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Hiland Holdings GP, LP 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. 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, 2009

 

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:  001-33018

 

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 days.  x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ 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

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

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 7, 2009 was 21,607,500 common units.

 

 

 



Table of Contents

 

HILAND HOLDINGS GP, LP

 

INDEX

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited, except December 31, 2008 Balance Sheet)

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Cash Flows

Consolidated Statement of Changes in Partners’ Equity

Condensed Notes to Consolidated Financial Statements (Unaudited)

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

 

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Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Balance Sheets

(in thousands, except unit amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,248

 

$

1,733

 

Accounts receivable:

 

 

 

 

 

Trade - net of allowance for doubtful accounts of $304

 

17,820

 

23,864

 

Affiliates

 

2,745

 

2,346

 

 

 

20,565

 

26,210

 

Fair value of derivative assets

 

6,188

 

6,851

 

Other current assets

 

1,348

 

1,936

 

Total current assets

 

32,349

 

36,730

 

 

 

 

 

 

 

Property and equipment, net

 

349,473

 

349,159

 

Intangibles, net

 

37,702

 

40,780

 

Fair value of derivative assets

 

1,597

 

7,141

 

Other assets, net

 

1,464

 

1,750

 

 

 

 

 

 

 

Total assets

 

$

422,585

 

$

435,560

 

 

 

 

 

 

 

LIABILITIES AND PARTNERSHIP EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

14,136

 

$

22,833

 

Accounts payable - affiliates

 

5,236

 

7,823

 

Fair value of derivative liabilities

 

921

 

1,439

 

Accrued liabilities and other

 

6,362

 

3,168

 

Total current liabilities

 

26,655

 

35,263

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Long-term debt

 

265,117

 

256,466

 

Fair value of derivative liabilities

 

147

 

 

 

Asset retirement obligation

 

2,560

 

2,483

 

 

 

 

 

 

 

Partners’ equity:

 

 

 

 

 

Common unitholders (21,607,500 units issued and outstanding)

 

4,862

 

12,386

 

Accumulated other comprehensive income

 

1,370

 

3,111

 

Total limited partners’ equity

 

6,232

 

15,497

 

Noncontrolling partners’ interest in Hiland Partners

 

121,874

 

125,851

 

Total partners’ equity

 

128,106

 

141,348

 

 

 

 

 

 

 

Total liabilities and partners’ equity

 

$

422,585

 

$

435,560

 

 

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

 

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Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Statements of Operations

For the Three and Six Months Ended (Unaudited)

(in thousands, except per unit amounts)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

Midstream operations

 

 

 

 

 

 

 

 

 

Third parties

 

$

48,007

 

$

112,214

 

$

98,118

 

$

201,467

 

Affiliates

 

867

 

2,022

 

1,899

 

3,043

 

Compression services, affiliate

 

1,205

 

1,205

 

2,410

 

2,410

 

Total revenues

 

50,079

 

115,441

 

102,427

 

206,920

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

16,646

 

51,191

 

34,417

 

93,642

 

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

 

10,353

 

36,882

 

23,798

 

63,049

 

Operations and maintenance

 

7,785

 

7,551

 

15,480

 

14,320

 

Depreciation, amortization and accretion

 

10,824

 

9,456

 

21,082

 

18,671

 

Property impairments

 

 

 

950

 

 

Bad debt

 

 

8,103

 

 

8,103

 

General and administrative

 

4,606

 

2,333

 

8,433

 

5,018

 

Total operating costs and expenses

 

50,214

 

115,516

 

104,160

 

202,803

 

Operating (loss) income

 

(135

)

(75

)

(1,733

)

4,117

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and other income

 

68

 

73

 

81

 

177

 

Amortization of deferred loan costs

 

(172

)

(168

)

(343

)

(324

)

Interest expense

 

(2,691

)

(3,130

)

(5,049

)

(6,636

)

Other income (expense), net

 

(2,795

)

(3,225

)

(5,311

)

(6,783

)

Net loss

 

(2,930

)

(3,300

)

(7,044

)

(2,666

)

Less: Noncontrolling partners’ interest in loss of Hiland Partners

 

(395

)

(2,192

)

(1,610

)

(2,398

)

Limited Partners’ interest in net loss

 

$

(2,535

)

$

(1,108

)

$

(5,434

)

$

(268

)

 

 

 

 

 

 

 

 

 

 

Net loss per limited partners’ unit - basic

 

$

(0.12

)

$

(0.05

)

$

(0.25

)

$

(0.01

)

Net loss per limited partners’ unit - diluted

 

$

(0.12

)

$

(0.05

)

$

(0.25

)

$

(0.01

)

Weighted average limited partners’ units outstanding - basic

 

21,608

 

21,603

 

21,608

 

21,603

 

Weighted average limited partners’ units outstanding - diluted

 

21,608

 

21,603

 

21,608

 

21,603

 

 

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

 

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Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended (Unaudited, in thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net loss

 

$

(2,930

)

$

(3,300

)

$

(7,044

)

$

(2,666

)

Closed derivative transactions reclassified to income

 

(2,171

)

3,028

 

(3,879

)

5,083

 

Change in fair value of derivatives

 

(1,332

)

(7,737

)

950

 

(10,253

)

Comprehensive loss

 

$

(6,433

)

$

(8,009

)

$

(9,973

)

$

(7,836

)

Less: Comprehensive loss attributable to noncontrolling interest in Hiland Partners

 

(1,816

)

(4,106

)

(2,798

)

(4,506

)

Comprehensive loss attributable to limited partners

 

$

(4,617

)

$

(3,903

)

$

(7,175

)

$

(3,330

)

 

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

 

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Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Statements of Cash Flows

For the Six Months Ended (Unaudited, in thousands)

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(7,044

)

$

(2,666

)

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

 

 

 

 

 

Depreciation and amortization

 

21,004

 

18,605

 

Accretion of asset retirement obligation

 

78

 

66

 

Property impairments

 

950

 

 

Amortization of deferred loan cost

 

343

 

324

 

(Gain) loss on derivative transactions

 

(247

)

1,935

 

Net proceeds from settlement of derivative contracts

 

3,155

 

 

Unit based compensation

 

673

 

840

 

Bad debt

 

 

8,103

 

Gain on sale of assets

 

(3

)

 

Increase in other assets

 

(48

)

(146

)

(Increase) decrease in current assets:

 

 

 

 

 

Accounts receivable - trade

 

6,044

 

(21,989

)

Accounts receivable - affiliates

 

(399

)

(1,773

)

Other current assets

 

588

 

(951

)

Increase (decrease) in current liabilities:

 

 

 

 

 

Accounts payable

 

(671

)

11,218

 

Accounts payable - affiliates

 

(2,587

)

7,454

 

Accrued liabilities and other

 

2,695

 

1,013

 

Net cash provided by operating activities

 

24,531

 

22,033

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(27,225

)

(20,276

)

Proceeds from disposals of property and equipment

 

12

 

6

 

Net cash used in investing activities

 

(27,213

)

(20,270

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from short-term borrowings

 

500

 

 

Proceeds from long-term borrowings

 

12,000

 

19,000

 

Payments on long-term borrowings

 

(3,000

)

 

Increase in deferred offering cost

 

 

(7

)

Debt issuance costs

 

(10

)

(339

)

Proceeds from Hiland Partners, LP unit options exercise

 

 

1,031

 

Redemption of vested phantom units

 

 

(35

)

Distributions held in trust refunded to Hiland Partners on forfeited unvested restricted common units

 

22

 

 

Payments on capital lease obligations

 

(350

)

(235

)

Cash distributions to non-controlling partners of Hiland Partners, LP

 

(1,803

)

(6,421

)

Cash distributions to unitholders

 

(2,162

)

(11,566

)

Net cash provided by financing activities

 

5,197

 

1,428

 

 

 

 

 

 

 

Increase for the period

 

2,515

 

3,191

 

Beginning of period

 

1,733

 

10,602

 

End of period

 

$

4,248

 

$

13,793

 

Supplementary information

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

5,191

 

$

6,437

 

 

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

 

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Table of Contents

 

HILAND HOLDINGS GP, LP

Consolidated Statement of Changes in Partners’ Equity

For the Six Months Ended June 30, 2009 (Unaudited, in thousands)

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

Accumulated

 

Partners’

 

 

 

 

 

 

 

Other

 

Interest in

 

 

 

 

 

Common

 

Comprehensive

 

Hiland

 

 

 

 

 

Unitholders

 

Income

 

Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2009

 

$

12,386

 

$

3,111

 

$

125,851

 

$

141,348

 

Periodic cash distributions

 

(2,162

)

 

(1,803

)

(3,965

)

Unit based compensation

 

72

 

 

601

 

673

 

Distributions held in trust refunded to Hiland Partners on 4,250 forfeited unvested restricted common units

 

 

 

23

 

23

 

Other comprehensive income reclassified to income on closed derivative transactions

 

 

(2,307

)

(1,572

)

(3,879

)

Change in fair value of derivatives

 

 

566

 

384

 

950

 

Net loss

 

(5,434

)

 

(1,610

)

(7,044

)

Balance June 30, 2009

 

$

4,862

 

$

1,370

 

$

121,874

 

$

128,106

 

 

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

 

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Table of Contents

 

HILAND HOLDINGS GP, LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

THREE AND SIX MONTHS ENDED JUNE 30, 2009 and 2008

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

 

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

 

Unless the context requires otherwise, references to “we”, “us,” “our,” “Hiland Holdings” or the “Partnership” are intended to mean the consolidated business and operations of Hiland Holdings GP, LP. References to “Hiland Partners” are intended to mean the consolidated business and operations of Hiland Partners, LP and its subsidiaries.

