

 

 


(a)          This cash distribution was announced on July 25, 2008 and will be paid on August 14, 2008 to all unitholders of record as of August 4, 2008.

 

Presented below are cash distributions by Hiland Partners to us and Hiland Partners GP, LLC from January 1, 2007 forward (in thousands, except per unit amounts):

 

Date Cash

 

Per Unit Cash

 

 

 

 

 

 

 

 

 

 

 

Distribution

 

Distribution

 

Common

 

Subordinated

 

General Partner

 

Total Cash

 

Paid

 

Amount

 

Units

 

Units

 

Regular

 

Incentive

 

Distribution

 

02/14/07