 

Hiland Holdings GP, LP, a Delaware limited partnership, was formed in May 2006 to own Hiland Partners GP, LLC, the general partner of Hiland Partners, LP, and certain other common and subordinated units in Hiland Partners. Hiland Partners GP, LLC was formed in October 2004 to hold the 2% general partner ownership interest in Hiland Partners and serve as its general partner. Hiland Partners GP, LLC manages the operations of Hiland Partners. In connection with the closing of our initial public offering, all of the membership interests in Hiland Partners GP, LLC were contributed to us. 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. (“CGI”) and Hiland Partners, LLC. Hiland Partners commenced operations on February 15, 2005, and concurrently with the completion of its initial public offering, CGI contributed a substantial portion of its net assets to Hiland Partners. The transfer of ownership of net assets from CGI to Hiland Partners represented a reorganization of entities under common control and was recorded at historical cost. CGI was formed in 1990 as a wholly owned subsidiary of Continental Resources, Inc. (“CLR”).

 

CGI operated in one segment, midstream, which involved the purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and fractionating and marketing of natural gas liquids, or NGLs. CGI historically owned all of Hiland Partners’ natural gas gathering, processing, treating and fractionation assets other than the Worland,  Bakken, Kinta Area, Woodford Shale and North Dakota Bakken gathering systems. Hiland Partners, LLC historically owned the Worland gathering system and compression services assets, which Hiland Partners acquired on February 15, 2005, and the Bakken gathering system. Since its initial public offering, Hiland Partners has operated in midstream and compression services segments. On September 26, 2005, Hiland Partners acquired Hiland Partners, LLC, which at such time owned the Bakken gathering system, consisting of certain southeastern Montana gathering assets, for $92.7 million, $35.0 million of which was used to retire outstanding Hiland Partners, LLC indebtedness. On May 1, 2006, Hiland Partners acquired the Kinta Area gathering assets from Enogex Gas Gathering, L.L.C., consisting of certain eastern Oklahoma gas gathering assets, for $96.4 million.  Hiland Partners financed this acquisition with $61.2 million of borrowings from its credit facility and $35.0 million of proceeds from the issuance to Hiland Partners GP, LLC, its general partner, of 761,714 common units and 15,545 general partner equivalent units, both at $45.03 per unit. Hiland Partners began construction of the Woodford Shale gathering system in the first quarter of 2007 and commenced initial start-up of its operations in April 2007. Construction on the North Dakota Bakken gathering system and processing plant began in October 2008 and became fully operational in May 2009.  As of June 30, 2009, Hiland Partners has invested approximately $22.9 million in the North Dakota Bakken gathering system.

 

The unaudited financial statements for the three and six months ended June 30, 2009 and 2008 included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which in the opinion of our management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Subsequent events have been evaluated through August 10, 2009. Results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2009.  The accompanying consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

 

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Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Concentration and Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and receivables.  Hiland Partners places cash and cash equivalents with high-quality institutions and in money market funds. Hiland Partners derives its revenue from customers primarily in the oil and gas and utility industries. These industry concentrations have the potential to impact Hiland Partners’ overall exposure to credit risk, either positively or negatively, in that its customers could be affected by similar changes in economic, industry or other conditions. However, we believe that the credit risk posed by this industry concentration is offset by the creditworthiness of Hiland Partners’ customer base. Hiland Partners’ portfolio of accounts receivable is comprised primarily of mid-size to large domestic corporate entities.  The counterparties to Hiland Partners’ commodity based derivative instruments as of June 30, 2009 are BP Energy Company and Bank of Oklahoma, N.A.  The counterparty to Hiland Partners’ interest rate swap as of June 30, 2009 is Wells Fargo Bank, N.A.

 

Fair Value of Financial Instruments

 

Our financial instruments, which require fair value disclosure, consist primarily of cash and cash equivalents, accounts receivable, financial derivatives, accounts payable and long-term debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values, due to the short maturity of these instruments. Derivative instruments are reported in the accompanying consolidated financial statements at fair value 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 and forecasted forward interest rates as a function of forward London Interbank Offered Rate (“LIBOR”) interest rates. The fair value of long-term debt approximates its carrying value due to the variable interest rate feature of such debt.

 

Interest Rate Risk Management

 

Hiland Partners is exposed to interest rate risk on its variable rate bank credit facility. Hiland Partners manages a portion of the interest rate exposure by utilizing an interest rate swap to convert a portion of variable rate debt into fixed rate debt. The swap fixes the one month LIBOR rate at the indicated rates for a specified amount of related debt outstanding over the term of the swap agreement. Hiland Partners has elected to designate the interest rate swap as a cash flow hedge for SFAS 133 accounting treatment. Accordingly, unrealized gains and losses relating to the interest rate swap are recorded in accumulated other comprehensive income until the related interest rate expense is recognized in earnings. Any ineffective portion of the gain or loss is recognized in earnings immediately.

 

Commodity Risk Management

 

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

 

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

 

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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 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.

 

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

 

Long Lived Assets

 

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, Hiland Partners evaluates its long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. The determination of whether impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets. If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified to be disposed of in the future, the carrying value of these assets is compared to the estimated fair value less the cost to sell to determine if impairment is required. Until the assets are disposed of, an estimate of the fair value is redetermined when related events or circumstances change.

 

When determining whether impairment of one of its long-lived assets has occurred, Hiland Partners must estimate the undiscounted future cash flows attributable to the asset or asset group. The estimate of cash flows is based on assumptions regarding the volume of reserves providing asset cash flow and future NGL product and natural gas prices. The amount of reserves and drilling activities are dependent in part on crude oil and natural gas prices. Projections of reserves and future commodity prices are inherently subjective and contingent upon a number of variable factors, including, but not limited to:

 

·     changes in general economic conditions in regions in which Hiland Partners’ assets are located;

·     the availability and prices of NGLs and NGL products and competing commodities;

·     the availability and prices of raw natural gas supply;

·     Hiland Partners’ ability to negotiate favorable marketing agreements;

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

·     Hiland Partners’ dependence on certain significant customers and producers of natural gas; and

·     competition from other midstream service providers and processors, including major energy companies.

 

Any significant variance in any of the above assumptions or factors could materially affect our cash flows, which could require us to record an impairment of an asset.

 

As a result of volume declines at natural gas gathering systems located in Texas and Mississippi, combined with significantly reduced natural gas prices, Hiland Partners recognized impairment charges of $950 in March 2009.  No impairment charges were recognized during the three and six months ended June 30, 2008.

 

Net Income (Loss) per Limited Partners’ Unit

 

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

 

Noncontrolling Partners’ Interest in Hiland Partners

 

The noncontrolling partners’ interest in Hiland Partners presented in partners’ equity on our consolidated balance sheets as of June 30, 2009 and December 31, 2008 reflects the outside ownership interest of Hiland Partners. This noncontrolling partners’ interest in Hiland Partners presented as “Minority interests” in the mezzanine section of the balance sheet at December 31, 2008 has been reclassified to the partners’ equity section on the consolidated balance sheet in accordance with SFAS No. 160, “Noncontrolling

 

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Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). The noncontrolling partners’ interest in income (loss) of Hiland Partners is calculated by multiplying the noncontrolling partners’ proportionate ownership of limited partner units in Hiland Partners by the limited partners’ allocation of Hiland Partners’ net income (loss). Hiland Partners’ net income (loss) is allocated to its limited partners and its general partner based on the proportionate share of the cash distributions declared for the period, with adjustments made for incentive distributions specifically allocated to its general partner. All amounts we have received from Hiland Partners’ issuance and sale of limited partner units have been recorded as increases to the noncontrolling partners’ interest in Hiland Partners in the partners’ equity section on the consolidated balance sheet.

 

Contributions to Subsidiary

 

The Partnership directly and indirectly owns all of the equity interests in Hiland Partners GP, LLC, the general partner of Hiland Partners. Hiland Partners GP, LLC is required to make contributions to Hiland Partners each time Hiland Partners issues common units or restricted common units in order to maintain its 2% general partner ownership in Hiland Partners. Contributions for the three and six months ended June 30, 2009 and 2008 were insignificant.

 

Recent Accounting Pronouncements

 

On June 30, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, “The FASB Accounting Standards Codification and The Hierarchy of Generally Accepted Accounting Principles” (“FASB ASC”), a replacement of SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  On the effective date, FASB ASC became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC, and preparers must begin to use the Codification for periods that begin on or about July 1, 2009. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification will be considered nonauthoritative. FASB ASC significantly changes the way financial statement preparers, auditors, and academics perform accounting research. The FASB expects that FASB ASC will reduce the amount of time and effort required to research an accounting issue, mitigate the risk of noncompliance with standards through improved usability of the literature, provide accurate information with real-time updates as new standards are released, and assist the FASB with the research efforts required during the standard-setting process. FASB ASC was adopted effective July 1, 2009 and will not have a material impact on our financial statements and disclosures therein.

 

On May 28, 2009, the FASB issued FASB Statement No. 165, “Subsequent Events (“SFAS 165”).  SFAS 165 requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. SFAS 165 is effective for interim and annual periods ending after June 15, 2009.  SFAS No. 165 was adopted effective June 30, 2009 and did not have a material impact on our financial statements and disclosures therein.

 

On April 9, 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FAS107-1”).  FAS107-1 increases the frequency of fair value disclosures to a quarterly basis instead of annual basis.  FAS107-1 specifically relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value.   FAS107-1 is effective for interim and annual periods ending after June 15, 2009.  FAS107-1 was adopted effective June 30, 2009 and did not have a material impact on our financial statements and disclosures therein.

 

On April 1, 2009, the FASB issued Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP141(R)-1”).  FSP 141(R)-1 amends and clarifies SFAS 141, revised 2007, “Business Combinations” to address application issues on initial and subsequent recognition, measurement, accounting and disclosure of assets and liabilities arising from contingencies in a business combination.  FSP 141(R)-1 is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. FSP 141(R)-1 was adopted effective January 1, 2009 and did not have a material impact on our financial statements and disclosures therein.

 

On April 25, 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the factors that an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. In determining the useful life of an acquired intangible asset, FSP 142-3 removes the requirement from SFAS 142 for an entity to consider whether renewal of the intangible asset requires significant costs or material modifications to the related arrangement. FSP 142-3 also replaces the previous useful life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal.  FSP 142-3 was adopted effective January 1, 2009 and will apply to future intangible assets acquired.  We don’t believe the adoption of FSP 142-3 will have a material impact on our financial position, results of operations or cash flows.

 

On March 19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, an amendment of SFAS 133 (“SFAS 161”). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial

 

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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 amended the qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in SFAS 133 and generally increased the level of aggregation/disaggregation required in an entity’s financial statements. SFAS 161 was adopted effective January 1, 2009 and did not have a material impact on our financial statements and disclosures therein.

 

On March 12, 2008, the Emerging Issues Task Force (“EITF”) reached consensus opinion on EITF Issue 07-4, “Application of the two-class method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships” (“EITF 07-4”), which the FASB ratified at its March 26, 2008 meeting.  EITF 07-4 requires the calculation of a Master Limited Partnership’s (“MLPs”) net earnings per limited partner unit for each period presented according to distributions declared and participation rights in undistributed earnings as if all of the earnings for that period had been distributed. In periods with undistributed earnings above specified levels, the calculation per the two-class method results in an increased allocation of such undistributed earnings to the general partner and a dilution of earnings to the limited partners.  EITF 07-4 is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented.  EITF 07-4 was adopted effective January 1, 2009 and did not have a significant impact on our financial statements and disclosures therein.

 

In December 2007, the FASB 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 noncontrolling 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.  SFAS 141(R) was adopted effective January 1, 2009 and will apply to future business combinations.

 

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 effective January 1, 2008, at which time no financial assets or liabilities, not previously required to be recorded at fair value by other authoritative literature, were designated to be recorded at fair value.  As such, the adoption of SFAS 159 did not have any impact on our financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) such as fair value hierarchy used to classify the source of information used in fair value measurements (i.e., market based or non-market based) and expands disclosure about fair value measurements based on their level in the hierarchy.  SFAS 157 applies to derivatives and other financial instruments, which SFAS 133 requires be measured at fair value at initial recognition and for all subsequent periods. SFAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157’s hierarchy defines three levels of inputs that may be used to measure fair value. Level 1 refers to assets that have observable market prices, level 2 assets do not have an “observable price” but do have inputs that are based on such prices in which components have observable data points and level 3 refers to assets in which one or more of the inputs do not have observable prices and calibrated model parameters, valuation techniques or management’s assumptions are used to derive the fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We elected to implement SFAS 157 prospectively in the first quarter of 2008 with the one-year deferral permitted by FASB Staff Position (FSP) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). The deferral applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which we use fair value. SFAS 157 was adopted effective January 1, 2009 and did not have a material impact on our financial statements.  See Note 6 “Fair Value Measurements.”

 

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

 

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interest in its subsidiary be accounted for consistently and similarly as equity transactions. Consolidated net income and comprehensive income are now determined without deducting minority interest; however, earnings-per-share information continues to be calculated on the basis of the net income attributable to the 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. SFAS 160 was adopted effective January 1, 2009 and did not have a material impact on our financial position, results of operations or cash flows.

 

Certain adjustments have been made to prior period information to conform to current period presentation related to our adoption of SFAS 160, which establishes new accounting and reporting standards for the noncontrolling partners’ interest in Hiland Partners.  Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interests) as equity in the consolidated financial statements and separate from our limited partners’ equity.  The amount of net income attributable to the noncontrolling interest will now be included in consolidated net income on the face of the statement of operations.  SFAS 160 also includes expanded disclosure requirements regarding our limited partners’ interest and the noncontrolling partners’ interest.  The adoption of SFAS 160 on January 1, 2009 did not have a significant impact on our financial position, results of operations or cash flows.  However, it did result in certain changes to our financial statement presentation, including the change in classification of noncontrolling interest (minority interests) from liabilities to equity on the consolidated balance sheet.

 

Upon adoption of SFAS 160 effective January 1, 2009, we reclassified $125,851 from minority interests liabilities to noncontrolling partners’ interest in Hiland Partners in our consolidated balance sheet as of December 31, 2008.  In addition, we reclassified $2,192 and $2,398 of minority interest in loss of Hiland Partners to net loss attributable to noncontrolling partners’ interest in loss of Hiland Partners in our consolidated statement of operations for the three and six months ended June 30, 2008, respectively.  Net income per limited partner unit has not been affected as a result of the adoption of SFAS 160.

 

Note 2: Recent Events

 

On June 1, 2009, the Partnership and Hiland Partners (together with the Partnership, the “Hiland Companies”) signed separate definitive merger agreements with an affiliate of Harold Hamm, pursuant to which affiliates of Mr. Hamm have agreed to acquire for cash  (i) all of the outstanding common units of Hiland Partners (other than certain restricted common units owned by officers and employees) not owned by the Partnership (the “Hiland Partners Merger”); and (ii) all of the outstanding common units of the Partnership (other than certain restricted common units owned by officers and employees) not owned by Mr. Hamm, his affiliates or the Hamm family trusts (the “Hiland Holdings Merger”). Upon consummation of the mergers, the common units of the Hiland Companies will no longer be publicly owned or publicly traded.  In the mergers, the Partnership’s unitholders will receive $2.40 in cash for each common unit they hold and Hiland Partners’ unitholders will receive $7.75 in cash for each common unit they hold.  Conflicts committees comprised entirely of independent members of the boards of directors of the general partners of the Partnership and Hiland Partners separately determined that the mergers are advisable, fair to and in the best interests of the applicable Hiland Company and its public unitholders. In determining to make their recommendations to the boards of directors, each conflicts committee considered, among other things, the fairness opinion received from its respective financial advisor. Based on the recommendation of its conflicts committee, the board of directors of the general partner of each of the Partnership and Hiland Partners has approved the applicable merger agreement and has recommended, along with its respective conflicts committee, that the public unitholders of the Partnership and Hiland Partners, respectively, approve the applicable merger. Consummation of the Hiland Partners Merger is subject to certain conditions, including the approval of holders of a majority of our outstanding common units not owned by Mr. Hamm, his affiliates and the Hamm family trusts, the absence of any restraining order or injunction, and other customary closing conditions.  Additionally, the obligation of Mr. Hamm and his affiliates to complete the Hiland Holdings Merger is contingent upon the concurrent completion of the Hiland Partners Merger, and the Hiland Partners Merger is subject to closing conditions similar to those described above.  There can be no assurance that the Hiland Holdings Merger or any other transaction will be approved or consummated.

 

On July 1, 2009, (i) the Partnership, Hiland Partners and its general partner, Hiland Partners GP, LLC (together with Hiland Partners, the “Hiland Companies”), Hiland Partners GP Holdings, LLC, our general partner, HH GP Holding, LLC, an affiliate of Harold Hamm, HLND MergerCo, LLC, a wholly-owned subsidiary of HH GP Holding, LLC, Harold Hamm, Chairman of the Hiland Companies, Joseph L. Griffin, Chief Executive Officer and President of the Hiland Companies, and Matthew S. Harrison, Chief Financial Officer, Vice President—Finance and Secretary of the Hiland Companies, in connection with the Agreement and Plan of Merger, dated June 1, 2009, among Hiland Partners, Hiland Partners GP, LLC, HH GP Holding, LLC, and HLND MergerCo, LLC filed a Transaction Statement on Schedule 13E-3 with the SEC and (ii) the Partnership, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC, HPGP MergerCo, LLC, Continental Gas Holdings, Inc. (an affiliate of Mr. Hamm) and Messrs. Hamm, Griffin and Harrison, in connection with the Agreement and Plan of Merger, dated June 1, 2009, among the Partnership, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and HPGP MergerCo, LLC, also filed a Transaction Statement on Schedule 13E-3 with the SEC. Concurrently with the filing of these Schedule 13E-3s, the Partnership and Hiland Partners jointly filed a Preliminary Proxy Statement on Schedule 14A pursuant to the definitive version of which the boards of directors of the general partner of each of the

 

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Partnership and Hiland Partners will be soliciting proxies from unitholders of the Partnership and Hiland Partners in connection with the mergers of both Hiland Companies.

 

On July 10, 2009, the United States Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Act with respect to the Hiland Partners Merger.

 

On June 26, 2009, Hiland Partners executed a series of hedging transactions that involved the unwinding of a portion of existing net “in-the-money” natural gas swaps and entered into a new 2010 Colorado Interstate Gas (“CIG”) natural gas swap. Hiland Partners received net proceeds of approximately $3.2 million from the unwinding of the net “in-the-money” positions, of which $3.0 million was used to reduce indebtedness under its senior secured revolving credit facility.

 

Three putative unitholder class action lawsuits have been filed relating to the proposed mergers with Mr. Hamm, his affiliates, and certain Hamm family trusts (the “Hamm Parties”).  These lawsuits are as follows: (i) Robert Pasternack v. Hiland Partners, LP et al., In the Court of Chancery of the State of Delaware, Civil Action No. 4397-VCS; (ii) Andrew Jones v. Hiland Partners, LP et al., In the Court of Chancery of the State of Delaware, Civil Action No. 4558-VCS; and (iii) Arthur G. Rosenberg v. Hiland Partners, LP et al., In the District Court of Garfield County, State of Oklahoma, Case No. C3-09-211-02.  The lawsuits name as defendants the Partnership, Hiland Holdings, the general partner of each of the Partnership and Hiland Partners, and the members of the board of directors of each of the Partnership and Hiland Partners.   The lawsuits challenge both the Hiland Partners Merger and the Hiland Holdings Merger.  The lawsuits allege claims of breach of the Partnership Agreement and breach of fiduciary duty on behalf of (i) a purported class of common unitholders of the Partnership and (ii) a purported class of our common unitholders of Hiland Partners.

 

On July 10, 2009, the court in which the Oklahoma case is pending granted our motion to stay the Oklahoma lawsuit in favor of the Delaware lawsuits.   On July 31, 2009, the plaintiff in the first-filed Delaware case (Pasternack) filed an Amended Class Action Complaint and a motion to enjoin the mergers.   This Amended Class Action Complaint alleges, among other things, that (i) the original consideration and revised consideration offered by the Hamm Parties is unfair and inadequate, (ii) the members of the conflicts committees of the general partner of each of the Partnership and Hiland Partners that were charged with reviewing the proposals and making a recommendation to each committee’s respective board of directors lacked any meaningful independence, (iii) the defendants acted in bad faith in recommending and approving the Hiland Partners Merger or the Hiland Holdings Merger, and (iv) the disclosures in the Preliminary Proxy Statement filed by the Partnership and Hiland Partners are materially misleading.   The Pasternack plaintiff seeks to preliminarily enjoin the defendants from proceeding with or consummating the mergers and seeks an order requiring defendants to supplement the Preliminary Proxy Statement with certain information.  We cannot predict the outcome of these lawsuits, or others, nor can we predict the amount of time and expense that will be required to resolve the lawsuits.

 

Additional information concerning these lawsuits may be found in the Preliminary Proxy Statement filed by the Partnership and Hiland Partners and, when filed, in the definitive joint proxy statement.

 

We and Hiland Partners have suspended quarterly cash distributions on common and subordinated units beginning with the first quarter distribution of 2009 due to the impact of lower commodity prices and reduced drilling activity on Hiland Partners current and projected throughput volumes, midstream segment margins and cash flows combined with future required levels of capital expenditures and the outstanding indebtedness under ours and Hiland Partners’ senior secured revolving credit facilities.  Under the terms of Hiland Partners’ partnership agreement, Hiland Partners’ common units will carry an arrearage of $0.90 per unit, representing the minimum quarterly distribution to its common units for the first and second quarters of 2009 that must be paid before Hiland Partners’ can make distributions to the subordinated units.

 

Pursuant to the terms of our existing credit agreement, we elected to reduce the commitment level on the credit facility from $10.0 million to $3.0 million on August 7, 2009.  Concurrently with the reduction of the commitment level to $3.0 million, the existing lenders under the credit facility assigned their interests in the facility to The Security National Bank of Enid and we entered into a first amended and restated senior secured credit agreement with The Security National Bank of Enid.   The credit facility is secured by all of our ownership interests in Hiland Partners and its general partner, other than the 2% general partner interest and the incentive distribution rights. The credit facility will mature on December 31, 2009, at which time all outstanding amounts thereunder become due and payable.  As our only cash-generating assets are our 2% general partner interest, all of the incentive distribution rights and a 57.4% limited partner interest in Hiland Partners, our cash flow is completely dependent upon the ability of Hiland Partners to make cash distributions to its partners, including us.  Our credit facility matures on December 31, 2009, at which time all outstanding amounts thereunder will become due and payable.  We believe the current availability on the credit facility will allow us to meet our current obligations and future expenses through maturity.  We cannot assure that any refinancing of our credit facility can be successfully completed or, if completed, that the terms will be favorable to us.  If we are unable to obtain a refinancing of our outstanding debt and Hiland Partners does not resume paying quarterly cash distributions in amounts necessary to satisfy our obligations, we may need to sell common units in Hiland Partners to satisfy our outstanding debt obligations and any current liabilities that we may incur in the operation of our business in the future.  See Note 7 “Long-Term Debt.”

 

Note 3: 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,

 

 

 

2009

 

2008

 

Land

 

$

295

 

$

295

 

Construction in progress

 

2,068

 

15,583

 

Midstream pipeline, plants and compressors

 

442,680

 

410,330

 

Compression and water injection equipment

 

19,417

 

19,391

 

Other

 

4,935

 

4,621

 

 

 

469,395

 

450,220

 

Less: accumulated depreciation and amortization

 

119,922

 

101,061

 

 

 

$

349,473

 

$

349,159

 

 

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During the three and six months ended June 30, 2009, we capitalized interest of $42 and $104, respectively. We capitalized interest of $24 and $155 during the three and six months ended June 30, 2008, respectively. Hiland Partners recognized $950 of property impairment charges related to natural gas gathering systems in Texas and Mississippi during the six months ended June 30, 2009. Hiland Partners incurred no impairment charges during the six months ended June 30, 2008.

 

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 Hiland Partners’ plants and pipelines. We have evaluated Hiland Partners’ asset retirement obligations as of June 30, 2009 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, 2009

 

$

2,483

 

Less: obligation extinguished

 

(10

)

Add: additions on leased locations

 

9

 

Add: accretion expense

 

78

 

Asset retirement obligation, June 30, 2009

 

$

2,560

 

 

Note 4:   Intangible Assets

 

Intangible assets consist of the acquired value of customer relationships, existing contracts to purchase, gather and sell natural gas and other NGLs and compression contracts, which do not have significant residual value. The customer relationships and the contracts are being amortized over their estimated lives of ten years. We review intangible assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. If such a review should indicate that the carrying amount of intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value based on the discounted probable cash flows of the intangible assets. No impairments of intangible assets were recorded during the three and six months ended June 30, 2009 or 2008.

 

Intangible assets consisted of the following for the periods indicated:

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Gas sales contracts

 

$

32,564

 

$

32,564

 

Compression contracts

 

18,515

 

18,515

 

Customer relationships

 

10,492

 

10,492

 

 

 

61,571

 

61,571

 

Less accumulated amortization

 

23,869

 

20,791

 

Intangible assets, net

 

$

37,702

 

$

40,780

 

 

During each of the three months ended June 30, 2009 and 2008, we recorded $1,540 of amortization expense.  During each of the six months ended June 30, 2009 and 2008, we recorded $3,079 of amortization expense.  Estimated aggregate amortization expense for the remainder of 2009 is $3,080 and $6,157 for each of the four succeeding fiscal years from 2010 through 2013 and a total of $9,994 for all years thereafter.

 

Note 5: Derivatives

 

Interest Rate Swap

 

Hiland Partners is subject to interest rate risk on its credit facility and has entered into an interest rate swap to reduce this risk. Hiland Partners entered into a one year interest rate swap agreement with its counterparty on October 7, 2008 for the period from January 2009 through December 2009 at a rate of 2.245% on a notional amount of $100.0 million. The swap fixes the one month LIBOR rate at 2.245% for the notional amount of debt outstanding over the term of the swap agreement.  During the three and six months ended June 30, 2009, one month LIBOR interest rates were lower than the contracted fixed interest rate of 2.245%.

 

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Consequently, for the three and six months ended June 30, 2009, Hiland Partners incurred additional interest expense of $462 and $905, respectively, upon monthly settlements of the interest rate swap agreement.

 

The following table provides information about Hiland Partners’ interest rate swap at June 30, 2009 for the periods indicated:

 

 

 

 

 

 

 

Fair Value

 

 

 

Notional

 

Interest

 

Asset

 

Description and Period

 

Amount

 

Rate

 

(Liability)

 

Interest Rate Swap

 

 

 

 

 

 

 

July 2009 - December 2009

 

$

100,000

 

2.245

%

$

(921

)

 

Commodity Swaps

 

Hiland Partners has entered into certain derivative contracts that are classified as cash flow hedges in accordance with SFAS 133 which relate to forecasted natural gas sales in 2009 and 2010. Hiland Partners entered into these financial swap instruments to hedge forecasted natural gas sales against the variability in expected future cash flows attributable to changes in commodity prices. Under these swap agreements with its counterparties, Hiland Partners receives a fixed price and pays a floating price based on certain indices for the relevant contract period as the underlying natural gas is sold.

 

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

 

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

 

On June 26, 2009, Hiland Partners unwound (cash settled) a 2010 coupled qualified hedge for a discounted net amount of $3,155 and entered into a new cash flow swap agreement for the same underlying forecasted natural gas sales which settle in the same monthly periods in 2010.  The coupled qualified hedge Hiland Partners cash settled on June 26, 2009 consisted of a receipt of $4,499 from one counterparty offset by a payment of $1,344 to another counterparty. Of the $4,499 cash received, $3,571 had previously been recognized as midstream revenues in 2008 as the hedge, at that time, did not qualify for hedge accounting. The net unrecognized loss of $416 has been recorded to accumulated other comprehensive income and will be recorded as reductions in midstream revenues as the hedged transactions settle in 2010. Under the terms of the new derivative contract, Hiland Partners receives a fixed price of $5.08 and pays a floating CIG index price for the same relevant volumes and contract period as the underlying natural gas is sold.

 

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,

 

 

 

2009

 

2008

 

2009

 

2008

 

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

 

$

2,171

 

$

(3,028

)

$

3,879

 

$

(5,083

)

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

 

$

(1,332

)

$

(7,737

)

$

950

 

$

(10,253

)

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

 

$

(137

)

$

(22

)

$

247

 

$

(5

)

Unrealized non-cash gains on non-qualifying derivatives

 

$

 

$

(1,512

)

$

 

$

(1,930

)

 

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At June 30, 2009, Hiland Partners’ accumulated other comprehensive income was $2,304. Of this amount, Hiland Partners anticipates $4,003 will be reclassified to earnings during the next twelve months and $(1,699) will be reclassified to earnings in subsequent periods.

 

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

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Fair value of derivative assets - current

 

$

6,188

 

$

6,851

 

Fair value of derivative assets - long term

 

1,597

 

7,141

 

Fair value of derivative liabilities - current

 

(921

)

(1,439

)

Fair value of derivative liabilities - long term

 

(147

)

 

Net fair value of derivatives

 

$

6,717

 

$

12,553

 

 

The terms of Hiland Partners’ derivative contracts currently extend as far as December 2010. The counterparties to Hiland Partners’ commodity-based derivative instruments are BP Energy Company and Bank of Oklahoma, N.A. The counterparty to Hiland Partners’ interest rate swap is Wells Fargo Bank, N.A.

 

The following table provides information about Hiland Partners’ commodity derivative instruments at June 30, 2009 for the periods indicated:

 

 

 

 

 

Average

 

 

 

 

 

 

 

Fixed

 

Fair Value

 

Description and Production Period

 

Volume

 

Price

 

Asset

 

 

 

(MMBtu)

 

(per MMBtu)

 

 

 

Natural Gas - Sold Fixed for Floating Price Swaps

 

 

 

 

 

 

 

July 2009 - June 2010

 

2,136,000

 

$

7.01

 

$

6,188

 

July 2010 - December 2010

 

1,068,000

 

$

6.73

 

1,450

 

 

 

 

 

 

 

$

7,638

 

 

Note 6:   Fair Value Measurements

 

We adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) beginning in the first quarter of 2008.  We adopted FSP 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually) effective January 1, 2009, which applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which we use fair value. 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 based) and expands disclosure about fair value measurements based on their level in the hierarchy.  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 133 requires derivatives and other financial instruments be measured at fair value at initial recognition and for all subsequent periods.  We use the fair value methodology outlined in SFAS 157 to value assets and liabilities for our outstanding fixed price cash flow swap derivative contracts. Valuations of our natural gas derivative contracts are based on published forward price curves for natural gas and, as such, are defined as Level 2 fair value hierarchy assets and liabilities. We value our interest rate-based derivative on a comparative mark-to-market value received from our counterparty and, as such, is defined as Level 3. The following

 

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table represents the fair value hierarchy for Hiland Partners’ assets and liabilities measured at fair value on a recurring basis at June 30, 2009:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Commodity - based derivative assets

 

$

 

$

7,785

 

$

 

$

7,785

 

Commodity - based derivative liabilities

 

 

(147

)

 

(147

)

Interest - based derivative liabilities

 

 

 

(921

)

(921

)

Total

 

$

 

$

7,638

 

$

(921

)

$

6,717

 

 

The following table provides a summary of changes in the fair value of Hiland Partners’ Level 3 interest rate-based derivatives for the six months ended June 30, 2009:

 

Balance, January 1, 2009

 

$

(1,439

)

Cash settlements from other comprehensive income

 

906

 

Change in fair value of derivative

 

(388

)

Balance, June 30, 2009

 

$

(921

)

 

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Hiland Partners reviews properties for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such property. Hiland Partners compares each property’s estimated expected future cash flows to the carrying amount of the property to determine if the carrying amount is recoverable. If the carrying amount of the property exceeds its estimated undiscounted future cash flows, the carrying amount of the property is reduced to its estimated fair value. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two.  In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and gas reserves, commodity prices based on commodity futures price strips as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate.

 

As a result of volume declines combined with significantly reduced natural gas prices, Hiland Partners determined that carrying amounts totaling approximately $950 related to natural gas gathering systems located in Texas and Mississippi were not recoverable from future cash flows and, therefore, were impaired at March 31, 2009.  Hiland Partners reduced the carrying amounts of these nonrecurring level 3 hierarchy assets to their estimated fair values of approximately $249 by using the discounted cash flow method described above, as comparable market data was not available.

 

Note 7: Long-Term Debt

 

Long-term debt consisted of the following for the indicated periods:

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Hiland Partners-revolving credit facility

 

$

261,064

 

$

252,064

 

Hiland Holdings-revolving credit facility

 

1,205

 

705

 

Capital lease obligations

 

4,701

 

5,051

 

 

 

266,970

 

257,820

 

Less current portion:

 

 

 

 

 

Capital lease obligations

 

648

 

649

 

Hiland Holdings-revolving credit facility

 

1,205

 

705

 

Long-term debt

 

$

265,117

 

$

256,466

 

 

Hiland Partners Credit Facility

 

Hiland Partners borrowing capacity under its senior secured revolving credit facility, as amended, is $300 million consisting of a $291 million senior secured revolving credit facility to be used for funding acquisitions and other capital expenditures, issuance of letters of credit and general corporate purposes (the “Acquisition Facility”) and a $9.0 million senior secured revolving credit facility to be used for working capital and to fund distributions (the “Working Capital Facility”).

 

In addition, Hiland Partners senior secured revolving credit facility provides for an accordion feature, which permits Hiland Partners, if certain conditions are met, to increase the size of the Acquisition Facility by up to $50 million and allows for the issuance

 

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of letters of credit of up to $15 million in the aggregate. The credit facility will mature in May 2011. At that time, the agreement will terminate and all outstanding amounts thereunder will be due and payable.

 

Due to lower natural gas and NGL prices and the impact of reduced drilling activity on Hiland Partners’ current and projected throughput volumes, Hiland Partners believes that cash generated from operations will decrease for the remainder of 2009 relative to comparable periods in 2008.  Hiland Partners’ senior secured revolving credit facility requires Hiland Partners to meet certain financial tests, including a maximum consolidated funded debt to EBITDA covenant 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 permitted acquisition or capital expenditure occurs.  Hiland Partners met the permitted capital expenditure requirements for the four quarter period ended March 31, 2009 and elected to increase the ratio to 4.75:1.0 on March 31, 2009 for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009.  During this step-up period, the applicable margin with respect to loans under the credit facility increases by 35 basis points per annum and the unused commitment fee increases by 12.5 basis points per annum. The ratio will revert back to 4.0:1.0 for the quarter ended December 31, 2009.  If commodity prices do not significantly improve above the current forward prices for 2009, the Partnership could be in violation of the maximum consolidated funded debt to EBITDA covenant ratio as early as September 30, 2009, unless this ratio is amended, Hiland Partners receives an infusion of equity capital, Hiland Partners’ debt is restructured or Hiland Partners is able to monetize “in-the-money” hedge positions.  Management is continuing extensive discussions with certain lenders under the credit facility as to ways to address a potential covenant violation. While no potential solution has been agreed to, Hiland Partners expects that any solution will require the assessment of fees and increased rates, the infusion of additional equity capital or the incurrence of subordinated indebtedness by Hiland Partners and the suspension of distributions for a certain period of time. There can be no assurance that any such agreement will be reached with the lenders, that any required equity or debt financing will be available to Hiland Partners, or that Hiland Partners’ hedge positions will be “in-the-money.”

 

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

 

Hiland Partners’ obligations under the credit facility are secured by substantially all of its assets and guaranteed by Hiland Partners, and all of its subsidiaries, other than Hiland Operating, LLC, its operating company, which is the borrower under the credit facility.

 

Indebtedness under Hiland Partners’ credit facility will bear interest, at its option, at either (i) an Alternate Base Rate plus an applicable margin ranging from 50 to 125 basis points per annum or (ii) LIBOR plus an applicable margin ranging from 150 to 225 basis points per annum based on its ratio of consolidated funded debt to EBITDA. The Alternate Base Rate is a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the Federal Funds effective rate in effect on such day plus  1/2 of 1%. Hiland Partners has elected for the indebtedness to bear interest at LIBOR plus the applicable margin. A letter of credit fee will be payable for the aggregate amount of letters of credit issued under the credit facility at a percentage per annum equal to 1.0%. An unused commitment fee ranging from 25 to 50 basis points per annum based on Hiland Partners’ ratio of consolidated funded debt to EBITDA will be payable on the unused portion of the credit facility. During the step-up period, the applicable margin with respect to loans under the credit facility will be increased by 35 basis points per annum and the unused commitment fee will be increased by 12.5 basis points per annum. At June 30, 2009, the interest rate on outstanding borrowings from Hiland Partners’ credit facility was 2.92%.

 

Hiland Partners is subject to interest rate risk on its credit facility and has entered into an interest rate swap to reduce this risk. See Note 5 “Derivatives” for a discussion of Hiland Partners’ interest rate swap.

 

The credit facility prohibits Hiland Partners from making distributions to unitholders if any default or event of default, as defined in the credit facility, has occurred and is continuing or would result from such distributions. In addition, the credit facility contains various covenants that limit, among other things, subject to certain exceptions and negotiated “baskets,” Hiland Partners’ ability to incur indebtedness, grant liens, make certain loans, acquisitions and investments, make any material changes to the nature of its business, amend its material agreements, including its Omnibus Agreement, which contains non-compete and indemnity provisions with affiliates, or enter into a merger, consolidation or sale of assets.

 

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

 

The credit facility limits distributions to Hiland Partners’ unitholders to available cash, as defined by the agreement, and borrowings to fund such distributions are only permitted under the revolving working capital facility. The revolving working capital

 

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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, 2009, Hiland Partners had $261.1 million outstanding under this credit facility and was in compliance with its financial covenants.  Hiland Partners’ EBITDA to interest expense ratio was 4.95 to 1.0 and its consolidated funded debt to EBITDA ratio was 4.40 to 1.0.

 

Hiland Holdings Credit Facility

 

On September 25, 2006, concurrently with the closing of our initial public offering, we entered into a three-year $25.0 million senior secured credit facility. Pursuant to the terms of the agreement, we elected to reduce the commitment level on the credit facility to $10.0 million effective May 15, 2009 and we elected to further reduce the commitment level on the credit facility to $3.0 million on August 7, 2009.  Concurrently with the reduction of the commitment level to $3.0 million, the existing lenders under the credit facility assigned their interests in the facility to The Security National Bank of Enid and we entered into a first amended and restated senior secured credit agreement with The Security National Bank of Enid.  The credit facility is secured by all of our ownership interests in Hiland Partners and its general partner, other than the 2% general partner interest and the incentive distribution rights.  The credit facility will mature on December 31, 2009, at which time all outstanding amounts thereunder become due and payable.

 

Indebtedness under the credit facility bears interest at the prime rate plus 1% per annum, but in no event less than 5% per annum, to be adjusted as changes occur in the prime rate.  At August 7, 2009, the interest rate on outstanding borrowings from our credit facility was 5.0%.

 

The credit facility contains several covenants that, among other things, require the maintenance of a debt-to-worth ratio and require financial reports to be submitted periodically.  The credit facility also contains various covenants that limit, among other things, subject to certain exceptions, our ability to grant liens, enter into agreements restricting our ability to grant liens on our assets or amend the credit facility, make certain loans, acquisitions and investments or enter into a merger, consolidation or sale of assets.

 

The amount we may borrow under the credit facility is limited to the lesser of: (i) 50% of the sum of the value of the Hiland Partners common and subordinated units and (ii) the maximum available amount of the credit facility (currently $3.0 million).  For purposes of this calculation, the value of (i) the Hiland Partners common units on any date shall be the closing price for such units as reflected on the NASDAQ National Market on any date and (ii) the Hiland Partners subordinated units on any date shall be deemed to equal 85% of the value of the Hiland Partners common units on such date.  At August 7, 2009, the borrowing base was $3.0 million.

 

As of August 7, 2009, we had $2.5 million outstanding under this credit facility and were in compliance with our debt-to-worth ratio covenant. As of June 30, 2009, we had $1.2 million outstanding under our prior credit facility and were in compliance with our financial covenants. The outstanding $1.2 million at June 30, 2009, which now matures on December 31, 2009, is included in accrued liabilities and other in the balance sheet.

 

Capital Lease Obligations

 

Hiland Partners is obligated under two separate capital lease agreements entered into with respect to its Bakken and Badlands gathering systems in the third quarter of 2007. Under the terms of a capital lease agreement for a rail loading facility and an associated products pipeline at its Bakken gathering system, Hiland Partners is repaying a counterparty a predetermined amount over a period of eight years. Once fully paid, title to the leased assets will transfer to Hiland Partners no later than the end of the eight-year period

 

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commencing from the inception date of the lease. Hiland Partners also incurred a capital lease obligation to a counterparty for the aid to construct several electric substations at its Badlands gathering system which, by agreement, is being repaid in equal monthly installments over a period of five years.

 

During the three and six months ended June 30, 2009, Hiland Partners made principal payments of $185 and $350, respectively, on the above described capital lease obligations.  The current portion of the capital lease obligations presented in the table above is included in accrued liabilities and other in the balance sheet.

 

Note 8:  Share-Based Compensation

 

Hiland Holdings GP, LP Long Term Incentive Plan

 

Hiland Partners GP Holdings, LLC, the general partner of Hiland Holdings, adopted the Hiland Holdings GP, LP Long-Term Incentive Plan for its employees and directors of its general partner and employees of its affiliates. The long-term incentive plan consists of three components: unit options, restricted units and phantom units. The long-term incentive plan limits the number of units that are permitted to be delivered pursuant to awards to 2,160,000 units. The plan is administered by the board of directors of our general partner or the compensation committee of the board of directors of our general partner. The plan will expire upon the first to occur of its termination by the board of directors or the compensation committee, the date when no units 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 reward 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, 2009. Non-cash unit based compensation expense related to restricted units issued is to be recognized over their respective four-year vesting period on the graded vesting attribution method. As of June 30, 2009, we have 16,500 unvested restricted units outstanding with a weighted average fair value at grant date of $22.52 per unit.

 

We recorded non-cash compensation expense related to the restricted units of $36 and $72 for the three and six months ended June 30, 2009, respectively, and $38 and $77 for the three and six months ended June 30, 2008, respectively. We will record additional non-cash unit based compensation expense of $145 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

 

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

 

Phantom Units.   On June 19, 2009, 2,500 phantom units awarded to our Chief Executive Officer in June 2007 vested and were converted to common units. On April 1, 2009, our former Chief Commercial Officer retired and forfeited 3,750 phantom units.

 

The following table summarizes information about Hiland Partners’ phantom units for the six months ended June 30, 2009:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Fair Value

 

 

 

 

 

Per Unit

 

 

 

 

 

At Grant

 

Phantom Units

 

Units

 

Date ($)

 

Unvested at January 1, 2009

 

50,794

 

$

47.74

 

Granted

 

 

 

 

Vested and converted

 

(5,625

)

$

51.65

 

Forfeited

 

(5,050

)

$

45.11

 

Unvested at June 30, 2009

 

40,119

 

$

47.53

 

 

During the three and six months ended June 30, 2009, Hiland Partners incurred non-cash unit based compensation expense of $219 and $463, respectively, related to phantom units. 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. Hiland Partners will recognize additional expense of $992 over the next four years, and the additional expense is to be recognized over a weighted average period of 2.5 years.

 

Restricted Units.   Hiland Partners issued no restricted units during the three and six months ended June 30, 2009.  On April 1, 2009, our former Chief Commercial Officer retired and forfeited 1,500 restricted units.  The following table summarizes information about Hiland Partners restricted units for the six months ended June 30, 2009.

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Fair Value

 

 

 

 

 

Per Unit

 

 

 

 

 

At Grant

 

Restricted Units

 

Units

 

Date ($)

 

Unvested at January 1, 2009

 

18,500

 

$

48.73

 

Granted

 

 

 

 

Vested

 

 

 

 

Forfeited

 

(4,250

)

$

47.56

 

Unvested at June 30, 2009

 

14,250

 

$

49.08

 

 

Non-cash unit based compensation expense related to Hiland Partners restricted units was $62 and $137 for the three and six months ended June 30, 2009, respectively, and was $83 and 167 for the three and six months ended June 30, 2008, respectively.  As of June 30, 2009, there was $212 of total unrecognized cost related to Hiland Partners unvested restricted units. This cost is to be recognized over a weighted average period of 2.0 years.

 

Unit Options.   At June 30, 2009, all common unit options awarded by Hiland Partners have vested.  The weighted average exercise price of 33,336 outstanding exercisable common unit options at June 30, 2009 is $37.79 per unit, and such common units have a weighted average remaining contractual term of 6.4 years.  Non-cash unit based compensation expense related to the unit options was insignificant for the three and six months ended June 30, 2009, respectively.

 

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Note 9: Commitments and Contingencies

 

We maintain a defined contribution retirement plan for our employees under which we make discretionary contributions to the plan based on a percentage of eligible employees’ compensation. Contributions to the plan are 5.0% of eligible employees’ compensation and resulted in expense for the three months ended June 30, 2009 and 2008 of $101 and $80, respectively and for the six months ended June 30, 2009 and 2008 was $190 and $155, respectively.

 

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

 

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

 

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

 

Hiland Partners leases certain equipment, vehicles and facilities under operating leases, most of which contain annual renewal options. We and Hiland Partners also lease office space from a related entity. See Note 11 “Related Party Transactions.” Under these lease agreements, rent expense was $751 and $636, respectively, for the three months ended June 30, 2009 and 2008, respectively and $1,594 and $1,252 for the six months ended June 30, 2009 and 2008, respectively.

 

Three putative unitholder class action lawsuits have been filed relating to the Hiland Partners Merger and the Hiland Holdings Merger.  These lawsuits are as follows: (i) Robert Pasternack v. Hiland Partners, LP et al., In the Court of Chancery of the State of Delaware, Civil Action No. 4397-VCS; (ii) Andrew Jones v. Hiland Partners, LP et al., In the Court of Chancery of the State of Delaware, Civil Action No. 4558-VCS; and (iii) Arthur G. Rosenberg v. Hiland Partners, LP et al., In the District Court of Garfield County, State of Oklahoma, Case No. C3-09-211-02.  The lawsuits name as defendants the Partnership, Hiland Partners, the general partner of each of the Partnership and Hiland Partners, and the members of the board of directors of each of the Partnership and Hiland Partners.   The lawsuits challenge both the Hiland Partners Merger and the Hiland Holdings Merger.  The lawsuits allege claims of breach of the Partnership Agreement and breach of fiduciary duty on behalf of (i) a purported class of common unitholders of the Partnership and (ii) a purported class of our common unitholders of Hiland Partners.

 

On July 10, 2009, the court in which the Oklahoma case is pending granted our motion to stay the Oklahoma lawsuit in favor of the Delaware lawsuits.   On July 31, 2009, the plaintiff in the first-filed Delaware case (Pasternack) filed an Amended Class Action Complaint and a motion to enjoin the mergers.   This Amended Class Action Complaint alleges, among other things, that (i) the original consideration and revised consideration offered by the Hamm Parties is unfair and inadequate, (ii) the members of the conflicts committees of the general partner of each of the Partnership and Hiland Partners that were charged with reviewing the proposals and making a recommendation to each committee’s respective board of directors lacked any meaningful independence, (iii) the defendants acted in bad faith in recommending and approving the Hiland Partners Merger or the Hiland Holdings Merger, and (iv) the disclosures in the Preliminary Proxy Statement filed by the Partnership and Hiland Partners are materially misleading.   The Pasternack plaintiff seeks to preliminarily enjoin the defendants from proceeding with or consummating the mergers and seeks an order requiring defendants to supplement the Preliminary Proxy Statement with certain information.  We cannot predict the outcome of these lawsuits, or others, nor can we predict the amount of time and expense that will be required to resolve the lawsuits.

 

Additional information concerning these lawsuits may be found in the Preliminary Proxy Statement filed by the Partnership and Hiland Partners and, when filed, in the definitive joint proxy statement.

 

Note 10: Significant Customers and Suppliers

 

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

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Customer 1

 

23

%

22

%

20

%

21

%

Customer 2

 

12

%

1

%

10

%

0

%

Customer 3

 

12

%

9

%

15

%

9

%

Customer 4

 

12

%

9

%

8

%

14

%

Customer 5

 

10

%

14

%

11

%

11

%

Customer 6

 

5

%

15

%

5

%

15

%

Customer 7

 

3

%

10

%

3

%

8

%

 

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Table of Contents

 

Customer 1 above is SemStream, L.P., a subsidiary of SemGroup, L.P., who filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on July 22, 2008.  In March 2009, Hiland Partners received a good faith deposit from SemStream, L.P. for $3,000 in lieu of renewing a letter of credit to our benefit.  The $3,000 deposit received is included in accrued liabilities and other in the balance sheet.

 

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

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Supplier 1 (affiliated company)

 

40

%

42

%

42

%

40

%

Supplier 2

 

20

%

16

%

18

%

15

%

Supplier 3

 

17

%

18

%

16

%

18

%

 

Note 11: Related Party Transactions

 

Hiland Partners purchases natural gas and NGLs from affiliated companies. Purchases of product from affiliates totaled $10,353 and $36,882 for the three months ended June 30, 2009 and 2008, respectively and totaled $23,798 and $63,049 for the six months ended June 30, 2009 and 2008, respectively. Hiland Partners also sells natural gas and NGLs to affiliated companies. Sales of product to affiliates totaled $867 and $2,022 for the three months ended June 30, 2009 and 2008, respectively and totaled $1,899 and $3,043 for the six months ended June 30, 2009 and 2008, respectively. Compression revenues from affiliates were $1,205 and $2,410 for each of the three and six months ended June 30, 2009 and 2008, respectively.

 

Accounts receivable - affiliates of $2,745 at June 30, 2009 include $2,649 from one affiliate for midstream sales. Accounts receivable - affiliates of $2,346 at December 31, 2008, includes $2,083 from one affiliate for midstream sales.

 

Accounts payable - affiliates of $5,236 at June 30, 2009 include $4,018 due to one affiliate for midstream purchases. Accounts payable - affiliates of $7,823 at December 31, 2008 include $6,682 payable to the same affiliate for midstream purchases.

 

Hiland Partners utilizes affiliated companies to provide services to its plants and pipelines and certain administrative services. The total expenditures to these companies were $82 and $111 during the three months ended June 30, 2009 and 2008, respectively and were $256 and $263 during the six months ended June 30, 2009 and 2008, respectively.

 

We and Hiland Partners lease office space under operating leases directly or indirectly from an affiliate. Rent expense associated with these leases totaled $41 and $37 for the three months ended June 30, 2009 and 2008, respectively and totaled $80 and $75 for the six months ended June 30, 2009 and 2008, respectively.

 

Note 12: Reportable Segments

 

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

 

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

 

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

 

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 $398,812 at June 30, 2009. Assets attributable to compression operations totaled $23,773. All but $27 of the total capital expenditures of $19,189 for the six months ended June 30, 2009 was attributable to midstream operations. All but $24 of the total capital expenditures of $18,368 for the six months ended June 30, 2008 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, 2009 and 2008.

 

 

 

For the Three Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Midstream

 

Compression

 

 

 

Midstream

 

Compression

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

48,874

 

$

1,205

 

$

50,079

 

$

114,236

 

$

1,205

 

$

115,441

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

26,999

 

 

26,999

 

88,073

 

 

88,073

 

Operations and maintenance

 

7,575

 

210

 

7,785

 

7,271

 

280

 

7,551

 

Depreciation and amortization

 

9,927

 

897

 

10,824

 

8,561

 

895

 

9,456

 

Property impairments

 

 

 

 

 

 

 

Bad debt

 

 

 

 

8,103

 

 

8,103

 

General and administrative

 

4,502

 

104

 

4,606

 

2,314

 

19

 

2,333

 

Total operating costs and expenses

 

49,003

 

1,211

 

50,214

 

114,322

 

1,194

 

115,516

 

Operating (loss) income

 

$

(129

)

$

(6

)

(135

)

$

(86

)

$

11

 

(75

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

68

 

 

 

 

 

73

 

Amortization of deferred loan costs

 

 

 

 

 

(172

)

 

 

 

 

(168

)

Interest expense

 

 

 

 

 

(2,691

)

 

 

 

 

(3,130

)

Net loss

 

 

 

 

 

(2,930

)

 

 

 

 

(3,300

)

Less: Noncontrolling partners’ interest in loss of Hiland Partners

 

 

 

 

 

(395

)

 

 

 

 

(2,192

)

Limited partners’ interest in net loss

 

 

 

 

 

$

(2,535

)

 

 

 

 

$

(1,108

)

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Midstream

 

Compression

 

 

 

Midstream

 

Compression

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

100,017

 

$

2,410

 

$

102,427

 

$

204,510

 

$

2,410

 

$

206,920

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Midstream purchases (exclusive of items shown separately below)

 

58,215

 

 

58,215

 

156,691

 

 

156,691

 

Operations and maintenance

 

15,053

 

427

 

15,480

 

13,811

 

509

 

14,320

 

Depreciation and amortization

 

19,287

 

1,795

 

21,082

 

16,881

 

1,790

 

18,671

 

Property impairments

 

950

 

 

950

 

 

 

 

Bad debt

 

 

 

 

8,103

 

 

8,103

 

General and administrative

 

8,234

 

199

 

8,433

 

4,969

 

49

 

5,018

 

Total operating costs and expenses

 

101,739

 

2,421

 

104,160

 

200,455

 

2,348

 

202,803

 

Operating income (loss)

 

$

(1,722

)

$

(11

)

(1,733

)

$

4,055

 

$

62

 

4,117

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

81

 

 

 

 

 

177

 

Amortization of deferred loan costs

 

 

 

 

 

(343

)

 

 

 

 

(324

)

Interest expense

 

 

 

 

 

(5,049

)

 

 

 

 

(6,636

)

Net loss

 

 

 

 

 

(7,044

)

 

 

 

 

(2,666

)

Less: Noncontrolling partners’ interest in loss of Hiland Partners

 

 

 

 

 

(1,610

)

 

 

 

 

(2,398

)

Limited partners’ interest in net loss

 

 

 

 

 

$

(5,434

)

 

 

 

 

$

(268

)

 

25



Table of Contents

 

Note 13: Net Income (Loss) per Limited Partners’ Unit

 

The computation of basic net income (loss) per limited partners’ unit is based on the weighted-average number of common units outstanding during the period. The computation of diluted net income (loss) per unit further assumes the dilutive effect of restricted units. Net income (loss) per unit applicable to limited partners is computed by dividing net income (loss) applicable to limited partners by the weighted-average number of limited partnership units outstanding. The following is a reconciliation of the limited partner units used in the calculations of net income (loss) per limited partner unit—basic and net income (loss) per limited partner unit—diluted assuming dilution for the three and six months ended June 30, 2009 and 2008:

 

 

 

For the Three Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Loss
Attributable
to Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Loss
Attributable
to Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Loss per limited partner unit-basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss attributable to limited partners

 

$

(2,535

)

 

 

$

(0.12

)

$

(1,108

)

 

 

$

(0.05

)

Weighted average limited partner units outstanding

 

 

 

21,607,500

 

 

 

 

 

21,603,000

 

 

 

Loss per limited partner unit-diluted: Restricted units

 

 

 

 

 

 

 

 

 

 

 

Loss attributable to limited partners plus assumed conversions

 

$

(2,535

)

21,607,500

 

$

(0.12

)

$

(1,108

)

21,603,000

 

$

(0.05

)

 

 

 

For the Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Loss
Available to
Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Loss
Available to
Limited
Partners
(Numerator)

 

Limited
Partner Units
(Denominator)

 

Per Unit
Amount

 

Loss per limited partner unit-basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss attributable to limited partners

 

$

(5,434

)

 

 

$

(0.25

)

$

(268

)

 

 

$

(0.01

)

Weighted average limited partner units outstanding

 

 

 

21,607,500

 

 

 

 

 

21,603,000

 

 

 

Loss per limited partner unit-diluted: Restricted units

 

 

 

 

 

 

 

 

 

 

 

Loss attributable to limited partners plus assumed conversions

 

$

(5,434

)

21,607,500

 

$

(0.25

)

$

(268

)

21,603,000

 

$

(0.01

)

 

26



Table of Contents

 

For the three and six months ended June 30, 2009, approximately 16,500 restricted units were excluded from the computation of diluted earnings attributable to limited partner units because the inclusion of such units would have been anti-dilutive.

 

Note 14: Partners’ Capital and Cash Distributions

 

Hiland Holdings

 

Our unitholders (limited partners) have only limited voting rights on matters affecting our operations and activities and, therefore, limited ability to influence our 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.” Our only cash-generating assets are our interests in Hiland Partners from which we may receive quarterly distributions. The amount of available cash may be greater than or less than the minimum quarterly distributions.

 

We have suspended quarterly cash distributions beginning with the first quarter distribution of 2009 and Hiland Partners has also suspended quarterly cash distributions on its common and subordinated units beginning with the first quarter distribution of 2009 due to the impact of lower commodity prices and reduced drilling activity on Hiland Partners’ current and projected throughput volumes, midstream segment margins and cash flows combined with future required levels of capital expenditures and the outstanding indebtedness under Hiland Partners’ senior secured revolving credit facility. Under the terms of the Hiland Partners partnership agreement, the Hiland Partners common units carry an arrearage of $0.90 per unit, representing the minimum quarterly distribution to the Hiland Partners common units for the first two quarters of 2009 that must be paid before Hiland Partners can make distributions to the Hiland Partners subordinated units. All distributions paid by us to our common unitholders from January 1, 2008 forward, including amounts paid to affiliate owners, were as follows (in thousands, except per unit amounts):

 

Date Cash

 

Per Unit Cash

 

 

 

Distribution

 

Distribution

 

Total Cash

 

Paid

 

Amount

 

Distribution

 

02/19/08

 

$

0.2550

 

$

5,513

 

05/19/08

 

0.2800

 

6,053

 

08/19/08

 

0.3050

 

6,593

 

11/19/08

 

0.3175

 

6,866

 

02/18/09

 

0.1000

 

2,162

 

 

 

$

1.2575

 

$

27,187

 

 

Hiland Partners

 

The unitholders (limited partners) of Hiland Partners have only limited voting rights on matters affecting its operations and activities and, therefore, limited ability to influence its management’s decisions regarding its business. The Hiland Partners 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. The Hiland Partners unitholders’ voting rights are further restricted by Hiland Partners’ partnership agreement, which provides that any units held by a person that owns 20% or more of any class of units then outstanding, other than the general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of Hiland Partners GP, 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: